Category: zerohedge

BNP’s Paul Mortimer-Lee knocks it out of the park today with not one, not two, but pretty much all quotes in his latest note, “The Fed and QE: Hotel California?” A random sampling thereof (full note shortly).

From BNP

• History tells us that when the Fed tightens, bad stuff happens. The bond sell-off this summer on the mere announcement of QE ‘tapering’ is a case in point.
• Bonds will suffer when actual ‘tapering’ is announced. When it starts, we are likely to trade through the previous high for yields.
• Equities may look fairly immune at first, but as QE buying fades and eventually stops, take care. Any equity sell-off will have a knock-on effect on bonds and the economy.
• How large the effect on the markets will be will depend on how much the markets rally while QE is ‘on’. The bigger the rally, the worse the sell-off will be.

…

Our overall assessment is that when the Fed [ZH: again] decides to ‘taper’, there will be an adverse effect on markets. Bonds will suffer from a higher term premium and an upward revision of expectations about future levels of Fed funds. Equities are likely to suffer, too. How big the selloffs will be will depend on the circumstances – how robust the recovery looks, to what extent inflation remains quiescent and to what extent the current period of maintained QE leads to excess valuations in markets. Those markets that sold off most during the ‘taper tantrum’ tended to be those markets that had rallied most in previous months.

Clearly, this is one of the disadvantages of QE – one of its purposes is to distort markets. When QE ends, those distortions begin to unwind. Because of the disequilibria in financial markets under QE, relative valuations, as well as valuations of the risk-free asset, are distorted. Markets may go through considerable gyrations as they try to find the “right” constellation of equilibrium prices. It is possible that sufficiently vigorous reactions could adversely affect the economy.

It may be difficult to foresee all the effects of ending QE. After all, except with relatively brief breaks, the Fed has been using its balance sheet to stimulate the economy since 2009. Markets and the economy have gotten used to it. Will there be unexpected effects when QE ends? Seems like a good bet. What they will be is more difficult to say.

…

In the 1977 Eagles song, Hotel California, a luxury hotel appears inviting and offers a tired traveller comforting relief from his journey. It turns out to be something of a nightmare, however, and he finds that “you can check out anytime you like, but you can never leave”.

Does that sound a little bit like QE and the Fed? The FOMC signalled its intention to check out of QE at its June meeting, but by September, it found it could not leave.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/WkeqtMY30CM/story01.htm Tyler Durden

BNP’s Paul Mortimer-Lee knocks it out of the park today with not one, not two, but pretty much all quotes in his latest note, “The Fed and QE: Hotel California?” A random sampling thereof (full note shortly).

From BNP

• History tells us that when the Fed tightens, bad stuff happens. The bond sell-off this summer on the mere announcement of QE ‘tapering’ is a case in point.
• Bonds will suffer when actual ‘tapering’ is announced. When it starts, we are likely to trade through the previous high for yields.
• Equities may look fairly immune at first, but as QE buying fades and eventually stops, take care. Any equity sell-off will have a knock-on effect on bonds and the economy.
• How large the effect on the markets will be will depend on how much the markets rally while QE is ‘on’. The bigger the rally, the worse the sell-off will be.

…

Our overall assessment is that when the Fed [ZH: again] decides to ‘taper’, there will be an adverse effect on markets. Bonds will suffer from a higher term premium and an upward revision of expectations about future levels of Fed funds. Equities are likely to suffer, too. How big the selloffs will be will depend on the circumstances – how robust the recovery looks, to what extent inflation remains quiescent and to what extent the current period of maintained QE leads to excess valuations in markets. Those markets that sold off most during the ‘taper tantrum’ tended to be those markets that had rallied most in previous months.

Clearly, this is one of the disadvantages of QE – one of its purposes is to distort markets. When QE ends, those distortions begin to unwind. Because of the disequilibria in financial markets under QE, relative valuations, as well as valuations of the risk-free asset, are distorted. Markets may go through considerable gyrations as they try to find the “right” constellation of equilibrium prices. It is possible that sufficiently vigorous reactions could adversely affect the economy.

It may be difficult to foresee all the effects of ending QE. After all, except with relatively brief breaks, the Fed has been using its balance sheet to stimulate the economy since 2009. Markets and the economy have gotten used to it. Will there be unexpected effects when QE ends? Seems like a good bet. What they will be is more difficult to say.

…

In the 1977 Eagles song, Hotel California, a luxury hotel appears inviting and offers a tired traveller comforting relief from his journey. It turns out to be something of a nightmare, however, and he finds that “you can check out anytime you like, but you can never leave”.

Does that sound a little bit like QE and the Fed? The FOMC signalled its intention to check out of QE at its June meeting, but by September, it found it could not leave.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/WkeqtMY30CM/story01.htm Tyler Durden

US and European stock markets (and European sovereign bond markets) have been sliding since early in the European morning overnight. The blame for the weakness appears to be coming from a double-whammy in Germany. First the German government resolved to push for the financial transaction tax (despite banks rejection of the proposal – well they would wouldn’t they) and then later in the day when Germany’s emerging coalition rejected the last-best-hope for shared sacrifice (or using more of Germany’s balance sheet) – The Debt-Redemption Fund – leaving more pressure back on Draghi to save the day. Anxiety in the US is clear with VIX (and credit spreads) rising as hedgers are active – and of course, markets are broken with NASDAQ options prices ‘crossed’ acording to some sources.

 

Europe’s markets are falling rapidly…

 

And the US is unhappy…

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/oqnRtxinDL0/story01.htm Tyler Durden

US and European stock markets (and European sovereign bond markets) have been sliding since early in the European morning overnight. The blame for the weakness appears to be coming from a double-whammy in Germany. First the German government resolved to push for the financial transaction tax (despite banks rejection of the proposal – well they would wouldn’t they) and then later in the day when Germany’s emerging coalition rejected the last-best-hope for shared sacrifice (or using more of Germany’s balance sheet) – The Debt-Redemption Fund – leaving more pressure back on Draghi to save the day. Anxiety in the US is clear with VIX (and credit spreads) rising as hedgers are active – and of course, markets are broken with NASDAQ options prices ‘crossed’ acording to some sources.

 

Europe’s markets are falling rapidly…

 

And the US is unhappy…

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/oqnRtxinDL0/story01.htm Tyler Durden

There was a time when the Fed’s QE was, at least on paper, supposed to generate jobs (the broad inflation will come on its own, in due course). After all, the prospect of injecting $85 billion in liquidity into a market with the sole goal of pushing the stock markets that benefit the purchasing power of about 10% of the population would hardly have received broad approval even by the co-opted Congress.

So, to all those who still naively claim Fed is not the sole reason for the market’s relentless march higher, those billions in liquidity must go into the economy, and specifically into job creation, right?

As a result, we decided to back into what the average private sector job has ended up costing the US population in pure dollar terms (which in turn ultimately manifests itself in terms of unsustainable government debt and pent up inflation) via the Fed’s monetary pathway. Well, according to the ADP data released earlier, in which a paltry 130K private sector jobs were created in a month in which the Fed, as always, injected $85 billion, the bottom line came to a whopping $654K per job (since government jobs are always a net drain, we exclude those from the calculation). And taking the average job growth throughout 2013, this number, as can be seen on the chart below, is a laughter-inducing $553K!

Obviously, the above “analysis” is merely a placeholder to show just how absurd modern policy has become, and yes – we do realize that all of that money has ended up solely into capital markets boosting risk assets, as we have been saying since 2009 and as JPM, Pimco and BlackRock now admit.

However, since the next and final tool in the Fed’s arsenal is Nominal GDP targeting on the back of direct monetary injections whose purpose is to unanchor inflationary expectations, crush savers, and take the wealth effect to the next level (as we predicted would happen recently), perhaps instead of pretending QE even remotely works on the economy, Bernanke can finally make it rain, and just hand over half a million each month to every man, woman and child… and just brace for the Weimar collapse that would inevitable follow.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/9GhcPepRBmU/story01.htm Tyler Durden

There was a time when the Fed’s QE was, at least on paper, supposed to generate jobs (the broad inflation will come on its own, in due course). After all, the prospect of injecting $85 billion in liquidity into a market with the sole goal of pushing the stock markets that benefit the purchasing power of about 10% of the population would hardly have received broad approval even by the co-opted Congress.

So, to all those who still naively claim Fed is not the sole reason for the market’s relentless march higher, those billions in liquidity must go into the economy, and specifically into job creation, right?

As a result, we decided to back into what the average private sector job has ended up costing the US population in pure dollar terms (which in turn ultimately manifests itself in terms of unsustainable government debt and pent up inflation) via the Fed’s monetary pathway. Well, according to the ADP data released earlier, in which a paltry 130K private sector jobs were created in a month in which the Fed, as always, injected $85 billion, the bottom line came to a whopping $654K per job (since government jobs are always a net drain, we exclude those from the calculation). And taking the average job growth throughout 2013, this number, as can be seen on the chart below, is a laughter-inducing $553K!

Obviously, the above “analysis” is merely a placeholder to show just how absurd modern policy has become, and yes – we do realize that all of that money has ended up solely into capital markets boosting risk assets, as we have been saying since 2009 and as JPM, Pimco and BlackRock now admit.

However, since the next and final tool in the Fed’s arsenal is Nominal GDP targeting on the back of direct monetary injections whose purpose is to unanchor inflationary expectations, crush savers, and take the wealth effect to the next level (as we predicted would happen recently), perhaps instead of pretending QE even remotely works on the economy, Bernanke can finally make it rain, and just hand over half a million each month to every man, woman and child… and just brace for the Weimar collapse that would inevitable follow.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/9GhcPepRBmU/story01.htm Tyler Durden

By Phil Davis of Phil’s Stock World

Yes, a RISING channel!

That’s why we are long-term BULLISH but short-term BEARISH.  As noted by TraderStewie (chart credit, click on to enlarge), this is a movie we’ve seen before, with the S&P making a power-move to the top of the channel, only to find resistance there.  

 

 If we break out over that channel (for more than a spike), I will be HAPPY to play a new channel higher but let’s just make sure we get there first!  In this chart of the Equal Weight Index, each company is treated as 0.2% of the S&P to eliminate the distortions of runaway Momentum Stocks.

On our Big Chart (below), the S&P is already off to the races, over the 1,760 line (+10%) that marks the top of the range we’ve been following since early 2009. Overdue for a 10% correction is an understatement here!  

It’s very hard to quantify where we should be as the Dollar has been diving – all the way from 84.96 in July to 79.06 last week. That’s a 5.8% drop in the currency, which is the measuring stick we use to put a PRICE (not a value) on the stock market. In early July, the S&P was at 1,600 and, wouldn’t you know it, 1,760 is EXACTLY 10% over that line (the Must Hold line on our Big Chart).  

 

The Federal Reserve’s stance on QE makes its announcement tomorrow at 2pm so important. Its actions will determine whether or not the Dollar is bottoming here and, if the Fed is not looser than it has been, we are likley to see the Dollar move back over 80, most likely to 81, which is a 2.5% move up in the Dollar. There is is roughly a 2:1 relationship between the Dollar and the indices, so if the Dollar moves up 2.5%, I think we’re looking at a 5% pullback in stocks. Oil and other commodities might also begin to break down against a stronger Dollar.

As it stands, these are the last few POMO days of the month and the Fed has already blown through over $50Bn in October (out of $45Bn it is supposed to spend on Treasury Purchases). The Fed has nothing left to contribute in the last few days other than a couple of Billion they found in the couch cushions. We don’t get the new schedule until 3pm on Thursday, but yesterday’s $5Bn injection was essentially it for the week.  

We got a bit shorter on the Nasdaq into AAPLs earnings last night, in case it disappointed.  AAPL did come through with strong numbers and gave a pretty good conference call so we’re very happy with our long AAPL position but still happy we took the money and ran on our bullish QQQ spread in our Short-Term Portfolio. 

So we’re going to be liking both the S&P’s 1,760 line (/ES) and the Russell’s 1,120 line (/TF) for shorting spots in the Futures. Very simply, we play those lines bearish with tight stops over the line, hoping to catch a good move down. It’s going to be tricky today and tomorrow as there will be rumors flying about what’s going on in the two-day Fed meeting but the Dollar is rising and, as long as it’s over 79.50, we should be getting a bit of market correction. 

We’re NOT playing oil short, other than our standing SCO spread in the STP, until we see the inventories this week. We hit our $96.50 target last week and below that is $92.50 (after bouncing at $95, of course) and, below that is $87.50 and below that is what oil would be trading at if not for all the shenanigans at the NYMEX – $82.50!  That’s the VALUE of oil based on supply/demand and cost of extraction in today’s economy – the rest is just fluff. Still, there’s plenty of fluff and professional fluffers at the NYMEX to keep prices pumped up but we may be approaching a major breakdown here – especially if the Dollar gathers strength.  

China is going the oppositie direction, injecting 13Bn Yuan ($2.13Bn) into their money markets this morning in an attempt to keep their one-week repo rates under 5% after 9 consecutive days of gains. Their overnight rate hit 4.5% and that’s a deadly combo that prompted emergency measures today and probably did a lot to bounce the Buck. India went the other way, RAISING their key lending rate from 7.5% to 7.75% as they attempt to put a lid on inflation, which is hitting 6.5%, 30% over the RBI’s 5% target cap.  

This is what happens when Central Banks attempt to control the economy. In fact, there was only a brief period in which India had inflation under control – out of control is “normal” for India but the people have reached a breaking point – not good in a Democracy of over 1Bn people!  Of course, as you can see from charts of our own economic idiocy – it’s not good in a Nation with 300M people either.  Thank goodness we don’t have a Democracy or people would be pissed!  

It’s sad that it doesn’t matter what AAPL does or what FB does or what IBM does, etc. this earnings season. All that matters is what the Fed does tomorrow (now today), in Bernanke’s last meeting as Chairman. Conventional wisdom is that he will punt and leave policy changes to Yellen’s crew next year, assuming Yellen gets confirmed. I think it makes more sense for Bernanke to be the bad guy and call for a teeny, tiny taper – just to see how the market reacts – and then Yellen can “save us” if it doesn’t work.  

No way to call it though, we’ll just have to wait and see. 

Click on this link to try Phil’s Stock World FREE! 

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/JexoUGrljds/story01.htm ilene

Another day, another broken market microstructure:

• *BATS OPTIONS HAS DECLARED SELF-HELP VS INTL SECURITIES EXCHANGE
• *NASDAQ OMX PHLX HAS DECLARED SELF HELP AGAINST ISE, ISE GEMINI

Perhaps we should rename the US equity (stock and options) markets – NasdaCare

 

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/JvwOV_42KE8/story01.htm Tyler Durden

Submitted by Charles Hugh-Smith of OfTwoMinds blog,

It's painfully obvious that real estate valuations are once again at asset-bubble extremes.

Correspondent Mark G. submitted a chart of the Wilshire REIT (real estate investment trusts) index that sums up the current real estate market in one image: it's painfully obvious that real estate valuations are once again at asset-bubble extremes, one that's even bigger than the last RE bubble that popped in 2008 with devastating consequences to the global economy.

Defenders of current real estate valuations can draw upon an array of justifications, but they boil down to the same one used to justify valuations in every asset bubble: this time it's different.

Is there anything in this chart that suggests this belief might be misplaced, for example, that credit/asset bubbles burst with a rough time/amplitude symmetry?

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/0mwaQUSBjpE/story01.htm Tyler Durden

Submitted by Charles Hugh-Smith of OfTwoMinds blog,

It's painfully obvious that real estate valuations are once again at asset-bubble extremes.

Correspondent Mark G. submitted a chart of the Wilshire REIT (real estate investment trusts) index that sums up the current real estate market in one image: it's painfully obvious that real estate valuations are once again at asset-bubble extremes, one that's even bigger than the last RE bubble that popped in 2008 with devastating consequences to the global economy.

Defenders of current real estate valuations can draw upon an array of justifications, but they boil down to the same one used to justify valuations in every asset bubble: this time it's different.

Is there anything in this chart that suggests this belief might be misplaced, for example, that credit/asset bubbles burst with a rough time/amplitude symmetry?

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/0mwaQUSBjpE/story01.htm Tyler Durden