Tuesday, June 29, 2010

Looking Over the Edge of a Cliff: Can The Bulls Hold S&P 1040?


What a day.  Let's get right to it.  As you all know, I am a macro guy when it comes to the economy.  However, there are times when the charts become extremely important when you are analyzing the markets.

Lets take a look a chart of the S&P:

My Take:

I drew a couple lines here that represent key resistance levels.  As you can see above, we closed a1041 which is right on the line of a key support level.  We currently sit a bit below that on the futes.

Essentially the market is looking over the edge of a cliff here folks.  Tomorrow will be extremely important day because if we close firmly below 1040 then the chances are high that we will test the next level of support which is around 875ish on the S&P.

If we get down to 875 it darn well better hold because there is basically nothing but hot air in between there and the low of 666 on the S&P that was set back in March of 2009.

I think the technicals will have a lot to do with where we head from here in the short term. We could quite possibly see a bounce tomorrow if this level holds.  If we bread it things could get rather ugly. I expect quite a tussle between the bears and the bulls here at S&P 1040.

European Debt Crisis

Alrighty, let's talk a little about what caused the equity dump today. 

The ECB's debt roll over failure was the key trigger today:

"The ECB failed to auction the €55bn in fixed term deposits it had planned to, and what it did auction (€31.86bn) was at a much-higher rate (0.54 per cent) than what it offered at the start of its Securities Markets Programme (SMP). The market seems to be holding tight to liquidity.

As Barclays Capital’s Cagdas Aksu pointed out before the results of the FTD:

Also ahead of the 3m LTRO on Wednesday, the ECB will conduct two operations today. First, there will be the normal weekly MRO: amounts have increased there to stand at EUR152bn, and some of that might be rolled over into the 3m LTRO tomorrow, maybe up to EUR50bn. Effectively, the less the roll today in the weekly MRO, the higher the chance that we might get a higher roll in general in the 3m LTRO tomorrow."

My Take:

Translation:  No one wants to buy the ECB's worthless debt.  Well some did, but they demanded a higher interest rates on the $31 billion that was bought.  Banks are focusing on liquidity.  In other words, the European debt markets have basically hit the wall.  More on this in "The Bottom Line" segment below.

Essentially, the is game over for Europe if they can't roll over their debt.  You will see an immediate panic in the stock market if this issue isn't resolved.  Looking back at recent history, we all know that the world's central bankers somehow find a way to "hide the Ponzi" so lets see if the ECB finds a creative way out of this with a little help from a few friends.

The ECB debt sales over the next couple of days are critical and that is an understatement.  keep a close eye on them.

The bottom line here folks is the game is about up without printing money which Bernanke has said in the past that he will never do....Yeah..OK..We'll just see about that. 

People tend to panic when the doo doo hits the fan, and I wouldn't expect anything different from a group of central bankers who are rapidly beginning to look like a group of "deer in the headlights". 

The "moment of truth" in the markets is right around the corner folks.  Get ready.

Consumer Confidence Collpases

We also got this bit of lovely news today:

"The Conference Board Consumer Confidence Index® Drops Sharply

PROVIDED BY PR Newswire - 10:00 AM 06/29/2010

NEW YORK, June 29 /PRNewswire/ -- The Conference Board Consumer Confidence Index® which had been on the rise for three consecutive months, declined sharply in June. The Index now stands at 52.9 (1985=100), down from 62.7 in May. The Present Situation Index decreased to 25.5 from 29.8. The Expectations Index declined to 71.2 from 84.6 last month."

Ouch!  This is a huge miss.  Let me add that I don't put a lot of stock into this number because it's just a psychological indicator based on a phone call to consumers.   What it does tell you though is people are not feeling good about where things are heading.

The Bottom Line

The trading the rest of the week should be very interesting to say the least.  The economy is essentially rotting and the stench is finally being smelt by Wall St.

I am extremely nervous about the situation in Europe.  Their banks leveraged themselves higher than any of the banks in the world including the investment banks on Wall St.

This combined with the debt crisis is a recipe for disaster.  The Euro cannot be printed and the banks do not appear to not have the liquidity to soak up the ECB's rotting debt.  This is a HUGE problem and I don't see an answer unless they get some help.

The problem here is simple:  We have hit the wall when it comes to liquidity.  There isn't enough money out there to support the insane amounts of debts that the governments of the world have run up.  There is no answer to this problem other then to just let it collapse. 

Deflation is coming and so is austerity.  Be prepared because it's not going to be pretty or comfortable.  Every one of us is going to feel it.  Pensions and jobs are going to get slashed.  Companies are going to go bankrupt.

As austerity sets in, global growth is then going to plummet and stocks are going to get flushed down the toilet as a result.

I will end with a little trading idea.  Shorting treasuries is beginning to look very interesting.  There is no way I will get in front of this move up in bonds given the problems out there but a great entry point is currently getting set up for TBT.

Some may not agree but I believe Treasuries are going to get called out as a result of insolvency issues with our debt.  Short term I can see bonds continuing to rise.  Longer term however there is no way rates will remain this low. 

This may look and smell like Japan folks but this situation is different because we run the serious risk of going bankrupt which was not an issue that Japan had. 

The bond market is not going to have the appetite for treasuries over the longer term at these rate levels unless we implement severe austerity plans.

I don't believe the political will is there to do this so our solvency will be a consistent risk that eventually will have to be priced into bonds. 

Shorting treasuries is starting to look really juicy as a result.

Disclosure:  Small holding of TBT that was held before the publication of this article. 


getyourselfconnected said...

I loved that this ECB failure was explained away as a non-event because banks were, wait for it, saving cash for another bond sale later in the week.

Jeff said...


Yeah I saw that. There is some truth to it though because the ECB is pulling over $400 billion in liquidity from the system.

That is going to be painful for the banks. this is the equivelent to us yanking the TARP money.

In the end its the same crap. There isn't enough money in the system to keep things going.

Good read here:


Check this piece out.

Anonymous said...

The second dip is starting now...

Tom said...

Hi Jeff
Do you think that they could be setting things up for Q/E 2? i.e. more stimulus?

Jeff said...



I think so two. More like a double collapse. The market action is pretty horrifying.

I really hope this doesn't play out like I think it's going to

Jeff said...


Ben will definately try. Not sure if he can get it through Congress though.

Especially if the economic data keeps worsening.

The Dallas Fed data was awful today.

I don't see how we can stop this collapse at this point.

Housing is rolling over without the tax credit. China looks to be slowing.

My post could have been 3 pages tonight because things are detiorating everywhere.

I really hope the ECB can stabilize things over there.

Anonymous said...

And in other news today. Case Shiller results are out. DC is now at 179.5, up +2.4% MOM and +7.3% YOY.

This was a huge move up. Certainly due in part from the tax credit, but this alone cannot explain the pricing. Still, it is a far far cry from the 125 level that Jeff predicted we would hit within the next (now 23) months.

Its gonna be fun watching Jeff squirm for the next 23 months as we count down to the date he has to eat his shit sandwich and admit he is a clueless idiot. Buckle your seatbelts folks, this is gonna be a bumpy ride!!!

Jeff said...


Keep dreamin!

Enjoy that last tax credit inflated Case Shiller number!

Enjoy the upcoming housing cliff dive over the next several years as the housing bubble continues to pop!!!

Tom said...

Hi Jeff
Is the case schiller number the average price for a home in DC? And what would protect Dc from a housing crash. I am curious as I live in Washington.
The reason I asked about Q/E is it will allow the Fed and Wall street to delay the crushing blow that is to come. Extend and pretend seems to be all they are doing. Once the market goes all confidence in the system will be destoryed.

Jeff said...


The government(and all of its jobs) insulates housing prices in DC more so than other parts of the country.

The Q/E is a tough one. Either the bond market is going to call them out and take yields higher or it could lower rates.

The reason rates might rise with another Q/E is the bond market will start to worry that the USA is insolvent after spending more trillions on the Q/E.

I do believe that rates would initially drop on the announcement. The question is how does the market eventually digest it.

I think the can has been kicked about as far as it can go though.

I don't believe that the appetite is there in Congress for another huge stimulus.

Time will tell. We'll see what happens.

Tom said...

Thanks Jefff

Anonymous said...

"Jeff said...Enjoy the upcoming housing cliff dive over the next several years as the housing bubble continues to pop!!!"

I love watching you continue to take a dump on markets where you clearly have no clue whats going on.

OK so 1 month in and you have yet to wisen up... Not unexpected. Still, I expect to see you start backpedaling in about 5-6 months as your prediciton of DC case shiller @125 by May 2010 looks more and more like fantasyland.

The question then is do you take a bite out of the shit sandwich @ 6 months old and say "I was wrong"? Or, do you hold out til the bitter end, refusing to concede how wrong you were, further embarassing yourself as I call you out on this month after month after month.

This is going to be sooo much fun to watch :)

Jeff said...

Dude this subject is so old and I am done talking about it.

There is no price discovery because people are stuck in these houses. They can't be sold.

The only people buying right now are fools or the wealthy who don't care if they take the hit.

It's going to take two years to see what houses are really worth.

CNBC was discussing the potential of eliminating 30 year loans today.

This discussion included you butt buddy Dr Shiller who totally agreed that the 30 year loan is a relic way to lend.

Housing will never be the same but you insist on beating this dead horse.

It's over but apparently you are not ready to let go.

Post away with more obnoxious comments. I am done discussing this with you for 23 months.

You are on ignore until then.

Anonymous said...

"Dude this subject is so old and I am done talking about it."

Really? You were OK spouting off just last month about how DC values were going to plunge another 30%.

"It's over but apparently you are not ready to let go."

What do you mean "its over"? How can we be due for a 30% plunge in the next 2 years if it is "over"?

"Post away with more obnoxious comments. I am done discussing this with you for 23 months."

Gladly. I enjoy nothing more than to point out again and again what a permabear fool you are. The next 23 months are going to be awesome!!!

You are on ignore until then.

Jeff said...

Market rolling over again here folks.

1040 has been officially violated if this move down holds into the close.

875 is next. Very bad day for the bulls.