The Bond Market Pushes Back

I have a busy day but I wanted to get this up.  

The plot thickens. 

So Ben comes out with his little speech today and tells the world that the Fed has many tools left in the toolbox and will do further easing if the economy doesn't continue to recover:

"U.S. Federal Reserve Chairman Ben Bernanke said on Friday that high unemployment and low inflation point to a need for a further easing of U.S. monetary policy, but he offered no details on the central bank's next step.


"There would appear—all else being equal—to be a case for further action," Bernanke said at a conference sponsored by the Boston Federal Reserve Bank."

Quick Take:

So how did the bond market react?  They basically shoved his speech up his *ss and said prove it:

Treasuries sold off hard on the news.  Here is the 30 year:

The bond market has always loves to call the Fed's bluff when they think their hand is weak. 

It's no different than a game of No Limit Hold Em Poker.  If you think your opponent has a 2/7 off suite after he goes "all in" you call him.

This is what we saw from the bond market today.  Bernanke gave no details about his additional tools in his toolbox.  The reason he gave no details is there are no more tools.  The box is empty and the Fed is now impotent.

Here is the full speech from Bernanke if you would like to take a peek.

If the bond market really believed his box was still full of tools they would have piled into treasuries and front run the Fed knowing that they could sell the treasuries back to them at a higher price.

This could still possibly happen.  Essentially by taking yields higher the credit markers are forcing Bernanke to show his hand.

Folks, this is basically morphing into a serious chess match between the bond boys and the Fed.  Stay tuned.

$100 Oil?

This is what OPEC wants as the dollar drops in price.

"The 13 percent decline in the Dollar Index since June has led some OPEC members to call for oil to rise to $100 a barrel.


The U.S. currency’s weakness means the “real price” of oil is about $20 less than current levels, Venezuelan Energy and Oil Minister Rafael Ramirez said after yesterday’s meeting of the Organization of Petroleum Exporting Countries in Vienna.

Shokri Ghanem, chairman of Libya’s National Oil Corp., said a higher crude price would help OPEC offset the loss of revenue from the weaker dollar.


“We would love to see $100 a barrel,” Ghanem said yesterday in Vienna. “We’re losing real income. Libya in particular would like to see a higher oil price.”

Kuwaiti Oil Minister Sheikh Ahmad al-Abdullah al-Sabah said in an interview this week that $70 to $85 is the “most comfortable” range, while his Algerian counterpart, Youcef Yousfi, said between $90 and $100 is “reasonable.”

Quick Take:

Ahh...Don't you just love the unintended consequences of a collapsing dollar as a result of the Fed's reckless policies?

Folks, this is so ugly I don't even know where to begin.  All one has to do is go back to the late '70's to see what kinda damage OPEC can do when it's not happy with oil prices.

Oil is used to manufacture pretty much everything.  If you think prices are rising now.  You "ain't seen nothing" yet if oil hits triple digits.

The Bottom Line

Stocks were down after Ben's speech.  I don't think they got enough specific language regarding the Fed's easing policies.  It was a pretty "wimpy" speech all things considered so I can understand the disappointment.

None of this is going to end well folks.  If the Fed heads down the QE2 path(which is likely) the dollar is going to get slaughtered. 

If Ben doesn't pull the QE lever then it appears the bond market is going to take rates higher in an attempt to push the Fed into "puking up" their new easing plans.

The Fed's in a tight spot and the economy hangs in the balance as they contemplate their next move.  I am sure they are terrified by what's happened to treasuries the last two days.

The consumer news today certainly didn't make Ben's job any easier.  It appears the falling dollar is already hitting consumer confidence:

"WASHINGTON (MarketWatch) — Consumer sentiment dropped in October, according to an index released Friday, showing the U.S. consumer is still wary with the U.S. jobs market weak.


The Reuters/University of Michigan consumer sentiment index fell to 67.9 in October from 68.2 in September, a reading which was less than the MarketWatch-compiled consensus of 69.8."

Let me close with a tidbit on the banks.  They are getting hammered again today as the ramifications of foreclosuregate continue to intensify.  This is the next big thing folks.  It could make the subprime crisis look like a walk in the park.  More on this later.

The market is really heating up, and I think we are nearing a major inflection point. 

Our way of life hangs in the balance as the market starts demanding answers from the Fed.  Stay tuned.







 

A Google Good Evening!

Haha...And you don't think this casino that we like to call the stock market is rigged?  Take a look at the last hour of trading on the QQQQ's(NASDAQ):

My Take:

Gee do you think the Google news got leaked before they announced blowout earnings after hours?

Congratulations to Google by the way.  That was a nice quarter.  This bear has no problem giving credit where credit is due. 

Nonetheless, the market shouldn't know about news before it's announced after hours.  This is the type of crap that makes investors lose confidence in the markets.  The SEC should be all over this kinda stuff but I guess I am delusional for thinking that honesty should be restored to the financial markets.

I am sure the NASDAQ will be off to the races tomorrow although the futures so far don't seem to be acting like it. 

Has Bondzilla Arrived?

This is ugly:

"An already-tough week for Treasury auctions turned dramatically worse Thursday when investors skipped out on a 30-year bond sale.

The $13 billion of reopened long bonds was a mess: the yield of 3.852 was well above the when-issued level; a bid-to-cover ratio, or the measure of how much was bid compared to each dollar auctioned, came in at 2.49, which was the worst since February and well below the average of 2.70; and foreign interest, as measured through indirect bidding, was a paltry 32 percent."

My Take

Folks, if we can't sell bonds today after the Fed has basically given us a QE layup then how in the heck are we ever going to sell them?

The 30 year bond no likey the news:

My Take:

These bond auctions should be cake walks right now!  Why have the central banks decided to run away after the Fed has basically told you that they plan on doing more quantitative easing?  Anyone that's not concerned about this is nuts!

Before I continue let me stress that this is only one auction so time will tell.  However, the central bank participation in the 3 year bond auction earlier this week was also pretty ugly.  Rick Santelli only gave it a "C".

If this trend continues folks it's time to wake up. 

The way I see it, the bond market sees the dollar dropping and they do NOT like it one bit. They are scared to death of the "I" word which of course is inflation.

If the bond market so much as even sniffs it then they will sell off treasuries and take interest rates higher.

The problem we have right now is is they are getting a big wiff of the "I" word as they watch the USD and the gold market.

So why would the bond market increase rates when it sees inflation? 

Let me answer this with a potential 30 year bond "nightmare scenario" if inflation hits:

Let's say inflation hits at an annual pace of 7% and you own the 30 year bond which only returns 3.5% yield.  Essentially you are guaranteed a 3.5% loss annually on your investment.  If the inflation continues you are guaranteed further losses the following year. 

Making matters worse is the bond that you own at a guaranteed -3.5% loss essentially becomes worthless.  Who on earth would want to own something like this that guarantees losses?

Makes sense right?  Think of it in another way:

If someone came to you with a crappy investment that they paid $10 dollars for that returned -3.5% would you pay $10 for it? Of course not!  It's no different when it comes to bonds.

The Bottom Line

Tomorrow will be interesting because the market has a lot to digest.  There was the big Google beat that was preceded by the bad unemployment news and the awful bond auction.

This mixed news is taking it's toll on investors.  Can you blame them for being confused?

On the one hand you have companies who are executing nicely as they slash their cost structures and raise cash.  On the other hand you have a financial system that's rapidly deteriorating behind the curtains to the point where it pretty much seems hopeless.

Money is scared right now and it's running into everything:  Stocks, bonds, and of course gold(which hit new highs once again). 

At this point, investors pretty much don't know what to do with their money.  I thought the results of my poll in the upper right reflected this:

Of the 35 people who responded(thank you) 48% of you are sitting in cash.  

You are not alone.  

The whole world feels just like you do:  Scared, confused, and angry!  It gets to me at times too.

It's also the biggest reason why I don't think we rally much higher from here.  Too many people want nothing to do with the market at this point.  And why should they? They have been violated by it several times in the last 10 years.

It takes time for those wounds to heal and it's not gonna happen overnight.  The Fed doesn't want to hear this but it's the damn truth.

Investors are not going to want to take risk for a looong time because they have been burned to a crisp in doing so.

The Fed's trying to tempt them to get back "in the game" with zero rates and it's not happening.  It's time for them to realize this and shut down everything down and allow the unsustainable credit bubble to collapse.

If they don't stop the dollar is going to go right down the toilet. 

The market in the past few weeks has sent a clear message to the Fed about our deficits: 

Stop it or we will stop it for you by taking rates higher, trashing the dollar, and driving gold into the stratosphere.

Only time will tell if they are smart enough to listen.

The world is waiting Ben...Whatcha gonna do?



Disclosure:  No new positions taken at the time of publication.

All Is Well

Everyone remain calm:  Stocks are up!

Jobless claims soared today but don't worry:  Stocks are up!

The dollar is getting slaughtered again today but don't worry:  Stocks are up!:

All Is Well!:



PS

I gotta kick out of this this morning:

Is Better to Go Long Gold Versus Equities?

I hate asking such a thing after seeing gold rise $25 today.   However, the question is a valid one in my view.

As the Fed steers the Titanic straight into the QE iceberg one must seriously begin asking themselves if they want to be in hard assets over stocks.

After all, the dollar will almost assuredly see further tankage once further easing is announced.  This will then place further pressure on the consumer as the bare necessities begin eating up more and more of their disposable income.

As we saw after the commodity bubble in March of 2008, equities down the line are at high risk of getting slaightered as the our purchasing power dries up.

It's important to realize that stocks are pretty much priced for perfection at this point because the the Fed's threat of quantitative easing has created high demand for stocks as traders try and front run the Fed's actions.

The problem here is stocks are not being bought for earnings or fundementals.  They are being bought based on pure speculation that the Fed will save us if the economy does not turn around. 

Essentially, the Fed has created a false sense of security for investors which is a very dangerous precedent.  I am sure they are thrilled to see all of this bubble blowing.  Ater all, their jawboning is designed to try and lure investors back into taking risk.

In their eyes, the only way to escape this Great Recession is to grow out of it.  The problem here is there is no way to grow out of this nightmare because our foundation is built out of sand.

None of the real issues have been dealt with: 

• The trillions of dollars of losses still remain on the banks balance sheets. 
• Our government continues to run massive deficits as they try and fend of this financial collapse. 
• The bailouts that add to our deficits have not been stopped.
• The fraud that has created this mess has turned into one giant cover up.
• Foreclosuregate continues to grow like a cancer without a cure throughout the banking system.

Essentially, nothing has been fixed.  As a result, nothing is going to change because the real problems have not been dealt with.

What did Einstein say?:  "The definaition of insanity is doing the same things all over again and expecting different results."

Have Investors Had Enough?

This is what has me concerned.  When I look at certain areas of the market you have to wonder if the market is trying to send a message to Washington that they are sick and tired of watching this trainwreck. 

Some signs of this are clear:

• Gold is hitting new highs on an almost daily basis. 
• The Yen(which is currency of a country that's more bankrupt then we are) is now sitting at 15 year highs against the dollar.
• Central bankers are beginning to back away from our treasury debt.

The only positive thing that's working right now for Wall St is stocks but does that really matter in the grand scheme of things?  After all, they are priced in US dollars. 

You have to ask yourself:  If the dollar continues to lose it's purchasing power are you really growing your wealth if the market goes up?

This is why I asked the gold question in the headline of this post. Before I start here let me state that this is not investment advice.  It's just how I see things right now.

So why gold over stocks?  Well, first of all, there has been a strong correlation between the way gold and stocks have been trading(especially in the last week): 

Here is the S&P over the past few weeks:

And here is etf GLD which tracks gold:

What I like about the gold versus stocks year to date is it's been less volatile and it has also performed better.  Gold is up over 20% versus the single digits seen in the S&P.

What's more attractive to me when it comes to gold is the current economic climate.  You have every tailwind possible for the gold trade.  We have tremendous amounts of fear, lack of confidence in the US dollar, and plans by the Fed to cheapen the currency even further.

To be fair, stocks get help from some of these tailwinds as well.  The problem here is when it comes to valuations or more importantly real wealth.  The risk to equities is two fold in my book:

First:  You have stocks priced for perfection in an environment where the cheapening dollar is going to hamper consumer spending.  This will eventually be realized in bad earnings.

Secondly, if stocks go up(and thats a big if moving forward), you are increasing your wealth in a currency that is losing it's value.  As a result,  your real growth in wealth relative to the drop in the value of the currency could actually be a net negative.

Think about it this way:  If stocks rise 8% but the cost of living in inflation adjusted terms rises by 10% during that same period have you really gotten anywhere?

The Bottom Line

Let me be the first to say that I am not suggesting that you sell all of your stocks and buy gold.  What I am trying to do is make a point that having all of your assets priced in denominated dollars is very risky when you look at the world we currently live in.

Inflationary and even hyperinflationary panics have been seen throughout time.  They can also hit very rapidly which is why you need to be prepared for them.  Art Cashin was actually talking about the risks of hyperinflation today.

Folks, risks that were unthinkable a few short years ago are now real.  The impossible has now become possible.

Foreclosuregate has only heightened the level anxiety out there and the market is acting extremely unstable. 

If you are long you might want to think about adding gold to your portfolio because they are both headed in the same direction.

The key advantage of owning gold is if the financial world panics and stocks fall off a cliff, gold will hold up much better than your equity positions because it will be one of the first places money runs to hide.

The one downside to the gold trade is the risk that the Fed does a 180 and realizes that they must raise rates in order to fight inflation and stabilize the bi-polar market.

This of course would lead us into a deflationary collapse so the risk here is minimal in my view because the Fed does not seem to be able to accept such an outcome.

These are certainly unprecedented times and as I always preach:  Diversification is a must and that includes diversifying out of the US dollar.

Disclosure:  No new positions taken at the time of publication.

US Dollar: ZIRP or Bust

Keep pushing it Mr. Bernanke.  Gold is already up $24 as I type this morning:

This has gotten comical to watch at this point. The market keeps rockin to that new #1 tune QE2.

To QE or not to QE: That is the Question!

Stocks closed flat today after a volatile day of trading.  I wanted to start with the 3 year treasury auction today which was far from impressive:

"Treasuries declined after the government’s sale of $32 billion in three-year debt, the first of three offerings this week of $66 billion in notes and bonds, attracted weaker demand than at past auctions.

The 2.95 bid-to-cover ratio at today’s auction compared with 3.21 at the previous sale and an average of 3.12 for the past 10 offerings.

“The details of the auction do look weak,” said BNP’s Prakash. “Treasury buyers are looking to buy what the Fed buys right now, and that means more intermediate Treasuries. Before the Fed makes its decision there will continue to be lots of uncertainty.”

Indirect Bidders

Indirect bidders, an investor class that includes foreign central banks, purchased 29 percent of the three-year notes at today’s sale, compared with 42.4 percent at the previous auction on Sept. 7 and an average of 47.5 percent for the past 10 sales.

Direct bidders, non-primary-dealer investors that place their bids directly with the Treasury, bought 11.9 percent, compared with 11.7 percent of the securities at the prior sale and an average of 13.2 percent for the past 10 auctions."

My Take:

The 10 year no likey this news:

This is pretty ugly when you consider the market has all but priced in a second QE by the Fed.  You have to wonder why the world's central banks backed off big time today today's auction.

I mean why wouldn't you front run the Fed and pile into treasuries if you are a central banker?  Buy today and then sell to the Fed at a higher price tomorrow.  Sounds like easy money right?

Perhaps some are beginning to hedge on the QEII bet?  The FOMC minutes that were released today suggested that things would have to get much worse before they would consider another QE.

Even some of the pigmen are starting to admit that they don't believe another QE will work.  Morgan Stanley's Stephen Roach couldn't have been more blunt when asked about QE(his answer is in the last 30 seconds of the video):





I couldn't agree more Steven.  There is no demand to borrow and spend because the US consumer is shell shocked by the worst economy since the Great Depression.  We are done consuming for a looooong time because our personal balance sheets are as bad as the banks.

Housing is a perfect example of how averse to risk the consumer has become.  Houses(that are 30% cheaper) remain vacant even though lending rates have fallen to a record 3-7/8%.

There isn't a damn thing the Fed can do to change the consumers spending habits right now.  They could do a $10 trillion QE or another twelve as Stephen suggested above.  It's won't matter because the money can't get out into the real economy if the consumer isn't willing to borrow and spend it.

The only thing another QE would do is blow more bubbles within our financial system as the money begins flowing into various assets like commodities, bonds,  and stocks.

All J6P will see is higher prices on everything at a time where they can't afford it.

The reason why Wall St keeps demanding  this because THEY are the beneficiaries of QE.  As usual it comes at the taxpayers expense.

I really hope the Fed wakes up to this reality and never pulls the QE trigger.  I know  it's likely going to happen but a guy can dream can't he?

The Bottom Line

Today was an interesting tape.  The market tried moved higher as the bubbletards on CNBC pounded the QE drums following the the FOMC statement.

It worked for a while but we sold off sharply at the end of the day to close flat.  I continue onto hold my small shorts positions. 

It appears more and more that when the QE announcement finally does happen it may end up being a classic "sell the news" event.  If it doesn't come at all or if the Fed chickens out and announces some puny version of it then the markets could move violently lower.

I still hold out hope that the Fed ends up being like that little boy who kept crying "Wolf!". 

However, I see little evidence that this is gonna happen because the market is dying for a second does of financial "heroine".

Hitler's Nightmare

I had the original clip of this up a year or two ago for a chuckle.

This remake is a classic in case you missed it on several other sites:

We're on a Road to Nowhere

Today was a total snooze fest as the S&P closed the day essentially flat. 

You know it's funny, I keep hearing about this glorious rally that the markets have seen in the last several weeks.  

The bulltards on CNBC deliriously tell us that all is well because the Fed is going to "QE" us back into prosperity.  

They then explain that if the Fed doesn't QE then it means the economy the economy is recovering so you need to buy stocks no matter what the outcome.

These clowns try to add fuel to the fire by explaining that interest rates rates are at an all time low which will eventually stimulate the economy(Yeah ok 3.875% mortgage rates and houses still remain vacant.  How's that workin for ya?).  Sorry couldn't resist.

Given this supposed "perfect storm" for equities I must say that I am not all impressed at the recent bounce when you look at the year as a whole:

As you can see above, the DOW has essentially flatlined for the year.  We still remain about 300 points below the highs for the year and about 400 points above where we started 2010. 

Essentially one rough day in the markets could wipe out all of the gains for the year.

Consider my a cynic until I see the DOW break through the highs for the year.  I am curious to see what happens if we bounce up a tad and get there. 

As I ponder about where we head from here I keep asking myself the following question:  What else can possibly be done to prop up stocks, and how do we move higher from here?  I really couldn't come up with much of an answer to either.

Think about it:

You have the Fed pumping in trillions of liquidity into the markets, rates are at all time lows, and companies no longer have to mark their losses to market.

The only answer I could come up that could send stocks higher is an economic recovery. 

Uhhh....Good luck with that one.  The chances of this developing are slim to none when you look at the unemployment levels in this country.

To be fair to the bulls I also ask myself the same question from the other side:  What could possibly happen to push stocks lower"?

I had no problem with this one:

-  Out of control deficits at both the state and federal levels.
-  Falling dollar/higher commodities.
-  Massive unemployment.
-  Foreclosuregate:  Can you say Subrime Crisis X 100?
-  Underfunded pensions.
-  Robotic market manipulation(I guess this one could go on either side)
-  Lack of confidence.

I could continue but I will leave it there.

BTW let me elaborate on the one point from above...A quick chart on some commodities.  Many were lock limit up last night.  I picked wheat for the chart below but pretty much all of them looked the same except for oil:

The Bottom Line

Without an economic recovery I think the bulls are in trouble.  The market has failed to reach new highs for the year despite receiving EVERY tailwind known to god.

The Fed is in a real bad spot here.  They market is 100% all in on the Fed doing another QE.  If they fail to deliver the market is going to throw a hissy fit and reverse course IMO. 

If the Fed does decide pull the trigger then you are going to see a lot more lock limit up days when it comes to commodities.  A dropping dollar as the heating bills start to add up during the winter is going to be painful for a lot of people who are barely making ends meet as it is.

We get the Fed FOMC minutes tomorrow.  Pay attention to this.  Any hint of easing could create some violence in the currency and commoditity markets.

60 Minutes gets the "Silent Treatment" from Wall St

Make sure you check out tonight's 60 Minutes piece on high frequency trading tonight.

What is interesting here is how no one on Wall St was willing talk about it. They couldn't even go in and see the building for crying out loud.

I can't help but ask: What is Wall St trying to hide?

As Steve notes below, high frequency trading appears to just another game where Wall St attempts to "master the markets". In other words" "manipulate them.

It appears the only way to make money on the street at these days is by blatantly cheating.  If what was going on was legitimate then they wouldn't be avoiding 60 Minutes like the plague.

I don't know about you but it makes me extremely nervous that there are only 15 people that are basically running "the nerve center" of the markets.

Again a few questions:

Who are these people and what do they have the ability to do when it comes to market making? Where did they used to work before they came to the exchanges? Goldman Sachs? JP Morgan? Band of America?

I will update this tonight if anything newsworthy comes out in this piece.

However, since nobody will talk, I think the chances of getting any solid information as to how this HFT game actually works are slim to none.

I'll say it again:  Why anyone invests their life savings in this shark tank is beyond me.




Update

Here is the 60 Minutes piece in it's entirety.  I suggest you take a peek.  It's very well done and it made me feel even less confident in the stock market.

Enjoy: