Tuesday, March 23, 2010

Yellen Indicates No Inflation Until 2013

From soon to be #2 at the Fed, Janet Yellen today –


“In light of these continuing headwinds in the financial system, the housing market, and the job market, I expect that the economy will be operating well below its potential for several years. Economists use the term “output gap” to refer to an economy that is operating below its potential. We define potential as the level where GDP would be if the economy were operating at full employment, meaning the highest level of employment we could sustain without triggering a rise in inflation. Obviously, with the unemployment rate so high, we are very far from that full employment level. In fact, the output gap was around negative 6 percent in the fourth quarter of 2009, based on estimates from the nonpartisan Congressional Budget Office, or CBO. That’s an enormous number and it means the U.S. economy was producing 6 percent fewer goods and services than it could have had we been at full employment. In view of my forecast of moderate growth and high unemployment, I don’t expect the output gap to completely disappear until sometime in 2013.

This idea of an output gap has important implications for inflation. We have a tremendous amount of slack in our economy. When unemployment is so high, wages and incomes tend to rise slowly, and producers and retailers have a hard time raising prices. That’s the situation we’re into today, and, as a result, underlying inflation pressures are already very low and trending downward. One simple gauge of these trends comes from looking at the U.S. Commerce Department’s price index for core personal consumption expenditures, which excludes the prices of volatile food and energy products. These prices have risen a modest 1.4 percent over the past 12 months, below the 2 percent rate that I and most of my fellow Fed policymakers consider an appropriate long-term price stability objective. I just predicted that the output gap might not disappear until 2013. If the economy continues to operate below its potential, then core inflation could move lower this year and next. “

She expects deflation over the next two years and no inflation until at least 2013!

The Government is borrowing at a pace of 9% of GDP this year, and growth this year should come in around 3%, or

9% Spending with borrowed money – 6% Output Gap (over capacity) = 3% Growth

What she is telling us is that the Government can print many more trillions of Dollars without worrying about any Inflationary consequences. Put another way, the Fed can keep on letting hedge funds and banks borrow at 0% and lever the money to infinity for at least the foreseeable future.

Thus today’s bonanza in the stock market.

Lots of Breakouts

Leaders have held the 20-day (Green Line) and have popped.

Here is my post mortem on some trades and some potential set ups.

These leaders broke out nicely –

There are many more set up just below resistance and we will see if the big boys move them out as well.

Disk Drives and Semiconductors are leading. I have never seen a time where that was bad.

Look at LRCX holding the 200-day and breaking out of a two-month trading range. KLAC and VSEA are potentially setting up the same way. AMAT looks like LRCX.

I like the looks of Western Digital (WDC – you own it) – holding support and then retaking the 50-day. Watch EMC. I like the gap up out of that big base, off of strong numbers. EMC is just sitting around – “never short a dull market” as the saying goes – hint, hint… JNPR looks similar. CSCO already started moving up today.

The IMF (The US Taxpayer) is going to bail out Greece. That should help to stabilize Europe, but it brings into question the use of the Euro as an alternative to the US Dollar. That will probably mean the EU will have to pay a higher yield to attract capital – time to restart the Dollar Carry Trade!

The Euro (FXE) has a humungous decision to make in the next few days. It is now testing the 61.8% retracement of the November 2008 – December 2009 rally. That’s right, the US Dollar has appreciated 11.1% since December 1st! I have my rules for how to enter. I will be mechanical if they trigger, because this could be a big driver for what goes on in the middle of 2010.

You can plainly see that the Oil Service ETF (OIH) and the Euro ETF (FXE) are highly correlated. The 15-hour EMA (Green Line) is often key support and resistance. If the US is not going to have inflation until 2013 and the Euro zone is paying a higher yield than the US, then the big boys will be looking for exploit the Dollar Carry Trade again at some point.

Let’s see if Commodities will come on line here. A reversal up in the Euro is key. I am watching Copper (JJC) very closely in this multi-week, narrow trading range.

Here is the Canadian Dollar (FXC). It broke out of a multi-month base and has sat around for a few days. Does the chart remind you of EMC or JNPR? A failure back through $97 on volume would not be good and a breakout will be great. Support below $97 is at $93. I am watching FXC closely.

EPP is the ETF for the Pacific Region minus Japan. It is 67% Australia and 30% Hong Kong / Singapore. EPP and FXC have a very close correlation, which tells me that Commodity-based Currencies and Economies have been going nowhere for about six months.

Here is the chart of Occidental Petroleum. It is very similar to the charts of FXC and EPP. Remember, the longer the base, the bigger the move if price can break out. I am watching these asset classes VERY closely.

Sunday, March 21, 2010

Like A Brick Wall

The Dollar hit key support and that night, the PM of Greece started to make noises again about the need for a better bailout and the possibility that the Euro could unravel. Again, this isn’t about telling the future, it is about knowing in advance where to look for potential resistance and support levels, and potential moves like this.

The question now is where is the next support level for UDN (or resistance level for the US Dollar)? Does UDN simply retest $26.4 or does it extend like the move for $28.8 to $27.4 and extend down to a level near $25.6?

I don’t care so much about currencies, but I am very interested in their impact on Commodity prices, because Commodities have been key leadership – Energy (OIH, XLE), Metals (XME), Gold (GLD, GDX). I will be closely key levels on these areas.

Oil Service (OIH) got hit for about 7% since the Dollar bottomed. Metals (XME) also was hit for about 6%, but is clearly now at key support.

Gold (GLD) is stuck in a three and a half month trading range. Critical resistance is $111.80

Copper (JJC) is now in its forth consolidation since mid-October. 1 & 2 led to nice rallies, while 3 led to a nasty break. There are some obvious support and resistance levels for JJC. Notice how on Monday, JJC cracked, only to see the market gap up hard at the open, to get back above support. Copper is currently up 40 cents over night, so we’ll see what tomorrow brings…

Apple is right above key support ($218.40 - $219.18). It has been sitting around for about 8 trading days, so a big move soon should not be a surprise.