Thursday, May 6, 2010

Illiquid Plunge

I just got back home from a trip and today was one for the ages. It reminded me of the Long Term Capital crash in 1998.

Basically what happened today is Liquidity vanished as the computers took over.

What we know –

The Euro was down below 126
US Treasuries have gone parabolic in a flight to safety
Japan intervened to weaken the Yen
The EU will not undertake Quantitative Easing – they will not buy the bonds og Greece, Spain…
Bid/Ask spreads on some large stocks blew up – I saw one with a Bid of 1 cent and an Ask of $60 at the same time
Many Brokerage Firms were so overwhelmed with orders today that their online systems crashed – It was a Panic today!

What can be speculated –

Some guy at Citi actually put in an order to sell $15 billion of PG, not the $15 million he intended – Citi denies this trade
The Fed stepped in to buy Futures and stop the Crash – the President’s Working Group on Capital Markets was set up after the 1987 Crash to buy Futures if the Market is Crashing and prevent a full-scale panic
Washington will vote to stop the banks from speculating with Taxpayer money

We know that the markets are terrified that Greece will default and that will wipe out the Capital of several major European banks. These banks have seen their stocks crash in recent days. The entire Greek Rescue is designed to prevent these same banks from going insolvent.

The markets were down today and then the Dow fell about 700 points in about 10 minutes. There was no liquidity during this move, so when somebody wanted to sell, the sale price simply imploded. A large part of the trading today was computers trading with each other. That has been the game the whole way up, where stocks have risen on low volume, as computers have bought and there have been no shares to sell, so prices simply melt up. The fantasy melt up in prices came back to haunt the markets today.

The Eu leadership had better figure out a way to stabilize the PIIGS or the $6 trillion spent by Obama and The Fed to prop up asset prices will be worth jack ****.

EURO Fast Approaching 124

We are at the key support level of 1,150 on the SPX that I noted early this week. That didn’t take long…

The Euro has collapsed to 126.3 versus the 2008-2009 panic lows at 1.24

The European Panic Trade is obviously in full effect. Basically what is happening is that Greece’s citizens do not want their free lunch to go away (like a retirement age of 60), so they are rioting and forcing the government to refuse the IMF/EU bailout. If Greece refuses the bailout, then their only other option is to leave the Euro and default on their sovereign debt. This would crush the European banks which hold the debt.

European Banks in Freefall –

Credit Suisse (CS)
Deutsche Bank (DB)
ING (ING) – breaking down out of a serious base (yikes!)

Current Debt Levels –

Greece $236 Billion
Portugal $286 Billion
Ireland $867 Billion
Spain $1.1 Trillion
Italy $1.4 Trillion

If Greece is killing the banking system in Europe, then imagine what will happen when Spain blows up later this year!

If you have ever wondered why the US decided to get rid of “Marked to Market” pricing and move to “Marked to Fantasy” pricing, then look at what is no occurring in Europe.

Everybody knows that the banks of the US and Europe are insolvent and that the only thing keeping them propped up is bs accounting and Government support via the taxpayers purchasing of bad loans. They also know that the only reason asset prices are going up is because of Government-funded leverage and Government-sponsored manipulation of asset prices. It is simply a matter of when, not if asset prices collapse again.

So the EU is left with a couple options, if it does not want a full scale collapse of the Euro Zone Economy –

Start Quantitative Easing. This is when the EU will ultimately print about $2.5 trillion in money to buy these bad loans off the books of the European Banks. This would be great for Gold. This also may force Germany out of the EU.

Ease accounting rules to allow for the Marked to Fantasy pricing of bank assets. I would assume that this would lead to a massive rally in European Banks.

Let Greece, Portugal, Ireland, Italy and Spain (the PIIGS) leave the Euro and go back to their old currencies. They could then execute their own domestic Quantitative Easing and Currency Devaluation policies, to inflate away their debt – this is how Banana Republics do it and how the US will ultimately take care of all of its debt.

Let the PIIGS default and suffer through a Depression over the next few years as we work off all the bad debt and rebuild our economies.

I think the most probable outcomes in the short term are QE and Market to Fantasy. At some point in the future, we then either get the breaking up of the EU or mass sovereign defaults.

Expect some sort of resolution in the very near future, because right now the debt and currency markets in Europe are frozen and a full-scale funding crisis is eminent.

May 15th is a key time cycle, so this all may get resolved by late next week.

Wednesday, May 5, 2010

The Euro Is Imploding This Morning

The Euro cut through 1.30 and is now at 1.2812

There is rumor of a banking holiday being called in Greece today and the early closure of the Portugese Bond Market.

Europe appears to be pricing in defaults in the PIIGS. Expect emergency Quantitative Easing action in Europe very soon. it may be IMF driven to bring in the Fed's printing press.

Tuesday, May 4, 2010

Correction It Is

I think there were two reasons why the markets cratered today –

The Australian Resource “Super Tax”
Yesterday’s proposed 40% Tax on resource companies in Australia, that is supposed to pay for everything from diapers for old people to mass transit that nobody uses, crushed stocks like BHP Billion. This is an election year in Australia and the Socialists are trying to buy votes, but the mining companies and its political allies have already forced concessions on the proposal.

A Euro Panic
1.30 is major support on the Euro and there is a rumor that the Bank of International Settlements (The BIS) intervened to avoid a crash in The Euro today. The BIS is the Central Bank for Central Banks.

A few weeks ago I mentioned that the Swiss Government intervened (Blue Arrows) to weaken the Swiss Franc (FXF). It has collapsed since the intervention. The Swiss Franc now targets a complete retracement of its 2008 – 2009 rally.

I am assuming that the BIS intervention will act to stabilize the Euro, at least for the short term. Maybe that will help to stabilize Commodities and The Euro, and weaken the US Dollar and US Treasuries.

US Treasuries

The fear in Europe and Asia is forcing a lot of money into US Treasuries. This is just the beginning of the sovereign debt crisis, not the end. Think of Greece as Bear Sterns, which blew up many months before Lehman et al.

Stocks are putting in signs of a significant top building – fewer stocks working, fewer countries and sectors working and increasing daily volatility. I don’t think that the current selloff we are experiencing is the final top for US Stocks for the move off last year’s lows. China and most of Europe have probably put in their high for the year. The US will peak last, as it is the safe haven from the Euro.

Here are multi-year charts of several US Treasury ETFs. I am using these, because they have significant volume.

iShares 1-3 Year US Treasury Bond Fund (Symbol - SHY)
It’s a base on top of a base. The current yield is 0.85% (30-day SEC Yield). Nothing spectacular, but if it breaks out of this base, then it gets interesting on a Total Return basis.

iShares 3-7 Year US Treasury Bond Fund (Symbol - IEI)
That’s a big base. A breakout from here and I get excited. The current yield is 2.36% (30-day SEC Yield). It has gone straight up the last five weeks, but I am watching it very closely.

iShares 7-10 Year US Treasury Bond Fund (Symbol - IEF)
This sure looks like a breakout to me. The current yield is 3.38% (30-day SEC Yield).

iShares 20+ Year US Treasury Bond Fund (Symbol - TLT)
This is another possible breakout. The current yield is 4.37% (30-day SEC Yield). Long Term bonds are the most volatile, and TLT looks like it has a lot of room to run if the fear trade accelerates from here.

There is potential here, but they have gone up pretty sharply the last five week. The chart of TLT is the inverse of the charts of risky assets. As they have rallied, institutions have shorted Treasuries to buy risky assets. In my opinion, any significant correction in Stocks and Commodities make Treasuries an attractive place to be. It is simply a matter of when.

Monday, May 3, 2010

Is A Near Term Top In Place?

Volume was huge on Friday’s selling and stank today. Leadership is narrowing and less volume is needed to drive indexes higher with fewer and fewer names that making ever larger percentages of the weighted indexes (Apple is now over 17% of the NASDAQ 100 Index). When Apple finally cracks, it is game over for the Bull Market. The same goes for BIDU.

Recently, the markets have been a story of the Euro Fear Trade. Money is leaving Europe and plowing into the US Market, The US Dollar and Gold. The Euro (FXE) looks like it is going to test the lows of the bottom of the 2008 – 2009 panic.

A Potential Major Top May Be In Place For The Euro
Here is a long term chart of the Euro ($XEU). It looks like the Euro has made a 123 Lower Top. That is not a bullish pattern. The potential top is over 6 years in the making. Yikes! Be on your toes. How many people have told you about the death of the US Dollar? When was the last time that everybody was right at the same time?

Also on this chart is the price of the ETF for Gold (GLD). You can see that Gold broke out when the Euro broke out against the US Dollar in early 2002. It would not surprise me if Gold were putting in a 123 Higher Top here, along with the topping of the Euro. Again, how many people have been telling you to buy Gold recently?

There is no way that the Dollar cracks if the IMF is going to be the World’s bailout machine. The US is the biggest backer of the IMF, so the US Dollar has to stay strong to finance all of these immanent sovereign bailouts. The end game will probably be to roll a lot of junk sovereign debt into the IMF and then hyper-inflate the Dollar.

If Greece were allowed to default, then a lot of Europe’s largest banks would become insolvent – and we know what happened the last time the banks ran out of capital. So now we get the absurdity of Greece contributing to the EU/IMF bailout package that bails out Greece.

Any acceleration of sovereign debt default news is positive for Gold. Gold has been a safe haven during this Euro implosion. It is now at significant resistance. I sold out of Gold (GLD) and Gold Stocks (GDX) Friday and Monday.

The Secular Bull in Gold is probably alive and well, but I would not be surprised if this recent rally in Gold is the last we see out of the yellow metal for a while. I’d love to be able to buy Gold again at under $1,000 per ounce. However, I will keep trading Gold if it keeps going higher.

Here is the chart of the US Dollar ($USD). It sure looks to me like a bottom is trying to form (a 123 Higher Bottom). A trade above 90 confirms the new Bull for the Dollar. I would expect a multi-year Bull Market if 90 is exceeded.

Foreign Markets Have Been Hit
Shanghai bottomed first, so it stands to reason that it should top first as well. Shanghai ($SSEC) is now trading below all moving averages and has broken down out of a 1-year triangle. The pattern targets a minimum pullback to at least 2,100. That said, I have seen a lot of head-fakes recently and this would be the perfect setup to ramp prices back above 3,150 and spark the mother of all short squeezes in China – especially considering that Shanghai has already retraced 38% of its 2008-2009 rally. The natural place to look to short is a weak rally that fails into the 3,000 range.

You can’t tell the future, but you can put yourself in a position to make decisions at key price zones. The Dow Jones World Market Index ($DJW) hit one of those levels on a key date 4/15. DJW has now put in a lower high and is in a short term downtrend.

The same goes for the FTSE.

We are in the first few days of a new month and that has proven to be a good time for stocks, as mutual funds invest the 401k payroll contributions they receive. The NYSE ($NYA) has not been able to clear its 4/15 high. It now appears to have topped for the near term, with the obvious short on the rally into 7,600 last Thursday. 7430 is key support for The NYSE.

Major support on the S&P 500 is 1,150.

The boys who have engineered this rally over the last two months know all the key support levels and how important it is to keep prices marching higher in stocks.

The Metals ETF (XME) has run into resistance at $60. It now sits at key support of $55. The next big move wins. Long term support is at $50-52.

BHP Billiton (BHP) has plunged the last few weeks, and is now touching its 200-day EMA (The General’s Pullback). Maybe we get a sharp reversal up in Metals in the near term. If we do, does it last? If we don’t, then how low does BHP fall? FCX and US Steel (X) look the same.

Financials (XLF) have either topped or a pulling back in a very orderly fashion.

The same goes for Energy (XLE) and Retail (RTH)

So if buyers are exhausted and the markets want to pull back, we are at a logical price level and at a logical time for that to occur. However, if more buyers show up, there are still setups and I will be prepared to join in on the fun.

One more thing, I mentioned in my last post that US Treasuries had reversed back above a failed breakdown and that the Fed would hold down Interest Rates for as long as they needed to forward their policies. Well, long term Treasuries broke out above resistance on Friday and are now trading above all key moving averages. TLT is yielding over 4.25% - not bad in this environment, but it is a trading vehicle.