Updated: July 2013 Market Call
Ahead of the NFP, I prefer be short the SPX and YEN and long VOL. I am going to look for some stupid strong GOLD day and will short GOLD when I see it. I think GOLD is going to $1000. Regarding my prior post on the carry trade being blown up and the change from duration to economic targets and what this did for gamma…blah, blah…read this article on Bridgewater interest hedging.
I was emailing last night with a former colleague and he wrote a few interesting things that I will reprint here:
“I had another thought. Let’s say hypothetically that the Fed now believes that QE is not working. The evidence showing its costs are greater than its benefits (as much as they hate to admit it). So they or enough of them believe it needs to be stopped. Thusly the BS that things are getting better (when they are not) and they are considering tapering. HOWEVER…many of them now fear the damage of stopping QE could be GREATER than the damage of continuing QE even though it is a bad thing (especially compared to never having done it in first place). Ergo they concluding QE is a negative, but stopping QE now that it in place is a greater negative. They saw the violent reaction from the bond market at the mere hint that tapering might begin and it has really spooked them. They are worried about a similar reaction from the markets as occurred in 1987 when rates were raised, which would be terribly embarrassing for them (even though after that market crash things moved steadily up and to the right afterwards). They had no clue the degree to which the addicts are addicted to the drugs. They don’t control the market, the market controls them. So talk about being stuck between a rock and a hard place. These guys have put themselves in the worst possible box, and have no idea what to do, which is why all the garbled and inconsistent communication from them.”
Which was followed by this email:
“Regarding my prior point I believe they had a holy sh*t moment when all they did was hint about considering to ultimately one day think about perhaps planning to eventually when the time is right stop buying $85B of Treasuries et al per month, and the following took place (30 year mortgage rate published by Bankrate.com). Wonder how this chart (and many others) would look if they actually stopped? And that chart would reflect “market” conditions which is what a capitalistic economy is supposed to have and is best for efficient capital distribution. I guess the Fed fears natural market conditions, which means this is no longer a capitalistic economy guided by the invisible hand, but instead the heavy, sloppy, academic, arrogant, naïve, and politicized hand. So what do you do when what you are doing is really bad, and stopping is really bad? I hope to god the answer is not more.”
Prior Market Post Below…from July 1
Here is a link to my short term SPX chart, following up on last night’s post. I did watch the market today and that was nothing to get excited about on the long side. A few wildcards to deal with: (i) short week, (ii) NFP on Friday and (iii) earnings kick off in ~2 weeks. I updated my short terms SPX chart here. I think we will have a mini-rally into the NFP and we might continue to rally into next week as this is a holiday week. I think money managers come back next week and start to think about exposures and risk. In short I think the market moves lower into mid September. It is not all down, but the trend is lower with targets at 1515-1520 and eventual convergence with support line from the March 2009 low around early September. That should put the SPX around 1420-1425. I will put a few shorts on this week and look to hedge my longs into the short term upside target of ~1625-40. When I feel really confident of this move I will aggressive trim the longs and juice the short. I am not there yet.
* UPDATE 1: Smartest point I read today “Thanks to unintended consequences of Dodd-Frank, the sell-side will likely sit this one out. That’s been evident in the lack of liquidity going into quarter end. With the buy-side having to provide liquidity for their own position, it is not clear where the clearing price is. My guess is it’s not in line.”
** UPDATE 2: I shorted the SPX, but in a small position about 1/3 of target size. I shorted the YEN and went long VOL. All positions are manageable and I can close or increase the size.
* The next post is likely an SDN, networking post…
I think that QE was a delaying action fought by the fed with the primary goal of allowing the banking system to heal by offloading assets and supporting their balance sheets with a buyer of last resort. It would stop when the banks were going concerns.
I don’t agree that the fed was “shocked” by the market reaction. Bernanke would not have scheduled a press conference to deliver the fed update (not normal) if he thought things would be OK.
I think the emerging markets turn soon. Brazil is back where it was in 2009. And today is not anything like 2009.
Hope you’re well. I enjoy these posts, but as your intro says I don’t understand most of them. 🙂
This one I did. Those two emails are the best and most succinct summary of the current financial mess I’ve seen. On this 4th of July, the only thing I cling to is hope and faith that the founding principles this country, including limited government, will somehow prevail. Take care, Gary
Gary Breitbord cell: 508-740-9310 Gbreitbo@aol.com
Pingback: Market Thoughts Post Labor Day Weekend 2013 | SIWDT