Morning Audibles 3.31.10 - Last Day of MBS Purchases by Fed

If anybody really thinks this is the end of the line, they probably need their head examined. But it's nice to observe occasions with a little cake and a few party favors.

After all, tomorrow is April Fools Day, and therefore we have more important things on hand to celebrate in this country.


I could probably be really funny here and conjecture about all the things that might happen as MBS purchases by the FED fade under the carpet into the past, but I'd rather take a more normal approach, and treat it for what it is... Here, I'll give you the Easter Bunny version (so as to be seasonal).

Let's review what the Fed buying MBS did in the first place.



- Helped bolster fraudulent balance sheets for the next wave of liquidations.
- Given banks time to raise capital & loan loss reserves ahead of that.
- Given a feeling of 'safety' (with implicit guarantees)
- Allow for a period of "risk on" trades to occur (more on that later)*
- Create a hypothetical conduit for "risk on" trades to unwind to a desired direction (don't laugh or spit out your coffee when I say that, while I doubt that was "in the plan" - I don't think the FED is that smart), It may end up as a bonus feature.

Still, while it is now easy to understand what this form of QE accomplished in hindsight, it is difficult to understand what the withdraw of such will produce.

Remember, this move has been 'telegraphed' for a long time. Amen Ra (on this blog, and many other blogs, for that matter, have even taken to doing "countdowns" as the final day approached. To offer a comparison, remember back in February (on the Thursday before OPEX - after the close of the markets) when the FED did a surprise hike on the "discount rate"? Remember the market reaction? A quick "whoosh" in AH trading, but by the next morning, algos & HFT were treating it as nothing ever happened. Now, remember, the "raising of the discount rate" was another move that was widely telegraphed (yet nobody was sure when it was coming). This policy shift (with regards to MBS), has been known about for quite some time.

So I'm going to hazard a guess that BASICALLY NOTHING HAPPENS. Or, if it does (and on what day it occurs), will likely be attributable to the mysterious way in which the markets move in aggregate.

Bottom line? This is "priced in" (and has been for quite some time).

Now we can get in to OTHER hypothesis. Being "priced in" could actually mean that a "RISK OFF*" trend needs to ensue (as hinted about above). It's a matter of 'timing'. The official end of these purchases by the Fed comes at the end of the first quarter. So it could be, in hindsight, that the apparent strength in equities over the past 6-8 weeks (especially PD bank stocks), has been typical "window dressing" in anticipation of the final event. I mean, even if you own a "clunker" car, you're probably going to slop it up with a little "Armor-All" if someone is going to take a look at it. Right?

So I'd nominate the same hypothesis as we've been doing for the past few weeks as the possible outcome.

- Equities are probably a little overbought 'technically' here, it's probably time for a little correction
- The dollar seems to be readying for its final medium term rally of strength
- The Treasury needs yields to flatten (appropriate time for some RISK ON trades)

These are "highly probable" occurrences, but, as always, the TIMING can't be predicted. The exact duration & steepness of the move (how far - how fast) is tough to determine as well. So if you're looking at in terms of equity index levels, what does it mean? 1150? 1120? 1000? Do we push minimally higher first?

My best guess is that if we push higher now (say, within the next 3 trading days), it will only be 'marginally' higher (I've set 1183 as a bogey in that case). One thing that this Fed & this Administration have successfully accomplished thus far is to EXTEND & PRETEND. Someday we'll probably crash. But the easiest way to "get by" in the meantime is to AVOID going totally vertical.

ANOTHER date coming up on the calendar is April 14th (the anniversary of the sinking of the Titanic). I suppose we need to get about "re-arranging some deck chairs" in order to pay proper tribute.

So RELAX, and enjoy the cruise in one of these babies!

AmenRa's Daily Candle Wrap

SPX
Doji day. Boring. Midpoint stayed above 10 SMA. Held fibo ext 85.4%. No daily 3LB changes. Only 1 more day of QE!!!




DXY
Bullish short day. Tested Gann 2x1 level and passed. Uptrend is back (Go Bucky!). No daily 3LB changes.




VIX
Bearish short day. Tested the fibo ext 50% and failed. Did not hold the 21 SMA. Midpoint still above 10 SMA (barely). No daily 3LB changes.



GOLD
Bearish short day. Confirmed doji to the downside. Back below the 89, 55, 21 and 10 SMA's. No daily 3LB changes.




EURUSD
Bearish short day. Midpoint is still below the 10 SMA. Next fibo level of 1.2935 is back in sight. No daily 3LB changes.




BAC
Bearish long day. Three previous days all show heavy selling pressure. Couldn't hold the fibo ext 85.4%. No daily 3LB changes.

Morning Audibles 3.30.10 - P2, The Run of Forrest Gump

On just about every financial blog I read, the constant topic seems to be, "How long will this bull run continue, seemingly unabated"? I've been known to ponder the same question from time to time. My ponderer is sore. So instead of trying to figure it out on charts or anything (which enough, ahem, "experts", have done already). I thought I'd illustrate what seems to be the path we're following in a metaphorical sense (both in terms of possible duration, and underlying motive for doing so).


Everyone remembers Forrest Gump running across America. Most famously, he ran across America back to back several times over a span of three years to get over the heartbreak of Jenny's leaving him.

Putting aside the symbolism of all his runs, one wonders how realistic his ultramarathon run was (even though it's supposedly fictional). What route he had completed? How does that measure up vs. real ultra marathon runners? Here's are some clues: 




Forrest started his three-year-long run from his front porch in Greenbow, AL in the early morning of July 5, 1976. 
 
Forrest headed to the west first. Across Greenbow (fictional) County, followed by the "Great State of Alabama", and clear to the Pacific Ocean (reaching it at the location of the Santa Monica Pier, Santa Monica, CA. He then turned around, and as he says "kept on going" and got to another ocean (Atlantic Ocean) at Marshall Point Lighthouse, Marshall Point Road, Port Clyde, ME. He only stopped for sleeping, eating and going to bathroom.

 
After more than two years, Forrest was about to cross the Mississippi River for the 4th time somewhere near St. Louis, MO. The TV screen (in the background of the film) actually showed a sketch of his route up to then.
 
Nobody really knows what route Forrest took after he crossed Mississippi River for the 4th time, but we do know where and when he ended his run. It is obvious from the location in the film, when Forrest states "I'm pretty tired... I think I'll go home", he ended his run at Monument Valley, UT on US Highway 163 near UT and AZ border in the evening of September 19, 1979. He had run for 3 years 2 months 14 days and 16 hours.
 
Obviously, the single most important clue is the sketch of the route on the TV screen. The following image shows a enlarged and sharpened frame of it.






From this sketch we know in more than two years he ran across America about 3.5 times. For the remaining a year or less, he probably kept running to the east, hit the east coast somewhere, turned around and started his fifth crossing from east to west. We know he ended the run in Utah. The question is: did he stop in Utah before he finished the fifth crossing or after he finished the fifth crossing and started the sixth crossing from the west coast? My guess is that he didn't finish the fifth crossing because he probably didn't have enough time otherwise, if he kept the same pace throughout his journey. The last movie clip indicates that just before he stopped at Monument Valley, UT, he was running from east to west because when he said "I'm pretty tired. I think I'll go home now", he went to the opposite direction, his home direction.    

Based on the sketch and some filling in of blanks, the following is list of cities that Forrest probably passed through: 






    
Cross1
    
Cross2
    
Cross3
    
Cross4
    
Cross5
   
    
Mobile, AL
    
Santa Monica Pier, Santa Monica, CA
    
Marshall Point Rd, Port Clyde, ME
    
San Francisco, CA
    
Norfolk, VA
   
    
Dallas, TX
    
Las Vegas, NV
    
Burlington, VT
    
Reno, NV
    
Pittsburgh, PA
   
    
Alamogordo, NM
    
St George, UT
    
Watertown, NY
    
Salt Lake City, UT
    
Indianapolis, IN
   
    
Phoenix, AZ
    
Albuquerque, NM
    
Cleveland, OH
    
Fort Duchesne, UT
    
Lincoln, NE
   
    
Santa Monica Pier, Santa Monica, CA
    
Oklahoma City, OK
    
Lansing, MI
    
Craig, CO
    
Denver, CO
   
    
    
Knoxville, TN
    
Chicago, IL
    
Denver, CO
    
US-163, UT
   
    
    
Harrisonburg, VA
    
Rapid City, SD
    
St Louis, MO
    
   
    
    
Washington, DC
    
Boise, ID
    
Richmond, VA
    
   
    
    
New York, NY
    
Portland, OR
    
Norfolk, VA
    
   
    
    
Boston, MA
    
San Francisco, CA
    
    
   
    
    
Marshall Point Rd, Port Clyde, ME
    
    
    
   
 


Using these cities as waypoints, it's loosely possible to generate the Forrest Gump Route. This is what it looks like.






Notice that the route generated does not match the sketch precisely. This is because 1) The route is entirely based on drivable roads. The route engine used tends to pick fast, major highways, while Forrest might pick any roads, including less important country roads; 2) The sketch is not very realistic in areas such as big mountain ranges and deserts, where there are simply no roads, assuming he always ran on some kind of roads. Forrest wasn't THAT dumb. 

Here's a comparison of Forrest Gump with some famous REAL long distance runners: 





    
Runner
    
Forrest Gump
    
Jesper Olsen
    
Dean Kamazes
    
Mark Covert
    
Frank Giannino
   
    
Duration      (days) 
    
1169.7
    
660
    
50
    
14600
    
46.3
   
    
Distance      (miles)
    
15182
    
16156
    
1310
    
150000
    
3000
   
    
Speed      (miles/day)
    
13.0
    
24.5
    
26.2
    
10.3
    
64.8
   
    
Description
    
Forrest Gump ran across America back-to-back for five times in a span of three years (1976 - 1979), covered a distance of some 15,000 miles.
    
Jesper Olsen of Denmark is the record holder of world run. He ran around the world in 22 months, on a route consisting of: London-Copenhagen-Moscow-Vladivostok-(air)-Niigata-Tokyo-(air)-Sydney-Perth-(air)-Los Angeles-Vancouver-New York-(air)-Shannon-Dublin-(air)-Liverpool-London. It covers a land distance of some 26000 km.
    
Dean Kamazes, the ultramarathon man, was ranked by a TIME magazine poll as one the "Top 100 Influential People in the World." One of his recent endeavors was running 50 marathons, in all 50 states, in 50 consecutive days. 
    
Mark Covert, a teacher of Lancaster, CA, is the longest streaker in the U.S., having run at least one mile a day everyday since July 23, 1968, which is more than 40 years and still counting! His lifetime total distance is over 150,000 miles so far.
    
The trans USA ultramarathon record is 46 days 8 hours 36 minutes (San Francisco, CA - New York, NY) set by Frank Giannino in 1980. 
   
 


By comparison Forrest Gump was more like a streak runner than a marathoner. He ran at a moderate rate everyday for a relatively long period of time. Keep in mind that he did not run for setting record. He did it for clearing his mind as he explained "My mama always said 'you got to put the past behind you before you can move on' and I think that's my run was all about."


Lastly, (getting back to equities), I say... "Forrest...Go back to Greenbow"...

AmenRa's Daily Candle Wrap

SPX
Bullish short day. Boring. Midpoint stayed above 10 SMA. Back above fibo ext 85.4%. No daily 3LB changes. Only 2 more days of QE!!!



DXY
Bearish spinning top day. Gann 2x1 level failed. Uptrend is back (so far so good). No daily 3LB changes.




VIX
Bearish short day. Tested the 50% fibo ext and failed. Did not hold the 21 SMA. Midpoint still above 10 SMA. No daily 3LB changes.




GOLD
Doji day. Still below the 89 and 21 SMA's. Held the 144 SMA. Daily 3LB reversal up with reversal now 1088.80.




EURUSD
Bullish short day. Midpoint is still below the 10 SMA. Next fibo level of 1.2935 is coming soon. No daily 3LB changes. Head fake?




10YR BOND
Bearish harami day. Closed above weekly 3LB reversal price of 38.62. The last three days form a short term wedge. No daily 3LB changes.

Morning Audibles 3.29.10 - It's Spring, But Keep the Earmuffs Handy

This past weekend I did hardly anything market or blog related. I stayed almost completely away from economic and financial news and instead worked around the yard most of the weekend getting areas cleaned out and ready for spring planting.


Naturally, come late Sunday, early Monday, I have to post a thread for this blog so I did a quick perusal of some of the usual haunts (Bloomberg, ZH, etc.) to see if there were any 'headline' happenings that might affect the markets this week. Before I get into that, I should start with a summary of the ideas I had in my head after the close of Friday. Sort of a "what worries me, what doesn't worry me" checklist. I'll list some of those here.


WHAT DOESN'T WORRY ME
- I believe that fundamentally equities are in bubble territory and will eventually correct.
- I apply that logic to both short and long term (medium term I'm still debating). To quantify that, perhaps a 5-10% correction in the short term, and eventually possibly a 50% correction (or more) longer term
- I'm not overly concerned with my own economic status, however, I'd prefer not to lose money trying to 'short' equities while the markets ar behaving irrational.


WHAT DOES WORRY ME
- Markets have shown that they can stay irrational for a long time.
- I'm worried that now that we seem to be in the latter phases of "bubble mentality", that NEWS FLOW tends to be the "justification of choice" to keep a bid under the market. Emotionally, it's very difficult to hold a position against that.
- I'm worried that, going into this week, the DIAL of that news flow is going to be turned to HIGH VOLUME.

If that's the case, and you're a bear, it might be best to put the ear muffs on for awhile.


Here are some examples of how the MSM and stock touters are going to operate this week.


1. End of quarter - NEED to "window dress" (we still have 3 more days to endure).
2. Proximity of S&P index to 1,200. (It's sure to get there, right?).
3. Manic Mondays - Market always "melts-up" on Mondays, right. Futures are already green.
4. Friday's jobs report will show employment gains (census jobs - but who cares about details)?
5. Earnings season coming
6. Economic Confidence numbers in Europe improving
7. Greece bailed out.
8. Dollar strong (now WAIT, this 'should' be a negative right? This week they'll spin it POSITIVE and say that since Treasuries are weak, and with a falling Euro, the only asset class to buy will be US equities - YOU WATCH).
9. Then, you get stuff like this that I read over at ZH

I can tell you THAT was met with much "consternation". The article seemed to give the impression that a "melt up" was imminent. Frankly, I don't think it implies anything in particular (comparing to the similar two spikes to now and last March when the markets started on this P2 run). I'll give you some reasons:

- Both came at the end of March. Japans fiscal year end. This may have had more to do with carry trade unwinding and squaring than anything else. Same with last year. This happens EVERY March.

- Look at the EOQ months on the chart. All EOQ months show spikes (rebalancing). For that matter, the smaller spike that preceded January '10 was followed by a 'correction in equities' (and in fact, the trough afterwards was perhaps just an insurance policy to get through the quarter).

- The large cover SPY positions may have even been the Fed, who was instructed to keep a put under the market until the HC bill was passed. In fact, last week there were several attempts to take the market down, which all failed.

The bottom line is, if you have EARMUFFS on, you don't have to really see anything sinister in the markets. I could be wrong here, but that's my position.

Two things I think we do have to watch very closely are long bond prices, and the EUR/USD. Last week, Goldman did a 180. (Going from a BUY recommendation on the Eur with a STOP LOSS at 1.34, to a SELL rating on it with a STOP at 1.35). This morning, 1.35 is likely to be tested. It would be AMAZING to see GS get stopped out TWICE on a public call they made within a few days time.

If Goldman IS on the right side of the Euro trade, then it would seem to me that ANY news article you read about the situation in Europe having been mitigated, is a load of crap.

As for bond prices, I mentioned last week that the last time the 10y note put a 4 handle on (last June), led to a 9% correction in equities. Don't forget that CHICAGO OWNS NEW YORK. Whatever Bernanke does, he cannot let the long bond market get away. Recently, it's been getting tougher and tougher for the Treasury to roll over short term debt. With this Administration and Congress showing no indication that they can say "no" to any spending opportunity, the cost of funding these measures at higher yields up the curve is simply not feasible. 

It would be a lot more feasible to tank equities at this point than to let the long bond slip away. 

But these last two ideas aren't things that are understood in CRAMERICA. Cramericans will be fed a steady diet of sugar coated news. For the rest, this is your likely posture for the week ahead.