Thursday Outlook: Another Bubble?

March 18, 2009


The printing presses are running overtime, the dollar is in peril, bonds rallied powerfully, and gold reversed course to close higher as another $1 trillion is tossed into the swamp.

The meat of the Fed’s statement follows:

“In these circumstances, the Federal Reserve will employ all available tools to promote economic recovery and to preserve price stability. The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and anticipates that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period. To provide greater support to mortgage lending and housing markets, the Committee decided today to increase the size of the Federal Reserve’s balance sheet further by purchasing up to an additional $750 billion of agency mortgage-backed securities, bringing its total purchases of these securities to up to $1.25 trillion this year, and to increase its purchases of agency debt this year by up to $100 billion to a total of up to $200 billion. Moreover, to help improve conditions in private credit markets, the Committee decided to purchase up to $300 billion of longer-term Treasury securities over the next six months. The Federal Reserve has launched the Term Asset-Backed Securities Loan Facility to facilitate the extension of credit to households and small businesses and anticipates that the range of eligible collateral for this facility is likely to be expanded to include other financial assets.”

The sword hanging over bond shorts has been the threat of the Fed buying long-term bonds. Another bubble is being created without any systemic changes to the system. It’s the same story throughout modern history—when in doubt, authorities will choose inflation every time.

Stock indexes rallied after the news. Financials are reportedly higher because the “bottom is in” so screams one headline. But, it may be more likely, per Andrew Wilkinson from Interactive Brokers, that loaned out stocks are being called-in creating a massive squeeze in Cititgroup (C) and others. Per Wilkinson:

“Intrigue continues in the June 5.0 strike options where arbitrageurs are using conversion plays that typically land a credit to take advantage of the squeeze. The volume in that line has more than 150,000 contracts trading both sides today with puts bought and calls sold when investors can position long of the stock. Earlier in the week rumors did the rounds that the authorities might be on the hunt for hard-to-borrow stock certificates in select financial names. This in itself has created a surge at AIG and Citigroup as desperate short-sellers try to cover their positions. The conversion trade could be established earlier in the week for a credit of 20 cents, but given the near-panic buying in the stock has shifted to a 1.10 cost to traders.”

Another stimulus package may also be in the works (ask Nancy) plus more bailouts down the road. It all might work to save the Fed’s client banks but it will come at a price for taxpayers and prices.

Let’s look at today’s action.

Volume increased today which is typical for Fed Day and breadth was impressive.

click to enlarge
















I’m just going to post a few charts today for a couple of reasons. I’m still operating at half capacity using an old laptop while I await receipt of a part shipment. Next, I think we should focus on just a few sectors today which were the focal point of today’s action. Lastly, I’m in shock but happy to be more spectator than participant at least for today.
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These markets are manipulated, and yes, even corrupt. Let them inflate; it’s what authorities want to do. Yesterday it was cover-up the losses with “mark to a model” nonsense. They’ll create another bubble and then deal with it down the road.

There’s another issue most have forgotten in the furious activity—it’s triple witching which begins in earnest tomorrow with trades settling on Friday. It will enhance volatility and confusion. A lot of stops in options and futures markets will be hit.

The next two days will be interesting. Investors are being sold a bill of goods. Nevertheless, confidence is a positive thing and as we wrote the other day TPTB wants to “pump you up.” They’re doing a good job so far.

That’s it for today and we’ll have a more detailed report tomorrow.

Disclaimer: Among other issues the ETF Digest maintains positions in TBT, GLD, DGP and USL.

The charts and comments are only the author’s view of market activity and aren’t recommendations to buy or sell any security. Market sectors and related ETFs are selected based on his opinion as to their importance in providing the viewer a comprehensive summary of market conditions for the featured period. Chart annotations aren’t predictive of any future market action rather they only demonstrate the author’s opinion as to a range of possibilities going forward.

Comments

[pacman1947:]

David,
Your quote says it all, "The next two days will be interesting. Investors are being sold a bill of goods."

One guru predicted, "They may just be posturing for the coming months of high unemployment, massive foreclosures, pension fund bankruptcies, and a run on the banks. When money becomes worthless, fear rules."

I don't know about you guys, but I'm there. I'm really scared this time.

Mar 19 07:52 AM

[prudentinve...:]

I am still not convinced that the fed will be able to reflate the asset bubble to anything near its former size. The collateral damage of increased consumer inflation will be hard to control, and it will be very difficult to inflate incomes in tandem with consumer prices.

The misguided bubble policies since the mid 90's have caused the ratio (incomes/assets) to become too low, and this needs to correcet through income inflation, asset deflation, or a combination.

With the consumer satiated, overcapacity in many sectors of the conomy, and globalisation, income inflation at any significant rate is unlikely.

The market responded by attempting asset deflation, but the fed is thwarting it.

Thus, the economy will remain mired, with asset prices disproportionately high compared to the wages of productive labor, killing the upward mobility that has always been a part of American psyche.

The crisis is by no means over, as the fed has just kicked the can a little farther down the road, with the fundamental imbalances not only still present, but exacerbated.

Mar 19 08:12 AM

[Mr. Big:]

Another bubble being created? Heck, I thought treasuries were already in a bubble!

Let's see.....the whole credit crisis and resulting economic downturn was a result (at least in big part) to cheap and easy credit. The cheap credit allowed people who can't afford homes to buy homes. So our great esteeemed leaders decided that in order to keep these people (who can't afford their homes) to keep their homes, they will decimate the dollar and inflate away the value of savings of other Americans. You know....I never pegged Americans to be such a socialistic group.

It's a sad day.....

Mar 19 09:09 AM

[Speedspirit:]

the good in all of this is when the smoke clears we will know exactly who to hold responsible and Guantanamo can become thier new home.

Mar 19 09:20 AM

[Chris B:]

Let's hope for a return to inflation.

The alternative is a Japan scenario or a depression, and an increase in the cost of servicing the national debt. I think the govt. gets this, which is why they are flooding the economy with dollars. If it takes a year or two of 8-10% inflation to get us out of this (which would only bring prices in line with what they would have been if deflation had never occurred) the government will accept that. After all, Paul Volker demonstrated that even persistent inflation can easily be killed by jacking up interest rates.

I'm in TBT too, and took a decent hit (on paper) yesterday. This hit was perfectly offset by my gains (on paper) in TIP. Yet, in the long run, there is no contradiction in these investments. A return to even 3-4% sustained inflation would result in double-digit % gains to TIP prices and to funds that short regular treasuries that are currently yielding 3% for 20 years (!).

The future has never been more obvious than it is now. The government is nearly unanimous in supporting expansionary policy. We can see an uptick in inflation from a mile away - even if it only ends up as a return to earlier low single digits levels. Yet, opportunities to exploit this dynamic abound.

Mar 19 09:26 AM

[Yankee Runn...:]

The big news from Ben was that he was going to buy back his own bonds. This of course means printing money at no cost to Fed, but it should have a cost on the dollar. This could be the big pivot point in the dollar. So lets see, expect a rise in gold, commodities, PG (multinational corps with large overseas profits). In other words, expect the price of real things to go up as the dollar goes down. Lets just hope they don't turn it into Wiemar 1923 where a wheelbarrow of paper money bought a loaf of bread. Helo Ben could be headed for hyperinflation

Mar 19 10:05 AM

[David Fry:]

"Your critical, judgmental statements on 3/17/09 of the new Obama administration's efforts to turn around the years of arrogant Republican mismanagement of our nation's economy are ridiculous beyond imagination. And to sit on sidelines writing your blog blasting away at politicians condemning their efforts to stem the misuse of TARP funds at AIG... what a joke. I'd like to see you run for Congress and see if they you do any better. How about offering something constructive for a change? Or are you just not capable of that kind of thinking?"

Name withheld.

I love these emails. They're fun and reflect partisan derangement on a magnitude seldom seen.

Oh, and yes, I could do a better job in my not so humble opinion!

Mar 19 10:19 AM

[unfaire:]

Inflation is the biggest Ponzi scheme in the world. It is mostly orchestrated by the government and taking advantages by the mass except those who hold cash and those who have no recourses to take a ride on it.

Mar 19 10:37 AM

[investor88:]

ISI # chartist quoted in cnbc as saying this is the rebound of the century! but only for 2 months then bear resumes. David is not too sure, I agree we have to be careful.

Mar 19 11:05 AM

[sickofthehype:]

Right on. Sure, Pelosi's save-the-rat program, Obama's blatant lies about pork spending, Dodd's loophole assistance with the AIG bonus program, and the list goes on. What class acts these dems are - even other dems are realizing the BS going on. They should be ousted.


On Mar 19 10:19 AM David Fry wrote:

> "Your critical, judgmental statements on 3/17/09 of the new Obama
> administration's efforts to turn around the years of arrogant Republican
> mismanagement of our nation's economy are ridiculous beyond imagination.
> And to sit on sidelines writing your blog blasting away at politicians
> condemning their efforts to stem the misuse of TARP funds at AIG...
> what a joke. I'd like to see you run for Congress and see if they
> you do any better. How about offering something constructive for
> a change? Or are you just not capable of that kind of thinking?"
>
>
> Name withheld.
>
> I love these emails. They're fun and reflect partisan derangement
> on a magnitude seldom seen.
>
> Oh, and yes, I could do a better job in my not so humble opinion!
>
>
>

Mar 19 11:14 AM

[SW Richmond:]

SWRichmond's Rule #1 for Life:

Nothing meaningful can be accomplished through politics.

On Mar 19 11:14 AM sickofthehype wrote:

> Right on. Sure, Pelosi's save-the-rat program, Obama's blatant lies
> about pork spending, Dodd's loophole assistance with the AIG bonus
> program, and the list goes on. What class acts these dems are -
> even other dems are realizing the BS going on. They should be ousted.
>

Mar 19 12:36 PM

[James Quinn:]

The end game is approaching.

theburningplatform.com...

Mar 19 12:39 PM

[Mad Hedge F...:]

Early data show that the economy was getting traction even before B-52 Ben launched his carpet bombing campaign. Some $45 billion poured out of near zero yielding money market funds last week. Fannie Mae financed $41 billion in new home loans, the most in a year. Bring on the “V” recovery!

Mar 19 02:11 PM

[popey:]

The gold market is one of the most corrupt and manipulated for sure. The cartel almost stopped me out of my longs at 885 but I stayed in. These criminals knew about the Fed decision. Evil anti-trust manipulators?? Probably. I look forward to the day when they need the physical and can't get it.

Mar 19 07:46 PM

[Tim Wise:]

Good one!

Mar 20 02:29 AM

[garbagecoll...:]

If we have inflation, will real estate prices also rise ?
Is now the time to buy a 1st home ?

Mar 20 07:43 AM

[finmah@yaho...:]

nice thinking -tip and tbt - I will add to tips (already in tbt)
Do you think WIP etf would add a possible hedge to the dollar decline?


On Mar 19 09:26 AM Chris B wrote:

> Let's hope for a return to inflation.
>
> The alternative is a Japan scenario or a depression, and an increase
> in the cost of servicing the national debt. I think the govt. gets
> this, which is why they are flooding the economy with dollars. If
> it takes a year or two of 8-10% inflation to get us out of this (which
> would only bring prices in line with what they would have been if
> deflation had never occurred) the government will accept that. After
> all, Paul Volker demonstrated that even persistent inflation can
> easily be killed by jacking up interest rates.
>
> I'm in TBT too, and took a decent hit (on paper) yesterday. This
> hit was perfectly offset by my gains (on paper) in TIP. Yet, in the
> long run, there is no contradiction in these investments. A return
> to even 3-4% sustained inflation would result in double-digit % gains
> to TIP prices and to funds that short regular treasuries that are
> currently yielding 3% for 20 years (!).
>
> The future has never been more obvious than it is now. The government
> is nearly unanimous in supporting expansionary policy. We can see
> an uptick in inflation from a mile away - even if it only ends up
> as a return to earlier low single digits levels. Yet, opportunities
> to exploit this dynamic abound.

Mar 20 09:19 AM

[ebworthen:]

"New" home loans or loans?

I refinanced at 5% to a 15 year from 25 years left on a 30 year to pay down debt.

No, I don't have a Hell loan (HELOC) and no, I'm not going to refi-to a 30 year to get more cash per month to spend at the mall.

I don't think I'm alone.

Trust in banks, Wall Street, and Washington is gone. Traders are smoking the hookah to think that the usual games are going to work again. The public has already been through the "spending is patriotic" pitch and the "credit is wealth" lie. The true lies and liars are being exposed.

I'm looking forward to all the players getting burned trying to gin up the market as it grinds down to a 90% loss.

It's unavoidable, no amount of cheerleading, smoke blowing, or charting is going to stop the societal correction.


On Mar 19 02:11 PM The Mad Hedge Fund Trader wrote:

> Early data show that the economy was getting traction even before
> B-52 Ben launched his carpet bombing campaign. Some $45 billion poured
> out of near zero yielding money market funds last week. Fannie Mae
> financed $41 billion in new home loans, the most in a year. Bring
> on the “V” recovery!

Mar 21 04:40 PM

[blucrab:]

What do baseball players' do when the team isnt proforming to it's expected level= they go back to the very basics-
LET'S START WITH SOME ''BASICS OF BASEBALL''----
analogy is that the weakest player qualifies the total strength of the team

#1- zero tax on savings accts. -
or any cd and perhaps fixed rate annuities

- please comment-

expected result - lead the simple/common players to be rewarded for increasing their personals finances - which - will lead the nation forward!

Mar 22 11:26 AM

[einstein p ...:]

If China buys all of our debt and the US government goes bankrupt, can they foreclose on the country? If so, will buy American also include buy Chinese and will there be a nifty acronym to go along with the transition? It's getting very confusing, not to mention scary.

Mar 22 03:09 PM