"While QE3 at the September 12-13 FOMC meeting remains possible, our best estimate is that it will take until late 2012/early 2013 before Fed officials return to balance sheet expansion."
That's the word form Goldman's Jan Hatzius.
While projecting 2012 GDP to finish strong at 2.3%, GS is also projecting a drop in 2013 to 2% as consumer spending drops once again and government spending remains a drag on the economy. Much more relevant, you will notice, is the forecast for the S&P, which they expect to fall to 1,300 by November and all the way to 1,250 in February - but back to 1,350 next August, as that QE kicks in.
Much as I hate to agree with Goldman, it makes perfect sense to me and keep in mind, this is the report that goes out to the world's top investors from their investment adviser. I would have said trusted but - well, come on.
The BOE was unanimous in its decision to leave rates unchanged (at a record-low 0.5% - still double the US rate) and also failed to raise their asset purchase program so it's not like Goldman is betting against the trend. Only China and Japan have actually stepped up to the plate since June with real money and, if the Fed is off the table, then it's all up to Mario Draghi to pull one Hell of a rabbit out of his hat to save the EU all by himself.
Of course rabbits (or at least our legs) are being pulled all over the place as the employment numbers we got last week were a joke with 195,000 LESS people working and the claim of 165,000 job gains. That's a 360,000 job discrepancy but it's all in the counting I guess. Speaking of counting, Dave Fry points out that the Census Bureau, aided by the Bank of Spain, altered their methodology for seasonal adjustments in yesterday's Retail Sales Data to arrive at that "surprising" 0.8% increase. Without these adjustments, using the same methodology they had used last month (which was -0.7%), this month would have been -0.9% - 215% WORSE than what the government is telling you.
So we have a 218% discrepancy in the bull's favor on jobs followed by a 215% discrepancy in the bull's favor on retail sales and it doesn't boost the market because this is all window-dressing for retail suckers while Goldman et al are telling their muppets to get the flock out while the getting is good. Of course, this is exactly what I've been telling you for weeks so - Yay! - maybe I'm not crazy. Thank goodness we stuck to our guns yesterday and went with the Futures shorts I listed right in the morning post (Russell (/TF) 802.50, Nasdaq (/NQ) 2,732.50 and Oil (/CL) $94) and, in my morning alert to Members, I reminded them to sell into the BS rally, saying:
What lovely, lovey entries for our short positions - I hope people are taking advantage and not acting like deer in the headlights because the market posts a half-point gain on a few million trades.
Speaking of which, today the VIX is up 5% at $14.38 so, so far, our theory that the rollover pushed the VIX much lower than it should be is holding up. We already have bullish VXX trades but notice the Sept $14 put on the VIX only fetches .18 but the $14 call is $4.60 so it looks like VIX $17 is a reasonable target (and the $17 puts are only $1.25 with the VIX at $14.40 - try thinking about that for a while!).
That's right, we figured out the VIX scam too. It was the rollover of the S&P futures that pushed the VIX down so low and it gave us fantastic entry opportunities yesterday as it tested $14 again - JUST LIKE IT DID ON MARCH's ROLLOVER - as well as great entries on many stocks on our Long Put List as the low VIX works in our favor when buying puts. As for our Futures trades:
See - Futures trading is fun! Don't be afraid of it. It just takes a very good stopping discipline that's difficult to master but this morning - as we had a nice sell off, we went long on copper (/HG) at $3.34 and the simple instruction is to kill the trade if it fails to hold that line. We already got a penny pop to $3.355 and that may not sound like much but copper futures pay $12.50 per 0.0005 move per contract - that's $250 per penny per contract. The trick to playing the futures is NOT playing the futures unless you have some serious support or resistance backing up your entry - that's the mistake most people make - forcing entries at inappropriate times. Also, greed - a penny and a half on copper futures is $375 in profit and that is certainly enough to pay for our Egg McMuffins this morning and that's all we ever hope to accomplish.
Speaking of copper, as we have been saying for quite some time, the ground is LITERALLY cracking in China, under the weight of all the copper they have stockpiled over there. Nonetheless, in an attempt to avoid a collapse in prices - China has actually INCREASED imports of copper by 19.5% this year and 5.9% more in July than June - yet there is no indication whatsoever that there is any actual demand. When this boomerangs back on the markets, it can turn ugly very fast. According to the FT (from April):
On a routine trip to examine copper inventories in the bonded area in eastern Shanghai last week, we were astounded by how much copper is being stored in warehouses. We visited one of the biggest warehouse operators (which holds nearly one-third of the inventory in Shanghai?s bonded area) and saw some interesting sights. Copper plates were piled to the maximum allowable height (based on weight so as not to damage the land it is sitting on).
The covered warehouses were full. The staff car park was used to store copper. The driveway between warehouses was blocked by copper. The warehouse operator told us that it cannot accept additional inventory until existing inventory is shipped out.
That's why we're happy to take a penny and run on copper - we see the support, but we know the support is nonsense and they'll be lucky to keep copper over $3 this fall. We've also been playing gold (/YG) long off the $1,600 line - although we've broken below that line twice in two days and will ultimately fail as gold drops back to $1,350 or lower, we got a nice $5 pop yesterday and this morning another $5 ($166 per contract) on the Dollar's rejection at 82.85. That then, will be the bearish line we watch closely today - if the dollar crosses over and heads back to $83, gold, copper, oil, the indexes ... should all take a tumble. For the bulls, they NEED the dollar to fail 82.70 (tight range) and, of course, below 82.50 is needed to make a serious attempt to get back to our highs.
Our CPI was flat this morning but Treasuries continue to fall out of favor, hitting 1.78% on the 10-year and up from 1.39% just three weeks ago. At a rate of increase of 9% per week, we will be paying more than Greece by the end of the year! Are US T-Bills finally falling out of favor? That would be double-plus ungood ... More likely, 1.39% was simply unsustainable as core inflation is still running at 2.1% and no one wants to lose 0.71% a year (7.1% over 10) lending us money.
I know - common sense - how quaint.
As the GOP candidates tour the country preaching austerity, the Empire State Manufacturing index fell from 7 in July to -5.85 in August with new orders dropping to -5.5 and prices rocketing to 16.47 from 7.4 (up over 100%). Overall, the report is no more catastrophic than all the other data we've been getting lately but we may be getting into promise fatigue on the stimulus talk as Central Bank after Central Bank fails to take action in what is now the 3rd week after Draghi promised to do "whatever it takes" to fix things.
Additional disclosure: Positions as indicated but subject to change.