We're Saved! Greek haircuts and market bliss

Below is this morning's Wall Street Journal front cover picture, The Italian Parliament going at it



Could you imagine if Orrin Hatch went after Chuck Schumer following a nice fiscal policy debate? Or perhaps John Kerry (good reach) taking a swing at john Boehner? Unquestionably there would be tears streaming. Sadly, our do nothing congress just isn't this entertaining. But who can really complain when all of our problems are solved?

Overnight a deal was done that puts a 50% haircut on Greek bonds. Without too much detail, this means that Greece will not pay all of their debt obligations, rather a portion thereof. This helped to send the markets into a state of euphoria as it was a sign of progress in Europe. The jubilation and soaring stocks (Germany up 5+ %, the Dow up nearly 400) are indicative of something I've discussed before; that it does not take much positive news out of Europe for us to rally like no tomorrow. Whatever your opinion of the news we rallied on, the chart and momentum has changed significantly as a result of it. Closing circa 1284, the S&P is now comfortably above the 1250 level considered to be the top of our "range'. In what has been a volume anemic market we started to see some real volume trade today (moves on heavy volume are more meaningful than light). To top it off, there are a lot of wounded hedge funds who are staring at a year of negative returns in which the stock market went positive.....eeek... here come the redemptions.... well... maybe not if we ratchet up some risk! But you want to short a market that rallies like this on news that doesn't even begin to address the real problems (Italy..Spain...)? Like I said when we were trading 1220 at the "top" of that range, your better off being long. So lever up and try to ride a wave up in hopes that you can save your precious hedge fund. Flows will start coming back to the equity markets (bonds got destroyed today) and we should push higher.

I had to mute the TV when I heard some analyst talk about how "I wouldn't enter now, I think we're going up, but there are better entry points". Come on, make a call. This is like when CEOs are "cautiously optimistic". What is that entry point? Support at 1250? So you think its worth waiting to get 30 points, and risk losing upside of 70 with this kind of momentum? And if support at 1250 doesn't hold, how can you justify buying then? Effectively, this double speak is nothing more than that. It is a recommendation to try to make the "perfect" easy stop out trade, and miss what could be setting up for a runaway rally. Buy here, don't wait. Stop yourself out below 1250, take your 3% or so loss if we fail, and call it a day. This seems far less risky than "waiting for a better entry point".

Talking to someone whose opinion I greatly respect a few minutes ago, it was mentioned that there's a lot of quiet negative talk out there, and we'll probably give back a portion of today's gains. Perhaps we will, but the hedge fund catch up scenario seems too powerful to me to wait. I am in no way positive on Europe. In fact, I think what happened today was nothing but a PR stunt. But you have to ask yourself if you put on trades because you believe in the fundamentals behind them, or because you believe they will work. I don't believe Europe did anything today, but I do believe the markets are going higher... so I'd rather my money be right than me.

Here is why I don't think anything was actually done today, and why it sets us up for a disaster scenario somewhere not too far down the road. The biggest concern in Europe is not whether Greece, or even some of these other countries can pay their debts. At least in the case of Greece, everyone knew that they could not. The issue is what happens to the banks who hold Greek assets. If you are a holder of Greek bonds and they default, what does it do to your balance sheet? MF Global is a sub 2 dollar stock for this very reason (more Italian debt, but Euro debt exposure more generally). So Greece didn't "default", their bonds just got nicely trimmed. For some reason I'm not nearly bored enough to examine now, this is technically not a default. This might not really matter to an outright bondholder. If your getting 50 cents on a dollar, 50 cents is 50 cents, it doesn't really matter if you call it a default or not. But then, there is a little something called CDS (Credit Default Swap). Why they haven't been made illegal yet is beyond me, but here is what is at stake.

CDS is essentially insurance on a bond. If I want to buy a bond because I think it is of good value, but want to protect against default, I can buy CDS on it. CDS is a separately traded contract all together. So buying such insurance is not an embedded option you get when buying a bond. So people who go short CDS (serve as insurance writers, betting that a bond will not default) likely don't have nearly sufficient enough collateral to make payments in the event of a default (if the letters AIG are coming to mind your not crazy). The famous "Greek Haircut" was done in such a way that those who are long CDS (bought insurance) will not get paid (consequently those who were short it, and likely massively leveraged in their short do not have to pay). I don't know what is on which bank's books, but I would lever up myself to bet that a significant amount of exposure that these banks have to Greece is in the form of Credit Default Swaps. But, because of technicality XYZ, the haircut doesn't trigger this CDS insurance, and the insurer, who is screwed won't have to pay. So there is progress in Greece, and the banks maintain their solvency. Pretty cool.

But somewhere, there is a team of investors who went super long Greek CDS preparing to make an entirely new type of investment... a massive lawsuit. There are one of two simple things that will come from this. Either there is some sort of resolution in which the CDS holders get paid, or no one will ever trade CDS again (barring an explicit change in rules). Greece has defaulted, and holders of that default insurance are not getting paid. If the lawsuit were to be successful, what would happen to the liquidity of these French banks with such massive liabilities? The speed at which such a liquidity crisis contagion could spread is nightmarish.

But for now, we're running hot. I'd rather jump on the bandwagon even if I didn't have any skin in the game. With a break in headline risk (unless this lawsuit comes forth soon) perhaps we can focus on the fact that q3 GDP for the US came out at 2.5% today, certainly not indicative of the recession the market had been pricing in.

Sell Euro stocks with exposure to the tabloids....

No no, I've got nothing about Rupert Murdoch. But without Silvio Burlusconi at Italy's helm, the page 6 reporters will have some serious writers block. The womanizing Italian Prime Minister is rumored by some Italian news sources to have agreed to step down from his post in the next few months. While his talk in Brussels of selling off Italian government owned assets to raise funds might have seemed amenable to some, the mere fact that Italy would openly state their intention to pathetically raise the retirement age by two years IN 15 YEARS, might just reinvigorate some skepticism. The German parliament, in a runaway vote, gave Merkel the power to negotiate an expansion of the EFSF (European Financial Stability Fund). But this German approval for Europe's most powerful leader states that the EFSF cannot be financed through the European Central bank. Also today, Mario Draghi, the incoming president of the ECB (starting November 1) put his support behind buying the debt of European nations. So what's the takeaway? It would seem to me that without the ECB to print money, the EFSF will not use buying sovereign debt as a tool to bailout Europe. 

Without funding from the ECB, the EFSF will either become obsolete, or have to find other means of funding. Enter the IMF. The IMF, as previously discussed, can receive funding from international bodies, including the USA. Then consider that the EFSF head Klaus Reglis (I'm learning more names by the day) is courting China to contribute to the fund (EFSF). China is under-represented in the IMF, and by contributing to the EFSF through the IMF, it might be able to gain influence. China would hold the most leverage in gaining such influence in dyer times, so I would not expect them to make any commitments anytime soon. But if things start to turn bad (ha... turn bad) in Europe, then China might just start to enter the equation a little bit more.

Today was November gold options expiration. Gold settled at 1723.5 having stayed positive all day while the stock market bounced around and went negative before closing higher. Keep your eye out for GDP numbers, coming out at 8:30 am tomorrow.

Wait... Europe Doesn't have a comprehensive plan? welcome back Gold

Europe reminds me a little bit of a group of my friends and I when we took a high school class entitled "short stories". None of us ever did the reading, and before class, we would all scramble to ask those who did to give us summary points so that we could pretend to have any clue what was going on. This worked out great, until one day, one of the "readers" decided to tell one of us some false information about the previous night's reading. When asked how a woman in the story had died, my friend, aloud in front of the class exclaimed "She was crossing the street at night and a car without its lights on struck and killed her"... Suddenly laughter and shock erupted from those who had done the reading... and the rest of us quickly figured out what happened. Turns out she had died from pneumonia.... O high school stories.

So Europe has been scrambling to come up with some semblance of a plan, and it becomes clear that they don't have one. The market came off big on the open, but perhaps it was because some interpreted that the entire summit due for tomorrow was canceled. It wasn't, rather they canceled a finance minister's meeting, which does not hold the same magnitude. The market recovered, but down 25, we closed at the lows of the day on the S&P. This market doesn't have faith in a comprehensive plan come tomorrow, as it should not. But now it is time to shut out the panic filled media and think about how we can capitalize on what looks to me to be a great opportunity... particularly for gold... and soon for equities as well.

A few posts back (Risk Off time, Oct 17) I pondered what it would take to see the strong directional correlation we had seen today between gold and the stock market break. I mentioned how we saw a few signs that it was breaking a bit, but that the options and often the underlyings (stocks/gold futures) were generally trading the same. But that all broke this morning. As the S&Ps fell, gold dropped all of 5 dollars from 1655 to 1650, which it held before rising 50 bucks to settle at 1700.4. As stocks sold off, the volatility rose as it usually does when the market is down. The Vix (front month volatility) rose back above 30... in fact yesterday was the only day in October it had been below. Gold volatility also rose, but as mentioned, gold was up. Call options picked up a strong bid after being picked on for the last couple of weeks. During gold's rise to it's highs circa 1930 (the dollar amount) the pattern was that as gold rose, so did volatility and call buying. 1 day does not a move make, but we saw that relationship that the gold bulls have missed so much today.

Last week, gold rallied and failed around 1685 on four separate occasions, but today gold had no problem climbing above it. I am told that 1696 is an important level as well. A floor trader pointed out that not only did it break, 1696, but that it did not break below it once it broke above (bullish sign). The high in gold (I'm not sure of the exact figure) was approximately 1925. The low on the down-move we experienced (which happened overnight as so many of our critical moves have) was 1530. So in order for us to retrace 50% from High to low, we are looking to test somewhere in the 1725-1730 range. From there I expect we hold and make our way higher as gold reestablishes itself as the safe haven from world events. 

Before the naysayers get too jumpy, let me just say that the idea that a 50 dollar move today means you missed the move would simply mean you haven't watched gold over the past few months. Two times I have had to bat my eyes twice as I watched gold drop $100+ in a day in these past months. While our moves have been contained of late, a $50 move (or about 3%) is not so significant at a time where European deadlines are likely to contribute to persistent volatility. The move this morning in gold came on fear of absence of a plan... so gold was the fear play. If that is back, what is the contrary scenario? Europe comes up with a comprehensive plan. But what plan doesn't involve the printing of money?

If fiat currencies are going to be devalued, this is a big positive for gold. This bullish gold scenario has played out after we did quantitative easing, and it will happen again if Europe starts printing.

One of the risks to buying gold is that a Euro disaster, or comprehensive Euro solution should they print should lead to devaluing of the Euro. As such, many (as Denis Gartman has often advised) have suggested buying gold in Euro terms as opposed to dollar (sell Euros to fund buying gold so as to gain in both Euro devaluation and gold appreciation). This makes sense, as we have already seen the willingness of traders to use US treasuries as a safety haven. Whether that scenario will replay itself in the event of a Euro meltdown I can't know, but it definitely supports the case for buying gold in Euro terms.

Lastly, I will point out the nearly forgotten number of the day which in a general market would be the top headline. Consumer expectations as measured by the consumer confidence poll was the lowest it has been since March 2009. The fatalist gets scared and discusses how consumption makes up something like 70% of GDP, and that such a number means we're going down. I say, March 2009 was the low of the entire financial disaster move down... so a reading at such a level is more likely bullish as overdone than it is bearish. That being said, if you haven't put on any equity positions I think the risk/reward is rather iffy for doing it overnight. I would rather put my money in gold and risk missing any short term (ie tomorrow when we were scheduled to get this Euro announcement) pop in equities... 

Also, I try to avoid conspiracy theories, but I couldn't help but notice that the "Euro meeting isn't happening (finance ministers as it turns out)" story came out practically on the open for U.S. stocks. While my confidence in Euro leaders is small, I do trust that they were aware that stocks in America opened at this time, and that the open can set the tone for the day. Perhaps they wanted an indication of how market sentiment would handle such news... sick joke... or maybe it just happened to be coincidence. I'll avoid taking any guesses, but it is worth storing this little tidbit somewhere in the back of our minds for a rainy day.

Lessons from the Subway

I was on the subway this evening, and on stumbled a man with a cane, a bag for food, and plastic container held together by a string for any monetary donations he might collect. Appearing to be vision impaired, he began his routine by showing one of his eyes and its redness, discussing how he had been (sorry for the imagery) "stabbed in the eye on his way home from work", and lost vision in that eye. For some other reason, he claimed poor vision in the other eye as well. I was very curious to see how the others in the car reacted, as I had a strange suspicion that his presentation was a bit too subtly refined to be completely true. His use of being stabbed "on the way back from work" painted a picture of someone who was out there trying to do the right thing (work) and just got unlucky. These are the people we want to help, the ones who are trying their best, because especially now when sentiment about our own future employment prospects is far lower, we fear that we might one day walk in their shoes. Emphasizing that he would take food, the lady to my right gave him some almonds she had, and then a dollar. Then, a 30 year old woman (give or take a few) with her boyfriend gave a bag which had some takeout that looked reasonably high end. This guy had made a pretty good splash, but the man sitting across the isle had a look of doubt. At that moment, I became pretty sure that my suspicion was right, and that these women had been duped by a pro.

After the "blind" man made his way through, the man across the way, adorned in an enormous awesome ugly patterned hat started teaching the rest of us about the act. He started explaining how a simple eye irritant could cause the redness he showed, and that were he to have been stabbed, there would need to have been some scarring around his eye, which indeed there wasn't. To add a little levity, I turned to the lady to my right and said "at least it was only almonds", not making mention of the dollar. At this point, our friend chimed in about how he used to give a dollar to a man in a wheel chair until he saw him get off one day, and throw the wheel chair over his shoulder as he trotted up the stairs. Ok, you mentioned the dollar, now this sweet woman just feels like an idiot. So much for my efforts.

Lost in my thoughts the rest of the ride, I imagined that had I had a friend with me, I would've probably bet him that this guy was an actor. Burden of proof would have been onerous, but our big hatted friend made a very strong case, broken down with solid relevant evidence. I would've made this bet at the point that I saw the look that Mr. Big hat had on his face during the ordeal. Mr Big hat looked like he had been around and probably had a little more street wherewithal than myself. So I began thinking about how sometimes the best bets we can make are not the bets we make on our knowledge, but our knowledge of those who have more knowledge than us.

So now that the S&P settled on the week above 1230, who to look to for answers? It probably makes sense to choose the smartest guys with the best track record, but as many know, that can get you in a world of hurt quickly. Anyone who tried to construct a portfolio based off of John Paulson's ideas following his subprime score is probably missing 1900/oz gold (you'll get it again soon be patient) and wondering if Meg Whitman can help those far less valuable HP shares they are holding recoup some losses. Two different market environments, two very different results. But while Paulson might have made a few bad bets on stocks, I would raise a very curious eyebrow if all a sudden he started buying subprime. Now however, subprime is not  the main driver of this market. So who would be good at dissecting a market like this? No, its not Warren Buffet, Bill Gross, or Julian Robertson. For a time like this, I wanted to hear what Bob Doll, BlackRock chief equity strategist had to say.

Why Bob Doll you ask? I had thought that Friday's S&P close above 1230 meant that we had reached a point on the chart where we could expect some buying to come in and push the market higher. As discussed in previous posts (particularly the last) I have been concerned that the headline risk game might be keeping investors away from a market that has the potential to creep higher. This "melt up" scenario happened following the lows of March 2009. While I can't speak to exactly when Doll put on his long call on, he definitely was dead on for most of the S&P's move up from 900 to 1200. After the events of our financial meltdown, people were scared to put money in markets, even as stocks started trading at silly valuations. Thus there are similarities between now and say July 2009. Investors are scared to get out of cash, and the headline risk, which could tell us at any moment that the world is doomed, controls the markets. 

So I decided to check out Doll's letter. (included below)

http://www2.blackrock.com/US/individual-investors/market-insight/investment-commentary/bob-doll-weekly-commentary

Doll, during our last "melt up" finished nearly every letter the same way, discussing how the fundamentals of earnings lent them to continue long exposure to equities....all the way on up. So would this time be the same? If you'd rather skip the weekly commentary, the short answer is, no. He sees us in a range-bound state still, between 1100 and 1250.

As he writes to conclude his letter

"For the time being, we expect that markets will remain in their trading range as the downside macro risks compete with attractive valuations and strong fundamentals. Should we continue to see progress and improved clarity around the European debt crisis, however, stocks could be poised for improved longer-term performance."

So it looks like our man is not yet ready to get optimistic, though there is a glimmer of hope in his writing. I'll be checking in on Doll's letters if the market continues to dilly dally. The last thing you would want to do is find yourself lulled to sleep by this market and miss an entry point for a ride up. Speaking of, getting lulled to sleep sounds pretty good right now. Til next time.

-Ben

It's all German to me

A few days back, I found myself to be very aggravated by the time 4pm rolled around. Why? Because the markets were completely headline driven, and the headlines seemed baseless. Europe will have a comprehensive plan by the 23rd, no they won't, well maybe next week... now definitely we'll have a lot of details laid out by next Wednesday... It's maddening. Trying to figure out what's next in Europe and trading on it with anything less than superior access to information is a loser's game. You will probably see a lot of stop orders getting filled, only to watch the market return to the levels you initiated your trade. As I reflected, I saw I was annoyed because I was trying to formulate opinions about something that for all we know, the European leaders might not have even fully explored.

So perhaps its best not to trade at all. If it is a headline risk guessing game, then trading simply becomes blackjack (assuming you can't count cards). Of course never happy with this as a theoretical answer (though it might well be practically prudent), I started thinking of whether one could play the market from one side or another while accepting his inability to front-run headline risks. Today, I saw Thomas Lee, Chief JP Morgan equity strategist on TV making his usual bull case. When the S&P was around 1275, he had said that 1250 (the previous low) would hold and stay as the lows for the year. I like that he was out there with an opinion, but I kept in mind that he was a bull 12% + higher. But then he started talking about just how much money is sidelined, and that with stocks trading historically cheap, the eventual return of capital to the markets would push us higher. I don't know if it was his reasoning or those glasses Lee wears, but I found it compelling.

Another bull case being tossed around is that earnings in American stocks are cheap enough to buy even if Europe does a poor job of resolving its issues. So do the math, and tell me how x% decline in European economies wouldn't impact earnings of U.S. companies enough to justify multiples. The problem I have with this case is that it doesn't take into account what would happen if banks had a liquidity crisis. If the French banks have to take massive markdowns on their assets and become insolvent, the question becomes whether or not the system would freeze up. From there, the question is how well and swiftly could European policy makers respond? What we have seen thus far from Eurozone policymakers does not exactly bring me comfort in envisioning such a scenario. But like Art Cashin says, betting on the end of the world only works once.

From a strategy perspective, I think it is important to remove oneself from the madness. Rather than listening to every headline, why not observe that the market seems to rebound on rather meager promises. "Give us another week, and it'll be great", and the market rallies. If you believe that this is an indication of just how desperate investors are, then steer clear. If however you think (as I do) that what the market really wants is to see  is some unity among policymakers, then maybe our bullish friend Thomas Lee is right. After all, it seems those Euro policy makers seem to know what to say to find a little support for the market. I still think there is downside potential, but for the longer term investor (and this is admittedly a cop out because "the long term investor" can remain in denial about being wrong for the longest) it might make sense to look at starting to average in to long positions. I really don't see the rush because an upside move is still more likely to be methodical than a down move. Still, I think investors fearing the end of the world might want to think about returning to the market soon.

As 4pm rolled around yesterday I was completely lost. I was surprised at Gold's breakdown as equities stayed flat, though as mentioned in the previous post Monday morning was the first time we saw some sort of disparity in their general correlation in weeks. It was also hard to get a feel for the market because both equities and bonds were trading higher, making it hard to see if it was a risk on or off type of environment. As the afternoon progressed, it became clear that Europe would be using the EFSF as its first line of insurance in the EU. Great... except for the fact that the details of it, initially released by The Guardian, were denied about an hour later. Last I investigated there was "back and forth" about the details. It is simply another example of how we cannot trust what we hear out of the EU, and the lack of concrete detail in any and everything they put out. Then, to top off this confusion, Apple comes out and announces for the first time in years that it missed quarterly earnings expectations. Death, taxes, and Apple beating street expectations right? I guess I'm down to two.

While we're on taxes, lets turn to Greece quickly, a place where people do not pay taxes. As I write I'm watching huge crowds in Greece protesting, and watching it turn violent. I was fascinated to see a year or so ago when the media was broadcasting Greek protests, that markets tended to become more volatile during the day as images of violence crossed our screens. Perhaps such imagery triggers a visceral reaction in us that can effect trading. So while we sit near the top of the new "top of the range" of 1230 on the S&P, be wary that in what might be an otherwise quiet market there is potential for some unexpected volatility.

When I got home last night I flipped through channels only to be delighted to see Romney and Perry going at each other as Anderson Cooper had to extend speaking time for candidates because they would not stop talking over each other. More thoughts to come on this later, but how do questions about the uninsured end up in yelling about illegal Mexican immigration... Yea yea, I know, we spend x number of dollars because the illegal immigrants are ruining our economy and it is taking money away from the Americans who really need it. And how could I ever elect Romney, who hired a lawn care service that hired an illegal worker as a contractor? You mean to tell me running Bain took up so much time that he didn't verify the papers of the people he allowed to cut the precious blades of grass that adorn his property? I guess I should give Romney some credit though. He managed to withstand attacks fairly gracefully (though you couldn't actually hear him given all the yelling in the background) from Rick Santorum, Jerry Seinfeld's disgruntled twin. 

Risk off time.....

"Made in Germany, you know the German's always make good stuff". The poignant observation from Shamwow! advertising icon Vince (http://www.youtube.com/watch?v=dYvP_bCnS2I) sadly will not apply to a comprehensive EU bailout plan.... at least not yet. I mentioned in my first post that I thought getting short before October 23rd, the day we were slated to hear about some fantastic European solution, was too risky despite the  technical resistance levels we were encroaching on.  So now the picture has changed. The markets sell off today following Germany's finance minister warning that October 23rd would not be the day of the grand unveiling of how Europe would be saved. In doing so, Germany has signaled to the markets that short term risk to the upside is off the table. So now, the basis of my "its not worth shorting this market" concept is gone, and I'm having trouble finding any reason to get long. Katie Stockton, who seems to be right a lot more than she is wrong, put the next support level for the S&P at 1100. That's an 8% drop from here. Sure doesn't make this look like much of a buying opportunity.

Gold had an interesting start to the day, trading higher pre-stock market open when the stock futures were clearly indicating a lower open. As stocks began to sell off so eventually did gold, but the shiny metal did show some resilience. Trading now at 1674, we are less than 10 dollars below Friday's settle. It will be interesting to monitor this gold/ equities relationship, to see if maybe gold's faint glimmer of strength could mark the start of a decoupling of their strong correlation. The options however are not showing any break just yet. Gold puts continue to get bid relative to calls (equivalent delta put options are trading at higher implied volatilities than calls.... ie people are starting to pay up more for puts more than calls). In equity markets, there is a skew to puts (puts are relatively more expensive than calls) because of the disproportionately large demand long investors have for the protection puts provide against a downturn. While I can't speak with too much knowledge about equity options, as fear of the downside increases, so does the volatility (the amount people will pay for options).  Currently in gold we are seeing puts get bid, and volatility which came off hard last week, started to catch a bid as well. This indicates to me that people continue to see room to the downside in gold....today the VIX (volatility index on the stock market) spiked (fear of downside)... add it up? Options in gold seem to be following options in equities...so the correlation lives on.

I wouldn't harp on the options piece as much, if it weren't for what happened last time gold topped out. It was the second time we were trading above 1900 (having sold off and rallied back up) and suddenly the gold options completely changed pattern. For the entire move up, call skew was going out (people were paying up for calls). Then one day, while we were trading higher, the puts started getting bid. This was a break in the pattern. That day just happened to be the day before gold made its high. So perhaps it is a bit of a leap to liken the implications of the skew move at gold's last top to the current gold/equity relationship. But for the time being, it is worth monitoring the change in the way the options for the two behave, as it can serve as a very valuable leading indicator.

I am still not satisfied with any of the explanations I've heard about the accounting provision that allows banks like JPM and C to goose their bottom line because of the cost of debt. Sans Bloomberg machine I am struggling to get some of the answers I want, but will continue looking into it because I think there might be some interesting takeaways. If anyone has information on the matter, please feel free to share.

I'm off to watch the Jets try to salvage their season. A loss to the Dolphins could certainly lead to an onset of depression, causing me to miss a day or two of posting. If this happens, I hope that my loyal and broad following will accept this as a preemptive apology.
-Ben

A short lived Entrepreneurial Dream (Outsmarted by the top 1% of the 99%)

(one occupy movement shirt I found online above)

For such a seemingly disorganized group, it appears that there are some entrepreneurs among the so called 99% protesting against a myriad of issues ranging from Wall Street, to people who make money, to the legalization of marijuana (I saw the sign). Last night, sitting with a friend, I thought to myself that I could be missing out on a big opportunity. If unity is what this movement needs, a common uniform could certainly do the trick. A T-Shirt that somehow encapsulated the movement would be perfect. Easy to produce cheaply, so as I saw it, little downside and huge upside if the symbol became the stamp of the movement.

My friend liked the idea, so quickly I called someone who I knew would become an investor if he liked the idea. He did, so I told him I'd get him something the next day, an idea and a plan for how to proceed. I then called my friend who works in the garment industry knowing that he could help us get the t-shirts made. While a bit skeptical, he didn't mind the idea and also told me to come up with something. We all realized that it was only so long until someone else caught on to the scheme and followed suit. As such, time was truly of the essence.

Today, I walked down to the park hoping to get some sense of who their leadership was. I figured if there were a few people who were in charge of stuff, I could try to rub shoulders with them and get them some free t-shirts in hope that others would soon follow... Then we could start charging. Unfortunately, as I stood their talking to a few kids, (one who could hold a conversation, the other who hated people with money) it became clear that there was no central leadership. They said that it had started with 15-20 people, but that they didn't want to "lead" the movement, because it was not in line with the spirit of the movement. As they put it, it was kind of the problem, the spirit of the movement was not to follow a leader (in fact it is a rather anti-establishment movement so to these protesters, to follow a leader would be to follow the way of the corporate led world in which we blindly operate as cogs of the corrupt machine...or something like that ) yet they knew the movement needed leadership. This was OK, and I figured I'd walk around and talk to a few more people.

It was shortly thereafter that my boyish dream of being the next guy to create a stupid t-shirt that I'd copyright and be forever rich from came to an end. Someone standing next to me asked me if I was in the T-shirt line. I began asking questions. He showed me a T-shirt he had gotten. "O Yeah" he said. "This is the line where you get t-shirts printed". He showed me the T-shirts, they were simple but good. Both of which used the "we are the 99%" slogan, one of which had a fist that reeked of revolutionary symbolism. I asked how much they cost to which he responded "O they're free, you just give a donation". If I wasn't crushed enough, I decided to walk ahead and see where the T-shirts were being made. There were a series of tables, with some simple t-shirt making contraption (I don't know too much about making t-shirts), making these cool simple t-shirts at what had to be so minimal a cost that the donations probably covered whatever they invested. Even if they didn't, Ben and Jerry might give you some ice cream to make it worth your time, or who knows? Maybe Russell Simmons would throw the 99% sympathizing entrepreneurs a Rush card. (for those who don't know about Rush Card.
 http://www.youtube.com/watch?v=YnzSF9gKgRQ&feature=results_main&playnext=1&list=PLB380E75F0C8D7BD7

I suppose there is still opportunity to get your friends who scoff at the movement to buy t-shirts... but that joke has to end pretty quickly. I will say though that this T-shirt I found online would serve as a pretty good one. If success is 99% failure, and America is success...then I guess the below could be the shirt to symbolize the 1% counter movement... though an expensive suit might send the message just the same.


Kudos to the bright minds taking donations for those T-Shirts. I look forward to seeing you on TV soon talking about how you were never in it for the money and really just cared about the cause. Trust me, I wanted nothing more than to live that dream myself.

Timmy talks

With due apologies for the poor picture quality I thought it was important to post a picture of Tim Geithner from his interview today with Steve Liesman. Bob Pisani later said that Geithner looked more "comfortable" than he has in the previous months. While Geithner may have been comfortable, I for one was not. Set in what appeared to be a hotel room in France ahead of the G-20, I felt as if I was watching a scene from the Bourne Supremacy, right before someone gets killed. The ugly flowers and lampshade in the background were the only thing that kept me distracted from Geithner's vampire like mannerisms. I did catch Geithner express his joy at the fact that the IMF will be playing a role in the recovery efforts going forward. Hmmmm, Christine Lagarde, director of the IMF is French. French banks have the most negative exposure to Eurozone debt. One is left to wonder when push comes to shove, might she sympathize a bit with the banks of her motherland?




The US of A uses tax payer money to help fund the IMF. Were the IMF to look to bail out French banks, we would effectively be helping to fund Euro-TARP. I will make no value judgments as to whether such a scenario would be a net positive or not. I do however grow a bit concerned when listening to the language Geithner chooses to use in his responses. The following is taken directly from CNBC quoting the interview.

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STEVE LIESMAN: What about this plan that was out there that the BRICs would buy some-- form a substantial portion of European bonds?

TIM GEITHNER: Well, you know, my sense from talking to the-- my counterparts around the world is, you know, what they want to see is Europe move. They want to see a more effective, more comprehensive financial strategy from Europe that they're very support of having IMF play a continuing a role. And they want to make it clear because the world has such a big stake in Europe solving this that we'll be as helpful as we can.

And- I think all of us have the same view, which is again in support of a broader European strategy that's much more forceful, has much more substantial European resources at-- at stake. We're happy to see the IMF play a continuing role.

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In his bumbling response, aside from not answering the question, Geithner (as he continues to do throughout the interview) gives no specifics about what the plan might be, and simply says he's happy that the IMF will have a role. It would seem reasonable that America, which funds the IMF should therefore have some concept of what that role might be. So maybe he's keeping it secret, but then why do the interview? If you want to calm markets, wouldn't it make sense to show some sense of confidence that there is at least a concept for a plan, or direction? I did not come away feeling re-assured. While Europe has bought itself time, and continues to give more promises of grand plans for which there is no evidence, Geithner provided no reasons to make an onlooker believe that such a plan really exists. Rather, he seemed to indicate how undefined the plan is as it currently stands. Even if we don't have influence over the IMF that we fund, it would seem reasonable to me that the secretary of the treasury might have some concept of what is going on there. Perhaps others feel as uncomfortable as I do when watching Geithner, which makes me wonder if everyone completely missed how disconcerting that interview was. 

Reality aside, the market looks healthy. We hit 1221 (top of range) again today in the S&P, sold off, and now, @ 340 pm are trading above, @ 1224. Sentiment has clearly changed in the markets. While Google had a blowout quarter, we are seeing markets hold strong despite JP Morgan's poor quarter, (which bodes poorly for next week's other financials' earnings). It looks like a lot of bad things may be discounted in this market already. If all of a sudden we choose to remain in denial about Europe, we might just break out to the upside of this trading range (see first post).

Gold, still following equity indices (and the Euro) showed some weakness today despite settling 1683, up 14.5 bucks. We continue to test the mid 80s, but have sold off multiple times this week having achieved those levels; never breaking through to 1700/1705. Volatility got smoked yet again as options drifted lower with no bids in sight.

For both gold and the equity markets, it will be important to see where futures open up on Sunday night. As the equities settle near their highs at the top end of the "1120-1220 range", an open higher could signal the end of the range bound market, though +6% on the S&P this week was a lot of good run in a short span.

Have a great weekend

-Ben

Dimons and Carrots

Before briefly delving into today's key highlights, let us all take a moment to bid adieu to Wall Street "insider" Raj Rajarajaratnam. A billionaire, Rajaratman's  insider trading scheme benefited him to the tune of between 50 and 100 million dollars....mere peanuts (or carrots as the case may be) for the former head of Galleon. Today he was given the longest ever sentence for insider trading of 11 years.

Rajaratnam (Top) managed Galleon Management. Bugs Bunny (bottom) served as Rajaratnam's double during tense social times throughout the trial, and considered Rajaratnam "A friend who will be sorely missed".

A look at the chart below shows today's price action until now in the S&P 500. The market opened lower, largely due in part to earnings that were considered to be disappointing from JP Morgan. JPM reported earnings of $1.02/ share compared to street estimates of 97 cents. A slightly deeper look showed that this so called "beat" was not much to gloat about. JPM marked down the cost of its debt to market, a 1.9 billion plus for the firm. Investment banking and fixed income revenues fell well short of the previous year's. Jamie Dimon, the CEO the march on Wall Street tried to visit at home, said that increased lending to small and medium sized businesses was a positive for the economy going forward. Dimon's tone was reserved however, stating that shareholders could be comfortable knowing that JPM is being "extremely cautious while navigating through this challenging economic environment" (FT). 

Markets have been quite resilient following the morning dip lower following the JPM earnings. The Nasdaq, which has been the leading index climbed into positive territory. As I write (20 minutes pre market close) The S&P looks to be holding some support at 1200, following a failure to break through and hold yesterday's settlement (1207.25).

Gold futures trading was quite boring for the greater part of the day. Having made highs near 86 early morning, we failed to hold above 1683, a key number according to my technical friend. After a sell off from the 1670 following the stock market open, we spent the bulk of the day trading between 1660 and 1664. As the indices rallied so did gold, settling at 1668.5. Volatility continues to get smashed as we are seeing gradual contained moves as opposed to the precipitous price action that we have become accustomed to over the last few weeks. 

On a side note, the featured article on CNBC this afternoon discusses Paul Brodsky's assertion that if we were to return to the gold standard, gold prices could climb to over $10,000 per ounce. While I don't think we will get to that point, the logic behind achieving such a price actually makes sense. In a world where countries print their fiat currencies in excess to help pay off the exorbitant debt they have run off, there may come a point where faith in fiat currency is lost. At such a time, it will be necessary to turn to some other form of currency as a perceived store of value. Gold is a natural consideration for this role since it has been used as such before (The Gold Standard). While some may dismiss gold as useless, and argue that it doesn't serve any utilitarian function, bear in mind that it is viewed as a store of value in Eastern cultures.... India and China to name two of them. As such, while I agree with what Mark Fisher has said, that a commodity such as oil should appreciate the most in the case of declining confidence in fiat currency (in a baron wasteland, standing next to my old green Toyota Corolla, I'd rather have gasoline than gold), we cannot forget the cultural perceptions of gold in the countries driving growth for the foreseeable future. With a finite supply, printing gold with a promise that it will stimulate economic growth will not be possible. Certainly there will be more to discuss with regard to this and its potential global implications in the future.

Range bound?

After weeks of fear and heavily bid volatility we are starting to see a bit of slow down in the markets. Volume is light, and vol is starting to get offered from skyscraper levels. Claims from European leaders that we will soon see some great rescue plan has brought some calm to the markets. While we have been rallying, the general consensus seems to be that we are in a range bound state. That range, as far as the S&P is concerned is between 1120 and 1220. This afternoon the S&P made its highs right around 1220 and then sold off to close @ 1207.25. This seems perfectly healthy and sensible. Heavy ETF selling came in toward the end of the day as it appears hedge funds were taking profits, and why not? We hit our target on the S&P and the bulls wounded from the bludgeoning of the last few weeks should be happy to take a profit. For now, sentiment seems to indicate that this relief rally is over and the technical picture points downward, but for the next week, I don't see a whole lot of upside in getting short.

If the longs were profit taking this afternoon, and volume has been light, we are left to ask who the sellers will be in the coming days. While perhaps there will be some continued profit taking from the longs, it is hard to foresee significant short positioning in the short term. Merkel and Sarkozy have pointed to October 23rd as their date for revealing their big plan to save Europe. Until then, bad Euro news is unlikely to spook markets as potential shorts will fear that today's shorting opportunity could go in their face if the Euro plan accounts for a fix for that bad news. Stocks within indices have been extremely correlated, as have asset classes. All one needs to do is look at the relative spike in ETF volume to see that its the macro picture as it pertains to Europe that has driven this market. If the longs were indeed taking profits this afternoon, one would be hard pressed to argue that they will now reverse positions and get short. You never short a quiet market, and for the next week, there is little reason to think that the quiet will dissipate. A few positive earnings surprises and we could see a reversal of sentiment.The likelihood is that we do remain range bound for the short-term, but good earnings might re-awaken investors to the fact that inevitably it is earnings that drive stock prices. As such, despite the technical picture, I see greater upside to being long in a positive earnings environment than I do to being short in front of worse than expected earnings.