The Most Important Point in Market History, says Todd Harrison

Thursday, June 30th, 2011

by Trader Mark, Fund My Mutual Fund

I wanted to highlight a story on Marketwatch by Minyanville’s Todd Harrison.  While the headline is a bit of hyperbole , I’ve learned many times, headlines are not written by authors but by publishers (but judging from the content of the piece, Todd might have choesn the headline as well).  That said, it’s a nice overview of the bigger issues behind the scenes – that of a grand transfer of risk.debt from the private sector to the public, as we focus on the day to day market environment in ‘bailout globe’.  As stock speculators this handoff is a “great thing” (as evidenced by huge rallies each time governments transfer trouble from the ‘markets’ to ‘citizens’)… and will continue to be a great thing, until one day it is not.  But for now kick the can forever is the only solution 2007-present.

A few snippets

• Still, we’ll chew through the macro dew one more time, for this is perhaps the most important juncture of the year—if not, and I’m not prone to hyperbole, history.  Yes, history.
• The bulls will point to strong corporate credit markets (which suggest higher equity prices despite trading well off their best levels) and “The Misery Index,” which recently hit a 28-year high, as a contrary indicator. They’ll use technical terms like “stochastics” and “put/call ratios” to support their thesis, and in a vacuum they’re 100% right.
• Outside the vacuum, here in the world with the rest of us, we’re dancing on the head of a pin, and few people seem to notice how precarious our position is. Way back when, during the panic of 2008, we spoke about the lesser of two evils, about how the government bought the cancer in an attempt to sell the car crash.
• They were “successful,” insofar that they jacked the stock market 100% and allowed Corporate America to roll its debt and issue stock. What they also did, perhaps unintentionally, is transfer risk from the private sector to an already burgeoning public sector, which has heightened tension across the geopolitical spectrum.

Again, there are two paths:

• Drugs that mask the symptoms (throwing trillions of dollars at the problem), which triggered a spate of unintended consequences (such as outsized bank profits) and lead to a tricky trifecta of societal acrimony (over the likes of Goldman Sachs and BP), social unrest (from Greece to Libya), and geopolitical conflict (yet to be determined).
• Medicine that cures the disease (debt destruction and reorganization) will be a bitter pill to swallow. But once we traverse that process, it’ll pave the way to a legitimate outside-in globalization (the US won’t lead, but will participate). This, in my view, is where the market was heading before the synthetic stimuli, and it’s where the market will ultimately go whether we like it or not. The question, of course, is,“From where?”

Tags: Bailout, Car Crash, Credit Markets, Dancing On The Head Of A Pin, Handoff, Head Of A Pin, Hyperbole, Issue Stock, Juncture, Lesser Of Two, Lesser Of Two Evils, Market Environment, Market History, Minyanville, Misery Index, Stochastics, Stock Speculators, Time Governments, Todd Harrison, Transfer Risk
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NomuraFX: “Mr. Bernanke, You Are Trapped!”

Wednesday, June 8th, 2011

From Nomura’s Brent Donnelly

Mr. Bernanke: You are trapped!

The way the data and psychology has turned down just as QE2 is ending is no coincidence – just like it was no coincidence when the same thing happened at the end of QE1. To use the Fed Chairman’s preferred term these days – the impact of QE is transitory. Much like fiscal stimulus, QE has a temporary impact but as soon as the extraordinary intervention ends, the patient begins to wither again. This is the trap that Bernanke fully understands and it seems like the endless monetization prophecies of Zerohedge and The Daily Dirtnap are at risk of coming true.

Without the promise of QE3 from Bernanke yesterday, markets are sad. With no major data on the docket and nothing promised  from the Fed (Evans also seemed to shy away from hitting the panic button yesterday), we may be in for some creative destruction for a while.

I have not been able to stick with a coherent equity view over the past few days as there are two offsetting factors at play in my mind : 1) the bear case is playing out perfectly as QE ON or QE OFF continues to be the only variable determining asset prices and multiple bearish cyclical factors kick in (sell in May, end of presidential cycle, etc)… But 2) stocks appear very oversold as we are in the 6th straight down week for the S+P and the market seems fully cognizant of the deceleration in US growth at this point.

I guess things can stay oversold for longer than one might expect especially after we have just rallied 100 percent in less than two years. It is probably reckless to buy equities until we get some sort of huge blowoff day. The slow motion car crash we are  witnessing since May 2nd is remarkably orderly. Too orderly.

AM/FX usually contains a trade recommendation but right now I am flat. Bearish fundamentals + very oversold market = be  patient.

Watch for significant barrier madness in USD/JPY at 79.50. Finally, for those keeping score at home: EUR/USD was trading on a 1.19 handle on this day last year.

Tags: Asset Prices, Bear Case, Car Crash, Coincidence, Creative Destruction, Deceleration, Dirtnap, Fed Chairman, Fiscal Stimulus, Jpy, Keeping Score, Nomura, Panic Button, Preferred Term, Prophecies, Qe, Qe1, Qe3, Slow Motion, Trade Recommendation
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