THE DOT - if this turns orange or red be alert

Wednesday, March 24, 2010

Brainstorming Wednesday

1. Euro did not even make it to 1.40 before it broke the consolidation pattern heading now for the 1.28/30 target.

UST-Bund Spread At Three Year Wides As ECB Warns IMF Involvement Would Be Beginning Of End For Eurozone

The spread between the 10 Year and the Bund has surged today to a 3 year wide. After hitting an intraday slide of 14 bps (a massive move in a world in which each basis point is leveraged thousands of times), the UST-BUND is now at 73 bps. The risk aversion trade in Europe has made 10 year Geman bonds yield just over 3%, even as the near-failed 5 Year auction in the US has spooked the bond market, and an unexpected drill has forced the Primary Dealers out of hiding and into purchasing everything past 5 years to prevent a full out rout in bonds. And all this is occurring as the ECB just warned that IMF involvement in the overhyped and two-month delayed Greek bailout will be the beginning of the end for the euro and will throw the Eurozone's economy, "which has shown fresh signs of recovery, into renewed turmoil."

A chart of the intraday spread

A longer-term perspective shows that more divergence may be in the works.

And meanwhile in Euroland, courtesy of Market News:

European Central Bank Executive Board member Lorenzo Bini Smaghi Wednesday starkly warned Eurozone leaders that they must agree on aid for Greece and not let the International Monetary Fund do the job for them.

Their failure on this score could undermine the monetary stability of the Eurozone and throw the real economy, which has shown fresh signs of recovery, into renewed turmoil, he said.

Bini Smaghi's views roughly reflect previously issued comments by other Council members but are much more assertive. The ECB's new tough stance, however, may come too late, as Berlin appears set on an IMF involvement and is slowly winning Paris over.


2. Someone bought plenty of calls early today in the US market, confirming the topping out scenario as pointed out the last weeks.

excerpt
All Securities
TimeCallsPutsTotalISEE
15:50464731295690760421157
15:30438075268383706458163
15:10387327229298616625169
14:50372386218987591373170
14:30358138211816569954169
14:10345770207087552857167
13:50332175195778527953170
13:30322803172678495481187
13:10303090160985464075188
12:50284630148457433087192
12:30275528139682415210197
12:10261266128636389902203
11:50240355121352361707198
11:30227536107407334943212
11:1020369090737294427224
10:5016917673346242522231
10:3014401463281207295228
10:108719250104137296174
09:50537322961383345181
All Equities Only
CallsPutsTotalISEE
366662188301554963195
342831167267510098205
294996130978425974225
283213125305408518226
272369119721392090228
262585116735379320225
251332109765361097229
244871105274350145233
22909997341326440235
21573387109302842248
20846480601289065259
19709873617270715268
18082367710248533267
16931459144228458286
15042748703199130309
12291940811163730301
10081232397133209311
738812470498585299
456531744463097262
All Indices & ETFs Only
CallsPutsTotalISEE
9797610733720531391
9515210106519621794
922399826919050894
891019363218273395
856979204517774293
831139030217341592
807718596316673494
7787767355145232116
7393663595137531116
6887661319130195112
6704559052126097114
6415854990119148117
5952253613113135111
5821248235106447121
532574200995266127
462513251078761142
431963085974055140
13305253753868052
8074121472022166

3. Some very valid points on the markets

excerpt

Son of Texas and financial seer, John Mauldin, believes the stock market could shed 40% in the near future (SPX). John is the president of Millennium Wave Advisors, LLC, a Dallas, Texas based investment advisor, with $600 million in assets under management.

John worries that the velocity of money, an indicator of how many times a dollar is reused in the economy, is collapsing. This ratio, which is defined by the GDP divided by the money supply, bottomed at 1.15 in 1946. It then reached a mean of 1.65 in the fifties, sixties, and seventies, and peaked at a breathtaking 2.2 times in 1997, near the top of the Dotcom bubble. It has been retreating ever since, has recently accelerated down to the 100 year mean, but still has much farther to fall to get to the bottom of the 100 year range.

The collapse of velocity signals the end of a 50 year super cycle in lending. For you and I, this means lower economic growth for perhaps another decade. It is partly the result of banks getting generous funding from the Treasury, and then sitting on it. The bucks simply stop there. It suggests that no matter how much money the government pumps into the economy, it might as well be pushing on a wet noodle.

The gold bugs have got it all wrong, simply focusing on money supply growth and expecting hyperinflation. A lot of money can sit and go nowhere. The inflation will come back with a vengeance when the economy revives and banks finally resume lending. With so much new money being created in the last two years, the chances of the Fed being able to head this off are close to nil.

Similarly, the bond vigilantes may have to wait a couple of years for their big move down in the 30 year Treasury bond (TBT). When the bond markets call “times up,” the US will be forced to embark on some highly deflationary spending cuts. If this happens during a recession, it could be a disaster.

John thinks there will be a substantial slowdown in growth in Q3 and Q4. With anticipated federal tax increases of 2% of GDP in 2011 added to a further 1% in state tax hikes, the recovery will be strangled in its crib. That’s when the risk of a double dip recession explodes. Over 3-4 years higher taxes could add up to a burdensome 9% drag on GDP.

John says that emerging markets (EEM) will decouple from the US and keep powering up, as this is where the real economic growth is (EEM). Japan is “a bug in search of a windshield.” With savings rates falling and deficit spending soaring, it may only have a couple of years left.

John has been a gold bull since 2002 (GLD), when it was below $300/ounce, and isn’t backing off from that position, but prefers to own it against Euros at this point. He thinks the entire premise for the existence of the European currency (XEU) is questionable, and sees it eventually moving to parity against the dollar.

John doesn’t manage money directly himself, but outsources assets with market timers employing a number of different models. One firm he has particular success with is CMG in Philadelphia (CMGTX). He really only selects individual stocks in the biotech area, which he thinks have the potential to develop into a bubble, and has a variety of small cap and microcap holdings.

Not pulling any punches, John said that the Republican leadership of the last congress was “criminally incompetent” in the way they unnecessarily squandered surpluses and spent their way into oblivion, leaving us without dry powder to fight the current crisis.

John has an incredibly diverse past, which includes a degree from Rice University, a stint at divinity school, and time spent running a check printing company which led him into newsletters. John then rose to the top of the American Bureau of Economic Research, and entered the fund management business in the late eighties. Today, his two letters, Outside the Box and Thoughts From the Frontline, go out on the Internet to 1.5 million readers a week. John is the publisher of three investment books, The Millennium Wave, Just One Thing, and Bulls Eye Investing. To learn more about John’s many activities in the markets, please visit his website at http://johnmauldin.com/ .

To catch my entire insightful interview with John Mauldin on Hedge Fund Radio, please go to www.madhedgefundtrader.com/ and click on the “Today’s Radio Show” menu tab on the left. To see the data, charts, and graphs that support this research piece, as well as more iconoclastic and out of consensus analysis, please visit me at www.madhedgefundtrader.com . There you will find the conventional wisdom mercilessly flailed and tortured daily.

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