Volatility Central. Wait Until Next Week...

[wndysrf]

Think we have volatilty now? Wait until next week. FOMC HedgeFund meeting coming up, and the day after we have Wednesday before options expiration.

 

Brace yourselves.....

 

Latest posted over at WSE

[wndysrf]

FOMC walking on eggshells next week.

[DrStool]

Mark- that was a classic!

[astral mike]

"Now is not the time for an overhaul of the statement, even if it is needed, said Mark Zandi, chief economist at Economy.com."

 

 

eggshells

[tdultima]

This isn't the bottom.

 

Last week was a better chance of a bottom with that +200 day coming off a huge decline, and that failed.

 

Thats how I see it.

 

Unless it follows through big on Monday...

[wndysrf]

Wow..........

 

Carry traders.........

 

[FeedFool]

First time rally looks like it has legs now it need follow through on Monday otherwise it?s dead cat bounce

[Tchaikofsky]

Close: Falling oil prices reversed sentiment, turned the indices positive and removed much of the nervousness initially sparked by mixed economic data and earnings reports... While crude oil futures ($49.72/bbl -$2.05) were weak most of the day, amid speculation that rising OPEC supplies will assure sufficient inventories to meet summer gasoline demand, a retreating desire to hold onto positions into the weekend exacerbated a late-day sell-off that closed oil near session lows... The commodity closed below $50/bbl for the first time since mid February and nearly 15% off an April high of $58.28/bbl...

 

Arguably also renewing interest that helped all ten economic sectors finish higher was a rotation out of bonds around 1:15 ET, amid speculation that traders were positioning for a new corporate bond deal and some end-of-the month portfolio rebalancing by fund managers that involved the selling of Treasurys... Yields on the benchmark 10-year note (-13/32) closed near pre-market levels of 4.19%...

 

Meanwhile, investors initially held a positive bias following an upbeat outlook from Microsoft (MSFT 25.30 +0.85) and found some relief with respect to the outlook for inflation and consumer spending amid stronger than expected economic data... Last night, the tech bellwether nearly doubled Q3 profits and issued surprisingly optimistic FY05 and FY06 guidance while better than expected March personal income and consumption data, as well as an encouraging read on regional manufacturing, were also contributing factors... Mar Personal Income rose 0.5% (consensus +0.4%) and Spending rose 0.6% (consensus +0.4%), while the Q1 Employment Cost Index - a key inflation measure - rose just 0.7%, below forecasts of 1.0% and the 0.8% in Q4...

[Guest]

Here's a post from mannfm11 over at the prudentbear board:

 

The bond market is telling us something contrary to short term rates. I was looking and the 30 year rate has dropped roughly 1% since Greenie started raising rates. Inflation/deflation, who knows for sure, but these guys are saying something different than the public expects.

 

First of all, the real rate of interest is supposed to be inflation plus 3%. If you put this on the horizon for the 30 year rate, we are looking at expectations under this formula of around 1.5% for the next 30 years. The only way I see this happening is a depression. The 10 year reflects an even tighter rate just above 1%. NO ONE BELIEVES THIS, SO IT IS AT LEAST AS LIKELY TO HAPPEN AS NOT TO HAPPEN.

 

One could say Greenie is doing this, but Greenie isn't supposed to play in this longer term area. In fact, Greenie is raising rates and pulling the long side down would invert the curve and foil any tightening he would do. Greenie is still under 3% and these bonds were in the 5.4% range when Greenie was at 6%. Don't confuse apples with oranges when looking at interest rates because different terms are different animals. He might influence the 5 year somewhat as people buy them because short terms are so low, but not the 10 to 20 year rates.

 

I have several theories. For one, credit growth in the American economy, at least as it applies to the public, has to slow down. Credit includes 2 components, principal and interest. The interest to repay the credit isn't created without further credit. Thus, credit which used to be used to propel consumer prices higher is now being used for the system to stay solvent. In this game, we have 2 players, those that accumulate credits in their bank accounts, the indirect lenders and those that accumulate debits on the bank ledger, the borrowers. As times slow down, the holders of the credits slow down their expenditures, making it harder for the people who owe the debits to gain possession of credits to solve their debts. The only means of erasing debts in this system is to gain possession of credits on the bank ledger. This includes cash, which some of you think is merely printed into existence without leverage.

 

This is the deflation or low inflation side of the equation. It goes farther, as the baby boom generation starts hoarding money they haven't saved for retirement and go from spenders to savers. Their mark in American demographics is such that if they have to quit spending and start saving, there is going to be a wild swing for demand of products worldwide. Thus we have 2 strong forces coming together to present a case for low growth, low inflation and low demand in an oversaturated system of supply of goods. I know this is too simple, but these are 2 irresistable forces. There is no mathematical solution for credit debt.

 

The other side of bonds are that they represent collateral. The government and its people are in a bind here. As the inflationists know, paper money can lose its moor pretty easily. The government is going to have to at least exhibit the intent to make good on the stream of income and the corpus on these bonds. The only other means of floating this ship is to have the Fed finance it and nationalize the Fed 100%. This is a remedy and the government has already decreed that "this note is legal tender for all debts public and private", so the holder at least has to beware that he could be paid in these notes, run off on the press like the Weimar Republic. The government and the Fed, if they did this would make FRN's and federal debt unacceptable. This would be a modified default on debt and would probably lead to a depression followed by either the extinction of mankind or the greatest economic boom in history. The government would basically fold up tent and lose its ability to wage war. This is not the long run behavior of man in power, allowing his power to wane in light of the difficulty of others.

 

The third equation is that many recognize there are going to be huge losses coming in all assets and what stands at least in part is going to be more desirable than what is totally wiped out. As I started to point out, bonds are collateralized. Stocks are collateralized only to the extent that they can make good on the debts incurred by the company. Tough times will wipe out the stockholders and transfer the assets of the corporations to the creditors. In the battle between stocks and bonds, 4.75% on 10 year AAA bonds beats 1.75% on the SPX any day of the week. If the fact of the matter is that if you hold a 10 year bond, in 10 years you are going to be able to redeem at par if things go right and draw an extra 3% return, and buying stock means that you are going to get 3% less and hope to redeem at par or better, the bond route is the smart route to go. If in fact inflation for the 10 year period comes in at 2.5%, the return on bonds is at least equal to the return on much riskier stocks. If we go to hell in a handbasket, the bond holder at least has the assets of the shareholder and the shareholder has nothing.

 

Thus, I can only make two ideas out of this. Either we are facing low inflation, deflation or the players in this market are looking at the lesser of several evils. For one, even at these rates, bonds are going to beat stocks for the next 10 years from this point. The long term return for stocks is a price function in relation to dividends and encompasses nothing but inflation plus real growth. Real growth is dependent on efficient credit growth and is a result in part of the productivity the companies can bank before the improvements of their competitors catch up with them. The paradox of if I can make it for less, do I pass all the savings onto the customer game. Thus, it is the amount of credit expansion that doesn't show up as inflation, but instead corporate profits. Sans growing credit, this process rapidly unwinds as margins shrink. If we did in fact have 10% inflation for the next 10 years, which would make it impossible to finance long term improvements this time around due to cashflow problems, the compound factor for 10% is 2.59 and 10.5% is 2.71, meaning we would have dividends in 10 years at current SPX prices of 4.75%. This would get the return on stocks back to the long term mean at current prices, but in the whole 10 years, stocks would be receiving less income than bonds,while the corpus of both would devalue the same. The risk factor favors holding the bonds.

 

Thus are we looking at a view of the inflationary/deflationary future or are we looking at a selection of the lesser of evils. It is true that bonds were at low rates in the pre 1965 period and in 10 years inflation was raging, but it did take 10 years. That was also a time when the public wasn't saturated up to their necks in credit, so they could just put everything on their credit cards for as far as the eye could see. We have passed that horizion. I believe the bond traders and bond buyers know something the stockbrokers aren't telling their customers. The real estate agents too.

 

There are a lot of chips on the table today. By that, I mean there are a lot of assets people can hold and pretend they have money. Some of these chips are going to totally disappear and the other stacks might get pretty small. But the guys holding chips that totally disappear have to give up their chair and the same real assets are going to be on the table for bidding. There are a lot of ways to recognize this. One is to buy gold as a hedge, as gold will always represent some kind of chip. If the price of gold collapses, you can bet the pile of other chips go with it this time. Thus, gold would allow one to keep his chair at the table and gain possession of assets at firesale prices. Good bonds should do the same, as they are backed by the best assets, including the power of the US government. Stocks only produce a return if we return to inflationary levels that will wreck the economy and real estate would be wrecked by inflation in the short term or deflation.

 

If I wasn't a guy thinking we are going to deflate and selling goods and services at a profit is going to get difficult, I wouldn't bring this topic up. But, we have a large, well capitalized group of people, including retirees flush with assets to buy bonds making a market at low rates in bonds, despite rising fed funds rates. My read is that credit is going to get difficult and longer term, inflation is going to be low or even negative in some years in the not too distant future. I am not too carried away with oil prices, as they are truly supply oriented this time around and will represent a drag on the pricing of other goods, as breakeven production levels will force the hand of other producers. For those that don't know, breakeven is a formula that requires operations to sell at a loss because marginal production reduces losses against shutting down altogether. Bill Gross said that if we didn't get the fed funds rate to 4% on this recovery, we would likely see Hillary in the White House in 2009. The bond market and some other factors are screaming that we don't make it. Oil prices make for a great culprit, but oil prices and other commoditiy prices comprise the real engine of growth and if the rest of the economy cannot operate without growth industries of basic products, then the rest of the economy is cooked. Oil this time is a bar to growth in production of other products in a different way than price. The world is awash in capacity for everything this time around except steel and oil. In other financial news, I doubt China can afford to slow down much and I believe they are the lynchpin to worldwide deflation.

 

Before I close, I will iron out one more mistatement I believe is being pushed around. That is that deflation is caused by lower production costs and that production costs in China are falling. These are not deflationary pressures, but competitive productivity pressures. In general, they allow for nonreflexive credit expansion or better yet, the capacity to maintain consumption without additional credit. True deflation comes when the suppliers cannot sell enough goods at a price level sufficient to produce a profit or meet breakeven. Deflation isn't from the fact that one closes a plant in Texas and moves their production to China, but more the fact the customers of the company in Texas are no longer employed. It is the result of a combination of overinvestment and a parallel increase in credit levels, producing what appears to be non-inflationary growth and an economic boom. Of course the overinvestment is the result of too much credit which creates more overinvestment. Google might be a case, as their price is the result of too many credits. The idea that GOOG is selling for more than DIS is about as absurd an idea as one can possibly embrace. It don't compute that a website is worth more than a worldwide television network.

[wndysrf]

Just like that last 200 point meltup.

 

All it took was to goose MSFT.

 

Its the only Dow stock that really did anything today.

 

[wndysrf]

Now the 7th highest weighted stock on the NDX.

 

Pinned at the highs.

 

[wndysrf]

Whacked out Weyerhauser

 

[Hiding Bear]

fxfox - if you out there in Euro land - Why has the Euro constitution got everyone worried about the Euro? Since the euro was around before the Constitution anyway.

[astral mike]

wndysrf,

 

either you believe inflation is REAL (and getting much worse) or you dont.

 

IMO, the article you posted is written by a blinked neo-con (from texas).

 

what on earth has 'hillary' & 'the white house' got to do with the subject?

 

---------------------

 

"Bill Gross said that if we didn't get the fed funds rate to 4% on this recovery, we would likely see Hillary in the White House in 2009."

 

---------------------

 

why else use twisted illogic that brings together 'texas' & 'china' into a senario?

 

---------------------

 

"True deflation comes when the suppliers cannot sell enough goods at a price level sufficient to produce a profit or meet breakeven. Deflation isn't from the fact that one closes a plant in Texas and moves their production to China, but more the fact the customers of the company in Texas are no longer employed."

 

---------------------

 

when suppliers cannot sell enough goods to breakeven, thats called recession.

 

look up "stagflation" if you need an explantion for USA's pitiful employment situtation, and the current inflationary dilema.

 

-------------------------

 

"This would be a modified default on debt and would probably lead to a depression followed by either the extinction of mankind or the greatest economic boom in history".

 

---------------------------

 

this is nothing more than extremely dangerous propaganda.

 

ecomonic irresponsibility does not justify going to war & using nukes!

 

that is nazi logic.

[BAREister]

Here's a post from mannfm11 over at the prudentbear board:

 

The bond market is telling us something contrary to short term rates. I was looking and the 30 year rate has dropped roughly 1% since Greenie started raising rates. Inflation/deflation, who knows for sure, but these guys are saying something different than the public expects.

 

First of all, the real rate of interest is supposed to be inflation plus 3%. If you put this o

This is the deflation or low inflation side of the equation. 

Thus, I can only make two ideas out of this. Either we are facing low inflation, deflation or the players in this market are looking at the lesser of several evils. 

 

Thus are we looking at a view of the inflationary/deflationary future or are we looking at a selection of the lesser of evils. 

 

If I wasn't a guy thinking we are going to deflate and selling goods and services at a profit is going to get difficult, I wouldn't bring this topic up.  .

<{POST_SNAPBACK}>

 

The global economy is slowing, witness our economy, Germany's and that of Japan; the bubble in several countries in RE is peaking; commodities have stopped soaring;

the equity markets are schizoid.

 

BARE hASS said all along he thought DEFLATION would get the upper hand. Rogers' commodities fund has given him real PAWZ, BUTT(_)_) in March, heer, HRFF said he wondered if we weren't at a MAJOR CREST/PEAK of some sort and if THEN was the point in time when most assets (all widely watched ones stox, bondz, commodities, gold, the dollar - the lot) might begin to implode simultaneously in earnest. Underlying this question is the DEFLATION thesis. HRFF has viewed the past 5 years or sew as a rear guard action by the Establishment to fend off deflation by flooding the system with liquidity, one doomed to fail, and that, like termites DEflation has been eroding the superstructure and INFLATION the facade (including the huge surge in Rogers' commodities funds' price) But it's awfully hard to argue with RESULTZ, and, b'gosh, b'golly, Rogers, alone, has 'em. And he's FURmly in the INFLATION camp.

 

FUR those results since inception in 1998 vis-a-vis the major indicies, see:

http://www.rogersrawmaterials.com