Thoughts

Time to pick up TBT calls?

A Peek Behind the Curtain

I don't alter my investments or trades ahead of big economic news.

Another negative market influence is that banks are beginning to roll over again.

Was the Chicago PMI reading buoyed by the large weighting in automobile production vis-a-vis other geographies?

I am wondering since the Chicago PMI was surprisingly strong and other regional indices were not so, could that series have been buoyed by the large weighting in automobile production vis-a-vis other geographies?

Technically, the market is delivering a potentially toxic combination of low volume, weak breadth and a deteriorating financial sector. These are classical bearish signals.

Fundamentally, there is unjustified confidence on the part of market participants concerning the implementation and efficacy of QE 2. It is clear from the Wall Street Journal's Jon Hilsenrath and in three speeches over the past 24 hours by Fed Presidents of Atlanta, Minneapolis and Philadelphia that some in the Fed are hesitant to come out with guns a-blazin'. If QE 2 is ultimately implemented, unlike the "shock and awe" of QE 1, the new program will be characterized by shucks and aww. Meanwhile, a number of recent economic releases (especially in housing and confidence) suggest risk to the downside -- just as a number of Wall Street strategists have raised their year-end 2010 and 2011 S&P targets.

What about the ramifications of our currency's debasement? Short term, a lower U.S. dollar helps to grow our exports and reduce our imports, so our trade deficit narrows. But intermediate term, a further, steep dollar drop could be disastrous. Massive monetary intervention ultimately encourages uneconomic activity, creates inflation and a misallocation of resources.

Is it wise to short bonds? The contrarian in me says that the spread of domestic equity outflows and fixed-income inflows are a red flag and reminiscent of the flow experience in 1999-early 2000 that presaged a collapse in stock prices (particularly of a technology kind). In fact, the $240 billion of equity outflows and $635 billion of bond inflows is the widest gap in any 36-month period in history. Of course, bond yields continue to trade near their yearly lows as the Fed anchors short-term rates at zero, but this is a temporary condition, and the Fed's policy will change in the fullness of time.