Does the weak Fed statement re-set the dollar reflation play?
Steve Cook on Disciplined Investing


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   This Week’s Data

    Weekly mortgage applications jumped 8.5%, the first increase in a month.

    The October Institute for Supply Management’s nonmanufacturing index came in at 50.6 versus expectations of 52.0 and 50.9 recorded in September.

    The FOMC meeting concluded and it (1) left the Fed Funds rate unchanged and (2) didn’t alter the language of its post-meeting statement all that much from the one issued following the September meeting [rates stay low, economy weak, inflation under control].  The only thing noticeable was the extra emphasis that it placed on all the reasons why inflation wasn’t a problem.

    Here’s more on the Fed’s perspective (medium):

    Weekly jobless claims fell 20,000 versus estimates of decline of 5,000.

    Third quarter productivity came in at +9.5% versus forecasts of +6.5%; unit labor costs dropped 5.2% versus expectations of a 4.6% decrease.




More from the congressional budget office on the healthcare plan (short):

  International War Against Radical Islam

The Market

    The Market schizophrenia continues.  The Averages (DJIA 9806, S&P 1046) are in a trading range though at the moment we only know the upper boundaries of those ranges (10130, 1102).  The VIX traded down but stayed above the down trend off its October 2008 high; in other words, it is in a trading range which is consistent with stock prices trading in a range. 

The dollar traded lower; but like the VIX remains above the upper boundary of a recent down trend.   Hence, also like the VIX, it is in a trading range.  Nevertheless, investors seemed to be getting jiggy with what was perceived to be the reassertion of the dollar/reflation trade, i.e. dollar down, stocks up (but dropped off dramatically near the end of the day), gold soared (again after re-establishing an up trend Tuesday).

So we wait for further definition of the trading range.  There is some probability that the recent lows (9671, 1029) will end up defining the lower boundary though as I pointed out yesterday, there are numerous other candidates within 1-3% of that level. 

And we wait to see if the old inverse alignment of gold and the dollar to reasserts itself.

    The latest from TraderFeed:

    And Trader Mike:
    Asset class performance since the 2008 election (graph):

    Gold and the S&P (graph):


    The FOMC meeting takes the lead for two reasons: (1) the language regarding interest rates, that is, the Fed expects interest rates to remain low for an extended time, didn’t change.  In other words, Fed monetary will stay easy for at least a couple more months [i.e. until they can change the language at the next Fed meeting]. And (2) the aforementioned increased emphasis on why inflation isn’t a problem. 

    The importance of all this is that it bears directly on the much discussed dollar/reflation trade.  In essence, the Fed said that it will continue to pursue an easy money, low interest rate policy which has been a primary driving force behind the slumping dollar. As an aside, I had hoped (ever the optimist am I) that the recent strength in the dollar was anticipating some sort of tighter Fed policy statement coming out of the FOMC meeting.  Alas, that was not to be.

So as I noted above, while the dollar has not resumed its decline, odds now seem to favor such an occurrence.  Hence, if the tight inverse relationship between the dollar and gold/stocks/commodities that has existed for the last couple of months hasn’t changed in the last week, we are likely looking at further advances in gold/stocks/commodities.

    From an investment point, I am fine with the dollar/gold/commodities part of the equation.  However, as you know I am getting worried that at some point investors will cease viewing a declining dollar as a positive for stocks.  Unfortunately, I am just not smart enough to know when that will occur.

    My solution is to raise our Portfolios’ exposure to our gold/foreign ETF positions (from 15% to 20%) and to be very price sensitive to the technical weakness of our US holdings.  Clearly, the earlier sale of a small portion of our gold position was a mistake and will be reversed on any short term price weakness in gold.

    This courtesy of Keith McCullough of Research Edge:

8:10 AM EST

"Nothing is more obstinate than a fashionable consensus."
-Margaret Thatcher
Per our friends at being obstinate is "characterized by inflexible persistence or an unyielding attitude."
I am no longer going to call him Heli-Ben. The cartoons and the free moneys... I'm done with those. This isn't funny anymore. I am going to call him The Obstinate One. Shame on you Ben Bernanke. Shame on you.
Bernanke pandered to the political wind again yesterday. Never mind the original justification for going to this "emergency rate" of ZERO percent on your hard earned savings accounts. It's time for The Obstinate One to make up new narratives that support the political position. He didn't change anything in his "exceptional" and "extended" language. He made it clear that he won't raise rates until both inflation and employment rise.
Let's consider both:
1.      US Employment - He's more of a 1930's Great Depression guy, so he obviously doesn't remember the 1970's. Most Keynesians would rather not remember those STAGFLATION days either. They were professionally embarrassing for "economists." Yes, Obstinate One, you can have a jobless recovery in inflation.

2.      Inflation - Newsflash: reported deflation already bottomed at -2.1% in the July of 2009 CPI report. Sequentially, Consumer prices will continue to rise (or REFLATE); particularly in the next 3-6 months. Yes, Obstinate One - that's what we call an accurate Research Edge Macro forecast.

Yes, Obstinate One, we understand that the government has changed the way inflation is calculated 9 times since 1996. Yes, we understand that, as a result of the calculus, its now almost mathematically impossible to have core CPI reported north of 3%. Yes, we understand that Washington will never have to worry about inflation because they don't use prices at the pump.
Americans should just stop whining, and take a cab. Enough already. The Obstinate One has successfully arrested the depressions and deflations in Wall Street bonuses. He's been hired for another term. There is a strong case here for the willfully blind to have Washington fear-mongering consensus stay the course.
Into and out of the FOMC announcement, here's what marked-to-market leading indicators of price inflation have done:
1.      The US Dollar broke my critical immediate term TRADE line of support ($76.20), trading down to $75.74

2.      The SP500 closed up for the 3rd day in a row, taking its REFLATION from March 9th back up to +55%

3.      The CRB Commodities Index closed at 276, taking it's week-to-date price gain up another +2.2%

Here's The Obstinate One's Christmas present to the citizenry who should just take his word for it on inflation:
1.      Oil in a Bullish Formation (positive TRADE, TREND, and TAIL): immediate term support/resistance = $75.81/$81.41

2.      Dr. Copper in a Bullish Formation: immediate term support/resistance = $2.88/$3.05

3.      Gold in a Bullish Formation: immediate term support/resistance = $1054/$1095

How about "Great Depressions" in prices of International Equity markets that are now using our Burning Buck to carry trade?
1.      China closes up for the 5th consecutive day taking the YTD gain on the Shanghai Composite to +71%

2.      Brazil took a sniff of The Obstinate One's free moneys and raced +2% higher into the close yesterday at +70% YTD

3.      Russian stocks are up again early this morning taking their YTD gain to +109%

Ah, who cares about the Russians, Brazilians, and the Chinese building economic power in this day in age. America has a lot of that to give, no? Are there any unintended consequences associated with Putin gaining political power again via petrodollars? How about Chinese military aspirations?
Who cares about all this when the American citizenry can fund it via a Piggy Banker yield curve (the spread between 10-year Treasury yields and 2-year yields has shot up to +263 basis points overnight as The Obstinate One politicized the short end of the curve)? Who needs to talk about these marked-to-market realities like a 3-month US Treasury rate of return of 0.05% (ZERO)?
If this weren't so pathetic it would upset me. Instead, I'll just sell American (I'm still short the US Dollar), and move on. Global capital flows to rates of return. Let's not get patriotic about this - Japan already tried. The Australians get it. The Norwegians get it. The Indians get it. They want The Client's (China) savings, and they'll put a rate of return on it.
I have dropped my Asset Allocation to US Equities down to 3%. I have immediate term TRADE resistance for the SP500 at 1064. Intermediate term TREND support is now inching closer to the future that the perceived wisdom of The Obstinate One is signing off on - that line is 1027 - watch it, real-time.
Best of luck out there today,


EWZ - iShares Brazil- President Lula da Silva is the most economically effective of the populist Latin American leaders; on his watch policy makers have kept inflation at bay with a high rate policy and serviced debt -leading to an investment grade credit rating. Brazil has managed its interest rate to promote stimulus. Brazil is a major producer of commodities. We believe the country's profile matches up well with our reflation call.

EWT - iShares Taiwan - With the introduction of "Panda Diplomacy" Taiwan has found itself growing closer to mainland China. Although the politics remain awkward, the business opportunities are massive and the private sector, now almost fully emerged from state dominance, has rushed to both service "the client" and to make capital investments there.  With an export industry base heavily weighted towards technology and communications equipment, Taiwanese companies are in the right place at the right time to catch the wave of increased consumer spending spurred by Beijing's massive stimulus package.

XLU - SPDR Utilities- We bought low beta Utilities on discount on 10/20. TRADE and TREND bearish.

EWG - iShares Germany- Chancellor Angela Merkel won reelection with her pro-business coalition partners the Free Democrats. We expect to see continued leadership from her team with a focus on economic growth, including tax cuts. We believe that Germany's powerful manufacturing capacity remains a primary structural advantage; with fundamentals improving in a low CPI/interest rate environment, we expect slow but steady economic improvement from Europe's largest economy.

GLD - SPDR Gold - We bought back our long standing bullish position on gold on a down day on 9/14 with the threat of US centric stagflation heightening.  

CYB - WisdomTree Dreyfus Chinese Yuan - The Yuan is a managed floating currency that trades inside a 0.5% band around the official PBOC mark versus a FX basket. Not quite pegged, not truly floating; the speculative interest in the Yuan/USD forward market has increased dramatically in recent years. We trade the ETN CYB to take exposure to this managed currency in a managed economy hoping to manage our risk as the stimulus led recovery in China dominates global trade.

TIP - iShares TIPS - The iShares etf, TIP, which is 90% invested in the inflation protected sector of the US Treasury Market currently offers a compelling yield. We believe that future inflation expectations are currently mispriced and that TIPS are a efficient way to own yield on an inflation protected basis, especially in the context of our re-flation thesis.

XLI - SPDR Industrials - Industrials shot up +1.1% on 11/3 because of a monster Berkshire bid. That's now in the price of XLI. We'll short expectations for V-shaped recovery. TRADE bearish, TREND bullish.

EWU - iShares UK - Despite areas of improvement, broader fundamentals remain shaky in the UK: government debt continues to expand, leadership in critical positions lacks, and the country's leverage to the banking sector remains glaringly negative.  Q3 saw its GDP contract by -0.4%. The announcement of further bank stimulus and talk of the BOE increasing its bond purchasing program suggest that this will not end well.

XLY - SPDR Consumer Discretionary - We shorted Howard Penney's view onConsumer Discretionary stocks on 10/30. The sector is broken from an immediate term TRADE perspective.

EWJ - iShares Japan - While a sweeping victory for the Democratic Party of Japan has ended over 50 years of rule by the LDP bringing some hope to voters; the new leadership  appears, if anything, to have a less developed recovery plan than their predecessors. We view Japan as something of a Ponzi Economy -with a population maintaining very high savings rate whose nest eggs allow the government to borrow at ultra low interest levels in order to execute stimulus programs designed to encourage people to save less. This cycle of internal public debt accumulation (now hovering at close to 200% of GDP) is anchored to a vicious demographic curve that leaves the Japanese economy in the long-term position of a man treading water with a bowling ball in his hands.

UUP - PowerShares US Dollar - We re-shorted the US Dollar on strength on 10/20. There continues to be no government plan to support it.

FXB - CurrencyShares British Pound Sterling - The Pound is the only major currency that looks remotely as precarious as the US Dollar. We shorted the Pound into strength on 10/16.

SHY - iShares 1-3 Year Treasury Bonds -  If you pull up a three year chart of 2-Year Treasuries you'll see the massive macro Trend of interest rates starting to move in the opposite direction. We call this chart the "Queen Mary" and its new-found positive slope means that America's cost of capital will start to go up, implying that access to capital will tighten. Yields are going to continue to make higher-highs and higher lows until consensus gets realistic.

    The elections deserve a brief comment.  Many investors appear to have concluded that one of the results of Tuesday night’s voting was a rejection of the more intrusive healthcare package (s) working their way through congress.  Healthcare stocks did fairly well yesterday.  I would caution against a too optimistic interpretation of election night.  Not that voters/investors aren’t fearful of too much government intervention into the healthcare system--they probably are.   But because as I have noted before, I think that Obama is an ideological purist.  My concern is that He will not accept rejection of His ideals (universal healthcare) and will only re-double His efforts.  That probably won’t be good for healthcare stocks.

    Finally, Cisco reported great earnings after the Bell last night and provided very optimistic future guidance on top of that.  I have bemoaned the fact that fundamentals seem to have lost their impact on stock prices; but one can always hope.  Let’s see how the Market reacts to this positive bit of news from a Market leader.

Posted 11-05-2009 8:27 AM by Steve Cook