Financial Research Updates (10/25/2010-10/30/2010) | powerLINKS

powerLINKS: Halloween Edition (*updated links 10/31/2010 5:48pm)

Activity in XLF Call Options, Watch 15 Resistance, XLF vs. SPY (Charts)

Interesting activity in XLF calls yesterday (financial sector ETF) -> @RMBrenna (optionmonster TV) and Benzinga. Watch $15 resistance and the 200DMA. Also XLF underperformed SPY by 10% during the past six months (XLF -9.41%, SPY +0.66%). How does the performance spread tighten?

Nikkei Future Under Pressure, Broke 50dma (9,195, NKZ vs Yen) - Charts

The Nikkei 225 (Dec future) is under pressure tonight. It is down 1.71% at 9,195 and broke through the 50 day moving average. It is testing July support and if 9,200 officially gets taken out it could bleed to the 8/31 low (8,775). 9,200 support is critical for a potential head and shoulders reversal. Japanese stocks really need a strong jolt here to pull it off IMO. NK is still trading in a descending channel. Over the past six months (since April) the Yen is up 15%+ and the Nikkei is down 15%+. So there's a clear inverse relationship. Japan needs a lower Yen. Charts and articles after the jump.

Ireland 10year Yield Makes New High (7.06%) on Deficit Worry, CDS at 463bps

Irish 10-year bonds were active today on deficit worries. The 10-year yield spiked to 7.06% before closing at 6.80%. Charts after the jump.

Irish borrowing costs at new high on debt fears - BusinessWeek
Ireland Credit Debt Swaps Soar on Anglo Bond Standoff (463bps) - BusinessWeek
Irish FinMin: Greece, Portugal weigh on Irish bond yields - Reuters
Irish four-year plan designed to prevent bailout-Fin Min - Reuters
Lenihan Says Ireland Needs ‘Significant’ Budget Cuts in 2011 - BusinessWeek
Irish, Portuguese Bonds Decline on Deficit, Political Concerns - Bloomberg

John Taylor (FX Concepts): US Dollar Will Remain Weak Through November, Still Sees EUR/USD at Par

John Taylor who runs the biggest currency hedge fund in the world (FX Concepts) thinks QE2 is priced in and believes the US Dollar will remain weak through the end of November [EUR/USD tops out between 1.40-1.43]. Taylor still believes EUR/USD hits 1.0 (par). He was on BloombergTV talking with Erik Shatzker watch below. Oh and beware of currency wars fueled by protectionism. You hear that Central Bankers?

Pimco's Bill Gross: Fed QE is a Ponzi Scheme, 30-year Bond Bull Market is Over

Bill Gross who runs the biggest bond fund in the world at PIMCO said quantitative easing and even our public debt has ponzi-like characteristics. Wow.
  • The Fed’s announcement of a renewed commitment to Quantitative Easing has been well telegraphed and the market’s reaction is likely to be subdued.
  • We are, as even some Fed Governors now publically admit, in a “liquidity trap,” where interest rates or trillions in QEII asset purchases may not stimulate borrowing or lending because consumer demand is just not there. Escaping from a liquidity trap may be impossible, much like light trapped in a black hole. Just ask Japan. Ben Bernanke, however, will try – it is, to be honest, all he can do.
  • The Fed’s announcement will likely signify the end of a great 30-year bull market in bonds and the necessity for bond managers and, yes, equity managers to adjust to a new environment.
  • Check writing in the trillions is not a bondholder’s friend; it is in fact inflationary, and, if truth be told, somewhat of a Ponzi scheme. Public debt, actually, has always had a Ponzi-like characteristic.

Night of the Living Fed, Jeremy Grantham's October Letter (Bonds or Equities?)

Night of the Living Fed by Jeremy Grantham
GMO's co-founder and chief equity strategist Jeremy Grantham released his 3Q 2010 letter titled "Night of the Living Fed". Check out the cover page to your left (click for full view). GMO runs $94 billion in client assets. After listing the "ruinous costs" of Fed asset price manipulation, Grantham questioned bonds versus equities since both are overpriced and bonds are manipulated. Read the full report here in PDF form.

"5) Should we buy overpriced stocks when bonds are even worse?

We plan to write more substantively on this topic in the near future, but for now the short answer is that bond prices are currently manipulated, and are yielding less than any market clearing price would suggest. They absolutely do not reflect the substantial fears in many quarters about inflation in the long term. Even in less manipulated times, bond prices can be quite silly for the usual behavioral reasons, as demonstrated most clearly by the 15% yield on the 30-year Treasury in 1982! Bonds are thus emphatically not a reasonable yardstick for measuring value in stocks. We use the long-term returns for stocks to decide what their fair value is. They are currently overpriced. Bonds are even less attractive. Yet, remember that in a strongly mean-reverting world, you need to be careful about enthusiastically buying the less ugly of two overpriced investments. Cash has an option value: on the chance that stocks or bonds or, better yet, both, decline, the investor will need resources from which to buy." [full report]

Big Volume in US Dollar ETF, March 2011 Call Options ($UUP), Get Ready For November Catalysts

The US Dollar Bullish ETF ($UUP) and its March 2011 call options saw big volume yesterday. UUP closed up 0.13 or 0.57% at 22.65 on 15.43 million shares (average of 3.76M) and a total of 227.57K options traded (average of 21.49K). UUP hasn't seen this much volume since May. UUP is testing the 2008 and 2010 lows which could explain the upside positioning, whether speculative or hedging.

Check out the two block trades: 99,000 UUP March 24 Calls traded at 0.34 (6,586 open interest) and 54,000 UUP March 23 Calls traded at 0.61 (48,617 open interest). The big volume was on the PHLX. It was a vertical call ratio spread according to OptionMonster. UUP was also on my ISE widget with 4,823 calls opened versus 253 puts opened.

Charts Get Upgrade in Google Docs Spreadsheets (Video)

Check out the new charting features in Google Docs Spreadsheets. Free advanced web-based charts. Thanks Google. The video below is from the Google Blog and ZDNet did a post.

The Real Estate Bust's Impact on Tax Increment Financing (TIF)

If interested in public finance here's a presentation on TIFs (Tax Increment Financing). Leveraging the tax base! CDFA - BNY Mellon Development Finance Webcast Series: Real Estate Bust Impact on Tax Increment Finance.

Bob Prechter: The Next Major Disaster Developing for Bond Holders (New Report)

There's a new report out by Bob Prechter of Elliott Wave International on bonds. You'll like the charts.

Download your free copy of Robert Prechter's new 10-page report, The Next Major Disaster Developing for Bond Holders, now -- it's free.

About the Publisher, Elliott Wave International

Founded in 1979 by Robert R. Prechter Jr., Elliott Wave International (EWI) is the world's largest market forecasting firm. Its staff of full-time analysts provides 24-hour-a-day market analysis to institutional and private investors around the world.

William Black on the Foreclosure Crisis, Mortgage Fraud (Dylan Ratigan)

Professor William Black is probably the right guy to explain the current foreclosure crisis. He was a former bank regulator and S&L investigator during the Savings and Loan crisis in the late eighties. He said today's crisis is the S&L/junk bond bust x 40. Below is a statistic he gave on mortgage fraud.

"Credit Suisse says that by 2006, 49% of all mortgage originations in the United States were liars loans. The lowest incidents of fraud is 50% and that’s when the fraud fraudsters study it themselves. When independent folks study it, it’s in the 80 to 90% range."

Also did you know that the FBI warned about a mortgage fraud epidemic in September 2004? FBI warns of mortgage fraud 'epidemic' (CNN). Lisa Epstein is featured first in the video clip.

Municipal Tax Base and Pension Fund Update (Milken Institute, Northwestern and SF Fed Info)

If you've been following the public finance crisis on my blog during the past 2 years, nothing has really changed. State governments and local municipalities are being squeezed by lower tax revenues (offset by tax hikes) due to the great recession, debt-deflationary drag, foreclosures, lower property values, unemployment and slower economic activity. Read: Lower Property Values Hit City Revenues (WSJ).

Analyst Meredith Whitney sees darkness ahead for the States: Whitney Says States May Need Federal Bailout in Next 12 Months (Bloomberg video). State credit default swaps, or insurance on State debt (see Illinois, California) have premiums almost as high as GreecePortugal and Ireland who are going through a similar situation. Chris Mier of Loop Capital disagreed with Meredith Whitney. On Bloomberg TV he said States "have their own resources, are sovereign and have deep powers to tax". Focus on local units of Government since "they have less resources, they have smaller economies and have limited abilities to tax"See the Bloomberg video here. Either way, get ready for a spike in taxes or a Federal bailout.

Gary Shilling on CNBC (Treasuries vs. Stocks), Home Index Rolls Over (ITB, XHB, TLT, SPY, XLF)

Gary Shilling of A. Gary Shilling & Co. was on CNBC on 10/22/2010. He sees home prices falling by another 20% and mortgages under water rising to 40% from 23%. Maybe that is why bank indexes are underperforming the Nasdaq and commodities (+ the mortgage put-back crisis). He also sees the 30-Year Treasury yield hitting 3%. Before Shilling came on, CNBC reported that the Clear Capital Home Data Index was rolling over. He says watch the standoff between Treasuries and stocks. One will give. Watch the S&P ETF (SPY) chart stream live here.

$USB (30-Year US Treasury Bond Price) vs. $SPX (S&P 500)

US Dollar Future Flash Crash or Capitulation? Prints 74.60 Low, Yen Running Higher (DXZ, JPZ, UUP, FXY)

Someone or a currency bot decided to pierce through October support in the December US Dollar Index Future (DXZ10) and print a low of 74.60. More on that print here, here and here. Short covering bots quickly rallied the almighty Dollar back to unchanged territory. It is now rolling over post G20 meeting (Dollar sell-off resumes after G20, eyes on Fed). Was that a flash crash or legit capitulation? Why are we seeing this happen in SPY and the Dollar Future during after hours? Watch 76.33 support which was the actual low on 10/15/2010. The Yen is making new highs as well. Watch that rising trend line. Charts after the jump. This week will be interesting.

60 Minutes: California Unemployment + UNDERemployment is 22% (U6), Thoughts On Economy

60-Minutes did a special on the unemployment problem in the U.S and specifically in California. We are currently in a debt-deflationary depression (see this MacroTwits video with Gregor Macdonald from 8/16/2010, he explained it). The trillion+ in Government stimulus (quantitative easing) was supposed to cure this problem. Instead the money backstopped banks, inflated stocks and commodities, deflated the US Dollar and attempted to put a floor under housing prices by buying Treasuries/agency mortgage-backed Securities to lower mortgage rates. As you can see from the Clear Capital Home Data Index reported last week, we might be experiencing a double-dip in housing.

The Fed's second stimulus (quantitative easing #2) could be announced at the November 3rd meeting which would focus on buying longer-term Treasuries to lower rates even further. Short term rates are at 0%. The Government hopes it will fuel refinancing activity and lower borrowing costs for businesses and households to provide an economic jolt. Hopefully commodity inflation doesn't mess that up.

Niall Ferguson vs. Keynes, US Steel on Manufacturing Crisis, Cotton Makes New High - powerLINKS (10/24/2010)

powerLINKS for 10/24/2010

Harvard's Niall Ferguson was at the The Daily Beast's Innovators Summit in New Orleans on 10/22/2010. Watch the full video at Zero Hedge. This was an interesting quote:
"We've had an enormous of stimulus in the US, it's the biggest fiscal stimulus in the world, and huge unprecedented monetary stimulus. What's been stimulated? Not jobs in Michigan. What's been stimulated has been commodity markets and emerging markets. Because the liquidity just leaks out, and that's why another round of stimulus would not stimulate in the promised way." [link]
*Michigan's unemployment rate is at 13% and the cotton future tripled since early 2009.