David Stockman: Fed Monetary Heroin Injection Into Financial System Will One Day Kill The Patient (Video)

This video was going around last week. David Stockman, former director of the Office of Management and Budget under President Reagan, said the "Fed was injecting high grade monetary heroin into the financial system of the world and one day it will kill the patient". Uh oh. BloombergTV clip from 11/4/2010 after the jump.

Bernanke at Jacksonville University on Commodity Price Increases, Fed Balance Sheet and How They Aren't Printing Money (11/5/2010)

Chairman of the Federal Reserve, Ben Bernanke, spoke with an economics class at Jacksonville University. He talked about how the Fed works, how they stopped the financial panic of 2008 (lender of last resort), AIG, the 2009 bank "stress tests", the unwind (tightening policy using interest rates, draining reserves or selling assets), the Fed balance sheet, Treasury securities and reserves in the banking system.

"Sometimes you hear the Fed is printing money, that's not really happening, the amount of cash in circulation is not changing. What's happening is the banks are holding more and more reserves with the Fed".

During Q&A Bernanke was asked if recent commodity spikes (cotton for example) could trickle down to the consumer. Does it threaten your outlook for low inflation?

Cameron Hanover Daily Oil Recap (11/5/2010)

Cameron Hanover Daily Oil Recap (courtesy of www.fmxconnect.com)

The monthly unemployment report was a surprise – it was surprisingly robust. A reported 151,000 new jobs were added against predictions that had been calling variously for increases of 60,000 to 80,000. That should have been unqualified bullish news. On top of that previous job losses were revised down by 110,000, meaning that this report made us aware of 261,000 more jobs than we had. And that was almost 200,000 more people working than had been expected. Granted, the unemployment rate remained unchanged because we need to create that many jobs just to tread water, but it was the best news we have had in a very long time.

Oil and Gas News from This Week (11/5/2010) - Guest Post

Submitted by Global Intelligence Report

Oil and Gas News from This Week

European Energy Consortium to Sign Turkmen Gas Deal

A consortium of two European energy companies and a financial institution are seeking to strike a major gas supply deal with Turkmenistan by the end of this month, to bring gas to Europe, bypassing Russia, which has recently experienced some disappointment in its dealings with Turkmenistan. If the deal goes through as planned, the first Turkmen gas would make its way to Europe by 2014. The information came from Turkmenistan's honorary consul to the EU, Koen Minne. "Our timeline is to get an agreement in principle during the month of November," he said. "The feasibility study was completed in the middle of September, and we've come to our conclusions on the commercial part." This is a historic deal that would cement indications that Turkmenistan has snubbed Russia and its pipeline plans and chosen instead to supply Western-backed pipelines. Among the energy companies are reportedly Italian oil group ENI.

China's CNPC Resumes Turkmen Gas Supplies

Research Updates (QE2 Recap): Goldman, Chris Wood, Jim Rogers, David Rosenberg

Zero Hedge: Goldman Sachs on Gold and TreasuriesAlbert Edwards (Société Générale), Chris Wood (CLSA), UBS's Art Cashin (QE2 = rolling PPT?)

Bloomberg: PIMCO's El-Erian on QE2, Deutsche Bank on 10-year Note, Jim Rogers on QE2 (video), Gluskin Sheff's David Rosenberg (video), Mark Mobius (Templeton)

CNBC: Art Cashin of UBS (video)

Optionmonster: XLF quote stuffing (video), VIX update (video), put buying in materials

FMXconnect: David Rosenberg (Breakfast w/ Dave on QE2)

Jim Rogers Interview in Oxford, UK on QE2, Commodities and Bernanke

Watch this Jim Rogers interview in Oxford (UK) with a decent Grandfather Clock in the background (BloombergTV Media link with Stephen Morris). He gave his outlook on commodities and QE2. Nothing new here if you've been listening to him on Distressed Volatility during the past 2 years. Did you take his advice (or opinion) to own silver on June 22, 2010? $SLV was at $18.26 and today it closed at $26.20 (+43.4%). He expects the commodity bull market to continue for several years based on supply/demand and currency debasement. He favors the most depressed commodities.

Also read about the speech he made at Oxford University: Bernanke ‘Doesn’t Understand’ Economics, Rogers Says  (Bloomberg.com) and it looks like economist Paul Krugman had something to say about Rogers and QE2 on his blog.

Bill Fleckenstein and Barton Biggs (Traxis) on QE2

Bill Fleckenstein of Fleckenstein Capital and Barton Biggs of Traxis Partners were on Bloomberg TV talking about the Fed.

S&P Priced in Silver Makes New Low! (SPX/Gold, SPX/Copper, SPX/BAL - Cotton)

So the S&P 500 is doing great right? Making new highs. It is exactly what the Fed wants to happen with quantitative easing. From Bernanke's Washington Post op-ed:

"This approach eased financial conditions in the past and, so far, looks to be effective again. Stock prices rose and long-term interest rates fell when investors began to anticipate the most recent action. Easier financial conditions will promote economic growth. For example, lower mortgage rates will make housing more affordable and allow more homeowners to refinance. Lower corporate bond rates will encourage investment. And higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending. Increased spending will lead to higher incomes and profits that, in a virtuous circle, will further support economic expansion."

However, if you priced the S&P in precious metals or commodities, it either made new lows or flatlined since QE1 or early 2009 when the market bottomed. The S&P priced in Silver just broke through the March 2009 low, the S&P priced in Gold is not that far off (watch the descending triangle inflection point), the S&P priced in Copper and Cotton (ETN) got annihilated and the S&P priced in Oil flatlined. So in real terms equities have underperformed most commodities and precious metals. Will these commodity spikes, especially in the agricultural space, ever squeeze household budgets or S&P margins going forward? Or will the US Dollar and/or 10-year note sub 2% (Bob Janjuah of Nomura) force people into equities either way.

Ireland Credit Default Swap Hits Record (586bps), Portugal In Play, Greece Has Highest Default Probability, U.S. 5yr CDS Widens

Sovereign Credit Update: The cost of 5-year insurance on Ireland Government bonds hit a new record of 586 basis points (5.86% to protect $10 million annually). 586.85bps was the 5-year mid spread. Portugal CDS rose 4.51% to 441.29bps and, although demonstrably lower than EU CDS spreads, U.S. 5-year CDS were up 6.18% at 41.79bps. Greece was at the top of CMA's sovereign "Highest Default Probability" list at 52.39% with a 857.84bps mid spread (8.57%). Ireland was in third place at 40.08% and Portugal sixth place at 32%. See table snapshots and articles below > >

Fed Chairman Ben Bernanke Blogged About QE2

What the Fed did and why: supporting the recovery and sustaining price stability - 11/4/2010 Washington Post (hat tip Zero Hedge).

Goldman Economist Jan Hatzius Sees No Inflation Threat, Home Prices Falling 3% (CNBC)

Goldman Sachs Chief U.S. Economist, Jan Hatzius, was on CNBC talking about QE2, inflation vs. deflation, home prices going forward, the unemployment rate and economic growth in 2011.

ETF Reactions to QE2, Traders Destroy TLT (GLD, SPY, OIL, UUP) - Charts

First read the QE2 announcements by the Federal Reserve and NY Fed (specifics). Also read Bernanke's op-ed in the Washington Post. Now for a few charts.

Reaction to QE2 announcement (2:15east): 20+yr Treasury Bond ETF (TLT) got destroyed, gold (GLD) snapped back hard (but closed red), equities (SPY) and the Oil ETN (OIL) hitched onto gold (closed green) and the US Dollar ETF (UUP) and Corporate Bond ETF (LQD) were weak. Some analysts say TLT got hit on less than expected Fed purchases on the long-end.

On the day: TLT -2.06%, SPY +0.40%, OIL +1.39%, GLD -0.69%, UUP -0.47%, LQD -0.33%. Bonds did not react well, however, the high yield bond ETF HYG rallied hard which was interesting. Duration?

Last but not least, check out SPYs ascending channel. It looks similar to the January-April rally. It could re-test the 122 high (closed at 120) but keep "one eye up" for any potential negative catalysts of the black swan variety that could break SPYs ascent. Don't miss the charts after the break.

New York Fed Statement on 850-$900 Billion Treasury Purchases (Includes Agency Debt/MBS Reinvestments)

$TLT (20+ Treasury Bond ETF) is down 2.50 at 3:32est. Here is a more detailed statement by the NY Fed.
Statement Regarding Purchases of Treasury Securities

November 3, 2010

On November 3, 2010, the Federal Open Market Committee (FOMC) decided to expand the Federal Reserve’s holdings of securities in the System Open Market Account (SOMA) to promote a stronger pace of economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate. In particular, the FOMC directed the Open Market Trading Desk (the Desk) at the Federal Reserve Bank of New York to purchase an additional $600 billion of longer-term Treasury securities by the end of the second quarter of 2011.

The FOMC also directed the Desk to continue to reinvest principal payments from agency debt and agency mortgage-backed securities into longer-term Treasury securities. Based on current estimates, the Desk expects to reinvest $250 billion to $300 billion over the same period, though the realized amount of reinvestment will depend on the evolution of actual principal payments.

Fed to Buy $600 Billion of Longer-Term Treasuries (Statement 11/3/2010)

Release Date: November 3, 2010

For immediate release

Information received since the Federal Open Market Committee met in September confirms that the pace of recovery in output and employment continues to be slow. Household spending is increasing gradually, but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit. Business spending on equipment and software is rising, though less rapidly than earlier in the year, while investment in nonresidential structures continues to be weak. Employers remain reluctant to add to payrolls. Housing starts continue to be depressed. Longer-term inflation expectations have remained stable, but measures of underlying inflation have trended lower in recent quarters.

BAL (Cotton ETN) is Killing It, +176% Since March 2009 Low, +64% Pre-Flash Crash High

The fabric of our lives, cotton, is breaking price records due to global supply constraints (Pakistan/India), emerging market demand, the reflation bid (flight to real assets) and a lower Dollar. The question is, when do these costs pass through to the consumer, or cotton hedges expire and profit margins get squeezed. I compared BAL to JJC (copper etn), QQQQ (Nasdaq 100 etf ), DIA (dow etf) and GLD (gold ETF). I read that the price of cotton is at a 140 year high (1870). At some point there will be a quick 38.2% Fibonacci retracement in $BAL and cotton futures. Boo ya.

+64% from Flash Crash
+176% from March 2009 Low

AUD/USD Testing Highs on RBA Rate Hike to 4.75%, RBA Statement and Charts (Australia)

AUD/USD is testing the October highs after a 25 basis points rate hike by the Reserve Bank of Australia to 4.75 percent. A few moments ago it pierced through the Oct high (1.00024) but sold off. QE2 + U.S-Australia yield differentials widening is bullish for AUD/USD, which explains the 0.22% spike to 0.99970 (in my opinion). You can also see that AUD/USD is trying to break through an ascending triangle.

However, going forward, if gold comes under pressure again and/or the US Dollar is bought on QE2, AUD/USD could retrace back to that uptrend line. It needs to stay above 1.0. Watch commodity currency reactions and volatility during the election and QE2. Below is the RBA statement released to the media at rba.gov.au and AUD/USD charts.

Good Read: Lessons From a Lost Decade (John Hussman)

Lessons From a Lost Decade: Valuations - Fed Policy and QE - Market Climate by John Hussman at hussmanfunds.com.

Roubini Sees a "Fiscal Train-wreck" With Congressional Gridlock (CNBC)

Nouriel Roubini (NYU Prof and Chairman of Roubini Global Economics) sees a "fiscal train-wreck" ahead (CNBC video 10/29/2010).

Yale's Robert Shiller on the Liquidity Trap, Home Price Index (Buttonwood Gathering)

Yale Professor and co-creator of the S&P Case Shiller Home Price Index was on Tech Ticker (w/ Aaron Taks) outside the Buttonwood Conference. He said if home prices go down another 5% that would put stress on financial institutions going forward. Shiller also mentioned the liquidity trap, or the lack of confidence to borrow money even at extremely low interest rates. Watch the vid after the jump.

Watching Credit Spreads During QE2, LQD Has 30,000 March 2011 $100 Puts Open, Thoughts?

I'm watching bonds and credit spreads during QE2 week. LQD, the investment grade corporate bond ETF, just pierced through a rising wedge and is trading right under the 50DMA. It is not volatile. Elliott Wave's Bob Prechter just released a report on bonds titled "The Next Major Disaster Developing for Bond Holders" (link). Take from it what you will. With the Fed propping up Treasuries to lower rates, it is kind of hard to figure out how to price "risk" at the moment as the "risk-free" rate (Treasuries) is being manipulated. We'll see if traders drift away from Treasuries and use another credit instrument to price risk at some point. Also, why are 33,659 LQD $100 March 2011 Puts open? I don't see much interest anywhere else. I see they were bought in September (see thoughts by OptionMonster on the trade). This trade is the option to sell 3,365,900 shares at $100 if LQD is in the money (below $100 + premium). Interesting hedge. See charts > >

SEC Investigating JP Morgan/Magnetar "Squared" CDO of CDOs Deal

After the SEC collected $150 million from the Goldman "Abacus" CDO (collateralized debt obligation) investigation, they are now looking at the JP Morgan/Magnetar "Squared" CDO (of CDOs). Read the article at ProPublica.

S&P 500 at 50 Month Moving Avg Resistance Again (30 Year SPX Chart)

The S&P is testing the 50 month moving average again. It failed at that level in April. The 50MMA is currently at 1204.25 according to freestockcharts.com (see below). Also look at the long term ascending triangle. SPX is currently in a multi-year cHoPpy ascent towards the 2000/2007 peak. It made a high of 1,195 today (pre-QE2 and elections) and quickly reversed to $1,179 just now. It probably makes sense to insure longs here, the chart looks overextended (imo)! But a crazy QE injection could destroy that idea.

December VIX Options Active, Will Market See a Volatile Rally or Fall? - Video

Hat tip to optionMONSTERtv / @coffeygrinds [big buys December 20 Puts, December 22 Calls, VIX spot at 21.6].

Marc Faber Sees Asset Price Correction, Dollar Rally, China Gloom (UUP, SPY, FXI)

Marc Faber, author of the Gloom Boom and Doom Report, was on Bloomberg on 10/26/2010. He said if QE2 (quantitative easing 2) is less than $1 trillion it could correct asset markets (stocks, commodities and precious metals) and rally the US Dollar (USDX, USD/JPY). However, Faber doesn't believe the bull market in stocks and commodities is over. In the long run he likes stocks over U.S. Government Bonds and cash (courtesy of Fed quantitative easing or the "economic put").

In the second segment Faber was gloomy on the Chinese economy. He said economic imbalances, capital flows, artificially low interest rates (credit growth), the property price boom and rising inflation (example corn/cotton) will slow down the economy. Marc Faber joined short seller Jim Chanos. If Chanos is right and the Chinese credit bubble pops, will the People's Bank of China (PBOC) just print money, backstop losses and buy assets to avert a crisis?

Marc Faber on Bloomberg TV with Margaret Brennan on 10/26/2010 after the jump.

Peter Schiff: Keep Your Head Above Dollar; Video Updates on Gold, Stocks, Economy, QE2 (Videos, Blog Post)

Peter Schiff of Euro Pacific Capital, who correctly said "home equity and phony wealth" would evaporate multiple times on CNBC before the mortgage fraud super bubble popped, gave a few market updates on Friday (Europac.net blog post, Schiff Report) and on Tech Ticker on 10/18. First his post.
Keep Your Head Above Dollar

By: Peter Schiff
Friday, October 29, 2010

There has been so much discussion recently about "QE 2" that you would think the entire financial sector were about to embark on a transatlantic cruise. Unfortunately, they, and we, are not so lucky. In the year 2010, "QE 2" doesn’t refer to a sumptuous ocean liner, but a second, more extravagant round of "quantitative easing" – stimulus. In the past, this technique was simply called "printing money." As if the nation has not already suffered enough from the first round, Captain Ben Bernanke and the Fed are determined to compound the damage by hitting us with another monetary juggernaut. Their stated goal is to boost the economy and create jobs. However, since economic growth cannot be achieved by printing money, their QE 2 will sink just as surely as the Titanic.

Bob Janjuah's S&P, Gold, Treasury Yield Targets, QE2 Reaction (2011)

Bob Janjuah, co-head of cross-asset allocation strategy at Nomura International, was on Bloomberg with Erik Shatzker on 10/27/2010 giving his outlook on the S&P, emerging markets, currencies, gold, QE2, Treasuries and asset bubbles. In 6 months time, Bob predicts: 10 year note yield sub 2%, S&P sub 1,000, gold prints 1500 in next 3-months (but absent policy response gold could fall).