Classic dilemma - calling the bluff?

We are now stretched in major asset classes, particularly in US dollar and equities.  From the mean-reverting perspective we are certainly entering buy levels, but this could be one of those black swans - the situation in Japan is clearly not contained: tepco-director-weeps-after-disclosing-truth-about-fukushima-disaster & also this week-end we could see military action in Libya. I have scaled down the exposure but keep options on dowside in stocks and long metals. Took the USDJPY off, but looking to resell US as we are most likely seeing a start of serious weaker US Dollar.

This stakes in this poker game are high, Governments are all in, Central bank likewise - now the market is looking across the table considering whether to call the bluff, knowing odds are 70/30 their way - still there is 30 pct chance of them having the four aces!

This is one of the more reliable mean-reversion indicators:

Oversold McClellan Oscillator

http://www.mcoscillator.com/market_breadth_data/

 March 18, 2011
Our chart this week is the same one that we feature every day on our Market Breadth Data page, in the free portion of our web site.  This is the original McClellan Oscillator, originated in 1969, and calculated based on the difference between the numbers of advancing and declining issues on the NYSE.  You can learn more about its calculation and interpretation here.
Investors' worries over the earthquake, tsunami, and nuclear crisis in Japan led to a 6.8% total selloff in the NYSE Composite Index, and produced a deeply oversold reading of -269.6 in the McClellan Oscillator.  Readings below -200 are pretty rare, and in the past year we have only seen it dip down that low or lower on four previous occasions.
What happens in the days and weeks after we see one of these extreme excursions depends on what else is going on.  The McClellan Oscillator is a great tool, but it should never be used all by itself, and without an understanding of what else is going on.  By itself, a McClellan Oscillator low below -200 says that the market is oversold and due for at least a bounce.  But it depends on other factors to determine whether that bounce turns into a resumption of an uptrend, or instead just serves to temporarily relieve the oversold condition.
During the May 2010 Flash Crash, we saw the McClellan Oscillator get down as low as -388.  It bounced almost all the way up to the zero line, before falling back down again to an even lower low of -426, which is the all-time low on a raw basis (not adjusting for the larger number of issues).  It took a lot more pattern development in the weeks that followed to get the market started on the upward path again.  And it did not hurt that the Fed started its second round of quantitative easing (QE2) on Aug. 17, 2010.
The first round of QE had ended on Mar. 24, 2010, a month ahead of the April 23 price top.  So the Fed's liquidity was not there during the May 2010 Flash Crash to help smooth out the liquidity problems that month.  By contrast, the post-election selloff in November produced a McClellan Oscillator reading of -266 at a time when permanent open market operations (POMOs) were still underway.  That turned out to be just a quick dip, and the market got back to trending higher.
Now, we have another McClellan Oscillator reading below -200, at a time when POMOs are still underway.  And we are also still in a period of favorable seasonality right now.  Both the POMOs and the positive seasonality are scheduled to end in June, and so from that point onward we can adopt a different interpretation of the meaning of an extreme McClellan Oscillator reading.
Tom McClellan

USD at critical level.........

http://stockcharts.com/h-sc/ui?s=$USD&p=D&yr=1&mn=0&dy=0&id=p25646417572&a=223442909

I`m so naive about finances. Once when my mother mentioned an amount and I realized I didn`t understand, she had to explain: `That`s like three Mercedes.` Then I understood. (1981) Brooke Shields - Macro Note

I`m so naive about finances. Once when my mother mentioned an amount and I realized I didn`t understand, she had to explain: `That`s like three Mercedes.` Then I understood. (1981) Brooke Shields


Dear Friends,

A short update on the macro picture:

I have basically not traded for a full month but only kept the same old positions in place:

• long silver
• long Crude
• Short S&P
• long Fixed income
• Short EUR/USD

The P&L has been volatile around a big fat zero for most of the time, but last weeks rally in Silver, Fixed Income & Crude gave some nice gains.

I took off Silver, Crude and Fixed Income on Friday close due to the sneaky but still firmer talks of tighter monetary policy coming from not only China but now also U.K and ECB - we have even had some Federal Reserve Governors talks about an early exit from asset purchases in the US, but seriously let's not kid ourselves: We will see QE3 and QE4 before Obama leaves office.

His reflation trade is not working and hence he and his loyal partner Geithner and Bernanke will continue to pump money into the system while pretending to make step towards curtailing spending.

I find it laughable that Obama talks about 10 bln. in cuts and Congress about 60 bln, while the MONTHLY DEFICIT in February was 200 bln. USD!  Yes 200 bln. USD in February alone. It's a lot of Mercedes to keep it in Brook Shields terms!

Federal Payroll Tax Deposits - An early estimation of growth and employment



Source: Shadowstats.com

The evidence provided in the tax receipts above indicate we will have classic seasonal outcome on growth in the US. Q1 will be revised down - the Ivory Tower banks will maintain Q2 and Q3 only to revise everything down in Q4.

It's classic in an economy which is "managed" in terms of analysis and input, but in real terms growth will continue to fail as the tailwind of public sector spending goes away leaving the high unemployment, the growing cost of financing the debt and a slowing world economy as the residuals to create growth. Again we have put ourselves into a corner of too much optimism based on nothing but belief. The normalcy bias is alive and kicking.

Meanwhile the stock market sectors seems to be trailing the overall index performance. Are we seeing signs of fatique here? I do not know - I am still convinced the market "Plan Economy Management", PEM, will continue to do everything in their power to take S&P higher still - the technical target will be something like 1385.00 before everything becomes too excessive even for Bernanke, who only have one hit going for him, the stock market which he keeps claiming does not create Asset Inflation!

Europe P.I.G yields to new highs


In Europe this morning we saw new highs in nominal yields for Portugal and the spread of Italy vs Germany exceed the magic threshold of 5.00%. We, Limus Capital, has been long this spread for a while and used the spike to take some profit, but both of us feels this could go further, but we are entering the "Promise Timezone" - as the European politicians fly to Brussels Friday for early talks about EU, we will see yet another desperate attempt by everyone involved to buy some more time.

We had a long and serious talk about potential outcomes from the EU Summit end of March. The bottom line being; They can only buy more time by using loose terms like: Commitments, principle agreement, new committee formed to deal with... etc. etc. The language for: We disagree too much to move this forward, but we have a strong political will to keep this game going as the alternative is too serious for us to deal with.

Germany and Merkel will not bring anything to the table, at a maximum they could agree to slightly cheaper funding for Greece and Portugal(they will apply shortly for emergency help), but not without consessions they are not about to get from the weaker Southern countries. Am I the only noticing that the countries in trouble all have Socialdemocratic or Socialist governments? In Germany SPD saw biggest gain in decades in Hamburg a traditional Liberal area - yes 2011 will see major shift of political leadership from Blue to Red, which will only reinforce the buying more time concept as dirigism remains the weapon of choice when dealing with this crisis.

Hair-cut and restructuring will not happen before the ECB have sold off their 75 bln. EUR of trash P.I.G bonds on their balancesheet to the EFSF, as this would be major loss of face and money for them.

Do not forget taking a loss also will impact the massive REPO ECB does with collateral being the same junk, but as my partner Jesper said: Well, really it's simple, you just convert your loans from being with collateral to being unsecured - right indeed - effectively we are all giving everybody unsecured loans presently as the FIAT money system is being dissolved slowly but nicely.

End of the day the most likely path from here becomes one where the US engage QE3 by August/September(despite present hawkish talk), EU find a way to extend the pain for everyone is Europe yet another year or two, while the amount of "Mercedes" we need to finance becomes ever bigger. It's clear to me that it is not only Brooke Shields who fail to understand an amount, the numbers are now so big that eveyone seems to think it's really just a game, a live-version of Monopoly.

Copenhagen, March 9th, 2011

ECB just ended the cycle of low subsidized capital ==> Cost of capital will rise .....

http://www.bloomberg.com/apps/quote?ticker=GDBR10:IND

http://www.bloomberg.com/news/2011-03-03/ecb-holds-benchmark-rate-at-1-as-trichet-grapples-with-surging-oil-price.html

ECB have just increased the odds of Europe going into a tail-spin by indicating they will raise rates at next meeting.

Trivia: When did ECB raise the rates last time: Answer: June 2008 - they NEVER LEARN - this is a dangerous world, as the ECB now has opened the bottle of ever higher rates, impact?

1. Much higher financing costs for already hard hit P.I.I.G.S - already big.
2. Stocks WILL GET HURT from this - cost-of-capital / the cycle of excessive low interest money has ended!
3. EUR should have a couple of days of rally, but watch Non-farm tomorrow in the US (I expect higher than expected print approx. 500K)....
4. DO NOT be long banks from here ......

It's so comforting that policy makers NEVER LEARN from history and keep repeating their mistakes.