Still Digging & why we are final phase of this S&P manipulation

Going through my morning Google Flip I found this article by Thomas Friedman: Still digging

I particular loves this quote:  More than ever, America today reminds me of a working couple where the husband has just lost his job, they have two kids in junior high school, a mortgage and they're maxed out on their credit cards. On top of it all, they recently agreed to take in their troubled cousin, Kabul, who just can't get his act together and keeps bouncing from relative to relative. Meanwhile, their Indian nanny, who traded room and board for baby-sitting, just got accepted to M.I.T. on a full scholarship and will be leaving them in a few months. What to do?'

Do read the whole thing.....

Otherwise this is key day as 10 year rates again makes new high in this cycle and meanwhile our semi-leading index from Citibank (measuring expected vs actual economic data) is coming down as hard as it did in Q1-2010 - It's at year low in our model so far, but market has little time for facts as the Kool-Aid stock market makes it final test into 1240/1250 on.... strong unemployment numbers from Australia (Indeed, indeed I don't get it either!).

Tomorrow is the day for the Chinese rate hike - market is hoping for more RRR hikes rather than actual discount rate higher. I have no opinion except this bull run is running into headwind from here:

1. Higher US yield - not only in 10 year govies, but mainly in 30yr and 10yr mortgage rates...
2. Chinese CPI / RRR hike incoming Friday or over the week-end
3. Tax deal still looks likely to go through - raising market growth forecast (although as per usual the actual effect will be much smaller - rule of thumb divide by 5 the growth hikes from Investment Banks)
4. Technical level extended beyond 1250.00
5. Manipulation of higher stock market values through POMO and long only market players running into XMAS/ Year-end
6. Banks needs to bring "order" in their risk and prop.trading volumes will go down - the very mean which is used in manipulation of market..

But wait for the confirmation - which I see if 1195/1200 is broken - meanwhile let the market run amok and enjoy the final phase -

I see Q1 S&P down to 1000.00 as austerity, California bankrupt, EU process stalling, and ever higher interest stops the market. Bottom line: The Fed and the banks needs a high stock market valuation into year-end as it is the ONLY 'success' of their failed QE1 and QE2, but come January 1st everyone will be dumping RISK left-right-and-centre.

Good luck

Risk of - major moves in China - our new Global Leader...

Playing the QE2 card Bernanke et al confirmed that we now need to look at China for ALL future directions. The US has no further tools to use but are at the mercy of the international lenders and capital markets.

The reaction post QE2 must be major disappointment for FOMC and Obama, but the importance now is the "reaction" function of firstly China, then Europe(Euro crisis) and then back to the US.....We know the reaction function of policy makers:  1. It's not what they say but what the do which is important 2. They will always delay any decision to last minute 3. The response is ALWAYS creating more debt and mini-max solutions.

In this lights the REACTION FUNCTION should theoretically be:

1. QE2 ==> China and EMG will hike rates aggressively - it has already started note these comments from Goldman Sach this morning on RISK OFF: Chart on QE2 reaction

KRW: Renewed speculation that concrete capital controls will be announced on Monday (1mnth high 1129.5)
PBOC asking more local banks to hike RRR.
Chatter of Chinese state-entity selling commodity futures in Shanghai (Bloomberg reporting that China sold almost all zinc on offer from state reserves at below-market prices in the latest auctions, although this was out a few days ago)
Onshore Chinese traders and brokers speculating about another interest rate hike tonight.
Lack of concrete resolutions from G20 meeting in Korea

                                                                             
2. Euro-debt story gets back into the headlines

Germany will use their VETO leverage to negosiate even tougher hair-cut rules effectively setting up the division of EUROPE into to a two-tier system by 2013/14. The ones who wants to live by the stability rules, and the 2. division for those who needs time to get their finances in order.....

Expect Ireland to tap EFSF very shortly - the risk being there is contagion spread to other PIIGS - so maybe a longer than expected delay in using EFST but more countries than Ireland tapping EFSF from the start.

3. G-20  Communique or the Ministry of Propaganda - what is farce!

In other new the G-20 communique is a total joke! The old Polit-bureau in Russia would have been proud to issue this statement: It's all BS - big time BS... using words like: comprehensive, commitment, unprecedented coooperation, concrete steps - but... there is not a single modus operandi except for including the ever useless IMF in all things possible. There are now more working groups under G-20 than there are sand in Sahara! G-20 communique - by the Ministry of Propaganda for the Politbureau of G20


Strategy:

Seems yesterday chart-book has played out for now, but remember there is now POMO for a full month - the risk will be if POMO does not help the market then we have a real issue on the downside - watch the US action tonigt if 1190-00 breaks on close, then we have top in place - and more importantly the QE2 was REAL MACRO TREND event....

Nice week-end