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My take on the MF Global debacle: It could have been a customer

As you may or may not know, I was a futures broker for 7 years.  Both of the firms I worked for during that time, through various mergers, are now a part of MF Global.  This means I have a lot of friends, clients and former co-workers that are struggling to make sense of what is happening with their accounts, positions, and cash on deposit with the defunct firm.

Here is my take:

When a client opens a futures account, they are assured that their money will be kept in a ‘segregated account’, meaning that their funds and positions will remain separate from all other monies within the firm.  Their cash will not be pooled with other clients money, nor does the firm have access to their account to finance it’s own operations.  Accounts are ‘marked to the market’ at the close of each day, and a client is to have access to those funds, at any time, without penalty for withdrawal.  Those are the rules as set by the CFTC.* (Please read footnote for explanation)

As a broker, this is what you tell your clients, and this is what you trust to be true.

At MF Global, SOMEBODY OR SOME GROUP with the firm had placed large bets on European bonds.** (Please read footnote for explanation)

SO, when Greece, for example, ran into financial trouble, the liklihood of default began to rise, so the yields on their ‘government’ bonds rose, prices fell.  The assets became more ‘risky’ therefor trade at a higher yield.  Some dope at MF Global, thought they were a good investment at the now higher yield, and bought a truckload of them.  In fact, he/she bought more than was reasonably ‘affordable’ based on the risk and cash balance of the account.  This dope could even have been a customer of the firm.

This is when the trouble began.

As these bonds continued to lose value, the account balance dropped, in fact, the balance dropped so far, that more money was needed in the account to finance the trades.  IF the money is not available, the positions should be liquidated.

As a former broker, I have made many a phone call to clients telling them that they need to add more money to the account to finance a trade that is under water.  If they refuse, don’t have the money, or are unreachable after several attempts, I have the right to liquidate their position at the close or intra-day if need be.  It’s written in the contract they signed to open the account.

OK.  Now let’s say this is a very good customer of mine, someone with whom I worked for several years.  And this customer assures me that he/she will wire the money by the end of the day.  It’s risky, but I may accept, and let the trade remain.  The money doesn’t arrive.  The next day, the customer is further underwater, to the point where the account is deeply in the red.  The customer either doesn’t have the money or is nowhere to be found.  This account now becomes the risk of me and my firm.

I contact the manager of my department and share the bad news.  The account is now down millions of dollars.  There is an emergency meeting whereby all management and even the CEO (Jon Corzine) are called in to assess the situation.  After careful consideration, the group decides to hold the positions and wait for a more ‘opportune’ time to liquidate.  UH OH.  The next day, as situations in Europe worsen, the trade is now down many millions if not billions.  Worse yet, the loss exceeds the risk capital of the firm.

This is when MF Global breaks the rules.

In an effort to ‘float’ the position and wait for a rebound, money from OTHER CUSTOMER ACCOUNTS is transferred to the bad account in order to hide the losses from the regulators and exchange.

The losses keep growing.

MF Global moves more and more money from other accounts until the losses grow so large that they are no longer able to hide them.  REGULATORS FREEZE ALL ASSETS AND SHUT THEM DOWN.

MF Global reportedly lost 633 million dollars of customer money trying to cover up a bad trade.

The news is reporting that it was MF Global itself that ‘invested’ in these bad bonds.  It is possible, however, that the trade began as a customer position.

This leaves me with one question:  WHO WAS THE CUSTOMER?

EDIT:  Someone at MF Global is going to jail for this, irregardless of how the trade got started.

See these links for more info:

http://www.bloomberg.com/news/2011-11-02/mf-brokerage-has-commodity-customer-shortfall-of-600-million-cftc-says.html

http://www.bloomberg.com/news/2011-11-03/corzine-lived-up-to-risk-taking-reputation-at-mf-global-before-bankruptcy.html

* Bank deposits: Think ‘It’s a Wonderful Life’, where George was begging people not to take all of their money out of his savings and loan, because he didn’t really have the cash on hand, it was distributed as loans to finance mortgages, etc. This is different than, say, a mutual fund, which pools assets together to make large purchases of stocks or bonds.  It is also different than a bank, which uses customer deposits to make loans to other clients.

**If you have been a follower of my blog, you know that the formation of the Euro set off a ticking time bomb:  Individual nations (Spain, Italy, Greece etc..) were now offering ‘government bonds’ based in a currency which is not their own. Greece, for example, does not have the power to ‘print’ Euros, they do not have the power spend Euros or finance government operations without having the deposits to do so.  They cannot run a deficit without eventual default.  In contrast, the U.S. DOES have the power to ‘print’ their own currency, therefor can make payments on all government debt issued in dollars regardless of the deficit. (This is why we have 10 year Treasury yields at 2 percent… because the investment is safe from default.)  It’s possible for STATES to default on their individual debt (municipal bonds, etc.) because they are reliant on tax income and cannot ‘print’ dollars.

All countries that joined the Euro gave up their financial power as a sovereign nation. They turned themselves into a ‘state.’

 

 

2011 11 03 admin Uncategorized Comments (0) Permalink

Comments on EU reform announced Oct 27, 2011

These comments are from Warren Mosler of www.MoslerEconomics.com:
“The markets like the announcement.
Of course they also liked QE2…
Unfortunately, as previously discussed, without the ECB the EFSF isn’t sustainable.
It’s like trying to lift up the bucket by the handle when you are standing in it.
Nor is it cast in stone yet, but all subject to details.
Also, the positive market response, if it continues, only encourages the continuing austerity
measures that are weakening the euro economy and forcing already unsustainable deficits higher.
And, again, it’s a case of ‘the food was terrible and the portions were small’
Starting with the 50% private sector loss on Greek bonds-
Presumably that ‘works’ if it indeed brings Greek debt down to 120% of GDP from 160% by 2020.
But that implies the austerity measures won’t continue to reduce GDP and cause the Greek deficit to increase,
as continues to be the case. It presumes the 50% haircut will be considered sufficiently voluntary to not be a credit event that triggers
a variety of global default clauses.
The rest of the ‘package’ presumes markets won’t reduce the presumed credit worthiness of member nations who fund the EFSF.
It presumes private sector funds will recapitalize the banks that lost capital on the write downs.
It presumes the EFSF won’t be needed to fully fund Portugal, Spain, and Italy.
It presumes banks and other investors required to be prudent and financially responsible to shareholders will continue to buy other euro member nation debt even after seeing the euro zone members allow Greece to default on half of their obligations.
That is, how could any bank now buy, for example, Italian debt, in full knowledge that euro zone policy options include a forced write down of that debt.
And not in extreme, unforeseen circumstances, but under current conditions.
And how can prudent investors invest in the banks when they’ve just seen euro zone remove some 100 billion euro in equity by decree?
The problem is, it takes a presumption of general improvement to presume additional losses will not be incurred by investors.
And it takes a presumption of general improvement to presume the EFSF will be successful.
And that requires the presumption that continued austerity measures will result in a general improvement.
Even as all evidence (and most theory) is showing the opposite.”
Check out:

Because we fear becoming the next Greece, we continue to turn ourselves into the next Japan

‘The 7 Deadly Innocent Frauds’
http://www.moslereconomics.com/2009/12/10/7-deadly-innocent-frauds/

“The most important book ever written”-  Elizabeth O’Tool, Jan 8, 2011The 1998-2001 budget surplus was the longest surplus since the 1927-1930 surplus.  Coincidence?

The financial sector is a lot more trouble than it’s worth.
www.moslereconomics.com
http://twitter.com/wbmosler

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2011 10 27 admin Uncategorized Comments (0) Permalink

Post Crackdown Update

You know from my previous posts that ANY bond rating administered by Moody’s or S&P is “suspect” due to their lack of understanding of how sovereign debt differs from State, Corporate or EU debt.  Any and all Treasury product obligations can be met, so long as Congress allows it.

I have always considered myself a ‘Republican’ for a host of reasons, but the recent behaviors of Republicans during the ‘debt-debate’ have me reconsidering that allegiance.  They used/exploited the S&P rating downgrade as an opportunity to instill fear in the public and gain political advantage.  Warren Mosler sent out a response to Congressman Ryan making this very point. Read the excerpt below:

“Congressman Ryan’s response to the President Obama’s State of the Union address included something we’ve all heard a lot of ever since.  He warned along the lines that that the US could become the next Greece, and be faced with some kind of a sudden financial crisis, where the world would no longer lend to us, interest rates would skyrocket, and the US, unable to spend, would be down on it’s knees before the IMF begging for the needed funding.
And no one with any kind of national public forum took issue with him.
Including the President and the Democrats in Congress, who for all appearances quietly agreed and acted accordingly.  Well, today, based on the near universal response to the S and P downgrade, everyone now knows, or should know, there is no such thing as the US becoming the next Greece.
The overwhelming response to the S and P downgrade by everyone from Buffet to Greenspan, and most every financial and academic economist in the world was along the lines of:
The US is the issuer of the dollar.
It can print dollars.
So it can always make timely payments without limit.
THERE IS NO SOLVENCY ISSUE FOR THE US.
There is no such thing as the US running out of dollars to spend.
There is no such thing as the US being dependent on taxing or borrowing to get dollars to spend.
Greece is very different.
Greece, Ireland, Italy, and all the euro member nations, corporations, and households can’t print euro, any more than the US states, corporations, and households can print dollars.
And so they are all indeed dependent on revenues from somewhere to be able to spend.
So, Congressman Ryan, please apologize NOW for being so wrong and so misleading.
There is no solvency risk for the US.  The Fed is price setter for the interest rates for the US government and the banking system, not the market, just like the European Central Bank sets the interest rates for its banking system and its own debt.
Congressman Ryan,
your reasons for deficit reduction have vaporized.
You see, the risk of overspending is inflation, not solvency.
So if you want to argue for deficit reduction, apologize NOW, regroup,
and come back with your next round of fear mongering about how the deficit can be inflationary, or something like that, and see how that flies.”
The sharp drop in stock indices is more a response to the EU debt concerns and NOT the US.  If US Treasuries are a more ‘risky’ asset, how does that explain the RUSH into US debt products as a safe haven as markets fell worldwide?
The future for US Stocks is still uncertain, there remains a large amount of ‘headline risk’ that could have the indices trade lower once more.  Have a look at this market update by Caldaro.  He surmises that if the S&P breaks 1180 this week, we may see a low put in around 1010.

 

2011 08 16 admin Uncategorized Comments (0) Permalink

Thoughts on rating agency S&P

Bond rating agency, Standard and Poors, lowered its outlook on U.S. Government debt from ‘stable’ to ‘negative’ while maintaining its current AAA rating.  They also said that there is a one-in-three chance that the rating will be cut sometime within the next two years.

10 year Treasury yields rose to 3.45% early and came back down to 3.37% by the end of the day.

Standard and Poors is the same agency that rated Sub-Prime mortgage debt as AAA prior to the financial crisis that unfolded in 2008.

Unfortunately, bond fund managers are forced to follow these rating buffoons because the funds they manage are only allowed to invest in bonds of certain ‘quality.’  If one manages a ‘high quality, low risk’ fund, then investments must/should be in AAA type rated bonds.  If one manages a ‘higher yielding/higher risk’ type bond fund, then there can be money allocated to lower rated type bonds.

Therin lies the problem.

Sub-Prime debt was rated AAA, when we all know now, that it was a very risky and unstable type of mortgage debt that hinged on the ability of over-extended home buyers to make their payments.  These bonds, however, became a large part of ‘money market’ type investment funds that were supposed to provide stable price and modest returns.  Lo and behold, when the housing market boom started to wane, these fund values plummeted, and billions of investors ‘safe’ money was lost.

Now we have a veiled sort of threat from S&P that they may cut the U.S. Treasury debt rating.  Imagine the vast changes in bond fund structure if this were to happen.

Unfortunately, the rating agencies are completely wrong, flawed, ignorant and dangerous in the way they evaluate government debt.

Here is commentary from an investment researcher at Morgan Stanley (I highlighted some important points in bold):

I would like to address the action taken today by S+P in revising the United
States credit outlook to negative.  

Simply, I believe the argument behind S+P’s decision is flawed and displays
a misunderstanding of how the monetary system operates. My view is not
predicated on any political ideology. I am merely attempting to demonstrate
the incorrect logic regarding United States credit quality and solvency.

1. FINANCIAL BALANCE FRAMEWORK:
The first fundamental item that must be understood is how financial balances
relate to government indebtedness. In a closed economy (or an economy with a
perpetually balanced current account), government deficits must equal
private savings. If private savings desires increase, a government’s deficit
must increase by precisely the same amount all things equal. There is no
other way.

In the case of the United States, the budget deficit has grown to 10% of gdp
from approximately 4% of gdp because the savings rate has shifted from
approximately negative 2% to approximately positive 6%. Simply stated, the
federal budget isn’t a function of profligate government spending, its a
function of higher desired private savings causing a shortage of aggregate
demand. This shortage of aggregate demand is putting downward pressure on
tax revenues (lower nominal gdp implies lower tax revenues) and upward
pressures on expenditures owing to automatic stabilizers such as UI.

With this example, it is theoretically possible to have much larger
government deficit and debt levels if savings desires grow commensurately.
If private sector savings desires were to fall, which implies higher
aggregate demand (because the spending of a person in the private sector
simply creates another person’s income), the government deficit would fall
commensurately owing to higher tax revenues and possibly lower expenditures.

2. MYTHS REGARDING FOREIGN INVESTORS FUNDING THE UNITED STATES AND EXTERNAL
LIABILITIES:
Firstly, the most important item to understand is the USA discharges its
debt in $US. So the entire argument of rating agencies behind ‘external
funding pressures’ is moot. Functionally there is no difference between a
holder of UST’s who is domiciled in USA or abroad, as they are both $US
dominated savers. The only difference is the foreign saver has no ‘need’ to
save in $US (where a USA investors needs $US as a means of exchange and to
pay his taxes).
So, what if foreign now dump their ust’s?
Foreign investors own ust’s and $us because they WANT to own them. By
engaging in fx driven trade policies, foreigners ‘pay up’ to get $US which
allows them greater sales into the USA market. If foreigners didn’t want to
save in $US, they would change their fx policy which would result in less
market share in USA economy. Foreigners can’t be both buyers and sellers
simultaneously. If foreigners wanted to own less $US, the result would be a
smaller current account deficit in USA, which again using a financial
balance framework would either result in more private savings, or a smaller
govt deficit. Bottom line – if foreigners want to have fewer savings in $US,
either private savers must increase savings, or the govt deficit must fall.

3. MYTHS REGARDING FOREIGN INVESTORS FUNDING THE UNITED STATES AND EXTERNAL
LIABILITIES part II:
The same way banks offer savers demand deposits and term deposits (ie
chequing accounts versus savings accounts) the USA economy offers savers the
same in the form of $US (demand assets) or UST (term asset). Foreign savers
can therefore keep their $ at their Fed Reserve account and earn basically
zero (functionally a ‘chequing’ or demand account) or buy UST’s
(functionally a ‘savings’ or term account) and earn a coupon. There is no
other way to save in risk free space. As said above, foreigners who engage
in fx driven trade policies must accumulate $US demoninated assets. The only
choice they have is term vs demand assets. So indeed if foreigners declined
to own ust’s and alternatively kept their savings in $US at the Fed, the
result could be a higher and steeper term structure for USA rates. If the
Treasury decided to sell less ust’s and more tbills, this term structure
rise could be negated. Note foreigners actions are never about SOLVENCY, its
merely a function of liquidity preference.

3. THE DEFAULT BY THE SOVEREIGN OPERATING WITHIN A NON-CONVERTABLE EXCHANGE
RATE REGIME IS A *FUNCTIONAL* IMPOSSIBILITY:
One must also understand the mechanics of government spending. A government
purchases goods and services from the private sector and then the Federal
Reserve credits the reserve accounts of the commercial banks whom the
sellers of such good and services bank. The Fed then debits the reserve
account of The US Treasury. The Treasury then sells ust’s, where the Fed
then credits the Treasury’s reserve account while debiting the reserve
accounts of the banking system.

So all that has happened is the government has created savings in the
economy by spending (from point 1 above: govt spending = private savings).
So as is illustrated, there is no issue of ‘solvency’ per se. The
government, by spending, is creating the savings to buy the ust’s. The only
issue here is the term gap. Specifically if savers only want demand assets
(ie $us), while the Treasury only wants to sell term assets (ie ust’s), the
resolution will be price and risk premium: ie how much interest rate spread
will a bank or arbitrageur need to intermediate this imbalance. This can all
be negated of course, if the Treasury only issued T-bills.

4. THE DEFAULT BY THE SOVEREIGN OPERATING WITHIN A NON-CONVERTABLE EXCHANGE
RATE REGIME IS A *FUNCTIONAL* IMPOSSIBILITY part II:
This is the fundamental flaw of the S+P decision. The basis of their
sovereign rating criteria is as they describe it is: “The capacity and
willingness to pay its debts on time”. As mentioned above, there is
functionally no reason for the USA to ever not pay its debts – the USA’s
debts are and will always be equal to savings desires of the private and
foreign sectors. So ‘CAPACITY’ can never be an issue.

Hence the only reason the USA would ever default was because they ‘wanted’
to default, they never under any circumstance NEED to default so long as the
$US remains a non-convertable currency. The implications for a voluntary
default (again, this is the only kind of default possible by the USA) make
such a default an impossibility. The reason is because the 2nd largest
liability of the federal government is deposit insurance. If the USA decided
it wanted to default to escape its obligations, it would bankrupt its
banking system, who’s holdings of ust’s are greater than system-wide bank
capital of $1.4 Trillion. In fact the contingent liability put the
government has issue via deposit insurance is almost as large as USA debt
held by the public at $6.2 Trillion. So essentially a voluntary default
would actually INCREASE USA indebtedness by almost 100% while simultaneously
bankrupting its banking system. So if ABILITY to pay is assured, and a
voluntary default actually raises indebtedness while collapsing the banking
system and economy, why would USA ever voluntarily default? So S+P’s
criteria of ‘WILLINGNESS’ to pay is also not applicable.

SUMMARY:
So as demonstrated, the bottom line is ABILITY to pay can never be an issue
in a non-convertable currency system. The only issue is WILLINGNESS to pay.
So if the argument by S+P relates to “the capacity and willingness to pay
its debts on time” as they described on Monday’s call, then their argument
simply isn’t cogent.

The last point I want to make is it would be incorrect to attempt to draw an
analogy to the placement of the UK on credit watch in mid May 2009 relating
to market performance. Yes indeed gilts sold off shortly after this
announcement. However this was more a function of the unhinging of the USA
MBS market. There existed a perception that the Fed via QE1 was attempting
to cap current coupon mortgage rates at 4%. Once this level was breached and
it became clear in mid/late May that this view was incorrect, a convexity
sell event hit the USA rates market which dragged all global bond yields
higher including Gilts.

To conclude – I view the decision today by S+P as having zero impact on
valuations of USA sovereign debt. We continue to engage in trades that
express the correct view that the solvency of the United States can never be
an issue in nominal terms; specifically we are buyers of 30yr assets swaps
at -25bps.

 

http://www.bloomberg.com/news/2011-04-18/standard-poor-s-puts-negative-outlook-on-u-s-aaa-rating.html

2011 04 19 admin Economic Analysis
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Japan’s Debt Rating Cut to AA-

Standard and Poors cut Japan’s government debt rating to AA-, down from AA.  The firm cites the country’s debt burden as the reason for the downgrade.  The AA- rating is on par with China’s, and three notches lower that the U.S.’ rating of AAA.

The Yen and bond futures fell in response to the news, and credit default swaps expanded.

Toyota and 12 other Japanese companies are now rated higher on the S&P scale than the country itself.

There is only one word for this:  COMICAL!!!!!

Japan’s 10 year bond yields are less than 1.5%!  They are so because the investing public is willing to accept a lower interest rate for a RISK FREE investment.  If yields rise, they are based on the investor’s perception of where the Bank of Japan will set rates down the road.  There is zero possibility that Japan could not make the necessary payments on any outstanding debt if they wanted to.  As the originator of their own free-floating currency, they are always able to credit investors accounts, period.

The question is their WILLINGNESS to pay.  The only thing that might hinder dept re-payment is if there is a policy decision to default.  This is an issue that is not addressed by the ratings agencies.  It is possible that policy makers, disillusioned by the hype behind debt-to-GDP ratios, could enact some sort of ‘debt-reducing’ strategy that hinders spending, but this would merely slow down the economy further.  If law makers decide to stop payment on debt, well, that’s a result of their own stupidity, and completely unnecessary.

Many traders and law makers already realize this fact.  Just read between the lines in the stories linked below and PLEASE read ‘The 7 Deadly Innocent Frauds of Economic Policy’ By Warren Mosler:  http://moslereconomics.com/2009/12/10/7-deadly-innocent-frauds/ !!

‘The downgrade is unlikely to cause any major deterioration in supply and demand conditions in the secondary JGB market or at upcoming tenders, Fukunaga said.: http://online.wsj.com/article/BT-CO-20110127-707480.html’

‘Today’s rating downgrade “was within expectations given the situation with the GDP and outstanding debt,” said Yoshimitsu Goto, general manager at Softbank Corp., Japan’s third-largest wireless carrier. “It won’t hinder our financial operations.” :http://www.bloomberg.com/news/2011-01-27/japan-s-debt-rating-lowered-to-aa-by-standard-poor-s-outlook-is-stable.html

‘“Default by the U.S. Treasury could cause significant and long-lasting financial and economic disruption,” Wyss wrote. “We don’t believe there is a significant chance of this occurring.”‘:http://www.chinapost.com.tw/business/americas/2011/01/20/288346/US-debt.htm

2011 01 27 admin Uncategorized Comments (0) Permalink

The Truth Behind Quantitative Easing? Ask Japan.

 From Bloomberg.com today (1):

“The dollar advanced from near a nine- month low versus the euro as a government report showed U.S. employers added more jobs than forecast last month, increasing payrolls for the first time since May.”

“Payrolls climbed by 151,000 jobs, beating the 60,000- position median forecast of economists surveyed by Bloomberg News, after a revised 41,000 drop in September, Labor Department data showed in Washington. Private payrolls that exclude government agencies also gained more than forecast, swelling by 159,000 positions, while the jobless rate held at 9.6 percent.”

“The dollar fell versus the euro earlier this week after the Federal Reserve said Nov. 3 it will buy $600 billion in Treasuries through June in a strategy called quantitative easing to spur employment and avert deflation.”

There seems to be a consensus among the media outlets that Quantitative Easing (QE) is an effective way to ‘add money’ to the economy, when, in fact, QE does nothing else but adjust the term structure of rates.  By buying back long dated maturities, the Federal Reserve is not adding money, it is merely exchanging a risk-free interest bearing instrument one-to-one for dollars.  These dollars now need to be invested in some other product.  With interest rates at near zero, that product has been the stock market and commodities.  Something that will continue…. until it doesn’t.

From Warren Mosler at www.MoslerEconomics.com:

“QE is not ‘money printing’ of any consequence.  It just alters the duration of outstanding govt liabilities which alters the term structure of risk free rates.
QE removes some interest income from the economy which the Fed turns over to the Tsy.  This works against ‘earnings’ in general.  
QE alters the discount rates that price assets, helping valuations.  
Japan has done enough QE to keep 10 year jgb’s below 1%, without triggering inflation or supporting aggregate demand in any meaningful way.  Japan’s economy remains relatively flat, even with substantial net exports, which help domestic demand, a policy to which we are now aspiring.
QE does not increase commodity consumption or oil consumption.
QE does not provide liquidity for the rest of the world.
QE does cause a lot of portfolio shifting which one way or another is functionally ‘getting short the dollar’ .”
Regarding the reference to Japan from www.pragcap.com (2):

“There appears to be some confusion over the response of equity markets to quantitative easing.  Of course, the Fed is hoping that they can ignite a “wealth effect” by driving stocks higher.  But as we saw in Japan this failed to materialize.  In fact, anyone buying in front of the QE announcement in Japan ultimately got crushed in the ensuing few months and years.  When the BOJ initially announced the program in March 2001 the equity market rallied ~16%.

But the euphoria over the program didn’t last long.  In fact, within 6 weeks of the announcement the Nikkei began to crater almost 30% over the course of several months.   In the ensuing two years the Japanese stock market fell a staggering 43%!  It wasn’t until the global economic recovery in 2003 that Japanese equities finally bottomed and went on a tear.  Ultimately, the BOJ ended the program in March 2006 and deemed it a failure.”

Success? Or Failure?

 

Be careful out there! 

(1) http://www.bloomberg.com/news/2010-11-05/dollar-extends-gain-versus-euro-after-u-s-adds-more-jobs-than-forecast.html

 (2) http://www.businessinsider.com/when-japan-first-did-qe-stocks-shot-up-and-then-quickly-cratered-massively-2010-11#ixzz14KbXzcHl

2010 11 05 admin Economic Analysis
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Reaching target?

Click underlined phrases for links to sources.

After the breakout above 1100 SPX, the stock indices are getting closer to the inverted H&S target area originally anticipated by Carl Futia and summarized in this post. 

Some negative news on jobs (Weekly Jobless claims rose to 460,000) seems have caused a pause in the bull run.  This mild correction may last through the middle of next week.  Volatility, as measured by the VIX, has dropped substantially, which may indicate that the correction will take us back toward the old resistance level of 1130.

From that level, so long as the market remains confident in Quantitative Easing and POMO auctions, the bull market in equities is likely to continue.

SPX to test red line?

2010 10 14 admin Uncategorized Comments (0) Permalink

In the zone

After a surge in prices yesterday, the RUT (IWM) is trading in the resistance zone I mentioned earlier.  Reasonable risk reward for a short here.  IF we break much higher in the major indices (over 1100 SPX, for example) then we are likely headed to new intermediate term highs.

In the resistance zone

In the resistance zone

2010 09 02 admin Uncategorized Comments (0) Permalink

Panem et Circenses

See the definition below and make your own conclusions….  :)

http://en.wikipedia.org/wiki/Bread_and_circuses

2010 09 01 admin Uncategorized Comments (0) Permalink

Wrap up to the week

Weekly cross confirmed.

New trend? Or extended period of consolidation?

 The two charts above depict the 13 and 34 Exponential moving averages.  On the $RUT, the averages finished the week with a bearish cross.  Judging by the close of Friday, I would expect this index to test 600-635 area early next week.  This would be another pivotal area to consider a short position with minimal risk.

The SPX chart above demonstrates how the initial cross can indicate the begining of a period of consolidation.  The SPX close Friday was not as positiove, but still indicates to me that we could test the 1100 area with little difficulty early next week.

From www.carlfutia.blogspot.com

The chart above was printed Wednesday and shows the potential for an Inverted Head and Shoulders pattern developing in the SPX.  The challenge on this pattern is 1130.  A solid break above this level sends stocks to 1250 (which has been Carl Futia’s target for a while now.)

Net, net:  I would be slightly bullish up to the levels described above, and prepared for more weakness once they are reached.  A breach of 1130 on SPX means new near term highs are likely.

2010 08 27 admin Uncategorized Comments (0) Permalink