Ultra Trading

We've Moved

2011-02-28T14:39:00.001-07:00

This blog has received great feedback and more traffic than originally anticipated.

There is a story that needs to be told and a typical blog format is no longer sufficient.

- Please visit us at our new home -

MacroStory.com

Check Back During The Day Today

2011-02-28T12:00:00.000-07:00

- We'll be launching our new site sometime today -

Fed's Bullard Hints At End To QE Early

2011-02-28T06:47:00.000-07:00

I'm surprised at this but reading commentary from Bullard's interview on CNBC this morning one of his quotes says it all. Bullard sees the economy improving and thus thinks an early end (not just an end in June as originally suggested) is in order. Bullard has been the outspoken advocate for QE. Very interesting comment if in fact it's true. No reason to believe this is not a direct comment from him.

"Policy is a continuous process," he said. "I would see it as possibly finishing the program a little bit shy of where we intended initially then go on pause for a while, let more information come in on the economy, see how things develop.

"If things continue to go as well as I think they will in 2001 then we can start the process of getting the balance sheet back to normal and getting interest rates up there eventually."

USD Testing Multiyear Support

2011-02-28T06:29:00.000-07:00

This does not look good for the USD as it tests multiyear support right now. If this does not bounce today and breaks further then there is much downside ahead.

Coming Soon

2011-02-27T15:50:00.001-07:00

In a few days this blog will post a redirect to something I think many will find very useful and informative. Make sure to check back. We have a story to tell!

Interesting Commentary From China Regarding The RMB

2011-02-27T08:20:00.002-07:00

Part if not all of the goal of quantitative easing is to force China's hand at revaluing the RMB, thus making US exports more competitive and bringing jobs back home. China has refused to revalue and as a result has faced growing inflation at home. Bernanke has even hinted at times that if countries do not like the results of "our" monetary policy they should adjust "their" currency. That's about as direct a central banker can be without writing down a country's monetary policy for them.

The choices for China are rather difficult. Inflation, especially in the face of the global unrest that has developed recently threatens instability within their country. Rice has now started to move up in price as well adding further pressure. Tiananmen Square was partly a result of inflation concerns and the last thing China wants as they try to become a more dominant player in the world are pictures of tanks rolling in the street at protesters.

Should China decide to raise the value of the RMB they can fight inflation, to some extent but they risk losing jobs. Is there much of a difference between higher inflation with a job or lower inflation without a job? Additionally China is trying to slow down its own economy to manage what many see as a bubble in asset prices. Chinese Premier Wen Jiabao seems somewhat concerned with the precarious situation China finds itself in a recent speech (from Reuters).

"Rapid price rises have affected the public and even social stability," Wen said.

Wen said maintaining social stability was also central to the country's foreign exchange policy, requiring a step-by-step increase in yuan flexibility so that Chinese businesses could adapt to the changes.

"If the yuan saw a one-off large appreciation, that would cause many closures of our processing enterprises and make many export orders shift to other countries and many of our workers will lose jobs."

"Let them think about that: if businesses go bankrupt, workers become unemployed and rural migrant workers go home, then what do we have to expand domestic consumption, where will increased consumption come from?"

"I have in fact said before that if price rises become linked to the problems of graft and corruption, that will be enough to spark public discontent, and even create serious social problems," Wen said.

The war between Bernanke and China is clearly on per Wen's comments. He seems to take a soft tone and almost concedes that China will revalue the RMB over time but I suspect their timeline is not that of Bernanke who needs jobs in the US immediately, not in two years. No one ever holds all the cards in a negotiation but clearly Wen is showing a weaker hand, something that may unfortunately inspire Bernanke to continue QE in June.

Lastly, another comment regarding growth forecasts was rather interesting and clearly shows China is concerned about an overheating economy and managing a goldilocks scenario which many have tried and I don't think any have succeeded.

Wen also said the official GDP target was 7 percent per year for the 2011-2015 developmental plan. That rate is significantly below the average annual 11.2 percent growth during the last five-year period, but growth targets tend to undershoot actual performance.

COT Report Week Ending 2/22

2011-02-26T16:17:00.004-07:00

For the period ending February 22, 2011, the weekly COT report showed very few surprises. Commercial positions do confirm the move down in copper. Commercial traders continue to be positioned for pending SPX weakness and the divergence continues to expand. The 30 year treasury did pullback in yield (higher price) this past week but commercial traders are positioned for further 30 year treasury price weakness (higher yield). While oil did pullback after the Egyptian crisis, commercial traders actually increased their net short position implying a further rise in oil prices.

Irish 2011 Elections And The Winner Is...

2011-02-26T08:10:00.001-07:00

No one knows yet... They are still counting. Do they hand count these things? An exit poll was released though last night and shows Fine Gael and Labour together having enough of a majority to push back on the IMF and ECB bailout. Both parties have already vowed to work towards senior bondholders taking a haircut. Senior bondholders include to a very large extent German and French banks which means these bailouts of any PIIGS nation is a bailout of the German and French banks. I'm working from memory here but I think Ireland exposure alone is north of 100 billion euros.

The Irish Times released the following poll results last night.

According to the poll, Fine Gael is on 36.1 per cent, Labour is on 20.5 per cent, Fianna Fáil has slumped to 15.1 per cent, Sinn Féin is on 10.1 per cent, the Green Party were on 2.7 per cent and Independents and Others were on 15.5 per cent. The poll of 3,500 voters was carried out yesterday. The margin of error was 2.5 per cent.

This Market Is All Long

2011-02-25T23:26:00.000-07:00

After being beaten for months, shorts have truly capitulated as represented by NYSE short interest. We've seen endless short covering rallies the past few months but those rallies are running out of fuel. What happens when the market begins to roll over? Longs are all invested with cash levels at record lows, while shorts have covered. Who puts a bid in the market?

When this market corrects and it will happen someday, there will literally be no one to squeeze. The bulls will have to rally the market themselves and not the bears for a change.

GDP Q4 2010 Revision

2011-02-25T08:59:00.002-07:00

Today's Q4 GDP revision was far below expectations. Originally reported at 3.17%, real GDP for the fourth quarter was revised down to 2.79% growth. Government, once a form of stimulus for economic growth has now become a drag at (.20%) of GDP. The consumer, thought to be strong came in weaker and was revised down as well by .16% although still contributing to growth.

Below is a summary of the original GDP versus the revisions. Overall, for an economy two years out of recession having experienced trillions in stimulus, this is not a good report. The data reported by BEA is real GDP and to convert from nominal to real the BEA uses two different inflation measures. They use a less aggressive number on the overall report yet on the import component which per the formula is a drag on GDP a more aggressive number. This questionable number many would argue easily overstates real GDP and in fact growth is far lower than reported.

Irish Elections Begin Polls Close At 10PM Local Time

2011-02-25T07:25:00.001-07:00

Today is a big day in the world of assigning risk. Senior bondholders have been protected for years but today may be the start of a shift in forcing those to profit, to also assume risk. Fine Gael is expected to win today and from their quote below, senior bondholders should be concerned. I don't suspect the results to be "news worthy" for some time, at least not in this "market." Irish banks are bleeding both from falling asset prices and dwindling deposits. They've resorted to the last straw of issuing bonds to themselves and using those as collateral.

Irish Independant

Opinion polls have put Fine Gael well in the lead to head the next government, securing as much as 40pc of the popular vote - potentially allowing for a single-party government propped up by independents.

Bloomberg

Fine Gael leader Kenny, 59, said this week his priority will be to renegotiate the 5.8 percent interest rate on the bailout. The party has said it may seek European agreement to share the burden of rescuing the country’s financial system with senior bank bondholders.

The Fed And DC's Next Move

2011-02-24T22:50:00.004-07:00

I don't think many realize the complicated, twisted, interconnected situation we are in right now and figuring out how all of this plays out is beyond difficult. A vast majority of those in risk assets right now have been conditioned for two years that you buy anything and just hold it. Don't sell, don't buy protection, just sit on hands while fully invested. The longer this game goes on the smarter they feel. They are truly oblivious to the world around them.

Anyone who has traded long enough knows the worst thing that can happen to you when starting out is to make money. You begin to think things are easy and ignore the warning signs. As Bill Fleckenstein says, "nonsense becomes knowledge." Those who have not participated in this market or worse tried to short this market are frustrated beyond words right now. We spend our days studying why the market is wrong and arguing with those who are "right."

I truly believe we have an amazing opportunity ahead of us. The fiat currency based, debt fueled, rampant fraud financial system is near collapse. The ponzi scheme has outlived its shelf life. As investors, the opportunity is to make a lot money. As a society, the opportunity is to reset our moral and financial compass. Recession is a normal part of the economic cycle. It is no different than a forest fire that results from excessive, unsustainable growth. Not until the excess is removed, can new life form.

Depressions are to a society, what recessions are to an economy. Talk to anyone from the great depression and you see someone who values money, hard work, the little they have in their lives. Our society has lost its moral and financial compass. We need a reset. Since the 2008 financial crisis we have not removed the excess in our economy. Consumers have not learned how to live within their means. We are literally using debt to pay debt. We may have finally run out of a greater fool to hold up the system.

If you are in cash and not participating I think time is better spent understanding the world we truly live in. I suspect in the not so distant future we will look back at this time as the quiet before the storm. We know about the headwinds. We know the banks are insolvent. We know the economy is on life support. The question is though, what course does the Fed and Federal government choose to take us on. As hated as Bernanke is, he understands the tough choices facing him. As political as DC is, they understand their endless budget deficit game is coming to an end. Those in power do not go down without a fight, without deceit, without one last effort to hide the truth. Every week we witness a different regime in the Middle East being brought down, yet their strategy to hold onto power is no different.

Gold and silver are the new flight to safety trade. They have replaced the USD and possibly US Treasuries. The Fed and Federal government must face the threat of losing reserve currency status and higher, uncontrollable interest rates beyond one year maturity. The printing press cannot be removed. Bernanke and DC are capable of anything to retain power. Keynes believed "gold was a barbarous relic." The demand for gold and silver is so strong that future markets are in historic backwardation. The Comex is literally ready to blow up and JPM is massively short silver.

The Middle East is erupting right now. Regimes are changing and the threat to oil, the fuel of the global economy is rising. Every passing day countries are slowly moving military assets into the region. The global economy will do all it can to protect the flow of oil. Iran will not sit and watch the world move in while their own people revolt. Al Qaeda is losing importance in the region and desperately wants another base to operate out of. Israel is facing renewed threats from Hamas and Hezbollah.

The US is experiencing its own revolution. Although peaceful, that can change fast. Wisconsin was the beginning but protests have spread to other states. The global revolution started in Tunisia and very quickly grew throughout the Middle East. Never underestimate the power of those with nothing. They will fight to the end for they have nothing else to lose.

China is fighting massive inflation and eventually another Tiananmen square. Bernanke is exporting inflation and hoping that will pressure the Chinese to strengthen the RMB. Their choice is either high inflation or weaker growth. Bernanke wants jobs back from China.

If the Fed continues QE they risk pushing bond yields to unsustainable levels.

If the Fed ends QE, who will buy treasuries? Ending QE will take pressure off China to revalue the RMB something neither Bernanke nor DC wants.

If the Fed continues QE they will strengthen gold and silver which will put more pressure on those like JPM and on the future of the fiat currency system.

If Fed ends QE there will be no stimulus left for the economy and it will double dip just like it was going to last summer.

If the Fed continues QE they will raise interest rates putting more pressure on bank balance sheets, on the 500 trillion interest rate derivative market and choke off what little demand is left in the economy.

If the Fed ends QE they will no longer be able to inflate the US economy.

This post has become far too long as this is no easy question to be answered. Do we see war in the Middle East? Are gold and silver the best long term investments? Will the global revolution move fast enough to stop more reckless moves by world leaders? I'll leave you with Hank Paulson's quote about the 2008 financial crisis for comfort on our leaders ability to make the right decisions.

"We had no choice but to fly by the seat of our pants, making it up as we went along."

SPX Update

2011-02-24T14:57:00.000-07:00

The SPX pierced the trend line going back to August. Considering how much the SPX has moved down in just three days a close below the trend line would have been rather difficult due to short term oversold conditions. It was a warning shot though that a trend may in fact be changing. Irish elections are on Friday and that may very well be a warning shot of its own to senior bondholders.

The Moment Of Truth Approaches

2011-02-24T11:45:00.000-07:00

1,300 has been holding for a while today but without a bounce soon an inevitable test of the trend line that has held since August is soon to be in play. I would expect a bounce off that level at least one or two times.

Oil Is NOT The Only Headwind

2011-02-24T07:41:00.001-07:00

Stay focused as we have far more headwinds than just oil. I'm reading articles and hearing pundits say that once the uncertainty in Libya passes then markets will move up. The upheaval in the Middle East is far from over. In fact should Gaddafi "pass along" then with over 130 tribes in that country civil war is almost certain. Beyond the Middle East though, tomorrow we have elections in Ireland with Fine Gael expected to win (possibly a 40% majority) and the risk to senior bondholders will be huge. Portugal is now in need of a bailout as well. I won't go into all the headwinds facing the global economy right now. Just a reminder that risk is not simply contained in Libya.

SPX Number To Watch

2011-02-24T07:34:00.001-07:00

The up trend going back to the creation of the Bernanke put in August has held to date. In fact the last time the lower bollinger was touched was on August 25. We have not touched it since, amazing. Today the trend line stands at roughly 1296-97. Oil is the wildcard in terms of how successful (if any) test is.

USD Ready To Test Long Term Support

2011-02-24T07:30:00.001-07:00

The USD is down $.32 as I write this article. This is while Asian and European markets are down and precious metals up. Oil is over $100 (Brent hit $120). The dollar is now only $.20 from testing long term support.

It has failed to bounce significantly off the prior test. Considering the fact that the fear trade is no longer denominated in the USD this coming test does not bode well for success. The Fed has killed the USD and is killing the treasury market. Mind boggling how one man (sure it's a committee but you really don't vote against your boss) controls in many instances global monetary policy and answers to nobody nor is subject subject to an audit.

As Bernanke tries to increase inflation to stimulate demand, he runs the risk of demand being offset by a consumer barely able to buy food to feed their family and gas to drive to work (or the unemployment office). The race to stimulate or choke the economy is on.

AAII Investor Sentiment - Week Ending 2/22

2011-02-23T23:10:00.001-07:00

WOW! Check out the reversals in market sentiment over the past week. The AAII report is through Tuesday so Libya would be "priced" in here. Still, the moves are massive. Bullish sentiment dropped to 36.6% from 46.6%. Bearish sentiment rose to 36.1% from 25.6%. Buying the dip may be out of favor for a period of time as fear has really crept back into the market.

The SPX has correlated very well with the AAII data as shown below. The divergence between the two is pretty large right now. Time will tell if the red line or blue line is wrong.

Bank Profitability Rises FDIC Report

2011-02-23T22:58:00.000-07:00

The FDIC issued a report today on the strength of bank earnings in Q4 2010 versus Q4 2009. Earnings are up $23.5 billion. Sounds great right? Banks are recovering as clearly the headlines states. CNBC reports the following.

"The banking industry continues to recover from the 2007-2009 financial crisis but lending will need to pick up if progress is to continue, Federal Deposit Insurance Corp Chairman Sheila Bair said on Wednesday.

Industry profits were up considerably from a year ago standing at $21.7 billion in the fourth quarter of 2010, which compares to a net loss of $1.8 billion a year ago, according to the quarterly banking report released by the agency.

Most of the increase was due to banks putting aside less to guard against loan losses.

Banks put aside $31.6 billion in the fourth quarter for losses, about 50 percent less than a year ago."

In case you missed it, banks put aside 50% less for reserves against credit losses in Q4 2010 versus Q4 2009. In Q4 2009 approximately $60 billion was charged to reserves for credit losses. In Q4 2010 the number was $31.6 billion. The graph below shows the percent reserved for credit losses for JPM, WFC, C, BAC. Notice the improving trend, meaning they are reserve less as a percent of total credits.

Improving credit quality? What? Banks are not extending credit because they already have enough homes coming back to them. Interest rates are rising putting further pressure on home prices. About 40% of CRE to be rolled in 2011 does not meet rating agency standards (do rating agencies really have any standards in the first place?).

BAC just restated goodwill impairment and credit card losses retroactively from 2009 through 2010 by an additional 10 billion.

The CFO of WFC abruptly left in the midst of an internal review of their credit quality. Is there a reason he could not finish the review and sign off on the audit. I mean he is only 60 and makes north of $5 million. He actually took an unpaid sabbatical for a few months at which point retirement is more financially beneficial.

Home prices have begun double dipping, meaning higher strategic defaults.

The volume of homes to go from delinquent to REO is growing.

Second tier credits still have yet to be marked down.

Didn't the Fed just tell all banks to stress test against a GDP decline and unemployment at 11%?

Don't fall for it. Read beyond the headlines from CNBC. Banks are a mess and at some point, their bullish bet on improving credit quality will result in them taking a massive hit to earnings.

The Global Revolution

2011-02-23T11:05:00.000-07:00

Libya Worse Than Being Reported

2011-02-23T08:22:00.002-07:00

SPX 1296 Test

2011-02-23T08:15:00.000-07:00

I'm not a intraday trader, too much noise for my liking. Still, I do follow intraday activity and right now SPX is looking weak but the critical test should it happen today would be 1296 (rough number) which is support going back to the August ramp. For now the market is still in an uptrend but should that level be breached, then longs will be forced to consider their positions. Banks looking weak here as is copper, treasuries.

Quantitative Easing and The Treasury Market

2011-02-23T07:15:00.001-07:00

The slide in treasuries continues again and it is clear the Fed has lost any control of the entire curve beyond a one year maturity. Equity markets are at a very critical juncture right now with QE2 expected to end in June. The reality is equity markets may very well begin pricing the end of QE in the near future, if you consider the Jackson Hole speech hinted at QE2 in August and saw equities price in the policy three months ahead of the November 2010 meeting.

There is no shortage of people calling for endless QE (easily 80% of those voices truly don't even understand QE). The environment now though has changed making the options to Fed monetary policy more limited. Probably the biggest headwind facing the Fed is rising interest rates. The federal funds rate is at 0-25 bp and QE was intended to push down rates further out on the curve and it did work for a while. The Fed conditioned all of us for low rates with their continual use of "extended period" with each FOMC statement.

The Fed needs to be careful moving forward. The bond market has clearly signaled they are concerned about inflation, loss of confidence in the Fed and US fiscal policy. The US is competing with other sovereign nations for capital at the same time they are increasing their supply with growing deficits. Imagine a shock even to the US economy. The US is in no position to use emergency stimulus without risk of truly blowing out yields.

Two Year Treasury

After catching a little bid last week the two year has given up all its gains and looks to test the lows again. The shorter end of the curve had stayed relatively low in yield but has risen more than any other maturity recently causing a bear flattening (higher rates and a flatter curve). Not favorable for banks or those on the wrong side of interest rate swaps (which is a $458 trillion market).

Ten Year Treasury

Has bounced along a multi year trend line after failing last week. Looks like it too is set up for failure. This is not good for housing which is already under pressure and double dipping. A 100 bp rise in 10 year yield equates to about an 11% drop in home prices.

Tuesday's Market

2011-02-22T17:13:00.004-07:00

I've been a little quiet in the posting category. I spent the entire weekend and then some editing code for a new site that will launch next week and expand upon the blog. More to come on that in the following days.

Today's market action was nice to see for a change. As always, down days have massive volume versus up days. Anything is possible, and this market may set new highs in a few days again but the risk / reward is getting far more skewed to the risk side of the equation.

The bond market caught somewhat of a bid today but still is not showing any real bullish tendencies. The 2 year auction today saw a bid to cover around 3.03 versus the 3.40 trend of late so that does not bode well for treasury demand, especially with the recent run up in yields. The implications to risk sensitive assets (swaps, housing, CRE, etc) are huge and the Fed has to be careful how much they push future QE.

The USD is done, put a fork in it. Precious metals are the new reserve currency, flight to safety. I won't call them a flight to safety trade, because they really are not a trade. They are another form of currency. When you go all cash in your trading account, that is not considered a trade, nor should owning precious metals. Ever hear anyone talk about how their cash balance takes a hit when the USD is weak or rejoices when the USD is strong? For some precious metals is a trading vehicle but for most it is a hedge against a dying fiat currency system.

Copper has really begun to roll over as are emerging markets, DOW Transports, Utilities. The VIX was up huge today and the AD line was heavily in the declining category. The only thing catching a bid is oil and the headwinds from rising prices will hurt the cash strapped consumer.

Libya is only going to grow in violence with Gaddafi now preparing to be a martyr. Bahrain is continuing to boil over and I read reports that Iran may see protests as early as Tuesday or Wednesday of this week. The global revolution is even happening in the US. First Wisconsin now Ohio and Indiana. Expect many other states to protest just how the budget gaps will be filled.

Ireland elections are on Friday and no one seems to be talking about it. Angela Merkel was handed quite the set back in this weekend's elections as well. Neither bode well for senior bondholders staying whole. Italy had to close its stock market today, Japan has been put on credit watch negative, Spain is acknowledging how bad their banks are finally, The UK is contracting (oh yeah, Japan too), Korea is a seeing a bank run (oh yeah Ireland too). I am sure I missed something but you get the point.

If this market is going to turn, don't think the dip buyers will give up without a fight. A majority of traders and investors have made money for two years by literally doing nothing but holding stocks. It was an easy way to make money and they won't give up without a fight. They will pour money into any weakness as they have been conditioned. They will focus on the Bernanke put which in reality expires soon unless QE3 is hinted at in the next few weeks. Today had the sign of a buy the dip trade working yet again but failed. It may still work but one thing is for sure, one day it won't work. Stay focused on the issues that the media is not covering. The issues are real and the opportunities to profit from them are very large indeed.

Bank Of America Credit Quality Deteriorating

2011-02-22T07:02:00.001-07:00

This most recent earning season saw all of the large banks quote improved credit quality as the basis to reduce reserves for credit losses and subsequently beat on the bottom line. Recently that has been called into question with the departure of Howard Atkins, CFO of WFC. This weekend's actions by BAC further question the improving credit quality assumption.

Feb. 22 (Bloomberg) -- Bank of America Corp., the biggest U.S. lender by assets, almost doubled a goodwill impairment for its credit-card unit to $20.3 billion to reflect increased defaults and an almost 2-year-old change in rules.

The bank restated federal regulatory filings to record the writedown to its FIA Card Services unit in 2009’s first half, the firm said yesterday in a statement. The non-cash charge, which replaced a $10.4 billion impairment booked on the unit last year, doesn’t affect “the financial results, safety and soundness or the capital position” of the Charlotte, North Carolina-based parent company, said Robert Stickler, a spokesman.

In November, the bank said some measureswould cut annual revenue by $1 billion, undermining efforts by Chief Executive Officer Brian T. Moynihan, 51, to improve returns for investors. The firm yesterday said the act and “deteriorating credit quality” caused the revision.

With deteriorating home and commercial real estate prices, rising unemployment (read beyond the BLS headlines), a rising interest rate environment and a US economy stuck at stall speed, BAC very likely will be forced to begin adding to reserves for credit losses in the coming quarters as the truth about "improving credit quality" is exposed. Don't confuse the recent dead cat bounce in this stock as a sign of corporate health.