Trading Desk Blog for Oct 11, 2010

October 11, 2010 by CTA Trading Desk Bookmark and Share

[10:00am ET] CTA Trading Desk Morning Report

Good Morning!

Today is Columbus Day in the US which means that Banks are closed but stocks will be trading in what will probably be a slow session. 

On today’s morning call, the trading desk discussed the possible effects of the “foreclosure crisis” on the markets. As most of us know by now or even suspected back then, fraud was prevalent at the end of the housing boom. The banking industry ignored many regulations in order to write as many mortgages as they could, bundle them up as securities and sell them off to investors with the assumption that the homes would be good collateral. We now see that wasn’t the entire story. As we wrote here last week, this issue is setting up to be the next possible crisis.

In our opinion, Washington and the Fed know the extent of the problem and will do whatever it takes to keep banks solvent should a crisis emerge. That is why we feel that QE2 is in the cards, which could raise asset prices high enough to avoid bank failures on a massive scale. If these OTC derivatives were freely traded and their actual worth was disclosed banks would fail, end of story. 

On one side of the coin, the Fed succeeds in stopping this crisis and all asset prices rise over time though liquidity. 

On the other side of the coin, we see Financials collapsing and days when gold jumps $50, $100 or more. We cannot see how volatility can remain so low for much longer. Hedge your bets folks, it’s gonna be a bumpy ride.

In the short term, we see the Euro forming a possible double top at high levels.  It makes sense that in the short term the Euro will decline, the US Dollar will rally, and stocks and gold will fall.

On Friday, the limit up move in corn drove the agricultural complex significantly higher. With the rallies in so many commodities and commodity-related stocks like JOYG, DE, MOS, etc, how long will it be before those prices start showing up in consumer products? The Fed says that inflation expectations are muted, but how long can that last?

Have a great Monday trading session!

– Geoff

CTA Trading Desk Post-Close Report

This report will appear after the close of the US markets.

Login or register to post comments Bookmark and Share Comments New Hussman Up Submitted by Bull Hunter (1453 comments) on Mon, 10/11/2010 – 10:43 #71225

The IMF warned that “Conditions in the global financial system now have the potential of jumping from benign to crisis mode very rapidly.”

It will come as no surprise that we agree, but at least for now, investors evidently could not care less.

http://tinyurl.com/2d7atyb

Login or register to post comments …. Submitted by baz22 (1411 comments) on Mon, 10/11/2010 – 10:49 #71226

started buy & add in ‘ bdsi ‘…

Login or register to post comments anyone else long dollar short gold/silver/SLW? Submitted by jack black (832 comments) on Mon, 10/11/2010 – 10:50 #71227

The trade feels scary but the stops hold so far. The trade is starting to work today IMHO.

Login or register to post comments Back to leaning long> Opening WFC/INTC @ 25.61/19.67 Submitted by 2nd_ave (4722 comments) on Mon, 10/11/2010 – 10:59 #71228

Small positions. IMO, bears have yet to capitulate. On the other hand, this could be the losing trade that establishes a change in sentiment.

Login or register to post comments will housing reflation work? Submitted by davefairtex (2299 comments) on Mon, 10/11/2010 – 11:01 #71229

Dr S – “Well, firstly, I’m not in the reflation camp. I believe the shoe will fall in housing and real estate in general but if reflation were to be implemented in housing all that would be required is targeted gov’t incentives like a $9,000+ tax credit to new homebuyers (sound familiar?) and a zero down payment at 0% for 50 years using ye ol’ Fan/Fred paradigm.”

Housing back in 2005-2006 was high because the popular vision was that home prices always increase, and so a large number of people were willing to take on absurd debt levels to get on the train “while they still could.” Now, people are well aware that home prices don’t always go up. The innocence is gone, the bloom is off the rose, and perhaps that is the real reason why the bubble never strikes the same place twice in a row. The biggest problem is the loss of Confidence. It takes over-confidence to overpay. I’m thinking that’s not likely to happen in housing for quite some time.

Plus, the move-up buyer is underwater, the first-time buyer doesn’t have a job, and the already-been-foreclosed-upon buyer has really crappy credit. Who exactly would be buying?

Perhaps – if Fan and Fred were to convert each and every REO they had, or will get in the next few years into rentals, that might do it. A policy statement saying they were taking those homes off the market, let’s say for five to ten years, and renting them out (subcontracting with some management company to do it) might be effective. If the supply overhang isn’t there anymore, it might make a reflation possible since the popular perception would be one of scarcity rather than oversupply.

It would kill the existing rental market, of course, with all that government supply, and all the folks who bought “investment” foreclosures hoping to rent would be quite upset, but it might reflate home prices a bit. And it might be doable without Congressional approval.

It will be interesting to see what happens.

Login or register to post comments Re: anyone else long dollar short gold/silver/SLW? Submitted by davefairtex (2299 comments) on Mon, 10/11/2010 – 11:12 #71230 (in reply to #71227)

I”m not short PM but I have a small long dollar position (a UUP put write). Well the UUPs in addition to all the dollars I own. 🙂

Login or register to post comments Rocket Higher On Earnings? Submitted by 2nd_ave (4722 comments) on Mon, 10/11/2010 – 11:26 #71231

No one believes in a bull market when it starts. No one. And right now, no one believes one has started. What better time to jump start the next bull?

Login or register to post comments Re: Back to leaning long> Opening WFC/INTC @ 25.61/19.67 Submitted by jack black (832 comments) on Mon, 10/11/2010 – 11:35 #71232 (in reply to #71228)

You are often right, but I’m not going to follow you, VIX jumped way below the BB today. The last time we had that was 1/11/10. I’m not saying bull is dead but expecting some easing at this time especially with dollar bounce.

Login or register to post comments Re: Rocket Higher On Earnings? Submitted by davefairtex (2299 comments) on Mon, 10/11/2010 – 11:41 #71233 (in reply to #71231)

2nd_ave – “No one believes in a bull market when it starts. No one. And right now, no one believes one has started. “

This is a great example of the use of a logical fallacy. Let me turn it around and see if the statement still provides insight.

Does a bull market start every time nobody believes that one has started?

Login or register to post comments Re: will housing reflation work? Submitted by Dr. Strangelove (773 comments) on Mon, 10/11/2010 – 11:51 #71234 (in reply to #71229)

davefairtex –

Perception is on the market value DISCOUNT which could very well drive employed public union workers back into the market but not at reflated prices. Fan/Fred need another bailout and an inventory dump … now. Take millions of abandoned junk starter castles, subdivide into multi-units because municipalities will allow rezoning to generate tax revenue, rent to illegals who can afford DISCOUNT rent until $10/gal gas makes the commute from said starter castles to the local WalMart parking lot for a day’s labor equal to ….. a day’s labor. Then a new wave of defaults will commence if CONFIDENCE in the USD can be sustained. Is that reflation?

Armstrong’s latest tome out this morning and it’s about Real Estate!

http://tinyurl.com/2ezwhly

Cheers.

Login or register to post comments Re: Rocket Higher On Earnings? Submitted by 2nd_ave (4722 comments) on Mon, 10/11/2010 – 11:55 #71235 (in reply to #71233)

Dave- I’m not one to put much stock in either logic or logical fallacies. I’m only interested in how the market might manage to frustrate the majority of traders. And if it takes a logical fallacy to do it, I don’t discount that possibility.

Login or register to post comments Re: Rocket Higher On Earnings? Submitted by gforce (360 comments) on Mon, 10/11/2010 – 11:59 #71236 (in reply to #71233)

Everything is obvious and then it is obviously wrong!

Hussman article leads me to believe anything is possible; but fundamentals(not necessarily “our” fundies, just fundamentals of history) at some point are paramount or at least attractive.

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