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 MONTHLY MARKET COMMENTARY

 

NOVEMBER ISSUE - 40 PAGES

Integrating Macro Research

& Technical Analytics

Gordon T Long

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READ ALL THE

"EXTEND & PRETEND" SERIES

 

 

Stage I Comes to an End!

 

A Matter of National Security

 

A Guide to the Road Ahead

 

Confirming the Flash Crash Omen

 

Its either RICO Act or Control Fraud

 

Shifting Risk to the Innocent

 

Uncle Sam, You Sly Devil!

 

Is the US Facing a Cash Crunch?

 

Gaming the US Tax Payer

 

Manufacturing a Minsky Melt-Up

 

Hitting the Maturity Wall

 

An Accounting Driven Market Recovery

FOR UPCOMING SHOW TIMES SEE: COMMENTARY READER 


 

 

 


 

READ ALL THE

"SULTANS OF SWAP"

 

ACT I

Sultans of Swap: Smoking Guns!

 

ACT II

Sultans of Swap: The Sting!

 

ACT III

Sultans of Swap: The Get Away!

 

 

ALSO

SULTANS OF SWAP: Explaining $605 Trillion in Derivatives!

 

SULTANS OF SWAP: Fearing the Gearing!

 

SULTANS OF SWAP: BP Potentially More Devastating then Lehman!

 

SULTANS OF SWAP: Gold Swaps Signal the Roadmap Ahead

 

FOR UPCOMING SHOW TIMES SEE: COMMENTARY READER

 


 

 

 

 

READ ALL THE

"EURO EXPERIMENT" SERIES

 

 

 

EURO EXPERIMENT: German Steel or Schmucks?!

 

 

 

FOR UPCOMING SHOW TIMES SEE: COMMENTARY READER

 

 

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Current Thesis Advisory

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Published November 2009

 

EXTEND & PRETEND

 

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READ ALL THE

"INNOVATION" SERIES

 

Innovate or Die

 

INNOVATION: America has a Structural Problem!

 

INNOVATION: What Made America Great is now Killing Her!

 

America - Innovate or Die!

 

FOR UPCOMING SHOW TIMES SEE: COMMENTARY READER

 


 

 

 

READ ALL THE

"PRESERVE & PROTECT" SERIES

 

 

 

 

FOR UPCOMING SHOW TIMES SEE: COMMENTARY READER

 

 

 

 

 

 

 

 

POSTS:  WEDNESDAY 11-24-10

Last Update: 11/25/2010 02:36 PM

SCHEDULE: 1st Pass: 5:30AM EST, 2nd Pass: 8:00 AM, 3rd Pass 10:30 AM. Last Pass 5:30 PM



Happy Thanksgiving

ARTICLE SOURCE 1 2 3 4 5 6 7 8 9 10
                       
                       
KOREA                      
S. Korea vows 'stern retaliation' against N. Korea's attacks Yonhap                    
Japans Calls For Attack On North Korea, Tensions Mount After Shelling Intel Hub                    
Unpredictable (Korean) geopolitical risk, illustrated FT Alpha                    
US to send aircraft carrier to South Korea  FT                    
Obama Promises `Unshakable' Support for S. Korea  Bloomberg                    
                       
Fears of Domino Effect Pervade Europe  WSJ  X                  
Greece Will Need `Extra Effort' to Meet 2011 Deficit, EU-IMF Say Bloomberg X                  
I.M.F. Clears Latest Installment of Aid to Greece NY Times X                  
The Complete Guide To The Oncoming Spanish Debt Crisis That Everyone Is Terrified Of BI X                  
Is The Bond Wolfpack Going To Skip Right Over Portugal And Start Feasting On Spain BI X                  
Spanish 10 Year Bond Spreads Hit All Time Wides ZH X                  
                       
IRELAND                      
The underwhelming Irish bailout Salmon X                  
Markets: Ireland bail-out a failure Telegraph X                  
Ireland's sacrifice may well sink eurozone, not save it Prosser X                  
Irish P.M.'s own party rebels, plans to replace him AP X                  
Who are the bond holders we are bailing out? Golem XIV X                  
Ireland's Banks Are All For Sale: Central Banker Reuters X                  
IMM positioning: Euro longs unwound ahead of Irish bail-out Danske X                  
What Will Happen To Ireland (And Various MNCs) When Ireland Is Finally Forced To Hike Tax Rates ZH X                  
Irish political turmoil complicates financial-system fix Washington Post X                  
                       
Japanese rushing to Shanghai for better jobs Asahi X                  
The greying of Japan Economist X                  
                       
USA                       
U.S. Jobless Claims Decline to 407,000, Lowest Since July 2008  Bloomberg                  
U.S. Consumer Spending Rises for Fifth Month as Incomes Rebound  Bloomberg                  
Orders for U.S. Durable Goods Unexpectedly Dropped in October  Bloomberg                  
October new home sales drop 8.1 pct., prices fall  AP                   
                       
There Are Massive Risks In Emerging Markets Too BI     X              
Munis Yielding More Than Treasuries for First Time Since Crisis Amid Sales Bloomberg       X            
United STRAITS of America: The Muni Bond Crisis Is Here EW       X            
Muni-Bond Issuers May Face Default `Crunch' as Stimulus Ebbs, Lehmann Says Bloomberg       X            
Residential construction in United States: Will 2011 be another year to write off? NBF                 X  
Fannie Mae, Freddie Mac and the Coming Wave of Foreclosure Buybacks Reality Trac                 X  
'Shadow Inventories,' a Dark Cloud Over Housing Barron's                 X  
                       
ARTICLE SOURCE 11 12 13 14 15 16 17 18 19 20
                       
Some States Weigh Unthinkable Option: Ending Medicaid WSJ X                  
Kamikaze Capitalism: GOP out to destroy Farrell                 X  
GOP Puts the `Lame' Back in Lame-Duck Session Baum                 X  
                       
REMAINING                      
Yuan begins trading against the rouble China Daily                   21
Fed Trims Outlook on Growth, Jobs  WSJ                    22 
                       
CENTRAL BANKING & MONETARY POLICY                      
Fed's power of the press hits limit MSN (Fleck)                    
Japan's Tale of Caution On Fed Monetary Policy WSJ                    
Does the Fed Create Money? Pento                    
Robert Prechter Explains The Fed, Part II EW                    
Time to revamp the Fed’s flawed mandate Roach                    
Bernanke Admits QE2 May Fail, Requests Fiscal Stimulus Now Lenzner                    
Fed Critics In Strange Position: Defending The Fed Huffington Post                    
Fed Adopts Political Tactics on Critics NY Times                    
                       
GENERAL INTEREST                      
A recession to remember: Lessons from the US, 1937-1938 VOX                    
                       
MARKET WARNINGS                      

Is A Dropping VIX Masking Rising "Fear" In Most Other Asset Classes... And Does Hedge Fund SPY Pair-Hedging Explain The Market Melt Up  ZH

ZH                    
                       

CURRENCY WARS

                     
China Inflation May Be Too Hot for Controls Amid Cash Glut Bloomberg                    
                       
Q3 EARNINGS                      
                       
MARKET & GOLD MANIPULATION                      
How the 'experts' get the insider info Fortune                    
While The U.S. Prints And Spends, Russia Loads The Boat With Gold Golden Truth                    
VIDEO TO WATCH                      
                       

Complete Legend to the Right, Top Items below.
Articles with highlights, graphics and any pertinent analysis found below.

 

 

 

                    LATEST RESEARCH PUBLICATIONS

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COMMENTARY for all articles by Gordon T Long

 

CURRENCY WARS: Debase, Default, Deny!

 

In September 2008 the US came to a fork in the road. The Public Policy decision to not seize the banks, to not place them in bankruptcy court with the government acting as the Debtor-in-Possession (DIP), to not split them up by selling off the assets to successful and solvent entities, set the world on the path to global currency wars.

 

By lowering interest rates and effectively guaranteeing a weak dollar, the US ignited an almost riskless global US$ Carry Trade and triggered an uncontrolled Currency War with the mercantilist, export driven Asian economies. We are now debasing the US dollar with reckless spending and money printing with the policies of Quantitative Easing (QE) I and the expectations of QE II. Both are nothing more than effectively defaulting on our obligations to sound money policy and a “strong US$”. Meanwhile with a straight face we deny that this is our intention.  

 

Though prior to the 2008 financial crisis our largest banks had become casino like speculators with public money lacking in fiduciary responsibility, our elected officials bailed them out. Our leadership placed America and the world unknowingly (knowingly?) on a preordained destructive path because it was politically expedient and the easiest way out of a difficult predicament. By kicking the can down the road our political leadership, like the banks, avoided their fiduciary responsibility. Similar to a parent wanting to be liked and a friend to their children they avoided the difficult discipline that is required at certain critical moments in life. The discipline to make America swallow a needed pill. The discipline to ask Americans to accept a period of intense adjustment. A period that by now would be starting to show signs of success versus the abyss we now find ourselves staring into.  A future that is now massively worse and with potentially fatal pain still to come. READ MORE

   

 

CURRENCY WARS: Misguided Economic Policy

 

The critical issues in America stem from minimally a blatantly ineffective public policy, but overridingly a failed and destructive Economic Policy. These policy errors are directly responsible for the opening salvos of the Currency War clouds now looming overhead.

 

Don’t be fooled for a minute. The issue of Yuan devaluation is a political distraction from the real issue – a failure of US policy leadership. In my opinion the US Fiscal and Monetary policies are misguided. They are wrong! I wrote a 66 page thesis paper entitled “Extend & Pretend” in the fall of 2009 detailing why the proposed Keynesian policy direction was flawed and why it would fail. I additionally authored a full series of articles from January through August in a broadly published series entitled “Extend & Pretend” detailing the predicted failures as they unfolded. Don’t let anyone tell you that what has happened was not fully predictable!

 

Now after the charade of Extend & Pretend has run out of momentum and more money printing is again required through Quantitative Easing (we predicted QE II was inevitable in March), the responsible US politicos have cleverly ignited the markets with QE II money printing euphoria in the run-up to the mid-term elections. Craftily they are taking political camouflage behind an “undervalued Yuan” as the culprit for US problems. Remember, patriotism is the last bastion of scoundres  READ MORE


  BRIEFS  

Obama's 'Hail Mary' Export Strategy
   
     

 READER ROADMAP -  2010 TIPPING POINTS aid to positioning COMMENTARY

1

         

1-SOVEREIGN DEBT

2-EU BANKING CRISIS
3-BOND BUBBLE

4-STATE & LOCAL GOVERNMENT

5-CENTRAL & EASTERN EUROPE
6-BANKING CRISIS II
7-RISK REVERSAL

8-COMMERCIAL REAL ESTATE

9-RESIDENTIAL REAL ESTATE - PHASE II
10-EXPIRATION FINANCIAL CRISIS PROGRAM
11-PENSION CRISIS

12-CHRONIC UNEMPLOYMENT

13-GOVERNMENT BACKSTOP INSUR.
14-CORPORATE BANKRUPTCY

TODAY'S TIPPING POINTS UPDATE

RED ALERT

AMBER ALERT

ACTIVITY

MONITOR

Click to Enlarge





11-24-10

 

GEO-POLITICAL TENSIONS - ISRAEL / KOREA / IRAN

 

KOREA

 

S. Korea vows 'stern retaliation' against N. Korea's attacks Yonhap

 

“I think enormous retaliation is going to be necessary to make North Korea incapable of provoking us again.”

 

Japans Calls For Attack On North Korea, Tensions Mount After Shelling Intel Hub

 

The Intel Hub

Debkafile is now reporting that Japanese Prime Minister Naoto Kan called Obama and demanded that the United States, Japan, and South Korea attack North Korea!

Prime Minister Naoto Kan called President Barak Obama urgently in the wake of the North Korean artillery attack on South Korea’s Yeonpyeong island near the Yellow Sea border early Tuesday, Nov. 23 and demanded a US-South Korean-Japanese military reprisal. Two South Korean marines were killed and 17 injured in the attack.

 

He also demanded that the UN Security Council be convened immediately on the crisis. He put the same demands to South Korean President Lee Myung-bak in another call. Naoto Kan then ordered his ministers to prepare for “unexpected events.”

Washington said it is watching the situation but is not militarily involved after strongly condemning the attack and calling for an end to belligerence.

 

debkafile’s military sources report that the Korean clash has prompted a special alert in the US Seventh Fleet headquarters at Yokosuka in Japan, together with the naval forces stationed there including the USS George Washington aircraft carrier

Unpredictable (Korean) geopolitical risk, illustrated FT Alphaville

US to send aircraft carrier to South Korea  FT

Obama Promises `Unshakable' Support for S. Korea  BL


1- SOVEREIGN DEBT & CREDIT CRISIS

 

SOVEREIGNS

 

 

Things in Europe are getting worse. Here is a brief summary of all the events in the increasingly troubled continent.

  • 1- Sinn Fein Says Irish PM Has No Support: The opposition party has tabled a motion of no confidence in Irish Prime Minister Brian Cowen (source)
  • 2- Wolfgang Schaeuble admits the end is near: The Irish debt crisis is putting the euro at risk, German Finance Minister Wolfgang Schaeuble warned Tuesday. "We are currently in a difficult international and European environment," Schaeuble said in a budget speech in parliament. (source)
  • 3- General weakness in European credit: CDS indices are mixed with Xover 6 basis points wider at 465bps, HiVol 4bps tighter at 154bps and Europe 2bps wider at 104bps. Holders of 92% of the current outstanding E750 million of Anglo Irish subordinated debt yesterday agreed to accept just 20% nominal value for the paper which will be exchanged for government guaranteed securities (source)
  • 4- Very poor Spanish 3-6 month bond auctions, with yields and Bid To Covers jumping, and the country selling (€3.2 billion) compared to the auction goal of €4-5 billion: Spanish 3-month auction for €2.091bln, BTC 2.34 vs. Prev. 2.77 (yield 1.743% vs. Prev. 0.951%); Spanish 6-month auction for EUR 1.165bln, bid/cover 2.6 vs. Prev. 2.08 (yield 2.111% vs. Prev. 1.285%). Spanish CDS about 20 bps wider as vigilantes consider speeding up the process of collapsing Europe
  • 5- Persistent rumor of Moody's downgrade of Portugal: probability 0.01%.
  • 6- CHF intervention needed but nobody willing to take on Fed: The head of the Swiss National Bank on Tuesday sounded the alarm on the strength of the swiss franc and tied it to the financial turmoil across Switzerland's borders in the Eurozone. Current exchange rate developments are a "major challenge" for Swiss exporters, SNB governing board chairman Philipp Hildebrand said. (source)
  • 7- 3 Month Euro LIBOR, which recently passed above the ECB's 1% key refi rate, and was seen as an improvmenet, is now back lower: When 3 month Euribor broke above the European Central Bank's key 1% refi rate last month it was heralded as a sign of a return to normality, but it has fallen back over the past eight trading sessions. Three month euro LIBOR failed to make the 1% level and is now declining again. On Tuesday, three month euro LIBOR fell 0.25 bps to 0.97375%, sterling 3 month LIBOR fell 0.125 bps to 0.73875% and dollar 3 month LIBOR held steady (source) Elsewhere, three month Euribor fell for the eighth consecutive day Tuesday, with the pace of decline accelerating as it dropped 0.4 basis point to 1.035% from 1.039% Monday. The 3 month Euribor/OIS spread widened 1.25 bps with the banking sector under pressure amidst heightened concern over euro zone peripherals (source)
  • 8- Lastly, the ECB drained €66.0Bn In a 1-week term deposit tender, to sterilize the money used for sovereign debt purchases. The amount drained matched the total volume of government bonds purchased by the ECB and settled as of last Friday and was up from the €65 billion drained previously. On Monday, the central bank reported that it had purchased €713 million in sovereign debt on the secondary market during the week ending November 19. (source)

Fears of Domino Effect Pervade Europe  WSJ

With the unraveling of Ireland's coalition government Monday, contagion is back on the minds of investors.

Portugal reported on Monday that its 10-month budget deficit widened from a year ago. Tuesday, Spain issued short-term debt at a significantly higher cost than a month ago.

"I think that's the market's realization; that these are systemic problems that are going to need a (European) systemic solution, this is not a one-off problem with an individual country."

Brian Yelvington, fixed-income strategist at Knight Capital.

 Rising spreads have hit one country after the other, moving from Greece to Ireland and now to Portugal and Spain.  The worry is that those rising borrowing costs eventually may prove prohibitive, forcing countries to seek some sort of bailout.

"People that are betting on contagion are probably making the right bet here,there's not really anything to stop the markets from pushing the next domino over." 

David Gilmore, a strategist at Foreign Exchange Analytics. "

 

 

GREECE

Greece Will Need `Extra Effort' to Meet 2011 Deficit, EU-IMF Say BL

 

I.M.F. Clears Latest Installment of Aid to Greece NYT

SPAIN

The Complete Guide To The Oncoming Spanish Debt Crisis That Everyone Is Terrified Of  BI

Is The Bond Wolfpack Going To Skip Right Over Portugal And Start Feasting On Spain BI

Spanish yields are at record highs this morning. The main event may coom sooner than people are expecting.

Spanish 10 Year Bond Spreads Hit All Time Wides  ZH

 

GERMANY

 

FRANCE

 

UK

 

IRELAND

The underwhelming Irish bailout Salmon

Markets: Ireland bail-out a failure Telegraph
“Rescue or no rescue, Ireland and the other peripheral nations face some difficult times ahead.”

Ireland's sacrifice may well sink the eurozone, not save it Prosser

Irish P.M.'s own party rebels, plans to replace him AP
An effort that could trigger a snap election and delay a massive EU-IMF bailout of Ireland.

Who are the bond holders we are bailing out? Golem XIV

Ireland's Banks Are All For Sale: Central Banker Reuters

IMM positioning: Euro longs unwound ahead of Irish bail-out Danske

What Will Happen To Ireland (And Various MNCs) When Ireland Is Finally Forced To Hike Tax Rates  ZH

Irish political turmoil complicates financial-system fix  Washington Post

What is needed now is an immediate general election so that a new government, with a clear parliamentary majority, can prepare the four-year economic plan, complete negotiations with the E.U. and IMF and frame a budget for 2011," Kenny told reporters in Dublin.

 

While European governments may have dealt with the immediate crisis facing Irish banks, the greater challenge for European governments will be ensuring that no nation defaults on its debts or drops use of the euro, the common currency.

 

JAPAN

Japanese rushing to Shanghai for better jobs Asahi

 

The greying of Japan Economist

 

USA

 

time (et) report period Actual Consensus
forecast
previous

Wednesday, Nov. 24
8:30 am Jobless claims 11/20 407,000 435,000 441,000 
8:30 am Personal incomes Oct. 0.5% 0.3% 0.0%
8:30 am Consumer spending Oct. 0.4% 0.4% -0.1%
8:30 am Core PCE price index Oct. 0.0% 0.0% 0.0%
8:30 am Durable-goods orders Oct. -3.3% -0.2% 5.0%
9:55 am Consumer sentiment Nov. 71.6 69.8 69.3
10 am New-home sales Oct. 283,000 310,000 308,000
10 am FHFA home prices Sept. -0.7% N/A 0.0%
 

U.S. Jobless Claims Decline to 407,000, Lowest Since July 2008 BL Mass Layoffs

U.S. Consumer Spending Rises for Fifth Month as Incomes Rebound BL BEA

Orders for U.S. Durable Goods Unexpectedly Dropped in October BL PDF

October new home sales drop 8.1 pct., prices fall AP PDF

 

2- EU BANKING CRISIS

   

 

3- BOND BUBBLE

 

There Are Massive Risks In Emerging Markets Too  BI

 

One of the interesting things that's happened over the last couple years is that investors have begun to perceive emerging markets as not only faster growing, but also safer thanks to less indebtedness and central banks that aren't perceived to be pumping like crazy (that's not exactly accurate, but it's the belief).

 

 

 

4- STATE & LOCAL GOVERNMENT

 

Munis Yielding More Than Treasuries for First Time Since Crisis Amid Sales BL
Investors withdrew $3 billion from open-end municipal bond mutual funds in the week ended Nov. 17, the most in almost 19 years...

 

United STRAITS of America: The Muni Bond Crisis Is Here EW

 

 

This November, the whole world tuned in as the greater part of the U.S.A.'s 50 states turned red -- and no, I don't mean the political shift to a republican majority during the November 2 mid-term elections. I mean "in the red" -- as in, financially fercockt, overdrawn, up to their eyeballs in debt.

Here are the latest stats: California, Florida, Illinois, and New Jersey now suffer "Greek-like deficits," alongside draconian budget cuts, job furloughs, suspensions of city services, and the growing "rent-a-cop" trend of firing city workers and then hiring outside contractors to fill those positions.

Next is the fact that the municipal bond market has been melting like a snow cone in the Sahara desert. According to recent data, 35 muni bond issues totaling $1.5 billion have defaulted since January 2010, three times the average annualized rate going back to 1983. Also, in the week ending November 19, investors withdrew a record $3.1 billion from mutual and exchange-traded funds specializing in municipal debt, triggering the largest one-day rise in yields since the panic of '08.

 In the words of a recent LA Times article "It's a cold, cold world in the municipal bond market right now."

 

Muni-Bond Issuers May Face Default `Crunch' as Stimulus Ebbs, Lehmann Says BL

 


5- CENTRAL & EASTERN EUROPE

 


6-BANKING CRISIS II



7- RISK REVERSAL

 

 

8- COMMERCIAL REAL ESTATE

 

 

9-RESIDENTIAL REAL ESTATE - PHASE II

 

Residential construction in United States: Will 2011 be another year to write off? NBF

 

Fannie Mae, Freddie Mac and the Coming Wave of Foreclosure Buybacks RealtyTrac

 

'Shadow Inventories,' a Dark Cloud Over Housing Barron’s

 

10- EXPIRATION FINANCIAL CRISIS PROGRAM

 

 

11- PENSION & ENTITLEMENTS CRISIS


Some States Weigh Unthinkable Option: Ending Medicaid WSJ

12- CHRONIC UNEMPLOYMENT



13- GOVERNMENT BACKSTOP INSURANCE

 

 

14- CORPORATE BANKRUPTCIES

 

 

17- CHINA BUBBLE



19- PUBLIC POLICY MISCUES

Kamikaze Capitalism: GOP out to destroy Farrell

 

GOP Puts the `Lame' Back in Lame-Duck Session Baum



 


OTHER TIPPING POINT CATEGORIES NOT LISTED ABOVE

 

21-US RESERVE CURRENCY.

 

Yuan begins trading against the rouble China Daily

“The pace of internationalizing the yuan is accelerating”

22-SHRINKING REVENUE GROWTH RATE22-SHRINKING REVENUE GROWTH RATE

Fed Trims Outlook on Growth, Jobs  WSJ

Fed officials downgraded their assessment of the economy at a November meeting as they debated the benefits and costs of bond purchases, minutes showed.

Long Slog

Federal Reserve officials' new forecasts for unemployment:

2010: 9.5%-9.7%

2011: 8.9%-9.1%

2012: 7.7%-8.2%

2013: 6.9%-7.4%

'longer run': 5%-6%

24-RETAIL SALES

 

 

26-GLOBAL OUTPUT GAP

 

 

31-FOOD PRICE PRESSURES

 

 

32-US STOCK MARKET VALUATIONS

 

 




BP - British Petroleum

SULTANS OF SWAP: BP Potentially More Devastating then Lehman!

------------

 






   

CENTRAL BANKING MONETARY POLICIES, ACTIONS & ACTIVITIES

------------

 

Fed's power of the press hits limit MSN (Fleck)

Japan's Tale of Caution On Fed Monetary Policy WSJ

Does the Fed Create Money?
Pento

Robert Prechter Explains The Fed, Part II EW

Time to revamp the Fed’s flawed mandate Roach

Bernanke Admits QE2 May Fail, Requests Fiscal Stimulus Now Lenzner

Fed Critics In Strange Position: Defending The Fed HP

Fed Adopts Political Tactics on Critics NYT

 

 GENERAL INTEREST

A recession to remember: Lessons from the US, 1937-1938 VOX

 

MARKET WARNINGS

Is A Dropping VIX Masking Rising "Fear" In Most Other Asset Classes... And Does Hedge Fund SPY Pair-Hedging Explain The Market Melt Up  ZH

 

 

 

As the trading year draws to a close, and as the QE2 driven melt up shows little sign of relenting (or breaching the 1,200 S&P level), the ever popular VIX, or "fear index" continues to plumb new depths. For many this is a superficial sign of complacency and lack of risk of any major moves within stocks. However, as BNY's Nicholas Colas demonstrates, this is far from the truth as to what is happening below the surface. While highlighting the grind lower in the VIX, Colas observes that "the options market has been busy pricing in higher levels of perceived risk across a variety of asset classes, most notably investment grade bonds, silver, and emerging markets. In fact, of the 20 asset classes and industrial sectors for which we track risk pricing in the options market, 15 show heightened levels of investor concern for the upcoming 30 day period." How does Colas explain this remarkable divergence? "I am tempted to say that the sector IVs are actually better representatives of the market’s take on future volatility, and the lower expected volatility of the market as a whole comes from macro investors who think the next month will be smooth sailing.

 

Conversely, those traders who use sector ETFs and their options to hedge specific single stock positions see a different and potentially more volatile story developing." We tend to agree with the second explanation, which also leads to another surprising conclusion... 

 

As most hedge funds now tend to hedge idiosyncratic risk using broad systemic hedges, most notably the SPY, which continues to be the most shorted (and "longed") hedge fund ETF, which, due to its being the most actively traded (or, some would say, churned) security by volume on US capital markets, in turn feeds the HFT relay to force robots to believe that due to daily pressure pushing the key market ETF higher or lower, the prevailing move in stocks should be higher (via forward feedback loops), when in fact hedge funds are shifting increasingly more bearish (short individual stocks, and net SPY buying) thereby explaining the constant move higher in stocks, and lower in the VIX. Is hedge fund pair trade hedging (now that everyone is terrified of shorting individual stocks as pair trade hedges) with ETFs solely responsible for the daily move higher? We will likely not know with certainty until a forensic analysis of the market can be conducted after the next mega-crash, although recent observations of market moves lead us to believe that this could be one possible explanation. Then again with all modern-day feedback loops which have no formal start or end, in a market in which one wing-flipping butterfly can cause a market flash crash, who really knows...

 

We hope to revisit this most fascinating emerging feedback loop theory at a later date, but for now, here are Colas' complete observations on why anyone trading purely on a dropping VIX may be in for a rude awakening.

 

If the Boys Want to Fight, You’d Better Let Em

 

Only 36 shopping days left until Christmas, and 29 more trading days left in 2010. The S&P 500 is up some 7.5% year to date, and the most recent prices on the CBOE VIX Index come in just shy of 20. The options specialists at ConvergEx don’t like it when I call that the “Fear Index,” but since that’s the shorthand many on the Street use to describe the VIX we’ll use it here. Just for today – I promise. I will go back to “Expected price volatility/cost of insurance” with the next installment of these monthly assessments of the options market and risk pricing.

 

The bottom line on the VIX is that both in terms of its absolute level and general trend, there just doesn’t seem to be any real fear in the U.S. equity markets. If the market is metaphorically a gathering place of buyers and sellers, then the current environment resembles a Seattle coffee shop. A quiet murmuring crowd. The low hiss of the milk foamer. Maybe someone playing Jewel covers on an acoustic guitar in the corner. The VIX is below 20 and has been moving lower in a calm collected manner since May. Over the last month, for example, the Fear Index (sorry, options guys) has come in from 20.6 to less than 19 yesterday.

 

Other parts of the options market, however, look more like a roadside bar on Hells Angels initiation night. The VIX is down over the last month, yes, but just look at our accompanying graph with 19 other industrial sectors and asset classes. That exhibit shows what is essentially the “VIX of…” these groups. You will notice that expected volatility in large cap U.S. stocks (S&P 500) is in the distinct minority when it comes to declining levels of fear. Here are a few examples of where the options market clearly sees more reason for near term concern:

 

Among asset classes outside of stocks, the options market has seen incremental concern in Investment Grade Bonds, Silver, Emerging Markets, Junk Bonds, International Stocks, and Gold. You might at this point ask how we calculate these changes. The answer is that the proliferation of Exchange Traded Funds tracking diverse asset classes has led to an active listed options market for these securities and the asset types they track. From there you simply calculate the Implied Volatility for the options associated with the ETF in question. We use www.ivolatility.com as our source for the data presented here.

 

Most of the sectors within the S&P 500 are seeing higher levels of expected near term volatility, even though the VIX itself is down. This includes Energy, Consumer Staples, Materials, Tech, Health Care and Consumer Discretionary. When you think about it, this is an oddball observation. How can the expected volatility of the index decline if the individual sector IVs are increasing? Low price correlations might explain the difference, except correlations are quite high at the moment. I am tempted to say that the sector IVs are actually better  representatives of the market’s take on future volatility, and the lower expected volatility of the market as a whole comes from macro investors who think the next month will be smooth sailing. Conversely, those traders who use sector ETFs and their options to hedge specific single stock positions see a different and potentially more volatile story developing.

 

The last point I would like to make is on Gold. There has been some concern of late that the yellow metal has topped out for the year and perhaps for good. Looking at the data from the options market, the “Gold VIX” doesn’t show either extreme complacency or extreme worry. It is exactly in the middle of its historical range of 15-25, with a current reading of 20. Maybe that puts Gold in the coffee shop rather than the roadside bar, but it does seem that the risk pricing in the options market does not support any overly positive or negative call.

 

CURRENCY WARS

China Inflation May Be Too Hot for Controls Amid Cash Glut BL

 

Q3 EARNINGS

 

MARKET & GOLD MANIPULATION

How the 'experts' get the insider info Fortune

 

While The U.S. Prints And Spends, Russia Loads The Boat With Gold  Golden Truth

 
This chart is sourced from Casey Research, Ed Steer's Gold and Silver Daily.  The Russian Central Bank purchased another 600k ozs of gold in October (some is purchased on the open market, some is purchased from internal mining production).  I think the message of this chart, combined with China's demure announcement about accumulating a lot more gold, is pretty clear:  get ready for some kind of gold-based currency standard at some point down the road.



Year-to-date Russia has accumulated 4.6 million ounces.  That's roughly 131 tonnes.  That's a lot of gold, especially considering that the ECB sold barely any of the 400 tonnes permitted under the Washington Agreement.  Now we know why the IMF decided to unload 404 tonnes.  Think about where the price of gold might be if the IMF had not supplied the world this year.

I mentioned earlier in this week in the comment section that it was my belief that, other than France, the EU Central Banks are largely out of gold - either via leasing or outright sales.  Anyone who has studied this topic thoroughly, of course, knows that it is likely that most if not all of the U.S. gold is either sold or leased.  Given the aggressive and large-scale accumulation underway by China, Russia, Iran, et al, 2011 should prove to be a very interesting year for anyone who has already positioned themselves ahead of what will inevitably be a substantial move higher in the price of gold, especially as valued in U.S. dollars.

 

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QUOTE OF THE WEEK


“Have politicians got the courage to make those who earn money share in the risk as well? Or is dealing in government debt the only business in the world economy that involves no risk?”
Merkel


“The thought that you can create a prosperous economy by inflating is an illusion”
Volcker

“We sure have to maintain some confidence in the dollar or none of this would work"
Volcker


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Gordon T Long is not a registered advisor and does not give investment advice. His comments are an expression of opinion only and should not be construed in any manner whatsoever as recommendations to buy or sell a stock, option, future, bond, commodity or any other financial instrument at any time. While he believes his statements to be true, they always depend on the reliability of his own credible sources. Of course, he recommends that you consult with a qualified investment advisor, one licensed by appropriate regulatory agencies in your legal jurisdiction, before making any investment decisions, and barring that, we encourage you confirm the facts on your own before making important investment commitments.ont>

 

© Copyright 2010 Gordon T Long. The information herein was obtained from sources which Mr. Long believes reliable, but he does not guarantee its accuracy. None of the information, advertisements, website links, or any opinions expressed constitutes a solicitation of the purchase or sale of any securities or commodities. Please note that Mr. Long may already have invested or may from time to time invest in securities that are recommended or otherwise covered on this website. Mr. Long does not intend to disclose the extent of any current holdings or future transactions with respect to any particular security. You should consider this possibility before investing in any security based upon statements and information contained in any report, post, comment or recommendation you receive from him.

 

         

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Gordon T Long is not a registered advisor and does not give investment advice. His comments are an expression of opinion only and should not be construed in any manner whatsoever as recommendations to buy or sell a stock, option, future, bond, commodity or any other financial instrument at any time. While he believes his statements to be true, they always depend on the reliability of his own credible sources. Of course, we recommend that you consult with a qualified investment advisor, one licensed by appropriate regulatory agencies in your legal jurisdiction, before making any investment decisions, and barring that, we encourage you confirm the facts on your own before making important investment commitments.

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© Copyright 2010, Gordon T Long. The information herein was obtained from sources which the Gordon T Long. believes reliable, but we do not guarantee its accuracy. None of the information, advertisements, website links, or any opinions expressed constitutes a solicitation of the purchase or sale of any securities or commodities. Please note that the Gordon T Long. or its principals may already have invested or may from time to time invest in securities that are recommended or otherwise covered on this website. Gordon T Long does not intend to disclose the extent of any current holdings or future transactions with respect to any particular security. You should consider this possibility before investing in any security based upon statements and information contained in any report, post, comment or recommendation you receive from us.