A Central Banker's Cocktail Party: Tequila or Water?

What is Quantitative Easing? A government monetary policy occasionally used to increase the money supply by buying government securities or other securities from the market. Quantitative easing increases the money supply by flooding financial institutions with capital in an effort to promote increased lending and liquidity.

Now that's out of the way we can dissect the size, announcement, and long-term affects of the easing on the Global Financial System.

First let us say congratulations to the United States Federal Reserve, in eight months time you will maintain a $3 Trillion balance sheet. The Central Bank is now the largest Hedge Fund in the World. Kudos, no really. Let's take a few moments to put this number into perspective. In, 2009 the U.S. GDP was $14.25630 Trillion. The IMF forecasts growth in 2010 of 2.6%. A back of the envelope calculation puts 2010 output at 14.627. Thus, in June 2011 the Federal Reserve will control assets worth 20-21% of 2010 Gross Domestic Product. In 2007, The Fed's Balance sheet was worth only 6.4% of Gross Domestic Product. All we can say is Kudos.

Consequently, the NY Federal Reserve has a tall glass to fill:

The FOMC directed the Open Market Trading Desk (the Desk) at the Federal Reserve Bank of New York to purchase an additional $600 billion of longer- term Treasury securities...Taken together, the Desk anticipates conducting $850 to $900 billion of purchases of longer-term Treasury securities through the end of the second quarter 2011.

I expect on-campus recruiting to increase at the next NYU career fair. Anyone want to take the opposite side of this trade?

Looking Back,today's market action after the FOMC announcement was incredibly entertaining. We observed The S&P 500 oscillate down to 1183 and then rocket back to 1199 to close the session. The EUR/USD fluctuated 190 pips, a range that would make any Black Box trader proud. Gold dropped from 1348 to 1327 and now trades at 1355. Ironically, Natural Gas was unchanged throughout. The fourth of July came late this year, hope you did not miss it!

SPX

Dollar Index

Moving forward, Quantitative Easing will surely inflate Global Asset Markets. Will it? Regardless, this is the current thesis the Fed operates with. The goal of 'QE II' is to re-inflate the U.S. economy. Specifically, the Federal Reserve desires an asset re-allocation trade. The FOMC hopes to push investors out of 'safe-haven' Government Debt instruments and squeeze them into more risky asset classes such as equites, commodities, junk-bonds, and real-estate. Why would the fed want to turn the proverbial risk switch off? Don't jump to conclusions, keep reading!

The second leg of this trade hinges on the 'wealth effect', The premise that when the value of stock portfolios rise due to escalating stock prices, investors feel more comfortable and secure about their wealth, causing them to spend more . Miller Tabak estimates this effect will carry a multiplier of 3x. Hence, the $600 B of Quantitative Easing will create new consumer wealth of $1.8 Billion. The Fed supposes a multiplier of this magnitude will allow consumers to feel comfortable parting with their hard earned Dollars and spend without discretion. Therefore the economy will grow, inflation will rise, unemployment will fall, and The 'Red, White, & Blue' will flourish in economic and financial prosperity once again.

Personal Savings Rate

Even Though The FOMC's policy makers and economists are a collective of the smartest and brightest in the United States of America, Quantitative Easing II sounds too good to be true. Why you ask? First, any good trader knows timing the market is nearly impossible. Second, who is to say consumers will look at their 401k statements, feel wealthier, and decide to spend. Lastly, 'QE II'has never been done before. The original U.S. Quantitative Easing was executed during the heart of the credit crisis. The impetus for the current version is plainly different. Also, Japan's attempts fell flat and failed miserably. In short, we are critical here because we are uncertain of the outcome. The Fed should be too.

To clarify we will attempt to explain our thoughts in a simple thought experiment:

Suppose you are two hours late to a cocktail party. There is food, drinks, and irresponsible adults galore. You head to the bar for your first drink of the night. The bar tender informs you the only beverages still available are water and tequila. At the same time you approach the bar an irresponsible adult, who consumed five beverages prior to your arrival, also approaches. You think, I hate tequila because it makes me sick. Instead you decide to drink water and enjoy the experience without alcohol. Meanwhile, the irresponsible adult orders another drink. Mind you this is his 6th drink and first of tequila. You think, 'I wish I was indulged in his level of intoxication'. Though, your next thought is 'I am so happy I am not that guy, he won't be able to get out of bed tomorrow'.

Is the Fed an irresponsible adult or a water drinker? Take from this simple thought experiment what you will.

Undoubtedly, we are entering uncharted territory. Here's to watching and waiting for events to unfold. Hey, if you get bored check the BOE decision at 08:00 EST and the ECB decision 45 minutes later. Surely the ECB won't surprise!

Cheers,

--Patrick M. Ambrus

Sources: Investopedia.com, The Gartman Letter, FederalReserve.gov, NewYorkFed.org, BEA.gov

Disclosure: We are Long the GBP and short the USD.

Lost in Transition

As the memories of summer dawn upon us and autumn's head-winds transition us into colder months, we remain stuck in a period of cryptic transition.  The green leaves are slow to transform into  red, yellow, and orange decay.  Throughout September and early October, temperatures here on the Eastern United States remain elevated with splashes of summer, spring, and autumn surprising us on a daily basis.  I seek clarity in these matters.   Moreover, when will a new forceful trend form and carry us into colder, cooler, and darker days?

This same phenomena can be easily applied to current market conditions.  We are at a a cliff looking over the edge and waiting to be pushed by "someone or something."  For the past month of trading the impetus for asset price appreciation came at the behest of the U.S. Federal Reserve.  Mr. Bernanke made it clear at the Fed's anual Jackson Hole Summit:

Notably, since December 2008, the FOMC has held its target for the federal funds rate in a range of 0 to 25 basis points. Moreover, since March 2009, the Committee has consistently stated its expectation that economic conditions are likely to warrant exceptionally low policy rates for an extended period. Partially in response to FOMC communications, futures markets quotes suggest that investors are not anticipating significant policy tightening by the Federal Reserve for quite some time. Market expectations for continued accommodative policy have in turn helped reduce interest rates on a range of short- and medium-term financial instruments to quite low levels, indeed not far above the zero lower bound on nominal interest rates in many cases....


In support of the stock view, the cessation of the Federal Reserve's purchases of agency securities at the end of the first quarter of this year seems to have had only negligible effects on longer-term rates and spreads. 

Many Market participants took statements like these as indicative of greater 'Quantitative Easing' measures in the near-term with an emphasis placed on purchases of longer-term maturing Debt instruments.  Thus, the cruise ship 'QE2' set sail and every trader, analyst, investment banker, and speculator jumped aboard.  The rumors of 'QE2' allowed an appreciation  of equity prices, commodity prices, and a continued rally in the bond market.  However, many market participants fight a potentially painful hangover as they wait for another round of cocktails to tide them over.  Until 'QE2' becomes a reality, the current run-up in asset prices will continue to be predicated on rumors supported by ubiquitous supply & demand, fundamental, and sentimental data.

Consequently, The USD has taken the brunt of the pain over the past month of trading.  The US Dollar Index is down 6.8% in the period from September 1st -October 11.  Even though this downward trend has been in place since early June, the recent rumor mongering has certainly contributed to the Greenback's precipitous plunge in value.

EUR/USD has appreciated by 9% since September 1st.

OK so what, why does a weak dollar matter? As the emerging markets transition into developed economies won't the USD need to allow the wealth to spread to other currencies, 'new reserve currencies'?  In the future, the USD may no longer be the benchmark for which emerging market rates are pegged or for which all central bank reserves pile into.  However, these structural changes will not placate current financial psychology for some years time.  Hence, we must look at the short-term trends to discern directionality.  Disregard, financial profits, journalists, and fund managers who say otherwise.  Trade the trends.  Block out the noise.


-Patrick M. Ambrus

Sources: Stockcharts.com, Federalreserve.gov

Headwinds of Change

Unpredictable Market Forces at Work



After a positive week for U.S. equities, market action lacks directional impetus. What will drive equity markets higher? It is clear to us window dressing season is in full effect. Many fund managers and Institutional Investors continue to pile into crowded, growth-oriented, and alpha-seeking equity trades. In addition, many prominent investment bankers sitting in the position of 'Head of Global Equities', at their respective shops, continue to preach 1300 on the SPX by year end. Is this feasible? Sure, but it is not likely.

Much of the current rally in the SPX from August lows of 1015 has been due to a weaker USD across the board. One can argue the impact of illustrious economic data releases on price swings until blue in the face. Yet, since the fear of debt contagion in the Euro-zone abated panic and worry shifted back on the country with the world's largest Gross Domestic Product. Since then, the EUR, CHF, JPY, and AUD have all made substantial advances against the 'Greendback'.


Down Under



Australia continues to benefit from their trade relationships with Asia in that exports of commodities have led to sustainable growth down under. The economy picked up last month creating 29,000 new jobs predominantly in construction and industrial sectors. As long as Chinese demand for iron ore, copper, and aluminum remains consistent, thE AUD Will continue to appreciate against all major pairs.


Efficiency



The 'Swissy' benefits predominantly from the risk-on/risk-off trade. The linguistically diverse country maintains a current account surplus of 8.9% of GDP, inflation hovers around 1% while unemployment is below a comfortable 4%, and 2011 GDP growth forecasts 2% growth. If one wants safety what is not to like? In addition FX traders seem poised to test the patience of the SNB again. Recall when the SNB stepped in with 'unilateral intervention' and sold Swiss Francs to keep the rate above 1.30 EUR/CHF. Will they sell Francs and buy Dollars? No, the Japanese already failed in this endeavor.


Tradition



The Japanese economy, like the U.S., is struggling to maintain growth. Deflation wanes in the balance and export demand is tailing off in large due to a strong currency and shrinking profit margins at the likes of Sony, Toyota, Bridgestone, and Kobe Steel. With a dire economic situation the MOF stubbornly talks up the JPY and the need for intervention. Though, by 'unilaterally intervening' in the FX markets already traders know the MOF has a gun. The question is how many bullets are in the gun, and does the Ministry possess the courage required to fire a full clip? Time will tell on the latter. I doubt we have seen the last of 'unilateral intervention'. Speculators who place bets in JPY strength will not learn until the MOF reverts back to 2004 tactics and dilutes the market with over $1 Trillion of Yen. Whether or not Kan's $55 B stimulus package helps weaken the JPY remains to be seen.

Lastly, I would like to touch on the political issues underpinning the currency. Since Ichiro Ozowa was ousted in his most recent attempt to gain power, Naoto Kan appeased the former's supporters with currency intervention. I trust the exporters mentioned above took note of this and will put pressure on Kan's administration to intervene again. Many have made it resolutely clear; 'we want USD/JPY rate at 95'. If Kan wants to keep his job longer than his predecessors he will intervene again and again until the Yen stops strengthening.


The Little King of Everything



Alas we have but one more pair to discuss, you guessed it, EUR/USD. As mentioned by Dennis Gartman this morning, 'This was the level from which the EUR plunged earlier this year... it marks almost perfectly the 50% retraetment of the EUR's collapse from the highs of 1.5200 last December to the lows of 1.1900 this spring.' 1.3500 will serve as a hard line of resistance over the next trading session. This morning around 10:00 the pair jumped above this level on a large candle to the upside. However, the pair rocketed back down to the 1.3450 levels within the next hour.

Also, ECB buying of sovereign debt is slowing. Last week the ECB bought only 134 M EUR of bonds in comparison to 323 M EUR the week prior. Maybe the ECB feels confident the liquidity in the sovereign debt market is here to stay, only until it dries up again. Another important point to note; many Germans are becoming unhappy with the 'Christian-liberal Coalition', noted in the latest edition of the economist. Any political instability surrounding the Euro-zone's growth engine may cause uncertainty in the single currency. However, I should note that this is pure speculation on my part.

Undoubtedly, the EUR/USD pair is driven by none other than the U.S. FED action. Various traders, analysts, and media alike expect a second round of 'Quantitative Easing' in which the FED once again opens up its balance sheet to buy U.S. Government Debt. Rumors suggest debt purchases of $1-2 Trillion of longer-term U.S. Treasuries. This is nonsense. If the FED wanted to create artificial inflation they already would have done as much. Especially considering the mid-term elections put a choke-hold on any further monetary policy action. I suspect, as a rumor from the WSJ this afternoon put it, 'Rather than announcing massive bond purchases with a finite end, Fed officials are weighing a more open-ended, smaller-scale program that they could adjust as the recovery unfolds.' Cheers. This ought to give the Bond market rally a bit more time run and allow equities to cool after a monster September.


Impetus for Change

Now let us examine a few possible harbinger's for a trend reversal in Dollar weakness. On Friday October first Global PMI data will release staring with CHina and ending with U.S. ISM. Last month trader's took China's moderate August reading of 51.7, up .5% from the month prior, as a reason to buy equities. The SPX rallied nearly 3% and closed up more than 30 points on the session. What would have happened if Chinese PMI came in around say 48 or 47? Equities would be in for a sharp and painful sell-off methinks. Hence, the fear of a global slowdown in consumption/demand would shift to the far east and away from the U.S. Perhaps poor EU PMI might just do the trick if the Chinese index posts 'robust' gains. Either way, I expect this data release to be a harbinger of asset allocation in the coming month.


Trade

We are gearing up for a switch in sentiment with a 'Strong Dollar Story' leading the charge. Specifically we like the the dollar against the CHF, CAD, and JPY. In addition, we see energy as the place to be in the coming months as seasonality changes. Be cautious though, this type of trading environment is dangerous.


Patrick M. Ambrus
Contact: analyzecapital@gmail.com


Sources: The Economist, The Gartman Letter, Financial Times, FT Alphaville, WSJ.com, bloomberg.com

Illustrious Imperfections

This evening I was perusing FT's Alphaville blog and came across a great piece written by Mohammed El-Erian. The PIMCO Chief Investment Officer breaks down Bernanke's speech from Jackson Hole.

Link:http://ftalphaville.ft.com/blog/2010/08/27/328906/el-erian-how-to-read-bernanke%E2%80%99s-jackson-hole-speech/

Some questions for the FED

El-Erian alludes to some great points....

1. Is the FED over-estimating its 'grip' on the U.S. economy?
2. What happens when Treasury purchases become the new norm?
3. How does the FED's current monetary policy measures stack up against those of other central banks (ECB, BoE, and BoJ)?
4. The main question that trumps all, is the FED comfortable maintaining a $2 Trillion Balance Sheet over the next 10 years?
4a. If yes, will Quantitative Easing become the new tool to re-inflate economies?

Seems to me 'Helicopter Ben' did his homework on the lost decades in Japan.

Patrick M. Ambrus
Analyze Capital LLC
Twitter: AnalyzeCapital

Gauging Market Sentiment

The current equity market is a lethargic trade. The more I look into potential trades the more I find a lack of opportunity. Since The May 9, 2010 ‘Flash Crash’ markets adopted an elusive modus operandi. The European Sovereign Debt crisis waned in and out of news, a bubble in Gold prices tempted us, and economists argued the nuances of stimulus vs. austerity. I miss the ubiquitous uncertainty.

Over the last 10 days volume in the SPY SPDR ETF averaged almost 190 million shares per day. In contrast, over a 3-month span, the SPY averaged close to 252 million shares changing hands daily. Thus, volume decreased by 24.6%. In addition, The GLD SPDR Gold Trust averaged only 10.3 million shares traded in the most recent 10 days. Meanwhile, GLD volume averaged 14.2 million shares per day in the most recent 3 months. Hence, volume declined by 27.5%.

The SPY is the largest ETF by AUM with 66.8 Billion under management. StreetTracks Gold is the second largest with 51.2 Billion under control. What has cooled trading in the aforementioned derivative-like securities? For one, volume has decreased throughout equity markets for the better part of August. Though, with all the technological advances in High Frequency Trading, iPhone/BlackBerry trading apps, and trading robots, we live in an age were trading routinely flashes 24/7-365. Vacation time alone cannot explain the illustrious drop in volume.

Let’s skin this cat another way. What market has seen a consistent uptick in volume without decline? The bond market has. The iShares Investment Grade Corporate Bonds ETF, LQD, volume rallied 13.53% over the past 10 days in comparison to the prior 3 months. Additionally, the iShares TIPS Bond ETF, TIP, saw volume increase by 5.23% over the past 10 days in comparison to average 3-month volume. Now don’t let me get carried away with these statistical redundancies. Empirical reason suggests a normalcy in the gradual volume changes. Spreads continue to tighten as interest rates remain at near zero levels and inflation subsides. Yet, I’m not convinced investment grade debt is the correct safe haven.

Aside from bond prices and yield curves, what catalysts chauffeur equity prices? U.S. economic data often sits behind the wheel. Central Bankers remain the biggest elephants in the room, in particular the FED. The FOMC has found a way to implement a new Quantitative Easing program without calling it QE. The Fed will take proceeds from its MBS securities and buy U.S. Treasury Notes. Hence, U.S. notes continue to yield near-all-time-low interest rates. One thing the FED is clear on, the committee fears deflation. Thus, the committee led by Helicopter Ben will continue to shower the economy with liquidity. Until the day of reckoning comes, expect investment grade debt to rally. I also expect corporate debt issuance to exacerbate demand.

Remarkably, I managed to construct a top down argument that bottoms up. The FED’s decision making on monetary policy and QE will affect the bond market, which will drive equity prices. I surmise, global debt markets coalesced to form a bubble. Now that we know a bubble exists, we need to know how large it will grow and when it will pop. Although calling a top or bottom is dangerous, pointing out a bubble is reasonable and needs recognition. Undoubtedly, equities will benefit tremendously from the unwinding of the crowded debt trade. My suggestion is to short overbought bond ETFs and long growth/value equity ETFs. This may be a defensive play, but it will work in time.

Bond ETFs: iShares TIPS Bond Fund (TIP), , iBoxx $ Investment Grade Corporate Bond Fund (LQD), Vanguard Total Bond Market ETF (BND)

Equity ETFs: Russell 1000 Growth Index Fund(IWF), Vanguard Total Stock Market ETF (VTI), ELEMENTS Benjamin Graham Large Cap Value ETN


Patrick M. Ambrus
Analyze Capital LLC
Twitter: Analyze Capital

FOMC Decision

Information received since the Federal Open Market Committee met in June indicates that the pace of recovery in output and employment has slowed in recent months. Household spending is increasing gradually, but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit. Business spending on equipment and software is rising; however, investment in nonresidential structures continues to be weak and employers remain reluctant to add to payrolls. Housing starts remain at a depressed level. Bank lending has continued to contract. Nonetheless, the Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability, although the pace of economic recovery is likely to be more modest in the near term than had been anticipated.

To help support the economic recovery in a context of price stability, the Committee will keep constant the Federal Reserve's holdings of securities at their current level by reinvesting principal payments from agency debt and agency mortgage-backed securities in longer-term Treasury securities. The Committee will continue to roll over the Federal Reserve's holdings of Treasury securities as they mature

federalreserve.gov

Thomas M. Hoening was again the lone FOMC dissenter. Since Helicopter Ben uttered the phrase 'nascent recovery' on Capital Hill, cryptic language has proceeded. Clarity from the FED going into the 4th quarter is unquestionably salient. Perhaps, we (market participants) should sit tight until Jackson Hole concludes. Surely, transparency will become abundantly apparent after the curtains close at the Committee's annual Wyoming refuge.

Uncertainty is apparent in risk/reward security markets. At this point in time, The FED maintains relevance and reverence on the Streets plastered with Investment Banks rather than cafe's and bakeries. Ergo, Monetary Policy must remain stable as U.S. fiscal policy shifts political party lines. The Bush tax cuts abide while politicians play musical chairs.

Something tells me Precious and Industrial metals may be the best play in the 4th quarter as risk aversion reigns supreme. Unless of coarse one likes Government Debt.

Related ETF's: iShares Barclays 10-20 Year Treasury Bond Fund (TLH:US), GS Connect S&P GSCI Enhanced Commodity Total Return Strategy Index ETN (GSC:US), ETFS Palladium Trust (PALL:US), E-TRACS UBS Long Platinum ETN (PTM:US)

Literature: Karl R. Popper's The Open Society and Its Enemies 2 Hegel and Marx

Sports: T-Mac finally gets another shot. Former Superstar Tracey McGrady officially Signed with the Detroit Pistons today. Detroit's backcourt is crowded.

Patrick M. Ambrus
Analyze Capital LLC
Twitter: Analyze Capital

PPI, Industrial Production, Deflation, and Hypothetical Bantar

PPI
Lower food costs unexpectedly weighed on producer prices with energy also helping. Overall PPI inflation fell 0.5 percent, following a 0.3 percent drop in May. The June decrease was larger than the market consensus forecast for a 0.1 percent decline. At the core level, the PPI eased to 0.1 percent from a 0.2 percent boost in May. Analysts projected a 0.1 percent rise.

For the overall PPI, the year-on-year rate decelerated to 2.7 percent from 5.1 percent in May (seasonally adjusted). The core rate eased to 1.0 percent from 1.3 percent the month before. On a not seasonally adjusted basis for June, the year-ago increase for the headline PPI was up 2.8 percent while the core was up 1.1 percent.

Bloomberg.com

Industrial Production
After almost a year of strong gains, industrial production slowed in June. And it would have been negative without a surge in utilities output-likely weather related. Overall industrial production in June edged up 0.1 percent, following a 1.3 percent gain the prior month. The June increase was above the market forecast for a 0.2 percent drop.

However, manufacturing fell 0.4 percent in June, following a 1.0 percent jump in May. For other sectors in June, utilities output was up 2.7 percent while mining gained 0.4 percent.

Bloomberg.com

Is deflation imminent in the near future? This question resides on the collective brain-power of the FOMC. In addition, Empire State Manufacturing released today reported a slow down in growth led by a decline in new factory orders and shipments. There are three things to do with this data:

1. Ignore it.
2. Wait and seek confirmation before acting.
3. Panic

The economic point of no return may come sooner than later in America. Rather, will the U.S. Gov. and Fed collaborate to pump up the economy with further stimulus checks and or/Quantitate Easing, or will Policy Makers put their feet in the sand and hold true to their proposed intentions of reducing the overwhelming fiscal/budget deficits? If our Politicians/Policy Makers have any desires to keep their respective words options number 1 and 2 will suffice, as reasonable rational responses. If option number 3 is the choice modus operandi expect obtuse action:

1. More stimulus
2. More QE
3. More government borrowing
4. More dovish talk from the Fed
5. A pop in Equities.

At present, sentiment driven trading is ubiquitous in the Global Equity Markets.
Rebuttal; "But good sir isn't equity trading more or less always sentiment driven, or all trading for that matter?"
Response: "In times like these I trust my gut instincts above all else, other traders will as well."
Rebuttal: "Why the bleak outlook, stimulus is a good thing for growth and prosperity, no?"
Response: "It depends on how long you plan on living."
Rebuttal: "I disagree, China will buy our debt forever, they need us to buy their products in order to support/sustain global growth."
Response: "Be that as it may, Japan may be the country worth worrying about. With political instability, deflation, and inconsistent budgetary reform policies simultaneously imminent, the Japanese Politicians my decide it is time to stop supporting the U.S., and sell Treasury holdings to supplant their own debt typhoon."
Rebuttal:"Don't pick on Japan. You have never been to the island, you don't know what it is like, you can't relate to Japanese culture."
Response: "I'll be in Tokyo on Monday, care to grab lunch?"

CPI data comes tomorrow morning. Good luck trading today!

Patrick M. Ambrus
Managing Partner
Analyze Capital LLC
ambrus.anlzgroup@gmail.com

Market Update-06.23.2010

Equity Indexes
INDU- 10298.40 4.92 (+0.05%)
NASDAQ- 2254.23 -7.57 (-0.33%)
SPX- 1092.04 -3.27 (-0.30%)

Commodities
WTI Crude Oil- $76.14 -0.21 (-0.28%)
Brent Crude Oil- $76.270 -1.770 (-2.27%)
Natural Gas- $4.7990 -0.005 (-0.10%)
Gold Spot- $1238.00 3.20 (+0.26%)
Silver Spot- $18.585 0.081 (+0.44%)

Bonds
2 Year UST- Price:99.89 (-0.02) Yield: 0.68% (+0.68)
10 Year UST- Price:103.20 (-0.02) Yield: 3.12% (-0.05)
10 Year Gilt- Price:110.75 (+0.17) Yield: 3.43% (-0.02)
10 Year Bund- Price:103.05 (+0.39) Yield: 2.64% (-0.04)
10 Year Oats- Price:103.51 (-0.11) Yield: 3.08% (+0.01)
10 Year JGB- Price:101.32 (+0.12) Yield: 1.15% (-0.04)
10 Year Greek- Price: 74.97 (-2.91) Yield: 10.36% (+0.59)

Foreign Exchange
EUR/USD = 1.2313
GBP/USD = 1.4973
USD/JPY = 89.9340
USD/CAD= 1.0394
EUR/JPY = 111.1698
EUR/HUF= 279.5028

Equity Index Futures
Nikkei 225- 9,950.00 +50.00
Hang Sang- 20,935.00 +96.00
SPI 200- 4,481.00 +8.00

10 year Greek debt is now trading at a whopping 772 bp over 10 year Bunds. It will be nearly impossible for the Greek government to roll over their debt in private markets or access short-term financing for their day-to-day operations, if spreads continue to widen. Unfortunately this story did not get enough play today.

The U.S. economy was front and center. Bernanke reminded us he and his team can continue to drop money out of the FED's helicopter if needed. Kansas City President Hoening was the lone dissenter today.

I took some profits on my SPX puts early in the session today. Tomorrow I'm looking to go long Nat Gas for part of the session. Crude is in play too.

By the way, All Kobe does is win! Good luck trading tomorrow!

Related ETF's: United States Oil Fund LP (USO:US), United States Natural Gas Fund LP (UNG:US), United States 12 Month Natural Gas Fund LP (UNL:US)

Patrick M. Ambrus
Analyze Capital LLC
ambrus.anlzgroup@gmail.com

IMF: Global Economic Risks Increase

Via Bloomberg:

Risks to the global economic outlook have “risen significantly” and policy makers have limited room to provide support to growth, International Monetary Fund Deputy Managing Director Naoyuki Shinohara said.

Most advanced economies are experiencing a “subdued” recovery, Shinohara said in a speech in Singapore today. “A key concern is that the room for continued policy support has become much more limited and has, in some cases, been exhausted.”

Uncertainties:
1. The Sovereign debt crisis in Europe
2. UK government's challenge of cutting the fiscal deficit

Early this morning Federal Reserve Chairman Ben Bernanke commented on the promising signs of the U.S. economic recovery, though he stated inflation concerns exist. I believe the inflation rate is still in check. The FOMC will not take actions until the Committee finds more evidence.

Liz T. Liu
Summer Analyst
Analyze Capital LLC

Bull or Bear: perhaps just business as usual

via bloomberg:

Hedge funds lost an average of 2.7 percent through May 27, according to the HFRX Global Hedge Fund Index, as the sovereign debt crisis in Europe triggered declines in stocks, the euro and commodities, and the gap in yields between U.S. short-term and long-term debt narrowed. It was the biggest decline since November 2008, when hedge funds lost 3 percent in the wake of Lehman Brothers Holdings Inc.’s bankruptcy two months earlier.

Almost every strategy lost money in May, according to Hedge Fund Research Inc. in Chicago, as the Dow index of 30 big stocks sank 7.6 percent including dividends amid speculation that Greece’s debt problems would spread to nations such as Spain and Portugal. Some of the best-known funds saw their gains for this year erased.

“Attempting to manage risk in an environment where everything that could go wrong does go wrong seems like a fruitless endeavor,” said Brad Balter, who runs Balter Capital Management LLC, a Boston firm that invests in hedge funds for clients. “The only defense that seems to work in months like these is being in cash.”.......

The price swings in May haven’t changed managers’ views on whether global economies are rebounding or shrinking.

“Managers who are positive are still positive, and negative managers are still negative,” said Charles Krusen, head of Krusen Capital Management LLC, a New York-based firm that invests in hedge funds for clients."

The market's performance in May has triggered yet another round of debates on the nature of the recent rally. One thing interesting about such debate is that every time it occurs, someone will bring up a resembling incident in the past in order to give strength to his(her) take on the market. Talking about "this really looks like the 19xx, when the stock market rebounded xx% in x months and then crashed....."

It is important to recognize that the future is always somehow different from the past, and that there could never be two identical market phases. Just because stocks have gone up a lot doesn't mean the market will drop down any time soon. On the other hand, even if the market is really overheated, rallies might still go on. Indeed, differentiating artificially cheap stocks from real bargains has become much more difficult than a year earlier. Making perhaps just one transaction, out of hundreds of analysis, is after all the nature of the business. How will the asset management industry do a year from now, it seems, is a question that could only be answered with the help of hindsight.

This is a time full of uncertainty, and in assessing prices we have to first ask ourselves which standard we would like to use. By the standard of crisis, such as the one in 2008, stocks do not look cheap. However, if we buy the argument that 2012 is not the end of human civilization after all, as investors we have a harder decision to make. Although personally I am more concerned with individual companies than the general market, I'd like to point out that the many things our governments have done in the last two years (quantitative easing, bailouts, deficits, etc..), dealt unwisely in the slightest, will definitely materialize considerable consequences in the future. The question is, do we want to invest and live with the uncertainty, or divest, sit on cash and completely throw ourselves into the hands of the "unknown unknowns" of the future?



Yi Gao
Research Analyst
Analyze Capital LLC

Consumer Price Index A.K.A. Inflation

Temporarily soft energy costs pulled down the headline CPI for February while weak shelter costs kept core inflation very sluggish. Overall CPI inflation for February eased to no change from 0.2 percent the month before. The latest came in just below the market forecast for a 0.1 percent uptick. Core CPI inflation rebounded a modest 0.1 percent, following a 0.1 percent dip in January and matching consensus expectations. A number of weak components point to the fact that inflation pressures, indeed, are subdued. Shelter costs were flat in the latest month while declines also were seen in apparel and recreation.

Looking at detail, the energy component of the CPI declined 0.5 percent in February after jumping 2.8 percent the month before. Gasoline temporarily eased 1.4 percent, following a 4.4 percent jump in January. Food inflation slowed in February to 0.1 percent from 0.2 percent in January.

Year-on-year, overall CPI inflation fell to 2.2 percent (seasonally adjusted) from 2.7 percent in January. The core rate was slipped in February to 1.3 percent from 1.5 percent the month before. On an unadjusted year-ago basis, the headline number was up 2.1 percent in February while the core was up 1.3 percent.

Today's report leaves a lot of room for the Fed to keep rates low for some time. On the news, Treasury yields edged down and equity futures rose slightly. At the same time, initial jobless claims came in very close to expectations.


My only take from this report is that the economy is not inflating. Meaning QE will likely remain in some form until the Fed raises rates.

It is a beautiful day in New York. Take some time away from the terminal and get some spring air. I am likely heading up to Newport, RI later tonight. Enjoy the rest of the trading week.

Commentary on Fed Minutes Press Release- 02/17/10

Information received since the Federal Open Market Committee met in December suggests that economic activity has continued to strengthen and that the deterioration in the labor market is abating. Household spending is expanding at a moderate rate but remains constrained by a weak labor market, modest income growth, lower housing wealth, and tight credit. Business spending on equipment and software appears to be picking up, but investment in structures is still contracting and employers remain reluctant to add to payrolls. Firms have brought inventory stocks into better alignment with sales. While bank lending continues to contract, financial market conditions remain supportive of economic growth. Although the pace of economic recovery is likely to be moderate for a time, the Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability.

We are seeing economic growth due to large stimulus measures, but this has not really helped unemployment. Banks are still unwilling to lend to consumers who are unemployed and can no longer pull equity out of their home to stimulate the economy. Corporate earnings have picked up but not enough to stop the laying people off and creating cost “synergies.” Due to abating demand it took a while but inventories are finally bone dry. The liquidity we pumped into the system has caused Equities and other asset classes to surge. The economy will get healthy later then sooner without inflation.

With substantial resource slack continuing to restrain cost pressures and with longer-term inflation expectations stable, inflation is likely to be subdued for some time.

Deflation is currently a more realistic setback than inflation at this point.

The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period. To provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve is in the process of purchasing $1.25 trillion of agency mortgage-backed securities and about $175 billion of agency debt. In order to promote a smooth transition in markets, the Committee is gradually slowing the pace of these purchases, and it anticipates that these transactions will be executed by the end of the first quarter. The Committee will continue to evaluate its purchases of securities in light of the evolving economic outlook and conditions in financial markets.

The economy cannot recover without liquidity in the system. Fed Funds rates will not be raised until 2011. We would like to start winding down Quantitative easing by deadline (March) set on the outset. Though, we reserve the right to extend the program as long as Obama/Summers tells us to.

In light of improved functioning of financial markets, the Federal Reserve will be closing the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility, the Commercial Paper Funding Facility, the Primary Dealer Credit Facility, and the Term Securities Lending Facility on February 1, as previously announced. In addition, the temporary liquidity swap arrangements between the Federal Reserve and other central banks will expire on February 1. The Federal Reserve is in the process of winding down its Term Auction Facility: $50 billion in 28-day credit will be offered on February 8 and $25 billion in 28-day credit will be offered at the final auction on March 8. The anticipated expiration dates for the Term Asset-Backed Securities Loan Facility remain set at June 30 for loans backed by new-issue commercial mortgage-backed securities and March 31 for loans backed by all other types of collateral. The Federal Reserve is prepared to modify these plans if necessary to support financial stability and economic growth.

Many of our QE programs were not very successful and therefore must come to an end. The TALF was a very successful program and it is unlikely we terminate it by the deadline; who will take on toxic paper as collateral besides us? We will do all we can to keep the U.S. financial system on artificial life support.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; James Bullard; Elizabeth A. Duke; Donald L. Kohn; Sandra Pianalto; Eric S. Rosengren; Daniel K. Tarullo; and Kevin M. Warsh. Voting against the policy action was Thomas M. Hoenig, who believed that economic and financial conditions had changed sufficiently that the expectation of exceptionally low levels of the federal funds rate for an extended period was no longer warranted.

We have a tight nit group were everyone agrees with Mr. Beranke except one person. Mr. Thomas M. Hoenig doesn’t believe in group think. He may have good ideas but he needs to study something called chain of command.


Patrick M. Ambrus
Managing Partner
Analyze Capital LLC
ambrus.anlzgroup.com

U.S. Economic Report- 02/14/10

2010 U.S. Economic Outlook: USD Implications

Growth Coupled with Dollar Strength

•The USD has room to strengthen against all G10 currencies since those currencies were overvalued against the USD by an average of 5.6% in 2009

•The U.S. economy grew by 5.7% in the 4th quarter of 2009 as interbank spreads narrowed, Equity, and corporate debt markets have rallied signaling a stronger dollar and return to normal growth

•Industrial output declined by 970 basis points in 2009,but is forecast to grow by 620 basis points for the year 2010, thus signaling a rebound in manufacturing and perhaps job creation

Inflation Story

•The U.S. Treasury, Federal Reserve, and FDIC have pumped enormous amounts of Liquidity into the Capital markets throughout the Great Recession in the form of Tarp, Stimulus Packages, PPIP, Legacy Securities Program, TALF

•The BOE and ECB are likely to tighten monetary policy before the FOMC because The U.S. federal Reserve will most likely keep interest rates unchanged in 2010 due to The Committee’s responsibility of handling Inflation and Unemployment

•Consumer Price Index Inflation declined by -0.4% in 2009 and is expected to increase to an average of 2.1% in 2010

Unemployment and Fiscal Deficits

•United States unemployment peaked in 4th quarter of 2009 at 10.0%, with nearly 8.4 million people out of work since the beginning of The Great Recession. The unemployment rate for 2009 was 9.28% and is expected to grow to 9.60% in 2010

•The Current Account deficit as a percentage of GDP widened to -3.0% in 2009 and will amplify to -4.0% in 2010

•The 2009 budget Deficit in the U.S. is expected to be $1.42 trillion which represents 9.98% of Gross Domestic Product


USD Drivers

Balance of Payments
The U.S. maintains a current account deficit of -3.0% as a percentage of GDP and is expected to grow to 4% in 2010. This can be attributed to 2009 net exports of -354 Billion. Also, the U.S. sees investment inflows into their equity and debt markets to offset such a large trade gap. China invested $790 billion in U.S. Treasuries as of November 2009. Fundamentally, this goes a long way of explaining long-term dollar weakness.

Growth
The United States Economy grew by 20 basis points in 2009 boosted by 4th quarter GDP output of 5.7%. This signals a return of demand to the world’s largest economy. Much of the growth story can be attributed to the excess liquidity put into the system by the Fed’s quantitative easing programs and government stimulus package. Additionally as The S&P 500 rallied 70% off the lows of March 2009 to January 2010, consumers have reason to spend as their net wealth increases even in the face of continuous declining real-estate values. In addition, Industrial output surged 700 basis points in the 4th quarter of 2009 to contribute to GDP growth. However, one caveat remains; U.S. unemployment remains at 9.7% currently and is expected to be flat with moderate increases/decreases in 2010. It is hard to justify an economic recovery without job growth. Though the Euro area has greater difficulties with unemployment.

Deficit
The 2009 budget Deficit in the U.S. is expected to be $1.42 trillion, which represents 9.98% of Gross Domestic Product ($14 trillion). Careful maneuvers will decrease the 2010 fiscal deficit to $1.14 trillion or 8.02% of GDP. According to John Maynard Keynes deficits can be have a positive economic influence by helping economies climb out of recession.

Inflation
The United States saw deflation in 2009 as CPI decreased by 40 basis points on average. Inflation is expected to pick back up in 2010 by 2.1%. However, the Federal Reserve will surely act quickly to spur inflation. The lesson was learned last go around when Alan Greenspan kept The Fed Funds rate at low for a historic period. This helped fuel the Credit crisis. Additionally, tightening monetary policy would increase the value of the dollar global and kill any potential dollar carry trade.

Interest Rate Differentials
Currently a 10 Year U.S. Treasury yields a nominal rate of 3.625% and a real rate after inflation is accounted for of 3.925%. The U.S. nominal 10 year rate beats out 10 year German Bunds yielding a nominal rate of 3.25% and 10 year Japanese Government Bonds with a nominal rate of 1.3%. Also, Bunds and JGB on average yield real rates of only 2.95% and 2.6% respectively. This has positive implications for dollar strength.


Patrick M. Ambrus
Managing Partner
Analyze Capital LLC
ambrus.anlzgroup@gmail.com

Dress For Success- 12/14/09

"I don't throw darts at a board. I bet on sure things. Read Sun-tzu, The Art of War. Every battle is won before it is ever fought. "

--Gekko



Econ Data for the week. I left out housing starts as well as energy numbers. I will blog on them if I have time later.







Tuesday:



PPI

Producer Price Index comes in tomorrow morning at 8:30. I am particularly interested in seeing the finished goods data. This should give investors enough information to gauge overall growth in the economy. Also, if numbers come in better then expected we can look for a continuing trend in CPI. Hence, putting pressure on the Fed to raise rates. However, that probably will not happen any time soon. Just wishful thinking. Look for Dollar strength if the numbers are good.





Via Bloomberg:

Market Consensus Before Announcement

The producer price index increased 0.3 percent in October after dropping 0.6 percent the month before. The rise in the latest month was led a 1.6 percent boost in energy and a 1.6 percent gain also for food. But at the core level, the PPI rate unexpectedly dropped 0.6 percent, following a 0.1 percent dip in September. The fall at the core level was due mainly to declines in prices for light trucks and passenger cars. Looking ahead, there is still upward pressure on the headline figure from higher oil prices. Imported petroleum prices were up 6.2 percent in November. Also, seasonally adjusted spot prices for West Texas Intermediate increased 6.9 percent for the month.



Industrial Production

If the numbers show economic growth look for this to spur a sell off in Treasuries.



Bloomberg:



Market Consensus Before Announcement Industrial production in October edged up only 0.1 percent, following a 0.6 percent boost the prior month. However, the manufacturing component declined 0.1 percent, following a 0.8 percent jump in September. Overall capacity utilization in October continued its rise from the historical low set in June, posting a gain to 70.7 percent from 70.5 percent in September. Looking ahead, earlier-released manufacturing indicators mostly suggest improvement in industrial production for November. From the employment situation, production worker hours in manufacturing were up 0.4 percent for the month. Key manufacturing surveys were in positive territory for November-including ISM, Philly Fed, and Empire State.







Wednesday:



CPI

Any inflation on the horizon? This number coupled with bullish PPI could re-fuel the St. Nick rally.



Bloomberg:



Market Consensus Before Announcement The consumer price index in October firmed to a 0.3 percent boost after rising 0.2 percent the month before. Core CPI inflation was unchanged with a 0.2 percent increase. Boosting the headline number was a 1.5 percent jump in energy prices. Food price inflation was restrained in October with a 0.1 percent rise. Looking ahead, there is still upward pressure on the headline figure from higher oil prices. Imported petroleum prices were up 6.2 percent in November. Also, seasonally adjusted spot prices for West Texas Intermediate increased 6.9 percent for the month.



Fed Decision

I want to know when Bernanke plans to wind down QE or if there is even a plan in place for this. Specifically I want clarity Mortgage backed asset purchases program. How will the Dollar react? Does the FOMC support recent USD strength?





Thursday:



Initial Jobless Claims

Will we see 5/6 positive weeks or a second consecutive week of losses?



Bloomberg:



Market Consensus Before Announcement Initial jobless claims for the December 5 week ended five weeks of improvement, rising 17,000 to 474,000 for the highest level since mid-November. But the four-week average improved, dropping 7,750 to 473,750. Continuing claims in data for the November 28 week fell very sharply, down 303,000 to 5.157 million. The drop in continuing claims reflects an uncertain mix of new hiring and the expiration of benefits.







Patrick M. Ambrus

Analyze Capital LLC

Managing Partner

ambrus.anlzgroup@gmail.com

Ignorance Is Bliss-11/23/2009

Re-Blog via Bloomberg:

What is the fate of Quantitative Easing? Today Federal Reserve Bank of St. Louis President James Bullard claimed the Fed should expand on QE past March. “Initially it would do nothing for the economy, but it would give the Fed the option to react to future news as it comes in,” Bullard said.

Additionally he stated, “If the economy came in very weak, let’s say, in 2010, weaker than expected, we would have the option of doing further quantitative easing” through additional asset purchases. “If the economy came in stronger than expected and inflation expectations started to ratchet up a little bit we could maybe sell off some of these assets and remove some of the accommodation from our quantitative easing program.”

Bullard also explained, The FOMC is not averse to hiking interest before unemployment cools, “We know the economy changes over time. Everybody’s got very strong opinions and takes the role very seriously. I don’t think anybody would feel bound just because we behaved.”

Thoughts:

Naturally, I am not sure what message the Fed is trying to convey to open markets. Every FOMC meeting of recent memory has lacked any type of clarity on interest rate policy. Yet Bernanke, Summers, and Geithner remain to back a strong USD.

On top of all this political banter Ron Paul's bill to regulate the Fed appears to have legs. As I have discussed with my partner Alex, The Fed is split. There is no unification. A disjointed front leads to two things: 1. Power Struggle 2. Defeat.

Commercial Realestate Looks Promising

Since the ides of March global equity markets have outperformed like never before. Yet consumer credit, small business loans, and interbank lending remain wedged in a tight pair of skinny-jeans . Perhaps this nugget may help decipher the phenomena. You be the judge.



Patrick M. Ambrus
Analyze Capital LLC
ambrus.anlzgroup@gmail.com

Entry for 10/29/08

As usual, I do like to comment on the Fed Reserve. I must say again, I am disappointed in decision making policy coming from the US federal reserve. Another rash decision of cutting rates pushing rates to 1%, I find this quite rediculous. People argue the Fed is doing this for lidiquity I may give some leeway to that arguement, but I will not accept the fact that the Fed is doing this to "restore confidence" for investors. The Fed Reserve has strayed far from its jurisdiction to an extent, though, yes indeed this is systemic, but should they be taking the lead in trying to fix this mess we are ?

What needs to be changed is underlying fundmentals, real change in the structure of systems in place. All the systems need to be reassesed in order to find a better solution to the current "crisis" we are in. Dumping lots of money into markets with a bunch of skiddish investors will solve no problems. With a sound system in place that people can trust will take some what years to accomplish. I feel that many investors (middle class investors) have been scarred from event from the early 2000's, and feel they are reliving the past. Many pension funds and 401ks are taking hard hits, while some are holding cash now some are biting the bullet and waiting it out (though if there are a large number of people in cash positions, this may have large implications to come in the future, but I will have to discuss this later) After the 2000 crash, Sentiment probably wasn't restored about 2 and half years later after the crash as this is reflected in Fed Fund rate cuts shown against performance of the S&P500.

If one were to follow previous Fed policy in the past we will see that Janurary 3rd 2000, Fed Fund rate was cut from 6% to 5 and 1/2. Soon after that 1 about year later on Dec 11 Fed Funds rates were cut to 1 3/4. This was not even enough to restore confidence in investors as the S&P500 continued its slide all the way up until around march 2003. Prior to March before the S&P500 started its 4 and 1/2 - 5 year rally, the Fed Fund rate was cut to 1.00. Considering long trends, cutting rates so low was quite ineffective. Some will argue that Greenspan was at fault for our current situation from such policy decisions. Though, I do not suscribe to such a belief, there is some truth to it. From what I can tell 1.00 in the Fed Fund rate is way below the average (though I would have to calculate the averages from all the times the Feds Changed rates which the available data ranges from 1971 - 2008, which I have not done. Wheather or not this is an acurate average or a statistical blunder I am not sure, though Im sure we can pull some general truths from it). 1.00 is below the average and has been only seen at times when there have been crisis. If indeed, people want to believe that Greenspan is at fault for our current situation, I think everyone should be extremely worried now. Whereas in it took about 2 and half years to reach 1.00 Fed Fund rate from 6.00 from the 2000 crash. Bernake may manage to get rates from 5.25 June, 29 2006 (the begginings of the subprime problem)to 1.00 in 2.3 years. If one were to actually use the more dramatic effects of the credit crisis as a starting point, the rate at which bernake has cut rates has been much higher than greenspans cuts. Also, I would like to note that over the 2 and half years of cutting, the S&P500 has a more gradual down trend, while in 2006 to 2008 we have an uptrend, and then from the start of 2008 to october 2008 we have a sharp drop. The different trend patterns may suggest that one cannot compare the two crisis accurately in order to predict market performance. Though it is possible to gauge investor behavoir based of policy.

As we saw in the past crisis of 2000, investor confidence may not have been restored based off rate cuts and may have been something that needed to be fixed over time. This may suggest Bernake should not be cutting rates at this point, as it will be ineffective, in a matter of time fundamentals will improve themseleves. From a historical perspective Fed Fund rates at 1.00 maybe too much and something below the average (whatever that may calculated to be) and holding rates there might be more effective as it might stave off uncessary future crises since rates would not be extremely low at the point of causes future crises.

Though on considering the difference performances in the S&P500, such a fast drop in the index may mean a faster recovery. Though this will have to be examined at a different time...

** I will have to reorganize or summarize this later as my arguement may not be clear or organized well enough for comprehension.

9/25/08

After finally arriving in London...

It would seem Im jumping back in after missing the greatest events of summer... I wouldn't dare say history, but that is just of my opinion.

Only a few words, as I am in the middle of orientation still and still not fully organzied, Im half on Vietnam time and Half on America time trying to sleep on UK time.

For the US...

A fed's fund rate cut from a liquidity standpoint makes sense. There is no capital in the markets at all. I spoke with my mom recently, Wachovia literally cut all unsecured loan lending. I don't know what took them so long, but they finally did it and Im sure many other banks will follow suit or have already. though i was surprised to here that some banks are still lending at prime minus... Im sure that won't last long either...

It seems that sentiment will be reigning king for sometime even if fundamentals of the economy picks up... Im sure the economy will certainly pick up before any recovery or bottoming of the financial markets. Which would exemplify that economy does not equal financial markets... though these days this is bloody hard to distinguish with all these governemnt interventions and the Federal Reserve stepping in to " " save " " the financial markets.

Which brings me to my next point, from a historical perspective as the job of the Fed reserve, explicitly a rate cut does not make sense since it is not their job to baby the financial markets, though it would appear that this job has changed with out any written change to the Fed charter.

Which brings me to my last point ( only for the day, as i must leave to orientation soon), from a monetary policy stand point cutting the rate would not make sense as there are only about 4 more possible rate cuts assuming bernake will be cutting at 25 bp intervals. Leaving no more weapons to stave of crisis...

Of course another cut might as well be considered good since the genius's in washington won't be coming up with any better solutions...

- "so about short-selling"
politician: " well aww gee... i guess its bad n all..."