Foreign Banking Stress

I am not going to pretend that I understand the subject matter ahead completely, but I can read a chart and see correlations. If it were not for the subject of the current financial environment feeling a lot like the Lehman failure era and the correlations presented in this post, I wouldn't even bother, but some members smarter then me on the subject will surely have some insight and if nothing else, we can all see the correlation to the Lehman period.

Foreign Reserve Repos with the FAD (as released today) have gone from $81.3 BB to $124.5 BB this week alone, in response the the MF Global bankruptcy. This is the largest amount ever and the second biggest weekly increase which is second only to the Lehman collapse.

Because of "systemic uncertainties" due to the MF Global bankruptcy, foreign banks have effectively pledged whatever treasuries they have left to essentially put money in the safety of the FAD.

This type of reverse repo is considered a leading indicator of correlated to the inverse performance of European Financial stocks.

Now that probably makes as much sense to you as me, but what will make more sense are the charts.

 Please take note of the dates.  This is the change in the weekly international reverse repos. The last time we were at this high, Lehman was failing as you can see at the spike at the left and the dates below.

This is the total international reverse repo notional which is at a new record high with the previous high around the date of the Lehman failure.

What I can say is this is liquidity being drained from European banks and put in safe storage at the Fad and is a direct result of the MF Global bankruptcy. There's also a clear correlation between this level of activity and international banking stress.

I'll try to bring you better perspective on the issue and feel free to email me with any knowledge you have about these international reverse repo operations.

UPDATE

This is an update of the last post, actually correlations just went negative -.65, which means while the Euro just saw a slight bounce ES didn't follow it higher, it didn't stay flat, it went down.

ES in AH is not responding favorably to FX

 Here's the Euro from the 4 pm close, around 6:40 EDT there was a small rally


 The rally lasted about an hour as can be seen here.

Actual correlations can be measured, 1.0 is a perfect correlation and what we had seen the last month or so. However during the rally, ES/FX correlations once again actually went negative at moments, meaning that ES went in the opposite direction (down) as compared to EUR/USD. However as the currency pair starts heading down, the correlation is near 1.0 again, meaning ES seems to be ok following the Euro down, but is not as excited about following it up.

Here's ES since the 4 pm close, it's off by -5 points so far and as you can see, is a little more in line with the move down in FX.

BAC, Again?

I could care less about BAC's dismal trading record this last quarter, what I find extremely interesting is that they're raising another $2.5-$3 billion (in tier 1 capital). Remember the $5 billion Warren Buffet put in to BAC about 24 hours after having a conversation with the president (BO) which for public consumption was Warren advising Obama about the economy?

Warren seems to be the Treasury and Fad's go to guy when there's blood in the water, they did the same with Lehman. BAC took the money even though at the time they said they had no need for it-if they said anything else, chum would be in the water.  Now that Warren has taken a thorough bath on his investment in BAC, they're raising another $2.8 BB(?) in capital.  This would be interesting for the future of BAC had it not been this week, as it is this week and within the context of MF Global and Jefferies, it sounds more and more like big losses are being taken in the financial sector and contagion from Europe as I have talked about already too many times this week, is already here. Just for some perspective, BAC has their hands in 1 of every 2 American households, if there were a TBTF, alongside AIG, they would be it.

Of course this could be related to the Mortgage/Bond settlement money or a lot of other things, but what is clear is the need to re-cap is becoming more of a trend then a random event.

They came up with a convenient cover story, but how long until they have to seek capital from other sources?

And even with the BS cover story, just like in Europe, why issue 400,000,000 new shares of common when they are trading at -55% off 2011 highs and over -50% off the start of the year? It's kind of the same reason European banks don't want to raise new capital, their share prices are below book value.

If you believe the number, BAC's share price is -67% off book value. Issuing common at these levels is just, well since we don't know the entire story, would seem on the face of it to be plain stupid. Obviously there's a real reason for their need to raise tier 1 capital and it's probably not too different then MF Global's reason, wherever the losses or expected losses are actually coming from.

Other curiosities...
I only spent about an hour watching CNBC before the "F-oh-M.C." announcement, but it was crystal clear that there was, as usual, an expectation that the FAD would do something "Bazooka-like", QE3 was one of the main talking points. I didn't spend a lot of time talking about it because of other fast moving events (in retrospect, just about as much time as it deserved), but there were some curiosities in the whole ordeal.

First, nothing much changed, in effect nothing changed except the wording of the first paragraph was pimped out a little to give this meeting a much different tone then the last 2 meetings, more of a "Goooo Team!" flavor, rather then the last meeting which was more like a 1 on 1 somber chat about the economy with your uncle Bennie.

Here are a few things that stood out:
-There weren't even slight concessions, such as giving the market a small bone by saying that they would continue ZIRP "throughout 2013" rather then through the middle of 2013.
-"Economic Growth Strengthened", while GDP did print a little better then expected, we all know that the revisions will be downward as they always are. The CONSUMER is a big part of why GDP was slightly better. Also, "Household spending increased", yes, that's why GDP came in slightly better and this was spun as, "We are expecting moderate growth", BUT, they already know that consumers blew their wad as household savings are now hitting a nearly 3 year low so this pattern won't be repeated. Business lending is up, Consumer lending is going nowhere so it won't happen again. To present that as a positive is at best, stretching the truth.

-Inflation Moderated-yes, it had no choice then to moderate after the inflationary QE2 ended, however, there's an alarming trend that has year over year inflation targeting 4%, which is above the FAD's mandate of 1-3%-(really 2%), so that's almost double and that is one reason that they stayed their hand. They are increasing money supply which is inflationary, to add QE3 now would kill the consumer through inflation.

-"Downward Risks in Global Financial Markets"-GLOBAL-not just European, which would include the US and this was my biggest argument as to why they would do nothing. One side of the coin would seem to be that Bernie gets in front of the Global banking liquidity shortfall here at home, but the other side of the coin is, "You can't make a plan and set a policy until you know what you are dealing with"

My guess is that the FAD has limited bullets left after the extraordinary accommodation, if an emergency arises, they need to know where those bullets are best targeted.  A failure of BAC would not be acceptable and there aren't going to be any Barclay's lining up to place a bid. The next banking crisis is going to be worse then the first for the obvious reasons and what I just outlined.

The thing is, Bear Stearns and Lehman virtually came out of nowhere and before you knew it, even GE  (a company making lightbulbs and such-not a financial) was in danger of collapse.

I think the thing we or the economy should be most concerned about after MF Global, Jefferies and possibly BAC, is whether or not that Black Swan is creeping throughout the US financial system, it doesn't give much warning, it's more like a Tsunami. Maybe these 3 events are random and maybe they aren't, if they aren't watch-out below.

Must Read

The last post gave me an idea which led to some real insight. There are  lot of charts below and I don't mind putting them together for you, but you have to decide whether to spend the time reviewing them and I don't just mean glancing at them, I mean comparing price action to 3C, notice what the 3C divergence led to in price. Look at the scale of things and really try to understand. If you can do that, I think you will find this post to be hugely insightful.

First lets start with what I posted on Tuesday, November 1st (this week). Click the link for the original post.

Here was the chart... 

I said, "Today's close looks to be a Doji, con't be surprised to see some upside off this close tomorrow."

I clarified in a later post that a Doji is a reversal signal, but it carries no target, it just says the current trend will likely reverse, the same as I posted on Friday 10/28 when I saw the Harami Cross, I thought it was highly likely that was the reversal signal even though we were going in to a weekend that had very bullish potential and the day before the S&P posted a 3.43% gain.

Several times I have shown you comparisons between now and a very similar price pattern right before the market collapsed in 2008. The two patterns share every major event and look nearly identical. Here's an update that shows that pattern in 2008 that led to a 50% decline in the market.

This is the pattern in 2008 and the yellow arrow would be correlated to Friday's top. The similarities go on, after a few days of decline, in the white box is a 3-day bear flag. Then there's a few more days of lateral trade and a decent up day at the white arrow. Two days ago I posted charts of this time period to help anchor your expectations, you may recall, I showed how there can be just as many if not more up-days in a bear market then down days and that even during the worst bear market, that is normal activity for the market so you would not "Get lost in the lines".

Today in my last post I wrote the following, 

"Here's the ES chart again with volume and you can see the volume surge at the EOD in the last hour, really through most of the afternoon on a very negative divergence. My gut feeling is a large number of shorts were set up sine about 1-2 p.m., the time before that was distributing the accumulated position in white.

With Credit leading the what lower and both the market in general and ES specifically out-performing the risk basket, it seems as if this has been a fairly obvious underlying countertrend trade, or in other words, the strength was used to short ES/the market."

So I just spent the last hour and a half looking for evidence of what I suspected. One of my favorite Technicians of all time has said some things that have stuck with me over the years.

"When you look at charts (price), always keep this in mind-the charts are often unfolding with the intent to mislead"

The quote that hit me at the end of the day when I posted the above is as follows, "The best payoffs will grow out of original insights, often gained during fleeting glimpses of market action" 

That last quote is why I pay so much attention to things that seem insignificant, like the correlation value of the EUR/USD vs ES that lasted only an hour today.

 At the EOD, the SPY was divergent in both RSI and MACD, price made no significant advance and volume was huge, this often is the churning or transaction of strong hands selling to weak hands and fits with the end of day comments.

 TLT which is a Treasury Fund is also a safe haven trade, why was it under accumulation today? This is where money goes when equities decline. 1 min chart

 TLT 2 min hart shows the same thing with an emphasis on the 1-4 p.m. timeframe, about when I said I thought we transitioned from distribution of a short term long trade to actually seeing smart money go short.

 TLT trades inversely to the market, with the market making new highs at the close, TLT should have made significant new lows at the close, rather it closed higher then it opened and with a large green volume spike.

 FCX-Doctor Copper- 1 min 3C shows distribution today, especially starting around 1 pm

 The 5 min chart is leading negative today, similar to the last fall.

 I checked JJC-The Dow index for copper to make sure it wasn't just stock specific, a worse 1 min leading negative divergence (remember copper is supposed to be a leading indicator for market direction).

 JJC 2 min-even worse.

 And the larger view hourly trend has clearly topped out and is leading negative.

 GCC is a commodities basket ETF, look at the negative divergence leading lower today.

 On a slightly longer chart, price up, major 3C distribution the last few days (since I said the market would likely see upside on Tuesday).

 GCC's longer term 30 min trend is very ugly and looks to have clearly topped.

 How about the Euro, we know it was headed down the last hour of trade, even though it was at odds with the market correlation. 3C shows distribution in FXE just as the negative price action started. Note the time.

 FXE 5 min has been under longer distribution since the reversal I mentioned.

 And the longer term view, it looks like the Euro has or is topping, bad for stocks. You should notice a trend of short term distribution the last day or two and long term distribution, meaning the market has likely entered a new bear phase. Look at the extent of the divergences and what they produced in the past.

 FXA, the Australian Dollar, another leading indicator for the market is seen under distribution this afternoon.

 And the $USD (trades the opposite of stocks) is under accumulation starting around 1 pm

 A longer term chart for confirmation

 XLF financials under distribution since 2 pm

 And the long term chart shows them hitting new leading negative lows.

 XLB-Materials, under distribution this afternoon.

 XLE-Energy under distribution this afternoon

 XLI -Industrials, again... under distribution this afternoon

 The long term view of XLI, hitting new leading negative lows.

 XLK-Technology, under distribution this afternoon

 The long term XLK chart, leading negative, worse then any decline on this chart.

 XLP Consumer Staples, under distribution this afternoon

 Look at the 3C signals on the XLP long term chart, they are very effective, then look at this new leading negative low in 3C...

 XLU -Utilities, even the safe haven of equities, under distribution this afternoon.

 And the long term chart, as ugly as I've ever seen.

 XLV- Health Care, under distribution this afternoon

 XLV long term chart, look at the last leading negative divergence and what happened next compared to this one...

 XLY-Consumer Discretionary -under distribution this afternoon

And the long term view with a leading negative divergence.

If you looked at the charts, not only today's action should be clear, but the state of the market right now should be very clear. I covered all of the main S&P sectors and not one disagreed with the others. I don't think you can find much more confirmation then that.

I'm Guessing a gap down tomorrow

And probably an ugly AH ES session overnight. Here's why.

 This is the last few hours of EUR/USD trade, but note the end, straight down.

 The market rallied and the ES/EUR/USD correlation dropped to the negatives, seems very much like a last minute push to juice the market as much as possible.

Here's the ES chart again with volume and you can see the volume surge at the EOD in the last hour, really through most of the afternoon on a very negative divergence. My gut feeling is a large number of shorts were set up sine about 1-2 p.m., the time before that was distributing the accumulated position in white.

With Credit leading the what lower and both the market in general and ES specifically out-performing the risk basket, it seems as if this has been a fairly obvious underlying countertrend trade, or in other words, the strength was used to short ES/the market.

Every Piece Counts

That's what 3C means, "Compare, Compare, Compare", it's a reminder that you find important information where other people miss it, or as they say, "To make money, you have to see what the crowd missed".

Here's the market/SPY with the FX correlation that usually running at 1.0, in the last hour down to .60

The FXE/Euro is in red and failed to make any new highs like the SPY did in yellow and a bit before. That mismatch in correlation seems to be returning back to the median now.

SLV stops

We might as well update some SLV stops as well.

 SLV hasn't done much since the opening and there is gap resistance nearby.

 This is a 50 m.a. on a 15 min chart, which looks pretty tight.

The 40 min trend channel is a little deeper.

Long GLD?

 GLD 1 min

 GLD 5 min

 GLD 10 min

If you are long GLD, based on the above, it is wise to at least have some sort of trailing stop in place, here are a few suggestions.

 The 50-bar 15 min chart has held the  trends well, it's a little deep as a stop, but effective for consolidations.

 The 50 bar m.a. on a 10 min chart is a bit tighter, you can always blend the 2 on a partial exit or phased exit if need be.

The Trend Channel has held the Trend using a 60 min chart, it will continue to lock in gains for a bit longer so it should be above $170.