Morning Wrap

*First, I have reports that Google Groups is working again and some members have emailed me that they ARE receiving email updates, hopefully that is over.

I hope you were able to rad Sunday's post, "Sorting the Noise From the Trend"  thus far it has been absolutely right on track and ahead of very fast moving events, it's not just a round up of news, but an collection of the very important data that separates what is important, what is not, what is likely and what will change the game.


For instance, Monti in Italy is having a very hard time forming his coalition government, which is exactly the issue tackled and raises the specter of the worst possible political outcome for Italy, early elections which likely won't be held until early spring 2012 and Italy simply CANNOT survive that much uncertainty for that long, they have weeks at most. Today is apparently the "final" day of negotiations which are not going well, Sunday's post covered some of the main reasons they may not go well. 


As a result, the EURO has fallen overnight, but more worrisome is the fact that on this news, Italian 10 year yields peaked this morning over the threshold of 7% before the ECB stepped in buying to bring them slightly under 7%,(6.996%) they may be back above 7% now as ECB interventions have had a very short half life.


Also in the article, the "true gauge of risk in Europe", French yields as THEY ARE NOT eligible for ECB intervention, they are the one place investors can look for real price discovery and this morning, they hit a new high at 3.49%, over 175 basis points over German Bunds.


In the post I also covered the long ago forgotten Spain and how they would soon re-emerge as a central problem, that happened just this morning, only 2 days after the post when they conducted an auction of $3.5 billion in bills, which failed and came in undersubscribed at $3.2 billion, with the yield coming in at 5.02% which is much higher then the last auction at 3.61 and sent their 2 and 10 year spreads compared to Germany's to new all time highs, contagion is once again a theme in Spain. The biggie, these were only 12 and 18 month bills!


Also covered in Sunday's post was the act that the EFSF is an abysmal failure, it is no longer even a semi-serious option, that means all eyes are on the ECB (European Central Bank), which I also covered as being implicitly AGAINST bailing out nations, further confirmation of that came today as ECB member, Yves Mersch echoed comments just this morning, the same as his German counterpart over the weekend in saying,


"monetizing government debts "is tantamount to inflation" and "not feasible." To use inflation to lower the fiscal burden "would reduce incentives for governments" to tackle their debt burdens and "would raise the risks of even higher future inflation and greater output volatility. Uncontrollable wage-price spirals would be likely." Mersch said in a speech in Frankfurt today. He also added that you can not make the ECB as a "lender of last resort for governments" and that governments must live up to own responsibilities"


So as I pointed out Sunday, all eyes will turn to the ECB and thus far the ECB is saying NO.


The stock market opened lower because of all that is going on in Europe, but saw a brief lift, not from the generally better then expected US economic data, but from F_E_D_ dissenter, Evans as he said this morning that ZIRP (Zero Interest Rate Policies) would continue beyond mid 2013, something the F_E_D itself has NOT said even in the most recent F_O_M_C release. That goosed the market a bit, but it looks like all eyes will be back on Europe momentarily as Italian yields are one again breaking north of 7% again, as I pointed out just momentarily ago, the ECB interventions have a very short half life and the money they spent in the secondary markets to bring down Italian rates is already wasted and at a loss.


At this point, Italy's new PM, Monti and his efforts to put together a ruling coalition with deadline for the talks TODAY, as yesterday they didn't go well and if you read Sunday's post, you would understand why they were not likely to go well, will be the focus of the rest of the day.

Daily Wrap

Tonight, for me at least, is very interesting as we get a look at what some big hedge funds have been up to and some very ironic statements that have been echoed here at WOWS recently.

First, tomorrow should be a volatile day as we expect to get numbers on German, Italian and French GDP. It's an Expiration week this coming Friday and then a holiday week thereafter (Thanksgiving November 24)

I want to lead off with a report by Phoenix Capital Management and in particular, the very first sentence which should be familiar to WOWS members.

"Without trust, the financial system cannot work."


You may recall that is exactly what I wrote a week or so ago when I talked about my experience trading the 2008 market crash, I said the tipping point was when no one trusted their counter parties and all liquidity and credit froze in the markets which was the beginning of the crash.


They go on to echo my post nearly verbatim,


"Nowhere is the lack of trust more apparent than in the financial sector. Indeed, it was a lack of trust between banks (inter-bank lending) that caused the credit markets to jam up in 2008, which resulted in the Crash."


I want to continue with a little more from the report because I think it really sets the stage for what we should expect and it goes on to further echo my sentiments, especially in regard to MF Global which is an event that you may not appreciate now, but it will be in the history books as the Bear Stearns of 2011.

That lack of trust continues to this day. In the post-Lehman collapse, instead of forcing real derivative and credit risk out into the open, the Federal Reserve and regulators instead suspended accounting standards and allowed financial firms (and other corporate entities) to continue to lie about the true state of their balance sheets. (This is another subject that has been covered here in bank earnings and their use of marking assets to model rather then market and why I am most bearish on financials)

As a result of this, the financial sector remains rife with fraud and impossible to accurately value (how can you value a business that is lying about its balance sheet?)

Indeed, we got a taste of just how problematic a lack of transparency can be with MF Global’s bankruptcy, in which a firm with $42 billion in assets lost over 80% of its value since August only to reveal in bankruptcy that it had stolen over $700 million worth of clients’ money.

That MF Global engaged in fraud and stole clients’ money is noteworthy. However, the far more important issue is:  HOW did this company receive primary dealer status from the NY Fed this year?

The Primary Dealers are the banks that actively engage in day to day activities with the New York Fed regarding the Fed’s monetary policies. Primary Dealers also participate in US Treasury auctions.

Put another way, Primary Dealers are the most elite, well-connected financial firms in the world.  They have unequal access to both the Fed and the US Treasury Dept. In order for MF Global to have attained this status it must have passed through a review by:

1)   The New York Fed

2)   The SEC

This is not a quick nor superficial process.

A final note on this: the NY Fed is the single most powerful entity in charge of the Fed’s daily operations. How can any investor believe that the Fed can manage the system and restore trust when the NY Fed granted MF Global primary dealer status a mere nine months before the latter went bankrupt?

If the NY Fed cannot accurately audit a financial firm’s risks during a six month review, then there is NO WAY an ordinary investor can do so.

So if you have not already taken steps to prepare for systemic failure, you NEED to do so NOW. We're literally at most a few months, and very likely just a few weeks from Europe's banks imploding.


I really couldn't have said it any better, except to add how much more inept European banking regulators are and that is where the crisis is coming from this time, the proverbial "Second shoe to drop".

If you go to Ron Paul's website (I like the guy) he has some interesting numbers and facts to add to the equation in his recent write up, "European Debt Crisis Threatens Dollar".

I won't quote the entire article, just a few key passages:

The global economic situation is becoming more dire every day.  Approximately half of all US banks have significant exposure to the debt crisis in Europe.

The US has a relatively small exposure to overwhelmed Greek banks, but much larger economies in Europe are set to follow and that will have serious implications for US banks.  Greece is technically small enough to bail out.  Italy is not.  Germany is not.  France is not.  It is estimated that US banks have over a trillion dollars tied up in at-risk German and French banks.  Because the urge to paper over the debt with more credit is so strong, the collapse of the Euro is imminent.  Will the Fed be held responsible if the Euro brings the US dollar down with it?

As for the Technical action today, it should be noted that today saw the lowest NYSE total daily volume for the entire year, this may have been part of the reason the DOW was so far off correlations today.

Today we also get a look inside some major hedge funds and we can CLEARLY see why volume has been lower and we can clearly see why 3C has looked as bad as it has, keep in mind that hedge funds tend to flock together, unfortunately we only have a sample of 2, but it should be indicative of the industry trend, which easily explains 3C's horrible looking stance as this is the kinds of transactions 3C is meant to track in underlying trade.

David Tepper's Appaloosa Fund (just for perspective, in 2010 Tepper was the top earning hedge fund manager in the world, this is no small operation) released publicly known positions, of which there are 63 in equities, in Q3 he sold part or all of his holdings in 59 of them! There were complete 

liquidations in Bank of America, Wells Fargo, Fifth Third, as well as Yahoo, Pfizer, Walter Energy, Metlife, Merck, Medtronic, Marathon Oil, Manitowoc, Frontier Oil, DR Horton, Alpha, ConWay and Cliffs Natural.

In addition, he started 4 new positions, that was it.

That is MASS liquidation of equities.

Then we also get Dan Loeb's Third Point Fund with Assets Under Management of $7.5 billion, until last quarter... Third Point is now at $7.1 billion AUM, but the real story is the same as above, selling risk or stocks;  he sold off his entire positions in BP, Cablevision, Freeport McMoRan, Freescale, Lyondell, NXP, Pall, ON Smi, Pall, Potash, Quest, Safeway, Swift, and Whirlpool. You can see by the graphic below, the theme is delveraging equity risk and moving to cash.

What have I been saying all this time? INSTITUTIONAL MONEY SELLS IN TO STRENGTH AND THEY ARE MOVING AGGRESSIVELY OUT OF THIS MARKET.

Most importantly, this is information, that while not specific, 3C has been showing you for the better part of a month, while others have to wait to see what smart money is doing, we can see it early and thus be ahead of the market, such as using day's like Friday's strength to enter short positions knowing that institutional money is likely doing the same, or at least removing large amounts of support from the market making it more likely to fall and fall hard.

Also released today was the CFTC's  (Commodity Futures Trading Commission) weekly COT report (Commitment of Traders) and it had some interesting perspective on the Euro.

It wasn't too long ago that the Euro had huge short side participation, helping to drive the market higher through October, but this is the 4th consecutive week that the net bearish position on the Euro has dropped; in total about a 30% decline from the start of October, which means short squeeze Euro rallies are going to be harder to pull off and last week's NYSE Short Interest also saw a sharp drop, meaning the same and also taking away the covering bid should the markets fall as there are fewer shorts to take profits, there is less natural support. However, that's not all, take a look at the graphic...

Th Euro short Interest has declined, but the Dollar short interest has gained, making a dollar short squeeze more likely, which has the opposite effect on stocks, moving them lower. 

Here are the 3C charts of the Euro and Dollar...

 Here's the 5 min chart of the Euro/FXE showing broad weakness Friday and in line today.

 However the 30 min chart is moving quickly down in a leading negative divergence, exactly as the graph above would suggest, it looks like the Euro is set to lose a lot more ground shortly.

 The $USD/UUP saw broad strength short term on Friday and held its own today.

The 5 min chart is showing the same strength. The real surprise though has been brewing for some time...

The daily chart is seeing a positive divergence it hasn't seen since the last one that preceded the 2009 dollar rally.

Financials have been mostly what I've been interested in and as the market starts moving away from directional trades, as I have mentioned, it's the first sector where I think "stock picking" makes sense rather then using broad ETFs. Take a look at the recent performance of financials.

Over a longer term then we usually look at, look how bad financials have performed relative to the S&P and the main S&P industry groups. The rotation in financials at the bottom is nearly invisible recently, they are trailing badly. MF Global was the canary in the coal mine.

 This is XLF (financials) in green vs the Dow-30, look at the correlation in the green box vs the lack of performance in the white box.

The S&P's performance (green) vs the Dow as the S&P has more financial components, it went from nearly identical to lagging. 

 Even the S&P (green) vs Financials (red)

 Here's Industrials vs Financials

And Tech which has also been underperforming vs financials.

This should tell us something very important about the market's change in character right now.

As for leading indicators...

 Look at the short rally in JJC, DR Coal. 3C is leading negative here which doesn't bode well for the market and as an aside, likely says something about China that few people recognize yet, namely that commodities are underperforming, being distributed and that weakness can largely be traced back to the Chinese economy; think about that as the EU crisis deepens.

 JJC/Coal on an hourly chart has topped, just like in July.

 On a daily basis, if this doesn't spell trouble, I don't know what does, leading negative hitting lows below the 2009 market low!

 The FXA/Australian dollar has also been a leading indicator for equities, its strength in September was manifested in equities in October and now it is showing weakness vs the S&P at what I call the October rally top.

 Looking inside FXA for hints of where it is going, this 30 min 3C chart has nothing good to say for the broad equities market.

 Back to the economy, market and China specifically, this is the SPY (green) vs the CCI (Continuous Commodity Index). Not only did CCI top before the S&P in summer 2011, it showed early strength before the October rally and is now showing weakness as the market begins to rollover from the October rally.

 Treasuries have seen massive selling, primarily from Europe as I have covered numerous times, China which is peeved with the US for many reasons, most recently Obama telling our biggest creditor to "act like an adult" is also probably contributing to treasury weakness, however, through all of those headwinds, TLT, the long treasury is showing signs of a move from stocks to the safety of treasuries recently.

 We saw some late day negative divergences in the 5 min chart, which were in line with the equity markets showing some positive 5 min divergences that seem very out of place, however...

 TLT 15 minute, exactly the opposite of the major indices showed surprising strength today in a leading positive divergence, which lead me to believe we are setting up for a major bearish event.

 Furthermore, look at how much the 30 min chart moved in 1 day! And that is all leading positive. 

 Even stranger, as Treasuries and equities move opposite to each other, look how TLT managed to still rally at the EOD with the market despite the inverse correlation!

 VXX/Volatility, which moves opposite the market also showed us strength on Friday, partially leading to my all to consider shorting Friday's strength. Right now it is leading positive, which would have a negative impact on stocks/the market.

 Again, the 15 min charts were the story of the day and VXX as no exception, making a serious move up in a rather flat range.

Even more surprising, the progress the 30 min chart made today, that's a lot for it to move in a flat intraday environment.

Technically, Friday changed nothing and the S&P is just barely above the hourly 50 ema as you can see, the October rally is rounding over. As I try to remind everyone, tops and bottom are a process, not an event and we are in an exceptionally volatile market that moves 1000 Dow points a week and the weekly change is nearly flat. This as well as low volume, as we saw today (the Dominant Price/Volume Relationship for every major average was price down / volume down) are both hallmarks of a bear market environment, the first being early in a bear market and the latter lasting throughout a bear market, that's right, low volume characterizes a bear market.

I hope this post lends some perspective and I think it is one of the best examples of 3C detecting the underlying action of institutional money, which clearly is showing a risk off environment and almost panic to get out of long positions.

As for the ES market and the FX market after hours...

 ES shows the ramp/positive divergence to close ES almost exactly at the VWAP (Volume Weighted Moving Average). Since, we have seen a negative divergence develop along the lines of what was seen late Friday, I'll update this chart later is there are any major developments, but with AH trade closed, I would expect that negative divergence to send ES lower shortly.

 Here's the EUR/USD open this week, clearly it's trending down and the market has some downside catching up to do as I posted earlier with the EUR/Dow-30 correlations.

The green arrow is about the same time as the late day ramp in stocks, but still is a countertrend move against the prevailing downtrend. 

Oh and as far as my recent preference to short XLE/Energy over USO, take a look at the percentage losses in each today, I still like Energy more broadly as a short over USO for the time being.

Update From Italy

Here's more from our Italian member of the pack...
The subject line:


***DANGER IN ITALY***


There are no bank runs, or at least that is not what he meant. However he said if you go to a bank to withdraw more then (I believe he meant 2000) 2.000 Euro, you need to put in an order and they will call you to come in and pick up the cash when they get it.


"They have no liquidity on hand, I don't know why?


The national news says they will reintroduce the ICI tax on your first home (which is confirmed by the Monti press release.)


The State will collect money from bank accounts (like I already said happened in the 1990's;  0.60% of ALL ITALIAN ACCOUNTS) people are afraid of all these things ...


UniCredit's situation is not convincing .. Have you read the budget? -10 bn euro .. 


All Italian companies are all increasing capital.. 


I swear to you, all of these things are true, you must believe me, these are not lies my friend..."


On behalf of the Wolf Pack, Thank You Ema.

Italian Clarification

I hope this come through for those who want to view it, this is from Scribd and is the "Clarification Letter from Monti to the EU"

Link

Put This in the Short Term Volatility/News Bin

The more I look at the short term vs the 10-15 and even 30 min charts today and consider the FX/Dow correlation that is so far off, the more I feel like there's a short term bullish move coming to be followed by a nasty bear move.


That's gut feeling...


Now to the point of the post, 


The "Full" Monti in Italy, or the new PM, has sent a letter to the EU about austerity measures to be implemented including:


300,000 public sector job cuts!!!
Raising the retirement age more rapidly
Tax system overhaul
Reintroduction of a property tax called ICI


Here is an email I just received from one of our members in Italy which was unsolicited.




"Here in italy, a lot of people are scared about the new taxes from Monti...

Very bad sentiment from the people..!

Ici (the property tax mentioned above) on all homes,  account withdrawals, etc.."

I'm trying to find out if he meant there's a tax on account withdrawals or he meant there's a bank run, I'll let you know soon.

As they say though, every boxer has a fight plan until the first punch is thrown. As for the reforms, they seem significant, whether they can actually be implemented is another story and the time it will take to see any meaningful financial change will likely be far too long with the way Italian bonds are trading, as if they are the next to seek a bail out. 

The key obviously is the ECB, until these fiscal measures, some of which will take 2 years to implement, start to take effect, only the ECB can save Italy and give it enough time, however as has been made clear by the ECB, the Germans and French, the ECB is NOT to be used in this manner.

Furthermore, the austerity measures being taken will have a dramatic impact on the Italian economy and GDP.

As fast as that

The SPY seems to be the most accurate chart today and before I could finish and post the last update just seconds ago, look at what has happened on the SPY 5 min chart.

 This is the chart of the 3C 5 min SPY just posted with a "possible positive divergence"

By the time that was posted, it has already started moving down making that "possible" positive divergence less likely.

It's amazing how fast things are moving.

Market Update

There's some disparity between the short term and long term chart, I'm putting more weight behind the long term charts for reasons I will explain after market and because they have tended to be more accurate. This update will be followed by another.

 DIA 2 min posted a nice leading positive divergence that crumbled and is moving toward new leading lows, but it did give us that bounce I was looking for.

That bounce being the second move toward the 15 min 20 bar average.

 The 5 min DIA chart shows some potential for a bounce as a positive divergence forms here, however it is not well supported in the earlier timeframe of 2 min above, not is it supported in the next timeframe of 10 min below.

 Here's the 10 min DIA in a leading negative divergence at significant new lows for the day, which causes me to think about the disparity between the FX/Dow correlation mentioned earlier.

 The IWM/Russell 2000 also shows the same bounce/positive divergence on the 1 min chart, which has since crumbled in to a leading negative divergence.

 The IWM 5 min chart isn't as strong as the DIA 5 min chart, but also shows a positive divergence, however one again the timeframes on either side of it don't support it, which makes me wonder if the 5 min is lagging and representing earlier strength that has since dissipated?  The 10 min as you can see, has hit leading negative lows associated with lower pries.

 And the IWM 15 min seems to be doing what a leading negative divergence does, and seems to be dragging the IWM lower.

 QQQ 1 min showed a small positive divergence and pretty much in line, although a bit stronger then in line. The 5 min chart here also shows a positive divergence

 However once again the 10 min is hitting new leading lows.

 As is the 15 min.

SPY 1 min is the only chart that is largely in line with trading action.

 The 5 min here shows the same "possible" positive divergence, even though on a leading basis, it has already gone leading negative.

 As has the 10 min chart.

Especially surprising is the amount the 30 min chart has travelled today in a leading negative divergence.

Somehow this is all just reminding me of the harts posted about the Dow and FX correlation earlier.