Barring an unexpected macro surprise, this looks to be a light-volume trading week with an extra strong portion of meaningless price action as algos push the indices around in the absence of real conviction.
With Labor Day weekend on deck and two central-bank speeches ahead, the focal point -- ECB’s Draghi and later Bernanke at Jackson Hole -- there won’t be a whole lot to sink one’s teeth into.
The strength of Apple’s sweeping win over Samsung could sustain a pop for AAPL stock, which in turn could translate to further risk appetite. Counter to that is a growing awareness that stimulus hopes are fading (the law of diminishing returns) and long-term investment rationales (e.g. being long past September) are getting thin on the ground.
In the Mercenary Live Feed we remain substanially net short -- some solar on the long side -- with open profits on all positions. Our highest conviction position remains short the Aussie (AUD/USD), which just keeps looking better and better by the day. Fundamentally we are also closet dollar bulls, given our strong and growing suspicion that the impact of CB stimulus is way, way, way overrated and that the threat of global slowdown -- in which the United States is the ‘least bad’ option -- is still underrated/temporarily deterred by QE3 hopes, which could soon evaporate.
It’s a good week to keep it light (in accordance with volume) and watch for elbows. There will no doubt be excellent opportunities in the upcoming weeks (and on into the fourth quarter) to really press for an advantage.
NEWS FLOW
- Buba Prez: ECB rescue plan could be ‘addictive like a drug’
- German Central Banker Sees Danger in Euro Rescue Plan
is still meaningfully divided on eurozone rescue plans. In calling central bank stimulus “addictive like a drug,” Bundesbank President Weidmann is breaking a taboo of sorts (by speaking actual truth about the situation).
It remains to be seen how long investors can hold out the fiction that enough unity exists in the euro zone to push a crisis solution through. “Denial aint’ just a river in Egypt,” as the saying goes, but it is a powerful market force, which explains many trends… still, though, at some point painful awareness leads to a forced reality check.
- Merkel Reins-in Greek Exit Talk as Euro Enters ‘Decisive Phase’
- Austria says Greece could get two-three extra years | Reuters
The need for Merkel to rein in her own coalition, and face pushback from Germany’s key financial institution, even as Germany stares into the face of recession, illustrates how high the stakes are becoming.
- Saudi Oil Producer’s Computers Restored After Cyberattack
- Tropical Storm Isaac Should Rival Hurricane Katrina – Forbes
The geopolitical fear premium is always a presence in oil markets, at some times more so than others. Another one of the embedded macro risks to markets is an energy supply shock at a time when the global economy is extremely weak. A severe spike in oil prices now, tied to a major supply disruption brought about, by, say, a successful strike on a Saudi Aramco facility would be the potential equivalent of a deflationary heart attack, as energy costs (which filter into everything) spike against a fragile earnings outlook and discretionary spending backdrop.
- Apple decisively wins Samsung trial: what it means | The Verge
- Apple Gets Decisive Win in Patent Case v. Samsung – WSJ.com
The massive victory for AAPLtranslates into a risk appetite positive as traders find reason to bid the most valuable and beloved company in the world ever higher. The next challenge for AAPL will be delivering on the iPhone 5, a bar that will be even higher (in terms of share price) as the stock gets bid up further in the Samsung aftermath. AAPL will now also have an edge in its battle with Google (GOOG) over smartphone related patent issues.
- Fed may struggle to deliver expected growth boost | Reuters
- Central Banks’ Incredible Lightness of Easing – WSJ.com
President’s characterization of central bank spending being “addictive like a drug” has already become a reality on both sides of the Atlantic. The question now is how juice is left in stimulus efforts given increasingly fierce macro headwinds and the law of diminishing returns. As with any recreational drug, the more you use, the more you need just to get the same high – eventually you find yourself “running to stand still” as various heroin addicts have described it.
This week we get to see what will come of Jackson Hole speech hopes, and the market is about ready to start discounting the possibility of disappointment and/or post-partum stimulus depression after September stimulus is implemented. All in all, hope for stimulus is a weak trading rationale at best, and ultimately a terrible reason for investment optimism.
- The Lost Decade of the Middle Class | Pew Social & Demographic Trends
- Real’ Durable Goods Reveals Huge Collapse in American incomes
- Laid-Off US Workers Take Pay Cuts At New Jobs
- Household income is below recession levels, report says
The outlook for U.S. households is terrible, and the U.S. is the best looking house in a bad neighborhood (to use one of the popular FX memes).
A controversial study by the Bank of England lays bare the reality that common sense already made clear – quantitative easing is a form of “socialism for the rich, capitalism for the rest” that improves the standing of those with outsized exposure to paper assets, while screwing over everyone with nominal exposure to paper assets and heavy exposure to cost of living increases via food and energy inflation (which the Fed both perpetuates, via its paper-pushing policies, and arrogantly ignores).
The most frightening aspect of the current food situation is tail risk -- the possibility that things could get much, much worse. Will markets have to adopt to an agricultural fear premium, similar to the geopolitical fear premium embedded in oil prices?
CHART NOTES
- Major indices light volume reversal on Friday
- Nasdaq (QQQ) bullish engulfing, bull flag intact?
- Small caps (IWM), emerging (EEM) still clearly weakest
- Transports (IYT) no real followthrough on Fri indices bounce
- A number of Dow components bullish engulfing on Fri:
- IBM, MO, VZ, T, AIG, MRK
- Multi-year high resistance on majors still notable
- Wedge pattern S&P weekly charts still notable
- Australian $ (AUDUSD) completing potential rollover process