Courtesy of John Nyaradi
This week’s speech in Frankfurt by Fed Chairman Ben Bernanke reminded me of the old legend of St. George and the Dragon in which a brave young knight slayed an evil dragon to save a town and a princess and become the patron saint of England.
In today’s version of the tale, Dr. Bernanke attacked China, the dragon, for most of the world’s problems and particularly their currency manipulation that is harming the developed world’s recovery.
In a thinly veiled comment directed at China, he said, ”Currency undervaluation by surplus countries is inhibiting needed international adjustment and creating spillover effects that would not exist if exchange rates better reflected market fundamentals…”
He also sent on to say, ”For large, systemically important countries with persistent current account surpluses, the pursuit of export-led growth cannot ultimately succeed if the implications of that strategy for global growth and stability are not taken into account.”
Widely seen as a rebuttal for the shellacking he took last week at the G-20 meeting in Seoul, Dr. Bernanke certainly raised the tensions in the ongoing dispute over quantitative easing and currency manipulation that is underway between the U.S. and China.
While certainly not a young knight, Dr. Bernanke wields a powerful sword; however, the dragon lives and a wounded dragon might turn out to be even more dangerous to Saint Ben as this battle escalates on a daily basis.
Looking At My Screens
chart courtesy of StockCharts.com
China made news all week as they raised the reserve requirements for their banks by 50 basis points to fight inflation. A subsequent interest rate hike is widely expected and this action served to dampen U.S. markets which ended virtually flat for the week in spite of POMO operations ongoing every day.
In the S&P chart above we can see how the index is sitting right at its 20 Day Moving Average represented by the blue line and at levels close to where it was before the election and the formal announcement of “QE2.” Strong resistance is at the 1200 level and the moving averages are turning flat while MACD at the bottom of the chart indicates declining momentum.
This week we had a one day call option trade that made 5% in the Option Master portfolio on Thursday’s big surge, however, we are in the “Yellow Flag” mode because direction from here is likely to be choppy.
A sustained break above 1200 could bring us to a retest of the April highs and a positive trend change as we move towards the end of the year while a break below 1180 could yield further declines. On a longer term frame, the chart is still above the 200 Day Moving Average which would indicate we’re in a correction/consolidation phase within a longer term bull market.
The View From 35,000 Feet
The news flow continues to be simply amazing.
As we’ve discussed, we saw moves this week from the Peoples Bank of China to slow growth and combat inflation while the Europeans rushed to bailout Ireland and the Irish Banks.
On the home front a massive insider trading scheme is about to be exposed by the FBI while the 149th bank failure was registered on Friday. John Boehner, the new Speaker of the House, doesn’t like “QE2″ while Treasury Secretary Tim Geithner said the Republicans shouldn’t politicize the Fed.
In more detail, the situation in Ireland will likely reach a head this week as the EU rushes to save that beleaguered country. Allied Irish Bank, the country’s second largest, has seen a 17% decline in deposits this year and the European Union is worried that if they don’t contain the problems in Ireland that the “contagion” will spread and that Portugal and even Spain, the Union’s 4th largest economy, could be next on the chopping block.
In response to QE2, the Irish situation and China’s moves to slow their economy, commodities dropped 2.8% for the week which is the biggest one week decline since August and oil has also taken a hit, dropping from $88/bbl to $82/bbl in seven trading days.
The FBI and SEC are reported by the Wall Street Journal to be nearing completion of an insider trading investigation that reportedly involves some of the most well known hedge funds, mutual funds and investment banks in the world and that the three year probe could “eclipse the impact on the financial industry of any previous such investigation.” This could be exciting, to say the least.
Last week’s economic reports were mixed with the Empire Manufacturing Report getting killed while the Philly Fed just down the road surprised to the upside. Housing starts and building permits remained in the dumps while new and continuing unemployment claims were better than expected.
Finally the bullishness of fund managers have reached highs not seen since the high point of last April while retail investors have reached extremes in bullishness not seen since December, 2007, which we all remember as the cusp of the approaching bear market.
Of course it’s unlikely that this optimism was shared by the 2 million people who will lose extended unemployment benefits by the end of the year unless Congress can reverse Thursday’s House of Representative’s vote to not extend those benefits.
What It All Means
We continue to live in this Alice in Wonderland world where markets are counting on Saint Ben and his $600 billion to save us from news flow and events that would completely tank markets in “normal times.” Let’s hope that Saint Ben can continue to slay all of the dragons that continue to bedevil our country and the world.
The Week Ahead
It’s a holiday shortened week ahead but one with two days of Federal Reserve POMO operations to the tune of approximately $8 billion and several key economic reports to bring us into the Thanksgiving holiday.
Economic Reports
Tuesday:Q3 GDP Second Estimate, October Existing Home Sales, FOMC Meeting Minutes
Wednesday: October Personal Income, October Personal Spending, October Durable Goods, Initial Unemployment Claims, Continuing Unemployment Claims, November University of Michigan Sentiment, October New Home Sales
Sector Spotlight
Winners: Silver (SLV) Oil Services (IEV) Japan (EWJ)
Losers: Home Construction (ITB) China (FXI) Hong Kong (EWH)
Yesterday I looked at my calendar and suddenly realized it was Thanksgiving and time for the Holidays again. It seems we just took down the Christmas decorations the other day.
I wish you and your family a wonderful Thanksgiving Day and holiday week. In spite of current challenges and problems, we’re blessed to live in America and have much for which to be thankful.
Wishing you a wonderful weekend wherever you may be.
