The Odds of QE3 (PLUS?)

There has been a nice run-up in the S&P 500 futures as of late and there may be more to come. This Wednesday it’s the Fed’s turn, and after a disappointing job report last week and weeks of buildup it’s now time for Fed Chairman Bernanke to step up to the plate. For sure last Friday’s jobs report was a pivotal report and more than likely will raise expectations for more aggressive action.

We fully expected the ECB to announce its new bond buying program last week, but what we did not expect was the size of the rally it caused. Additionally, we thought there could be some type of “sell the news” price action, but that didn’t occur either. With the ECB now in the rearview mirror, this week is going to be all about expectations. Those expectations are now leaning toward an open-ended bond buying program in which the Fed holds open the possibility that it will continue to keep buying bonds after the initial allotment is purchased, and they have also been looking at purchasing mortgage-backed securities. This is what we call QE3 Plus.

In the big picture this is not good. It means that investment firms would rather stay less exposed to stocks even if they see the markets are going up. Is that the right choice? Not right now it’s not. The S&P is now only a few handles away from its May 2008 highs. What is going on now with the ECB and the Fed is pushing many of these firms to put money back to work as they chase returns. If you look at a 1-year chart of the S&P, it’s up 19.96%. If you look at a 2012 chart of the S&P it is up 14.34%, the NASDAQ is up a whopping 20.39% with the Dow up close to 9%. With only two months till the election, it seems the race is on not only for the White House but the S&P 500 too.

Last week the S&P 500 and the NASDAQ finished out their best week in three months. All 10 S&P sectors finished in the black, with the financials up over 3%. Yes, it was a dismal non-farm payroll report, but like we learned last week, it’s on to the next thing, and this week’s is Wednesday’s FOMC meeting. The fact that the benchmark S&P is up nearly 14% on the year and the fact that stock buyers remain pessimistic is clearly favoring the upside. As we head into the final 3-1/2 months of 2012 it seems the uninvested portfolios have a lot of catching up to do.

Our view:
The S&P 500 futures can run but not hide from the Fed. Last week was pivotal for the ECB and this week it’s the Fed’s turn. Bloomberg is saying there is no turning back for the Fed, that it is 99% sure some type of quantitative easing program will be announced this week. With that in mind, we lean to selling the early rally and then looking to buy weakness. 1441, 1450, 1476 are all resistance levels we are looking at on the upside.  As always, please keep an eye on the 10-handle rule and please use protective stops.

• It’s 6:00 a.m. and the ESU is down 2.5 handles at 1435.75, crude is up 4 cents at 96.45 and the EC is trading 12779, down 19 ticks.
• In Asia 7 out of 11 markets closed higher.
• In Europe 8 out of 12 markets are trading lower (CAC -0.08%, DAX +0.10%)
• Today’s headline: “Fed Stuck at Zero Into 2015 Seen In Swaps, QE Odds Reach 99%.”
• Economic calendar:  MONDAY: Consumer credit. TUESDAY: NFIB small business optimism index, McDonald’s August sales, international trade, 3-yr note auction, Intel developers forum. WEDNESDAY: Weekly mortgage apps, import & export prices, wholesale trade, oil inventories, 10-yr note auction, crop outlook report, Apple iPhone 5 event, FOMC meeting begins. THURSDAY: Jobless claims, PPI, 30-yr bond auction, FOMC mtg announcement, FOMC forecasts, Bernanke press conference and earnings from Pier 1 Imports. FRIDAY: CPI, retail sales, industrial production, consumer sentiment, business inventories.

• VOLUME: 1.46mil ESU and 7.5k SPU traded
• SPREADS: 1.5k SPU/Z spreads traded
• FAIR VALUE: S&P -1.00, NASDAQ -6.00

Friday recap
Surprise!!! As the 96k non-farm payrolls flashed across the big board on the CME Group trading floors, the grimace over the crowd was/would be comparable to Tiger missing a three-foot putt to lose the coveted Ryder cup. In this case, the miss quickly turned the disbelief into reality of more QE support likely or at least standing by – even closer…Goldman’s Hatzius said on CNBC more QE coming next week – been saying that for 3ish months.

Late breaking alert German chancellor Merkel backs the ECB, bucking German anger over the bond plan according to the WSJ  //  @RangerHondo adds, ECB essentially shifted approval to EU which Germany has full veto over…. puts Germany right where she wants to be…

Trade recap - Real interesting activity in the SPY 148′s for Sept looks in excess of 50K bought in decent blocks and 10K bought in smaller size at 1545ET  / new positions as the 90K done exceeds the open interest.

CFTC says the net EUR short position is now USD 16.1bln, an increase of 1% from the previous week – Net JPY long position USD 3.8bln, increase of 12% – Net AUD long position USD 6.4bln, decreases 22% – Net USD long position USD 694mln, was previously a USD short position

Tom McClellan, publisher of the McClellan Market Report, thinks a lot of the fuel behind Thursday’s rally was short covering, sparked by the ECB’s bond-buying program. “The thing about short covering rallies is that the energy they bring is typically exhausted in just one day or less,” McClellan said. “In other words, I am not at all optimistic about an immediate continuation of Thursday’s pop, and instead I think that the opposite is more likely.” While he’s now short-term bearish, he remains intermediate- and long-term bullish as he thinks “an important bottom” is due next week. DJIA futures up 40 ahead of the key jobs report.

US equity strategy update from JPMorgan’s T Lee – the S&P hit the highest level since ’08. Few investors are cheered by this. Most say the market “should” not be rising, given problems in Europe, hard landing in China, election uncertainty, US fiscal cliff, and of course, the fact that we are in a deleveraging world with deflation risk. As for the question of whether we would be buyers of the market at today’s price? Yes. We remain buyers and affirm our view that the market is going to melt up into Election Day.

SPR release or not to release … There has been considerable chatter regarding the SPR. These links have been posted by @Mark4124NK on our @mrtopstep twitter feed. White House consults oil experts on SPR; some say “go big”  http://reut.rs/Q7WqgN
US oil stock release imminent, consultant says http://bit.ly/TZeNVH other chatter from the trading floor as well

German Court’s ESM Ruling Won’t Be Delayed by Judge Removal Bid http://bloom.bg/TYBXM5

Chinese CPI is due over the weekend and is likely to gain a fair deal of attention as speculation remains on any possible PBOC rate cut. China has 3-4 trillion in foreign reserves they can stimuli whenever they please..China ramps up the stimulus. China has disclosed more infrastructure investment as it seeks to boost its slowing growth, announcing plans for 13 highway construction projects, nine sewage-treatment plants, seven waterway schemes, and five port and warehouse projects. That’s on top of the 25 subway projects China announced earlier this week, and takes total spending to 1T yuan $158B US$. Calling Dr. Copper, oh, Dr. Copper where are you heading?

Friday started with 478k ESU and 1.8k SPU traded on Globex, trading range 1430.40 – 1437.70 / Thursday’s range 1432.00 – 1411.00, settled 1431.00 up 27.5 handles.  Today’s RTH’s gapped 2.5 handles higher to open at 1434.00 – 1433.20, traded down to retest and hold Thursday 1432.00 HOD. After printing the early low at 1432.80 the spoos traded 1436.50 at 8:43CT and then traded 1436.60 – a new high by a tick at 8:47, holding below the globex high 1437.70. EUBIE (08:47:21): lets start a SWING SHORT 1436 or 1438 around this 1437 WIDOWMAKER / need tics & bbands. At 9:02 the spoos were printing 1432.70, a new daily low by a tick… the remainder of the morning was marking time as traders once again exited stage left – extending the weekend. The fundamentals are out of whack and money is shifting around. Many of the markets were choppy, treasuries enjoyed a 2 full point range, rallied on the jobs number and gave back the gains midday. Crude traded a new weekly low of $94.08 before rallying $2.50 to my chagrin as travel soccer season has started for my twins, separate teams of course… At 1:50 a retest of the daily high held and traded faded back to sit in the 1435 area. The closing imbalance showed 30 of the Dow 30 to buy, huge size and the broader market showed a whopping $1Bil to buy – followed by 1438.50 HOD. On the 3:00 cash close the SPU traded 1437.50, settled at 1438.20, up 7.2 handles and 3 handles shy of the May 2008 high.

MTS video: http://www.mrtopstep.com/2012/09/9-7-2012-tim-hafke/

Vintage video of Ben Bernanke as a child  http://i.imgur.com/XaiUx.gif

Very good interview with Frank Giustra Billions he made http://blog.cambridgehouse.com/2012/09/03/frank-giustra-interview/

Posted 9/6 Investors Dump U.S. Stocks: Our flow data indicates investors loathe stocks and love bonds. U.S. equity mutual funds and exchange-traded funds lost $20.9 billion in August, the biggest monthly outflow since the U.S. debt downgrade in August 2011. Global equity funds and ETFs fared better, but they only took in $200 million, the smallest inflow in three months- TRIMTABS

“Pain trade,” a number of fund managers missed out on the summer rally and as a result are lagging the broader indices. The longer prices stay at present levels, the greater the impetus for managers to “chase” stocks will become. This could cause a virtuous cycle whereby higher prices beget higher prices. *WSJ = 2007 http://on.wsj.com/Opy8hQ

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