Which Way Wednesday – Waiting on the Fed, Then the ECB

Waiting to cut out the deadwood.
Waiting to clean up the city.
Waiting to weed out the weaklings.
Waiting for the final solution
To strengthen the strain.

Waiting to follow the worms. – Pink Floyd 

Don't you just love the anticipation?  

As expected, we got a bit of a bump from Geithner's turn on Bloomberg last night but it was utter nonsense with Timmy pleading for policy makers in Europe and at home in the US to DO SOMETHING!!!   Timmy saying something needs to be done is a very, very far cry from something being done – a nuance that seems to be escaping the bulls as the thinly-traded US futures are up about 0.4% at 8am.  Europeans are not quite so gullible and their markets are off about 1%, following up on yesterday's awful close.  

Of course the MSM pep squad has all morning to quote Geithner out of context while we wait for the FOMC statement at 2:15 but Bernanke is not scheduled to speak after the statement is released and it would be extremely odd for them to make a major policy move via their statement with no press conference so I think it's all going to be on Draghi and the ECB tomorrow and they'd better be coming up with a Hell of a big bazooka if they want to make a dent in their problems.

You're welcome, by the way, if you went with yesterday's Futures picks from the main post.  Oil fell all the way to $87.50 before turning back up (and we went long into the close so YAY!) for a nice $2,500 per contract gain on /CL.  Gold dropped $15 to $1,615 and /YG for $33.20 per Dollar and that's $498 per contract there.  We had similar gains shorting the Dow off the 13,000 line (/YM in Futures) but the cool thing about that Dow is it hit that line over and over and over again for $400 and $500 per contract gains all day.  Right now (8:15) it's at 13,000 again! 

Yesterday was the last day of our free picks.  Each earnings quarter we like to show off for the month and give the free readers a chance to see some of the trades we make every day at PSW – kind of like giving samples of free products.  It's very successful as we always add a lot of new Members but that's it for this quarter.  We'll be back in October with more free picks – hopefully bullish ones by then as we're finishing July generally short as we have little confidence that anything will actually be fixed this week.  

Only the fear of some kind of coordinated Central Bank action is keeping us from being gung-ho bearish at the moment.  The TERRIBLE data continues to pour in and, as you can see from this chart, market strategists are at extreme levels of bearishness, which is usually a good contrary indicator but – what if they are right?  If my daughter's pee-wee football team gets to play a game against the NY Giants – much as I love her – I think I'd have to go with the flow and bet on the Giants.  Sometimes you can have extremely bearish measurements simply because you are measuring something that IS extremely bearish.

Analysts were not wrong to be bearish in 2004 – just early and they weren't wrong to be bearish in 2009 – they just didn't count on $15Tn of global stimulus/QE coming in from the G20.  Analysts analyze companies, not the macro picture (what they SHOULD do is another discussion) and they are not wrong to be extremely bearish now as earnings have been a train wreck this quarter – especially on the revenue side – and forward guidance give no indication we'll be out of the woods for the rest of 2012 either – even if the EU does not completely collapse and even if China manages to extend and pretend for another 6 months.  

Bill Gross calls it "The Death of Equities" in his latest investment outlook, comparing the current market situation to the end game of a massive Ponzi scheme – a fraud that has been perpetrated on the bottom 99% by the top 1% for the past century:  

“The 6.6% real return belied a commonsensical flaw much like that of a chain letter or yes — a Ponzi scheme. If wealth or real GDP was only being created at an annual rate of 3.5% over the same period of time, then somehow stockholders must be skimming 3% off the top each and every year. If an economy’s GDP could only provide 3.5% more goods and services per year, then how could one segment (stockholders) so consistently profit at the expense of the others (lenders, laborers and government)?

The commonsensical “illogic” of such an arrangement when carried forward another century to 2112 seems obvious as well. If stocks continue to appreciate at a 3% higher rate than the economy itself, then stockholders will command not only a disproportionate share of wealth but nearly all of the money in the world!”

Like me, Gross sees inflation as the only possible exit for the Global Economy – short of default which would be much, much worse:  

Unfair though it may be, an investor should continue to expect an attempted inflationary solution in almost all developed economies over the next few years and even decades.  Financial repression, QEs of all sorts and sizes, and even negative nominal interest rates now experienced in Switzerland and five other Euroland countries may dominate the timescape.

We'd better be getting that QE very soon as the evidence is mounting that the Global economy needs a huge kick in the ass to get going.  We discussed China's phony-baloney GDP numbers yesterday and here we have a nice chart showing the alarming 2008-style drop-off in electricity production.  That, combined with oil demand that's off 0.4% and a 96% drop in profits in China's steel industry all point to far less than 8% GDP growth – no matter what the official numbers claim.  

The IMF has identified Europe as the number one threat to China – if one goes, the other goes with it.  They are also concerned about rising oil and food prices, deteriorating local Government financial pictures, a sharp slowdown in foreign investment and the continuing collapse of the property market – especially as it affects the balance sheets of Chinese banks, who kept lending right into their bubble – even as the West was in collapse.  

Western Europe is still in collapse with HORRIFIC PMI data this morning.  UK dropped to 45.4 (under 50 is contraction) from 48.4 in June – the worst reading since May of 2009, Germany hit 43 (down from 45), France 43.4 (from 45), Italy 44.3 (from 44.6) and Spain 42.3 (UP from 41.1 – YAY!).  So all of the EU, except Ireland is in contraction and Markit rates the overall Eurozone PMI at 44 – well beyond the point at which a single month can turn it back up – another month down and we will certainly lose the year so, of course, the EU markets are anxiously awaiting a massive bazooka blast from the ECB tomorrow because anything less than that and the are DOOMED!  

Nonetheless, Germany reiterated its opposition to granting a banking license to the EU rescue fund (the ESM).  Economy Minister Roesler said "the Chancellor, the Finance Minister, and I are all agreed … (this) cannot be the path we take."  As we noted yesterday, Germany is 27% of the ESM and it CAN'T move forward without German approval – so it's not likely Germans are going to rush back from their vacations a month early to approve extraordinary actions by Draghi tomorrow.  

Meanwhile, the Bundesbank chose today (24 hours ahead of an ECB policy meeting) to publish on its website a late-June interview with bank President Jens Weidmann in which he says the ECB is "obliged to respect" and not overstep its mandate. "We have a greater say than many other banks in the EU."  No, Nien, Nyet – how many ways do the Germans have to say it before investors take them seriously? 

We got a strong ADP report (163,000) but our own PMI fell to 51.4, down from 52.5 in June with New Orders taking a huge hit at 51 (down from 53.7).  This is a 34-month low for the US PMI and we'll get ISM Manufacturing at 10am as well.  As the report notes: "With order books barely growing in July as export orders fell for the second month in a row, the survey signals a real risk of manufacturing production falling the Q3 unless demand picks up soon." 

Nonetheless the Futures are climbing as bad news continues to be good news – at least until 2:15…  

Get read for a crazy couple of days – gold just fell to $1,600 as traders are beginning to see that if Draghi does what Ben doesn't – the Dollar will fly up – that won't be good for commodities, or equities, which are priced in Dollars too.