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Thursday, December 19, 2013
KRUGER INSIGHTS THURSDAY, DECEMBER 19, 2013
Joel Kruger
When The Third Strike Is A Foul Ball - In the great American sport of baseball it's three strikes and you're out. I suppose yesterday was my third strike with the S&P. Though I will argue that it was a foul tip (strike that still keeps you in the game) given I took no loss on the position (sold 1805 with stop 1805). Still, for the time being, I have been sidelined. Looking back at the Fed decision, it sure was something to see. To think we would get a taper and at the same time, a Fed sounding as dovish as ever, was quite perplexing. The Fed teased hawks with the reining in of asset purchases, and at the same time, buried these hawks with more dovishness than they could handle. Bernanke made it very clear in his statement the Fed was still doing a lot and would continue to do so, and then drove it home with some new forward guidance that rates would not go up until well after the unemployment rate dropped below the 6.5% threshold. That's some kind of a threshold! I suppose two words that were used with a very liberal use on Wednesday were "threshold" and "qualitative." Bernanke described the Fed's approach to policy reversal as qualitative in nature. Now I get that "well after unemployment drops below 6.5%" is certainly not a quantitative metric. But assigning it as qualitative feels more like an assignment by default than anything else. I would classify the approach as vague, abstract and reflective of a central bank that will hold out on a tightening (taper is not tightening...wink wink) at all costs, to avoid the risk of making a bad call. So not too sure how helpful the forward guidance is, and in fairness, not too sure how helpful it could be anyway with so many things that could happen between now and 6.5% unemployment.
Goldilocks - Another thing that struck me yesterday was the Fed Chair's response to a question from Binyamin Appelbaum at the New York Times. Applebaum asked if the Fed was concerned it made the wrong decision in starting to taper too early and effectively do less to help stimulate the economy, as historically, this type of a move had burned the central bank in the past. Bernanke answered that he didn't feel the Fed was doing less. Now I know we are splitting hairs here, but what is the point of a taper if not to signal to markets that the Fed is doing less. It might be on the most marginal of levels, but isn't a taper by definition doing less? So anywhere you looked on Wednesday, it was clear the Fed had no intention of letting the markets think a taper was a tightening in an form or fashion. And so, the S&P rallied a spectacular 40 points off the daily low to trade back just shy of the recently established record highs. The equity market bathed in the dovishness and was relentless into the close. Yet I am still not convinced and am not sure I would be buying into the Goldilocks reaction. In my view, call it whatever you want and mask it however you want, but a taper is still a taper. Yesterday's decision to taper still officially marked the beginnings of a very long path towards tightening, and I do not believe the Fed will revert back to a looser monetary policy than before yesterday, as much as they would have us think they still might.
Too Many Layers - The fact is, economic data has been showing healthy signs of recovery, and if the Fed weren't so shellshocked by the crisis of 2008, they would have been quicker to respond to the recovery in the economy. Instead, the Fed has added several layers of caution into its guidance, and we see this with things like "threshold," "well beyond," "qualitative," and "not doing less." My point here is really not to be critical of the Fed and more so to be critical of the ongoing bid in equity markets. If the stock market is truly forward looking, it stands to reason that it should now be pricing in the end to historic, ultra accommodative monetary policy. And with this pricing in should be some form of a significant corrective decline as the Fed's artificial support is slowly priced out. I believe this is what we will see in the weeks ahead, and would not be expecting much in the way of additional gains beyond the recently established record highs. In light of the above and circling back to where I started today's analysis, I am still standing at the plate and will take another swing on the short side, should the market stall out once again above 1810 and roll back over below 1800. Even if you subscribe to the view that tapering is not tightening, it sure as heck ain't accommodating, and even if you wan't to take Bernanke's word that the Fed isn't doing less, it sure as heck don't mean the Fed is doing more. So while the Fed shift might be analogous to watching an erosion, at the end of the day, the wheels are still in motion.
Goldilocks - Another thing that struck me yesterday was the Fed Chair's response to a question from Binyamin Appelbaum at the New York Times. Applebaum asked if the Fed was concerned it made the wrong decision in starting to taper too early and effectively do less to help stimulate the economy, as historically, this type of a move had burned the central bank in the past. Bernanke answered that he didn't feel the Fed was doing less. Now I know we are splitting hairs here, but what is the point of a taper if not to signal to markets that the Fed is doing less. It might be on the most marginal of levels, but isn't a taper by definition doing less? So anywhere you looked on Wednesday, it was clear the Fed had no intention of letting the markets think a taper was a tightening in an form or fashion. And so, the S&P rallied a spectacular 40 points off the daily low to trade back just shy of the recently established record highs. The equity market bathed in the dovishness and was relentless into the close. Yet I am still not convinced and am not sure I would be buying into the Goldilocks reaction. In my view, call it whatever you want and mask it however you want, but a taper is still a taper. Yesterday's decision to taper still officially marked the beginnings of a very long path towards tightening, and I do not believe the Fed will revert back to a looser monetary policy than before yesterday, as much as they would have us think they still might.
Too Many Layers - The fact is, economic data has been showing healthy signs of recovery, and if the Fed weren't so shellshocked by the crisis of 2008, they would have been quicker to respond to the recovery in the economy. Instead, the Fed has added several layers of caution into its guidance, and we see this with things like "threshold," "well beyond," "qualitative," and "not doing less." My point here is really not to be critical of the Fed and more so to be critical of the ongoing bid in equity markets. If the stock market is truly forward looking, it stands to reason that it should now be pricing in the end to historic, ultra accommodative monetary policy. And with this pricing in should be some form of a significant corrective decline as the Fed's artificial support is slowly priced out. I believe this is what we will see in the weeks ahead, and would not be expecting much in the way of additional gains beyond the recently established record highs. In light of the above and circling back to where I started today's analysis, I am still standing at the plate and will take another swing on the short side, should the market stall out once again above 1810 and roll back over below 1800. Even if you subscribe to the view that tapering is not tightening, it sure as heck ain't accommodating, and even if you wan't to take Bernanke's word that the Fed isn't doing less, it sure as heck don't mean the Fed is doing more. So while the Fed shift might be analogous to watching an erosion, at the end of the day, the wheels are still in motion.
Wednesday, December 18, 2013
KRUGER INSIGHTS WEDNESDAY, DECEMBER 18, 2013
Joel Kruger
The Big Decision - As I scan the currency markets on Fed day, there are no compelling opportunities in the major currencies that are screaming out to me. Whatever the outcome today, I am positioned over the medium-term short risk assets, and have built up decent exposure short NZD/USD and short the S&P. I am in the camp that believes risk assets, particularly US equities, have been supported by Fed policy, and now that this policy is fully extended, these assets will enter a period of underperformance. With this in mind, I think the risks associated with the Fed staying on the dovish side today are far greater than the risks associated with a move towards reversal. If the Fed does nothing today (no taper, or no strong language suggesting imminent taper), I wouldn't be so sure this will translate into a massive equity rally. Again, if the Fed has nothing left to do but stand still, we could start to see equity markets pull back on profit taking, with no fresh incentive to buy. Furthermore, failure to act ultimately sends a disturbing message to market participants, that despite all of the positive data in recent weeks that would support a move towards reversal, the Fed still is afraid to act. So in this scenario where the Fed does nothing and stays on the dovish side, what happens when equity markets fail to respond favorably and actually start to reverse sharply on profit taking. This could create a panic environment with the Fed standing by helplessly, unable to do anything to buoy the setbacks.
Continuity And Cohesion - But if the Fed moves towards a taper, and comes out less dovish than market participants are expecting, at least in this scenario, when risk assets come under pressure, investors will be comforted by the fact that the policy decision and reversal in equity markets are because of positive developments in the economy. This is the better scenario in my view and one the Fed should embrace. I am actually quite surprised analysts are only pricing in a 33% chance of taper today in light of the above, and am concerned that the Fed will cater to analyst expectation and not want to shake things up because of this. Another pro taper argument in my view is that the initiation of the official reversal while Bernanke is still on the watch, will translate into a smoother transition for Yellen, with the move giving market participants a nice sense of continuity and cohesion at the Fed. The two key members at the Fed that were there from the start of this unprecedented monetary easing policy, will be there together to to bid this policy farewell. However, if Yellen is the one to initiate the reversal without Bernanke (the longer she takes the more dangerous), it could open the door of uncertainty, with market participants questioning and comparing the two policymakers. I don't think this is what the Fed will want, especially considering the actual impact of a Fed taper on the economy would be less than marginal at best. Better to get the show on the road now.
Slow Starter - Moving on, I recently established a fresh long position in AUD/NZD at 1.0897 that is underwater. Still, I was fully prepared for the possibility of additional weakness before the bounce and am looking to hold this position into 2014. I will only grow concerned if the market puts in a weekly close below 1.0700. Technically, the price action is unreal, with the market showing oversold across the board. Daily, weekly, and monthly studies are deeply stretched and warn of the need for a major correction. It isn't too often that you get this type of confluence, and when you do see it, as a contrarian, it is a dream. Fundamentally, I believe there is just too much good that has been priced into New Zealand of late, and the relative outperformance in the currency is a severe liability for the local economy. If risk assets come under intensified pressure over the coming days and weeks as I believe they will, look for significant Kiwi outflows, as market participants flee from the higher yielding commodity currency. But let's get something straight right now. While I absolutely love this trade, it does not mean that my whole life is on the line with the position. If it doesn't work out then so be it. I will dust off and move on. But I gotta say..it is a very pretty setup.
Short Of A Lifetime - Last but not least - Bitcoin. I would never have guessed I would be recommending positions in Bitcoin at the beginning of the year, but on November 29th, as per below, I couldn't ignore the hyperparabolic price action. Today I recommended fully exiting the trade at $580 as per analysis earlier this week that targeted at retest of the previous December base at $576. This is definitely a trade I will not forget. I am most intrigued with this virtual currency and am not sure what the future holds for the market. For now, it has caught my attention, and I will make sure to keep an eye. I still think there is a risk for deeper setbacks towards $200, but at the moment, I am sidelined.
Best trade out there might be the riskiest but highly compelling. Sell #Bitcoin $1175 for open objective; stop on daily close above $1375.
— Joel Kruger (@JoelKruger) November 29, 2013
Tuesday, December 17, 2013
KRUGER INSIGHTS TUESDAY, DECEMBER 17, 2013
Joel Kruger
Now Or Never - I'm not too sure how much volatility we will get in the markets on Tuesday, with participants squarely focused on the outcome of Wednesday's Fed policy decision. Irrespective of the outcome, I believe this will be a huge decision that will have a major impact on markets going forward. Recent economic data has certainly been supportive of a shift in policy, and would seem to justify some form of a taper at a minimum. More importantly, strategically, I think a taper or some very strong language tomorrow warning of an imminent taper, would be in the Fed's best interest. I am in the camp that believes risk assets have been supported over the past several years by Fed policy. My worry now is that risk assets have finally taken full advantage of a Fed policy that can't extend any further. If the Fed continues to show an unwillingness to reverse policy even the slightest, we could see a scenario where risk assets start to come off heavily (investors book profit as they no longer see additional incentive from the Fed), with the Fed having nothing it can throw at the situation to buoy the risk liquidation. This in turn would create a credibility crisis and another economic crisis. If however the Fed starts to move on a path towards tightening, at least markets will be able to reconcile any pullback in risk assets, understanding that it is because of the Fed moves. This seems to be the better route at this point, as it will produce a less panicked reaction.
Forget About Monday - Technically, I believe risk assets should come under intensified pressure in the weeks and months ahead, with the charts all warning of topping in these markets. US equities are at the center of it all right now, and a serious pullback is long overdue here with studies so overextended. We saw a very nice bearish reversal week in the previous week, and the price action would suggest that US equities should close this week a good deal lower than where we closed last Friday. Yet the signal has not been sympathetic to bears in the early week, with Monday's sharp rally leaving many bears feeling defeated. Still, I would not throw too much weight behind Monday's rally, with the market only consolidating the previous weekly declines thus far and prepping for what I believe will be the next major downside extension in the S&P below 1760 and towards 1720 further down. Clearly tomorrow's event risk is the leading candidate for such a catalyst, and it would stand to reason that if we were in fact to see this bearish follow through in risk assets, it would imply the Fed decision will come out on the more hawkish side.
Be Careful With Euro And Yen - For currencies, stay away from EUR/USD right now. I like the idea of selling, but also would not rule out the possibility of one more surge to fresh yearly highs beyond 1.3835 and towards major multi-month falling trend-line resistance off of the record highs from 2008, which comes in around 1.3900. I also would be careful with USD/JPY. While the outlook is aggressively bullish over the medium and longer-term, I still feel there is risk for a significant short-term pullback that could take us back into the 99.00's. Otherwise, I would expect to see the US Dollar very well bid against all other currencies, particularly against the commodity bloc and emerging market currencies. Moving on, don't forget about EUR/CHF and the implications here if the market comes under additional pressure and starts to threaten 1.2000. Finally, I am out of the money on a long AUD/NZD trade (long 1.0897), but absolutely love this trade. I got into the position knowing that I would be holding medium-term, and I would only be concerned if we established back under 1.0700 on a weekly close basis. This is a market that has been obliterated this year and is begging for a major reversal higher. I think this reversal is imminent, and also believe that if we do see a shift in risk sentiment, this will weigh more heavily on the higher yielding New Zealand Dollar.
Now Or Never - I'm not too sure how much volatility we will get in the markets on Tuesday, with participants squarely focused on the outcome of Wednesday's Fed policy decision. Irrespective of the outcome, I believe this will be a huge decision that will have a major impact on markets going forward. Recent economic data has certainly been supportive of a shift in policy, and would seem to justify some form of a taper at a minimum. More importantly, strategically, I think a taper or some very strong language tomorrow warning of an imminent taper, would be in the Fed's best interest. I am in the camp that believes risk assets have been supported over the past several years by Fed policy. My worry now is that risk assets have finally taken full advantage of a Fed policy that can't extend any further. If the Fed continues to show an unwillingness to reverse policy even the slightest, we could see a scenario where risk assets start to come off heavily (investors book profit as they no longer see additional incentive from the Fed), with the Fed having nothing it can throw at the situation to buoy the risk liquidation. This in turn would create a credibility crisis and another economic crisis. If however the Fed starts to move on a path towards tightening, at least markets will be able to reconcile any pullback in risk assets, understanding that it is because of the Fed moves. This seems to be the better route at this point, as it will produce a less panicked reaction.
Be Careful With Euro And Yen - For currencies, stay away from EUR/USD right now. I like the idea of selling, but also would not rule out the possibility of one more surge to fresh yearly highs beyond 1.3835 and towards major multi-month falling trend-line resistance off of the record highs from 2008, which comes in around 1.3900. I also would be careful with USD/JPY. While the outlook is aggressively bullish over the medium and longer-term, I still feel there is risk for a significant short-term pullback that could take us back into the 99.00's. Otherwise, I would expect to see the US Dollar very well bid against all other currencies, particularly against the commodity bloc and emerging market currencies. Moving on, don't forget about EUR/CHF and the implications here if the market comes under additional pressure and starts to threaten 1.2000. Finally, I am out of the money on a long AUD/NZD trade (long 1.0897), but absolutely love this trade. I got into the position knowing that I would be holding medium-term, and I would only be concerned if we established back under 1.0700 on a weekly close basis. This is a market that has been obliterated this year and is begging for a major reversal higher. I think this reversal is imminent, and also believe that if we do see a shift in risk sentiment, this will weigh more heavily on the higher yielding New Zealand Dollar.
Sunday, December 15, 2013
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