Slope of Hope Blog Posts

Slope initially began as a blog, so this is where most of the website’s content resides. Here we have tens of thousands of posts dating back over a decade. These are listed in reverse chronological order. Click on any category icon below to see posts tagged with that particular subject, or click on a word in the category cloud on the right side of the screen for more specific choices.

Don’t Interest Rates Matter Anymore?

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I would have otherwise had a good day, were it not for one position – a large long on TLT (the ETF on Treasury bonds). I had been watching @ZBH1 all night, and earlier it was up nicely, but it started slipping. What puzzled me was that, a little before the open, the futures were down about 1/10th of a percent, whereas TLT was down over half a percent (and that was just the beginning).

I got out of TLT at a loss early on, and a good thing too, because the thing basically collapsed all day long.

But that leads me to the question which is the subject of this post: don't interest rates matter to the market anymore?

Here are the cold, simple facts:

(a) Bernanke has made it abundantly clear there is no limit to how many hundreds of billions he will throw at the market to keep interest rates down. Conclusion: since this pledge is made by the most powerful financial force on the planet, rates should get low and stay low.

(b) Interest rates had done almost nothing but climb for the past three months, as shown in the graph below. Conclusion: the market's concerns about inflation outweigh the most powerful financial force on the planet, and QE2 is and will continue to be a failure.

1228-interest

(c) The housing industry, ostentisibly one of the principal beneficiaries of QE2, is heavily dependent on low interest rates (I'm pleased to report I refinanced my house at 3.25% fixed this autumn – – just about the only positive financial event in my life this year). Conclusion: With rates soaring higher, the housing market is going to continue to get damaged.

(d) The stock market, which for eons has shown its reliance on interest rates (dropping rates=good for equities; rising rates=bad for equities), simply keeps puking to new recovery highs every single day (check out the $INDU today), in spite of the above facts. Conclusion: the entire stock market can be replaced by one financial instrument whose ticker symbol will be WTF.

Some Musings (by BKudla)

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As 2011 unfolds before us, I am thinking hard about my portfolio and how to position myself with the upcoming volatility.  To me, even if the FED is actively buying and adding liquidity to the market, headwinds are already blowing strongly.

China is now playing defense in trying to control a FED induced inflation, which will slow their economy down more than anyone is will to publicly comment.  Their banks are loaded with non performing assets, and their companies are operating on near zero margins.  It will be hard to justify the China is the engine theme.

Europe will have member state defaults, IMNSHO, Ireland will cry uncle and default, Sein Fein is likely to take control of the government in March, and they already are declaring this agreement null and void.  Once this occurs, the British banks are toast, and France and Germany take some sweet haircuts.  Best case scenario is a radical restructure of the current deal to Ireland's favor.  But Ireland is only a catalyst, Spain blows the barn down.  Either way the Euro weakens in 2011.

The BRIC nations, we already spoke about China, Brazil and Russia are commodity countries that have different futures.  Russia will suffer some serious food shortages next year, their wheat belt is already drought stressed, and with this very cold winter, expect the planting season to be late.  This brings frost into play and another failed crop will cause grain prices to spike, devastating Russia, and seriously impacting the ROW.  Brazil is dependent on a healthy China, as well as Australia.  Although I do not follow India that closely, it appears they are having some inflation issues.

Then there is the good ol USA, I already recapped in an earlier post regarding our priced for perfection market, and extreme bullishness, but we have some serious skeletons coming out, and a political environment that is hostile to the devalue and stimulate environment everyone blindly bought into for the past 20 months.

The mortgage crisis will come to a head this year, rising interest rates and judicial proceedings will see to that, this overwhelms any interest income spread the banks enjoy.  California, Illinois, and New York will blow up this year, here in CA the budget deficit is 25% of the entire budget, it takes 2/3 vote to increase taxes, which won't happen, and congress will block any attempt by Obama to subsidize the states like the past two years.  This is a train wreck coming.  The House is dominated by the Republican party with a voter mandate to shut down the spending, and this will dry up any expected uptick from the federal government.  The FED may try for QE 3,4, whatever, but there is a vote pending to raise the debt ceiling, I believe the Repubs will use that leverage to take power away from the FED, and most definitely Obama.

Does this sound like economic recovery to you?

This post is getting long, I will next explain my trading plan for 2011, based on this thesis.

 www.arum-geld-gols.blogspot.com

Shalom’s New Best Buddy

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As proof of a munificent God, I offer the fact that none other than Ron Paul – the libertarian Texas congressman whose last book is dedicated to why the Federal Reserve should be abolished – is going to be in charge of Congressional oversight of…………the Fed.

Here, from a New York Times article, are some earnest expressions of Paul's love for this esteemed institution:

The Beginning of the End

“The day the Fed came into being in 1913 may have been the beginning of the end, but the powers it obtained and the mischief it caused took a long time to become a serious issue and a concern for average Americans.”

The Gold Standard

“Whenever I talk of a gold standard, there are always people ready to accuse me of having some obsession or fixation. Fetish is a word thrown around. In fact, I’m only observing reality: the idea of sound money in most of human history has been bound up with gold money.”

A Full-Time Counterfeiting Operation

On Mr. Bernanke: “There is something fishy about the head of the world’s most powerful government bureaucracy, one that is involved in a full-time counterfeiting operation to sustain monopolistic financial cartels, and the world’s most powerful central planner, who sets the price of money worldwide, proclaiming the glories of capitalism.”

New Money Out of Thin Air

“Only the Federal Reserve can inflate the currency, creating new money and credit out of thin air, in secrecy, without oversight or supervision. Inflation facilitates deficits, needless wars and excessive welfare spending.”

Fed Chairmen He Has Known

“Being in Congress in the late 1970s and early 1980s and serving on the House Banking Committee, I met and got to question several Federal Reserve chairmen: Arthur Burns, G. William Miller and Paul Volcker. Of the three, I had the most interaction with Volcker. He was more personable and smarter than the others, including the more recent board chairmen Alan Greenspan and Ben Bernanke.”

Low Interest Rates

“Artificially low interest rates are achieved by inflating the money supply, and they penalize the thrifty and cheat those who save. They promote consumption and borrowing over savings and investing. Manipulating interest rates is an immoral act. It’s economically destructive.”

The Bailouts

“Today, there is no principled opposition to the corporate bailouts and the Fed’s trillions of dollars of new credit and the takeover of insurance, mortgages, medical care, banks and the auto industry. The arguments have only been over amounts, financial vehicles, and which political group gets to wield the economic power. If there is no moral argument against the economic takeover of America, there will be no resistance to the dictator who rules over our lives with an iron fist.”

The Obama Legacy

“For the same reason a disease cannot be cured by more of the germ that caused it, the inflation and debt accumulation of the Obama years will not inflate our way out of it. This depression will likely last and last.”

Technical Difficulties (by Springheel Jack)

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My main charting computer went down yesterday afternoon and all my futures and live forex charts have gone down with it for the time being. I'll be doing computer open-heart surgery today and tomorrow to get back to normal service and for today I'm just using stockcharts, as that is web-based.

I've been expecting the current retracement to resolve bullishly and I'm still expecting that, but I'll spend some time today considering the possibility that this might go the other way. We're close to key support on SPX and key resistance on USD, and it's worth looking at where those levels are and what the implications are if they break.

Firstly on SPX where after last week's low it is clear that SPX is in a rising channel that is a model of technical perfection. Here it is on the daily chart, and it really is a beauty:

Note also the parallel lines I have drawn in in red, as a mainly notional declining channel / range between January and October this year, and how last week's low retested the broken upper trendline perfectly.

Now that doesn't mean of course that this must resolve bullishly, but it does underline that as we stand today, the SPX move up from the summer lows is in robust technical shape, albeit also at major resistance levels, and until that changes the trend is still up.

There is some reason to think that this might resolve bearishly though. We are still close to the channel support trendline and a move below 1180 SPX now would break down through it. There is also a possible H&S forming, with a target at 1119 SPX, that you can see here on the 60min chart:

I've posted often before that equities and USD are strongly inversely intertwined, and that a break up on USD here would move likely end this wave up on equities. It's hard to believe that USD can do anything other than fall under the stewardship of the Fed, but some winds of change are blowing in the US, and it may be that the Republicans may be able to restrain the Fed from the reckless money printing that has dominated the last two years, and from the push to devalue USD that has dominated the second half of 2010 after the USD top in early June.

On the weekly USD chart we hit a key support trendline a few weeks ago, and it held on a weekly basis. If the bounce holds and breaks recent highs then there are two patterns in play. First is the triangle, with a target in the 87 area, and a rising channel upper trendline with a target in the 94 area:

First however, USD will need to break the declining channel from the June high. In practical terms a daily close over 79 would deliver that, and yesterday's close was at 78.69. The upper trendline of the channel has already been tested hard and is looking a little ragged now. It could break and this daily chart with SPX as the background illustrates the likely implications for equities if it does:

I've posted before a little right-angled and ascending broadening formation that I have on the Vix 60min chart. Here it is again, and unless the support trendline breaks, with a pattern target of 13 that I'm not taking too seriously, then the next move should be up with a target in the 23.5 area, which would obviously be negative for equities:

I've been reading a lot recently from Carl Futia and others that this retracement will go down further and then reverse to an upwards target in the 1300 area. I disagree, as we're clearly testing major support and resistance levels on SPX and USD respectively at the moment. If these break then this current equities uptrend will be broken, and the recent high was a major interim top. I'd be expecting a move then to retest support at 1130 SPX and that might well also be broken.

Until we see those breaks though, there's only one good risk / reward trade at an unbroken major support level, and that's obviously to go long. Only when that support breaks does the short trade become more attractive. I'll be watching for that support break on SPX, and the resistance break on USD, and if they happen the picture will entirely reverse, and the best risk / reward trades will be short equities / long USD.