With the Put “gone”, we suggest start loading up on Puts. Dallas Fed’s Fisher expresses some concerns on the Bernanke Put;
In the interest of full disclosure, I should add that I was also concerned that just by tweaking the language the way the committee did, our action might be interpreted as encouraging the view that there is an FOMC so-called “Bernanke put” that would be too easily activated in response to a reversal in the financial markets. For those of you unfamiliar with the expression “Bernanke put,” or more generally, a “central bank put,” this term refers to the concept that a central bank will allow the stock market to rise significantly without tightening monetary policy, but will ease monetary policy whenever there is a stock market “correction.” Given the extent of the drop in the stock market leading up to and following Standard & Poor’s downgrade of U.S. debt, combined with the FOMC’s commitment to hold short-term rates near zero until mid-year 2013, some cynical observers might interpret such a policy action as a “Bernanke put.” My long-standing belief is that the Federal Reserve should never enact such asymmetric policies to protect stock market traders and investors. I believe my FOMC colleagues share this view.
Full speech, click here.
First, a quick review of market conditions. Short-term measures of market action became extremely oversold mid-week, and investors took the Fed’s latest statement as an occasion to launch a fairly typical “fast, furious, prone-to-failure” rally to clear those conditions. Beyond that, however, the full ensemble of evidence remains negative at present, and we remain defensive as market internals have collapsed, our Recession Warning Composite is fully active, credit spreads have blown out as in 2008, advisory bullishness is excessive and has paradoxically increased, and valuations remain too rich.
There are certainly developments that could move us quickly to a more constructive investment stance, but the most promising one would involve a deeper decline, coupled with significant turn toward bearish sentiment and then a reversal from negative to positive breadth. While we focus more on aligning ourselves with prevailing conditions than on distinctions like “bull” or “bear” (which can only be confirmed in hindsight), strong reversals from negative to positive breadth can be useful in identifying the potential for multi-week advances during what are, in hindsight, continuing bear markets. Unfortunately, those reversals don’t tend to hold if overvalued and overbullish conditions are in place. This is particularly true given that typical pre-recession conditions are active, because further advances are likely to be used as selling opportunities.
It is important to recognize that the S&P 500 is presently only about 13% below its April peak, and the word “only” deserves emphasis. Our valuation impressions align fairly well with those of Jeremy Grantham at GMO, who puts fair value for the S&P 500 “no higher than 950″ – a level that we would still associate with prospective 10-year total returns of only about 8% annually. I would consider investors to be very fortunate if the market does not substantially breach that level in the coming 12-18 months. Wall Street continues its servile attachment to forward operating earnings, seemingly unconscious that the perceived “norms” for the resulting P/E are artifacts of a bubble period. The fact is that historical periods of overvaluation and poor subsequent long-term returns correspond to forward operating P/E multiples anywhere above 12, while secular buying opportunities such as 1950, 1974 and 1982 map to forward operating multiples of only 5 or 6 (based on the strong correlation but downward-biased level of forward operating P/E ratios, when compared with multiples based on normalized earnings – see Chutes and Ladders for a graphic).
Full article, Two One-Way Lanes on the Road to Ruin .
We are still in the bounce period, from last two week’s aggressive selling. The US markets are back to pre S&P Downgrade levels. We have traded with absolutely very low volumes during this bounce, and are approaching resistance levels 1200/1220. The market will ultimately “fool” everybody before it starts the real collapse. Once again we are seeing the greed factor at it’s best. Some points to remember from UBS great Technical Team, before you start buying the dip;
From Gold Core; Gold is mixed in various currencies today after French President Nicolas Sarkozy and German Chancellor Angela Merkel unsurprisingly failed to deliver a solution to the euro zone debt crisis.
The London AM fix in USD was a new record nominal high. Gold’s London AM fix this morning was USD 1,792.00, EUR 1,240.39, GBP 1,089.96 per ounce (from yesterday’s USD 1,779.00, EUR 1,236.18, GBP 1,086.81 per ounce see LBMA).
Bloomberg ‘Chart of the Day’
Euro gold is higher again today despite the meeting and at €1,238/oz remains close to record nominal highs of €1,283/oz. Sterling is down 0.45% against gold after the poor UK jobs number. The Swiss franc has surged against all currencies including gold but remains over 1,400 CHF/oz.
Gold in Euros – 30 Day (Tick)
The Merkel Sarkozy plans to centralize financial and economic governance in the EU has failed to calm markets and there is further weakness in stock markets today.
A key aim of the meeting was to restore confidence in the euro. In the short term this has not been achieved and it is highly unlikely that it will be achieved in the long term.
Dell has slashed its revenue forecast for the rest of this year in the latest sign that a in consumer confidence and delays in government spending are eating into the prospects for leading computer hardware companies http://ftalphaville.ft.com/thecut/2011/08/17/655196/falling-confidence-dents-dell-forecasts/
Fitch Ratings on Tuesday confirmed the US’ triple-A credit rating and gave a vote of confidence to Washington’s deficit-reduction efforts, Reuters reports. The decision contrasted sharply with rival Standard and Poor’s decision to downgrade the US earlier this month. http://ftalphaville.ft.com/thecut/2011/08/17/655131/fitch-firm-on-us-triple-a-rating/
HTC, the Taiwan-based company that is Asia’s second-biggest maker of smartphones, filed another salvo in the escalating patent wars around the devices. Its patent-related complaint at the US International Trade Commission seeks to block imports of Apple products http://ftalphaville.ft.com/thecut/2011/08/17/655096/htc-makes-new-bid-to-block-iphone-and-ipad-in-us/
Manchester United is planning to raise up to $1bn through a partial flotation in Singapore that would go a long way towards establishing a true valuation for the Premier League football champions, the FT says. People familiar with the matter told the newspaper said the club has appointed Credit Suisse to prepare for the float which will aim to tap into the club’s strong fanbase in Asia.http://ftalphaville.ft.com/thecut/2011/08/17/655081/man-utd-prepares-1bn-singapore-float/
Twenty years after the Soviet Union collapsed, Vladimir Putin, the Russian prime minister, may not, as is sometimes alleged, be trying to recreate it, writes the FT. But he is pursuing a different project – to build a “quasi-European Union” out of former Soviet states http://ftalphaville.ft.com/thecut/2011/08/16/654996/putin-sets-sights-on-eurasian-economic-union/
Bank of America is in exclusive talks to sell the bulk of Merrill Lynch’s boom-time real estate investments to Blackstone for up to $1bn, as the largest US bank by assets tries to clear up its balance sheet and bolster capital ratios, http://ftalphaville.ft.com/thecut/2011/08/16/654966/bofa-in-talks-to-sell-merrill%e2%80%99s-property-assets/