Wall Street insiders get bullish

With markets fluctuating on the euro-dollar exchange rate, big bets against the greenback suggest the heavy hitters are positioning for a stimulus rebound.

By Anthony Mirhaydari Jun 13, 2012 11:03AM

I've been expecting a drop in the dollar and a rise in the euro for weeks -- a reversal of recent tendencies that will bolster stocks and dollar-sensitive commodities, especially silver and gold. There are a number of fundamental reasons and now some strong technical ones, too.

 

The heavy hitters on Wall Street are betting on a rise in the euro -- big-time. According to the latest data from the Commodities Futures Trading Commission, commercial traders (insiders hedging other exposures) are net long the euro on a scale not seen in at least 12 years. In fact, they have moved into the euro more aggressively than they did back in 2010, just before the euro moved up and out of the original Greek bailout low. There's more. 

 

 

Commercial traders are also moving against Treasury bonds and moving toward gold. All are signs these guys are increasingly embracing a risk-on posture and are preparing for another bout of inflation fueled by central bank stimulus. China's central bank has already acted, cutting interest rates for the first time since 2008.

 

And they're not just saying this is so. They are using real money to express these opinions. And they tend to be right.

 

 

For one, I'm looking for fresh easing from the Federal Reserve at its June 20 policy announcement. The team at Societe Generale believes a "sterilized" bond purchase program will be announced that would see the Fed buy long-term bonds and mortgage securities -- and fund the purchases by mopping up short-term bank deposits. There is plenty of money to be had, as excess reversed at Fed member banks totals $1.5 trillion, as shown in the chart above. If the banks aren't willing to use the cash, the Fed will be.

 

This will be seen as highly inflationary, since interest rates, adjusted for inflation, are already deep in negative territory. That's a dollar negative and a positive for commodities like gold and crude oil.

 

Also, I'm looking for fresh intervention by the European Central Bank as Spanish and Italian borrowing costs rise quickly. Spain's 10-year bond yield has already moved over its November high. Higher sovereign yields fuel that weak government/weak banks dynamic that has been the bane of the eurozone crisis.

 

Late last year, as the crisis intensified, the ECB restarted its direct bond purchase program and unleashed two offerings of unlimited three-year loans to Europe's banks. The Fed even got in on it by offering dollar funding, via the ECB, to Europe's banks.

 

The latest bout of the crisis, which has plunged Greece into political chaos and pushed Spain to accept a bank bailout from the rest of Europe, has yet to see a response by the central banks. Indeed, the last ECB bond purchases were done back in March. There's been 13 straight weeks with no support.

 

I think that will change. And the positioning of commercial traders suggests they're thinking the same way.

 

To be clear, I think this will be a short-term market reprieve before big structural issues -- like the U.S. fiscal cliff and a global economic slowdown -- pull stocks down again later this year. So enjoy it while it lasts.

 

Trading update

I've positioned for this with a focus on risk assets that are poised to perform best as the dollar, a haven asset, falls away as greed and confidence return. Thus a concentration on precious metals and foreign stocks in the Edge Letter Sample Portfolio.

 

Highlights include a 13.3% gain in the Market Vectors Junior Gold Miners (GDXJ) since I added it on May 17 and a 9.3% gain in the Velocity Shares 3x Silver (USLV). 

 

 

I am adding one new biotech stock to the list: Nektar Therapeutics (NKTR), a developer of drugs using its "molecule polymer conjugates" technology. Shares are breaking up and out of a multimonth bull flag pattern as traders roll into "high beta" names in semiconductors and biotech.

 


Check out Anthony's investment advisory service The Edge. A two-week free trial has been extended to MSN Money readers. Click here to sign up. Contact Anthony at anthony@edgeletter.c​om and follow him on Twitter at @EdgeLetter. You can view his current stock picks here. Feel free to comment below.

49Comments
Jun 13, 2012 2:48PM
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There is no way additional stimulus will help the American economy. Interest rates are already to low, we are in stagflation. The only thing QE3 is is panic about economic policies that are not working. There is no economic leadership from Congress, the President or economists. We are going to have to come up with new and completely unorthodox economic ideas.
Jun 13, 2012 5:22PM
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"There is no way additional stimulus will help the American economy. Interest rates are already to low, we are in stagflation. The only thing QE3 is is panic about economic policies that are not working. There is no economic leadership from Congress, the President or economists. We are going to have to come up with new and completely unorthodox economic ideas."

Exactly right - except for the last sentence, which is exactly wrong. We have tried, ad nauseum, the "unorthodox". 
Now is a good time to return to the basics. We could start with this simple concept.  Does anyone believe that "price controls" ever actually work? Of course not. They are a recipe for economic chaos and mis-allocation. Always have been, and always will be.
But now interest rates - which are really nothing but the "cost" of money - are exempt from this simple economic truth? It must take many, many years of schooling and indoctrination to fully appreciate how this guaranteed failure of an idea will help us.
Jun 13, 2012 3:30PM
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IDK has it right, further stimulus will not help. If printing money with wild abandon really helped then Zimbabwe would be the most prosperous nation on earth. It would be wise to remember that the intrinsic value of the U.S. dollar and the Zimbabwe dollar are virtually the same. 

Jun 13, 2012 10:54PM
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The only mystery on inflation taking off now is why it didn't happen in the last rounds of stimulus. When it does blast off there will be wailing and gnashing of teeth from the Occupiers. The same people dependent

on surfing the girlfriend/boyfriends couch while living off the foodstamps and cash the welfare state doles out. 

 

Meanwhile the Fed/government elites are just as addicted to further rounds off denial as the folks on the couch.

 

Gonna be very interesting where this ride takes us. As usual, the folks stuck in the middle will end up dealing with the reality of it all.

Jun 13, 2012 5:04PM
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Get rid of Obama. and maybe this ecoonomy  can recover!

Jun 13, 2012 4:50PM
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Who is buslisih on Obama, he is the the downfall of America's CAPITISLISM!
Jun 13, 2012 4:29PM
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Anyone that takes this headfake at face value deserves what they're going to get.
Jun 13, 2012 5:44PM
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I hope this guy is wrong.  And no QE3 ever happens.  It didn't work the first 2 times.  No more QE3 it just raised commodity prices in a quick short run.  It was so short and many ways so fake commodity produces were not encouraged to produce more and others to enter the market to produce more.  So it didn't do its job.  It's too artificial and producers are aware of this. 

Put in a QE, prices will soar until demand is soaked and deteriorates.  It didn't work. No more.

Jun 13, 2012 5:04PM
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I really think that is a way bad bet on the Fed doing something else. If anything happens, there's probably a 50/50 chance they will continue operation twist. Other than that, they have pretty much communicated that there aren't going to be any new measures unless the economy takes a major downturn.

 

Credit spreads aren't as bad as 2010 and 2011. And they didn't even take action in 2011, so you'll have to assume it would have to get worse than last year when the market went down 20% and Europe was in panick and they just sort of stood pat on monetary policy.

 

I'm actually putting in a much higher probability of baby traders crying that the Fed isn't doing anything and getting very dissapointed when they don't at the next meeting.

Jun 13, 2012 7:04PM
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Buy blue chip equities because this market here and Europe will be 25 or 30 or 40 percent higher by November, guaranteed!!! All you chicken littles stashing your battered cash in savings accounts paying zero percent interest are going to regret waiting while the rest of us profit. After it hits the mark, stay completely out of stocks for 2013 or until Congress gets it act together.

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Where are Jim, Tim, and Franklin now?

Just in case you might have wondered how their ineptitude affected their lives after they ruined so many dreams and lives.

Where are Jim, Tim and Franklin now?

Here's a quick look into the three former Fannie Mae executives who brought down Wall Street.  You may be surprised...

Franklin Raines - was a Chairman and Chief Executive Officer at Fannie Mae. Raines was forced to retire from his position with Fannie Mae when auditing discovered severe irregularities in Fannie Mae's accounting activities. Raines left with a "golden parachute" valued at $240 Million in benefits. The government filed suit against Raines when the depth of the accounting scandal became clear.

Tim Howard - was the Chief Financial Officer of Fannie Mae. Howard "was a strong internal proponent" of using accounting strategies that would ensure a "stable pattern of earnings" at Fannie. Investigations by federal regulators and the company's board of directors since concluded that management did manipulate 1998 earnings to trigger bonuses Raines and
Howard resigned under pressure in late 2004. Howard's Golden Parachute was estimated at $20 Million!

Jim Johnson - A former executive at Lehman Brothers and who was later forced from his position as Fannie Mae CEO. Investigators found that Fannie Mae had hidden a substantial amount of Johnson's 1998 compensation from the public, reporting that it was between $6 million and $7 million when it fact it was $21 million. Johnson is currently under investigation for taking illegal loans from Countrywide while serving as CEO of Fannie Mae. Johnson's Golden Parachute was estimated at

$28 Million.
********************​********************​********************​****************


Where are they now?


FRANKLIN RAINES?
Raines works for the Obama Campaign as his Chief Economic Advisor.

TIM HOWARD?
Howard is a Chief Economic Advisor to Obama under Franklin Raines.

JIM JOHNSON?
Johnson was hired as a Senior Obama Finance Advisor and was selected to run Obama's Vice Presidential Search Committee.

Kinda makes you sick to your stomach.


Are we stupid or what? Vote in 2012..it is the most important election of our lives...  You won't realize what they are doing until the US Constitution is destroyed and THEN some.



January 20th.............the end of an error.

Jun 14, 2012 12:59PM
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QE3 has already happened. Do you really think the stock market is moving on A hope sombody is going to do something, no its moving on the FED giving money to the PPT they throw it at the market...
Jun 14, 2012 3:58PM
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If the feds want to spend money, then invest in infrastructure,  Roads, Bridges, Ports, Sewers, Water etc.  This will employ hardworking people and will not only repair our aging and dangerous roads and bridges, but will also aid in economic development and global competitiveness.    Last stimulus was only about 3% to these projects, even though it was a major selling point by obama admin.

Jun 13, 2012 7:20PM
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It's funny that those greedy pigs who earn dollars are betting against it.   Bomb Wall Street.  It's time for the American people to wake up and band together to topple the greed machine.  What will the Wall Street scum do when that happens?
Jun 14, 2012 1:51PM
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we need to quit giving wall street money and get rid of Ber---whats his name and let the wall street millionaires and billionaires eat dirt for a while.
Jun 13, 2012 5:21PM
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It's spelled patriot.  If you could spell perhaps your views on the president would be taken seriously.
Jun 13, 2012 9:16PM
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the Republicians will make sure that "deadlock" dominates all meaningful congressional actions until the November elections.......which of course, then, they will hopefully go down in defeat! 
Jun 14, 2012 10:02AM
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if you are still trying to play the market, you are going to get hammered, you have drop coming with in the next six months that will 2008 look like a an Easter Egg hunt..

The nanny staters in Europe are still trying to prop up their handout programs, printing money
  Obama and Bernanke, will not be able to resist the temptation to some how, some way increase the economy, just before the election. They will be printing money again in the next few days.
Inevitable inflation will go up as result of those two actions and business will further hunker down
There is only one way to have a growing stable market, that is to have a growing stable economy.
That is not possible with an anti business government, who current schtick is to raise the cost of electricity up to 800% in parts of Ohio, Pa and Ky.
Buy gold, take physical possession of it, forget you have it.

Jun 14, 2012 1:47PM
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Wait, isn't this still George Bush's responsibility????
Jun 13, 2012 4:58PM
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"For one, I'm looking for fresh easing from the Federal Reserve at its June 20 policy announcement. "

 

If by "fresh" you mean continuing operation twist, that wouldn't be new.

 

"Also, I'm looking for fresh intervention by the European Central Bank as Spanish and Italian borrowing costs rise quickly. Spain's 10-year bond yield has already moved over its November high. Higher sovereign yields fuel that weak government/weak banks dynamic that has been the bane of the eurozone crisis.

 

Late last year, as the crisis intensified, the ECB restarted its direct bond purchase program and unleashed two offerings of unlimited three-year loans to Europe's banks. The Fed even got in on it by offering dollar funding, via the ECB, to Europe's banks."

 

So....from the chart.....when that happened the Euro steadily dropped. Which shouldn't be surprising as the ECB was essentially dumping a whole lot of Euros into the banking system.

 

So, if they were to do that again on a Greek/Spain failure, or even in the event of a Greek/Spain failure, why is that positive for the Euro? You know the saying about cheap stocks, they can always get cheaper. So can currencies, just because it's oversold doesn't mean a long position is a good idea. Bounce, maybe.

 

But even in the very near term, it's hard to see the Euro rallying significantly. If Greece leaves, the Euro goes lower. If Greece stays and the ECB starts pumping Euros in again, the Euro goes lower.

 

And again, I don't see anything about trades in those positions as was recommended all the way till June. Taking from May 17 seems inappropriate if there was dollar cost averaging and expanding the position thru June 5.

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