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.
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.
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.
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 email@example.com and follow him on Twitter at @EdgeLetter. You can view his current stock picks here. Feel free to comment below.
Put in a QE, prices will soar until demand is soaked and deteriorates. It didn't work. No more.
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.
"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.
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.
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