Darshan's Blog

Darshan's Daily Market Ponderings

Monday 16th November, 2009

Bernanke "Words Are All We Got!"

Afternoon all! As each day progresses, the people in charge of our financial destiny, seem to get progressively comical. Yesterday, we had Fed Chairman, Ben Bernanke waxing lyrical to the Economic Club of New York (Yes the same place where Alan Greenspan gave a speech telling the world that things were great). He told us how great things were and how the Fed would do everything it can to support the dollar. Well this promise lasted for merely two seconds as the USDX spiked to above 75 again and then as the world realised that Benny is talking rubbish - it came flying back down. This particular comment might have been the reason for the loss of faith in his words...

"It s not obvious to me...that there s any large misalignments currently in the U.S. financial system."

Is he kidding us? Is he? This is meant to be one of the smartest economists in the world (That is an assumption). The moment he said that, every trader in the world thought "Sell the dollar, buy equities...it looks like we are going to get a lot more free money to help us out!".

To reinforce this interpretation, Superman, forgot to tell us about his exit plans for the stimulus packages and also failed to address the little issue of the unemployment rate surpassing the conditions used to conduct the banking sector stress tests earlier this year. Of course, Bernanke was not helped by utterings of Meredith "I Just Told You to Go Long Goldmans In August" Whitney - who has suddenly been slapped around the head with a bout of common sense again. She came out yesterday and said that "I have not been this bearish in a year" and reinstated her super bearish views on the banking sector. Now I may just forgive her for her moment of madness in summer but I guess, that's what an analyst is paid to do on TV - talk their book! Essentially, Whitney is right - the banks WILL return cap in hand, asking to raise more cash from shareholders and taxpayers. It's not a matter of if, it's a matter of when.

We are in for one heck of a ride, if Bernanke carries on gambling with the dollar. This is where my eyes have been since summer 08 and this is where they will continue to be - the USDX is showing signs of life today but notice, how the stocks are just not moving much. There seems to be a change taking place in the background and it's not a good one. It's almost like the big guys are sneaking out of the back door, while the newbies come in and buy this market up. Remember, while the media shouts about a dying dollar and talks about how bad it is - we are still above the summer 08 lows for the dollar. It's not as bad as everyone is making out. This is what is going to break the equity bulls. They are almost flaunting the death of the dollar, so they can catch a further big on equities but this will not work forever. At some point, the positive divergences building up on the USDX and the negative divergences building up on the indices - are going to meet face to face with a concept called reality. It's at this point, where Bernanke will realise and see the 'large misalignments currently in the US Financial System' - actually no - he will see it manifest itself on the global arena.

Just remember, that this is the same guy who in 2005, 2006 and 2007 - stood tall (well as much as someone his size can) and told us that there were absolutely no problems in the housing sector and that "This is not a bubble as far as I can see". Still want to pay attention to him?

Well I'll tell you now - Sovereign CDS prices are showing an increase in risk expectations and are moving higher. and bond prices are moving higher with equities. What does this tell you? It tells you that the big guys are trying to protect themselves against risk and that there is too much liquidity in the system, when bonds and equities move in the same direction. For the markets, words are the only things standing between comfort and reality, at the moment.

With all this in mind, where do I think the markets will head today? Well, same script as I said yesterday - I am looking at trading this week on a weekly timeframe rather than a daily one. The VIX is forming a broadening megaphone pattern and so this means we will now see far more volatility - so plenty of down and up moves to capture; I always find that sort of whipsaw is great for a trader who is also a computer but I am human - I'd rather play it safe and play on larger timescales. So I am still looking for above 10500 on the Dow, 1130-50 on the SPX and 5500-5600 on the FTSE by December. Of course, this means still lower for the USDX but it won't be straightforward. In the meantime, if you must play day to day - today has the scope for some profit taking, as there are gaps to fill from Friday's close. So look for a move higher to about 10450 on the Dow before a swing lower and then by Friday, we should be swinging back up.

Stay safe and happy trading!

Darshan

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