Short Takes

Some will tell you futures are higher this morning due to Alcoa’s earnings. Keep in mind, Alcoa was down in the after hours session following Monday’s earnings announcement. What is the primary driver of this morning’s pop in the S&P futures? You guessed it….hope for more stimulus (a.k.a. money printing). From Bloomberg:

Emerging-market stocks rose to a one-month high amid speculation China will loosen monetary policies to bolster economic growth.

The “good news” coming out of China was that import growth fell to a two-year low, which means its time to, once again, print more money.

As stated numerous times in recent weeks, it is still prudent to see how the S&P 500 acts between 1,285 and 1,343ish. Approximate levels to watch include 1,293, 1,305, 1,326, 1,313, 1,324, 1,334, and 1,343. We are open to better than expected outcomes over the coming months, but it will be difficult for the market to gain sustained traction with significant problems in Europe.

From CNN (01/05/2012):

The debate over whether the Federal Reserve would pull the trigger on QE3 started even before QE2 ended last summer.

Now, six months later, the verdict is still out, but most of the investment experts surveyed by CNNMoney largely agree on one thing: the U.S. economy will have to get worse before Fed chief Ben Bernanke will even consider launching yet another round of asset purchases, a policy known as quantitative easing or QE.

“The Fed is already using all of the tools at its disposal to stem the crisis,” said Doug Cote, chief market strategist at ING Investment Management. “QE3 or bond buying of both U.S. banks debt and European bank debt remains a powerful tool but will only be used as a last resort.”

As we mentioned in a recent video, 2011 was a difficult year, primarily based on the ever-increasing central planning (read market intervention) influence on asset prices. Robert Colby posted the following:

Hedge Funds suffered their second-worst year on record in 2011, according to an index maintained by Eurekahedge, an independent research firm that specializes in hedge fund data. Some of the world’s largest and best-known hedge funds suffered huge losses, down 20% to 50%.

Under “normal” market conditions, banks assist each other with short-term needs via overnight loans. When banks are concerned about the assets on the books of other banks (European debt), they avoid lending to each other. The European Central Bank (ECB), which is fast eclipsing the Fed as King of The Bank Bailouts, is happy to help “private” banks with their funding needs when trust between banks is low. Therefore, when the ECB is making a lot of overnight loans to banks, it shows (a) ongoing concern about balance sheets, (b) lack of trust, and (c) concerns about getting paid back (see MF Global). Banks borrowed 17.3 B euros from the ECB last Thursday, 14.8 B on Monday, and 15 B on Tuesday, which according to the Financial Times is “exceptionally high even by standards set during the turbulent past few months”.

The bias for the first few weeks of 2012 may be bullish due to seasonal factors and recent market intervention from central banks. The European Central Bank’s (ECB) balance sheet expanded at an unprecedented rate late in 2011, which impacts market dynamics. Serious fundamental problems remain in the form of debt and demographics.

After you click play, use the button in the lower-right corner of the video player to view in full-screen mode. Hit Esc to exit full-screen mode.

It sure looks like the ECB is trying to cap the yield on an Italian 10-year at 7%; see the “resistance” in the green box.

Yields are sitting at one month highs, which hardly looks like a bond market that is convinced the situation in Europe is under control.

The ECB has flooded the European banking system with newly printed euros via their three-year loan program. We may become buyers of gold and silver in the coming weeks/months based on the explosive growth of the ECB’s balance sheet - click here for a Wall Street Journal chart dating back to 2002.

From Bloomberg:

“It doesn’t take away the problem of the sovereign-debt financing and the amount of sovereign debt being held by banks becoming a concern for other counterparties,” said David Mann, regional head of research for the Americas at Standard Chartered in New York. “What we saw was a good result, but it wasn’t enough to draw a line under the crisis.”

“We’re starting to see more headwinds start up for the euro,” said Brian Kim, a currency strategist in Stamford, Connecticut, at Royal Bank of Scotland Group Plc. “Whether it’s been the latest summit hasn’t worked, whether it’s been the growth picture in Europe versus the U.S., people are finally noticing that it’s lagging.”

“This is QE in another form,” referring to the monetary policy the Federal Reserve used in undertaking of purchasing debt to keep long-term rates low, Taylor said in an interview on Bloomberg Television’s “Inside Track” with Erik Schatzker. “Three-year money at a low price — you can give it back after a year - it’s a giveaway. What scares me is what the hell are they going to do with it? They’ll buy Spanish and Italian debt.”

“Much like the warnings of catastrophe are seldom fulfilled, so too the promises of resolution,” said Noel Hebert, a credit strategist at Mitsubishi UFJ Securities USA Inc. in New York. “In the end, you risk more euros in the system and you don’t solve the solvency issue.”

The Financial Times reported that central bankers have been calling banks to encourage them to borrow even more money. Bloomberg noted:

The European Central Bank invited euro-area banks to place orders for its first tranche of unlimited three-year loans, an attempt to keep credit flowing to the 17-nation economy during the sovereign debt crisis. The Frankfurt-based ECB will lend banks as much cash as they want against eligible collateral for 1,134 days at the average of its benchmark rate over the period of the loan.

“The ECB loans assure banks they don’t have to worry about liquidity for a long time,” said Christian Schulz, a former ECB economist now working for Berenberg Bank in London. “This has already managed to push down government bond yields as banks are buying those bonds to use as collateral,” he said. “How long that effect will last and whether it will filter through to the real economy is an entirely different matter.”

While we can expect the Fed to print more money should the situation in Europe deteriorate further, Chairman Bernanke told Senators today there are limits to what the Fed can do. From Bloomberg:

Senator Bob Corker, a Republican from Tennessee, said Bernanke made it “very clear” in closed-door comments today the central bank doesn’t intend to rescue European financial institutions. Lindsey Graham, a South Carolina Republican, said Bernanke told lawmakers that “he doesn’t have the intention or the authority” to bail out countries or banks. Both senators spoke to reporters after leaving the one-hour session at the Capitol in Washington.

The Fed chairman also said he doesn’t foresee the U.S. providing any more money to the International Monetary Fund (IMF) to combat Europe’s debt turmoil, Corker told reporters. “People were very glad to hear that,” said Corker, who sits on the Banking Committee.

While the Fed may not be able to lend directly to banks outside the U.S., it can provide loans to their U.S. branches through the discount window. The Fed’s currency-swap lines also provide indirect dollar funding to overseas banks through the ECB and other central banks who assume the credit risk.