Tuesday, March 29, 2011

"Fool me once, shame on you. Fool me twice, shame on me."

Fed Should Consider Curtailing Stimulus Program, Bullard Says
March 28 (Bloomberg) -- St. Louis Federal Reserve Bank President James Bullard said policy makers should review whether to curtail a plan to buy $600 billion in Treasury securities, noting that the U.S. recovery may not need that much stimulus.

“The economy is looking pretty good,” Bullard said to reporters in Marseille, France, on March 26. “It is still reasonable to review QE2 in the coming meetings, especially this April meeting, and see if we want to decide to finish the program or to stop a little bit short,” he said, referring to the second round of so-called quantitative easing.

“If the economy is as strong as I think it is then I think it may be reasonable to send a signal to markets that we’re going to start withdrawing our stimulus, and I’d start by pulling up a little bit short on the QE2 program,” Bullard said. “We can’t be as accommodative as we are today for too long, we’ll create a lot of inflation if we do that.”

Talk is cheap, and actions speak louder than words.  The Talking Fed Heads speak as if they are sending a message, perhaps a warning.  They don't want any surprises should Bumbling Ben wrap up QE2 "unexpectedly".  "Hey, we told you so," will be the Fed's smug reply as the equity markets plummet along with the commodities sector as they respond to "inflation fears". 

The Inflation "expectations" of the public are high on the list of the Fed's "early warning signs" that Inflation may be getting "out of control".  Looking inside today's poor Consumer Confidence report reveals a growing unrest with consumers regarding Inflation, despite the Fed's belief that rising Food and Energy costs do not contribute to Inflation.

Inflation worries push consumer confidence lower
"Rising food and gasoline prices are starting to take their toll on the consumer psyche, and Japan's triple calamity -- earthquake, tsunami and nuclear disaster -- has been very unsettling," said Chris Christopher Jr., senior principal economist at HIS Global Insight.

"Consumers' inflation expectations rose significantly in March and their income expectations soured, a combination that will likely impact spending decisions," Lynn Franco, director of The Conference Board Consumer Research Center, said in a statement.

Signs of financial strain emerged Monday in February's consumer spending report, which showed that most of the 0.7 percent jump in spending went to cover higher gas prices.

Why spending data should hurt, not help, stocks
WASHINGTON (MarketWatch) — U.S. stock indexes were higher and Treasury prices fell on Monday, signs that investors expected a stronger economy following reports that U.S. nominal consumer spending increased 0.7% in February, the fastest growth in four months. Read about how “Spending rise spurs stocks.”

There’s just one problem with that bullish view: The data released on Monday actually pointed to a slightly slower economy, due to weaker consumer spending and higher prices for energy and food.

Keeping in line with the Fed's penchant for creating booms and busts to "justify their existence", expectations will likely grow as we move forward into spring for the Fed to shut down thier QE2 as planned by June 30, 2011...if not, though unlikely, before.

"Blood in The Streets" As QE2 Could End in April?
As seen on zerohedge.com
So, it seems that QE2 will get a serious review during the Federal Reserve`s April meeting, and could be cut short by two months in order to send financial markets the message that they will not allow inflation to get out of control.

The problem is that the current market perception is at odds with the possibility that QE2 could end early.

Biased Towards Commodities
Remember, there are a whole lot of crowded trades in areas all revolving around the QE2 Monetary Program that were initiated as far back as the Jackson Hole Speech. Therefore, an early end of QE2 would bring some considerable unwinding, disproportionately biased towards commodities, as the broader equity market would still have support from increasing corporate profitability, and relatively reasonable valuations, as compared to commodities.

Off Guard Mass Unwinding
In other words, expect significant selling in commodity related funds as a result of major players unwinding large positions – the selling could go on for months if QE2 ended abruptly. This is in large part why the Federal Reserve likes to send signals ahead of time, which Bullard appeared to be doing, to prepare market participants so the unwinding of positions is done in an orderly fashion.

One thing for sure is that nobody on Wall Street is currently positioned for an ending of QE2 in April. If the Federal Reserve through its various communication channels of member speeches, media conduits, and personal interviews starts in the next few weeks reinforcing this notion of QE2 ending ahead of schedule over the next couple of weeks, i.e., sending Wall Street the ‘get prepared’ signal, one could expect a whole lot of market volatility as fund managers try to reposition themselves accordingly.

Blood in The Streets’?
Since commodity prices tend to move in unison across the board, there could be some massive selling ahead - the proverbial “Blood in the Streets”, at least for anything commodity related, where large and liquid commodity index linked funds, popular with institutional funds (pension, 401k, etc.) such as Goldman Sachs Commodity Index (GSCI), Fidelity Series Commodity Strategy (FCSSX), could see huge volatility with large liquidation.

Good Jobs Report, Bad news for Commodities
Furthermore, as the U.S. 4th quarter GDP was revised up to 3.1%, there is a fairly good possibility that strong numbers could be coming out of the unemployment report due out on Friday, April 1. Since this is the last major economic data release before Fed’s April meeting, good jobs numbers would actually be bad news for commodities, as that would add to the argument that Fed should end the QE2 early.

You, I, and the fence post over there all know that QE must continue to infinity.  Alas, but just like markets, nothing goes straight up.  QE3 will not make an appearance until their is a genuine demand for it.  Expectations are one thing, demands are another, and if the Fed excells at anything, it is meeting the demand for monetary stimulus.

I continue to urge caution with regard to the Precious Metals at the current prices.  I'll point to December's failed CRIMEX default again, and point out that it too came at the end of the fourth quarter [not to mention the year end].  The month that followed was less than kind to the Precious Metals.  Fundamentals being what they are today are not much different from those in December.  It wouldn't be the first time then that the Precious Metals "corrected" in the face of supportive fundamentals.  Do I know for certain that the Precious Metals are about to correct?  No, I do not, but I must respect the possibility. 

Believe me, for a diehard Precious Metals Bull, it is difficult to entertain the possibility that these markets are not going to go straight to the Moon. 

"Fool me once, shame on you.  Fool me twice, shame on me."  Learn to expect the unexpected, and profit from it.

Immediate support levels in both Silver and Gold have held up well this week.  $36.50 in Silver and $1410 in Gold.  On the plus side this emboldens the Bulls as it strenghtens their dip buying sentiment.  On the minus side, should these support levels giveway, the race to exit these markets could get ugly.

A couple of markets to keep an eye on specifically are the Japanese Yen and the Euro.  The Yen is on the cusp of a break lower today that will be cheered by not only the G7, but by US Dollar Bulls as well.  A break through 82.50 would be key to a Yen move lower.  The Euro is also on the cusp of a break lower today despite the anticipation of an interest rate increase by the ECB next week.  A break below 1.4027 should delight Dollar Bulls.  A breakdown in both of these currencies will be a big negative for the Precious Metals in the near-term.

The caution flag remains high on the pole this evenning, and the CRIMEX looks to have dodged default in Silver in the month of March 2011.

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