USD: noise and reality

Lotta noise on dollar's fate recently may hide the real story in the process of making. The dollar is the main  funding currency in the world. Trillions of liabilities are dollar denominated and should be payed back in dollars as well. Under the light of the private credit contraction, I think it's the time to take seriously the long ago  discussed theory of the Synthetic Short Dollar. I remember, when  gold bugs were criticizing the theory as something impossible due to the fact that a genuine deflation in US is impossible. And, really, the Fed and US government did all they could to stop the deflation. Did they succeed? The time will show. But we must take in account that they had a good ally - China. Being pegged to USD, the RMB credit expansion has amplified the American reflationary attempt. Moreover, I would even think that it's the Chinese who have reflated  the World economy and only because of the peg we have felt it as a dollar reflation. Since this reflation attempt is clearly slowing in the US and China, one could suppose  that, US and China deflationary forces will strike back with the vengeance and hence the dollar will rise. It's exactly what the USD index chart suggests:

The bottoming process, in my opinion, is clearly underway. Should we break out the blue trend line, a sharp rally will ensue with very certainly higher than 90 as target. Of course, that rally will go along with a massive stocks and low quality debt liquidation.

So, we're about done

Looking at markets' recent  action, I've been feeling something like nostalgia.  Really, it's such a beautiful  moment. The one where you clearly see that all these "green shoots" are fake, but somewhere deeply inside you're enjoying it and would like it to continue as long as possible, just like we enjoy a sunny November day, here in Paris, knowing that the next 3 months it's gonna be rainy  and cold.

As for me, I will very certainly associate this Indian summer with the biggest french retailer Carrefour publicity campaign : "Le positif est de retour" (The positive is back). Never before, I've seen so much rebated brand products and rebate coupons as during this campaign, - certainly because of a lot of money in the clients pockets and positive mood in general.

So, in my opinion,  we should put in a top next week on cash SPX at about 1114-1125. The plunge under 1029 which should follow, will mark the end of this rally. As for Nasdaq Composite, I'm still  skeptical about it's ability to make new highs (above 2190.64).

3 possible scenario for the next wave of crisis

Seeking Alpha publishes an interesting article on 3 possible ways the next wave of crisis will play out.

In brief they analyze 3 scenario :
Deflationary: dollar and bonds  rise, stocks fall.
Inflationary: dollar and bonds continue to fall, stocks continue to rise. In one word: more of what we have  already, and that's precisely why, in my opinion, it's the least probable:  at present, the real economy and financial markets are going in the different directions.
Hyperinflationary: all paper instruments fall destroying the economy as we know.

A simple analysis of some recent trends  gives a higher chances for the 1st scenario. It's my opinion as well.

It's a final count down

So, a pretty strong day for the beginning of the week.
Patterns are in process of completing: Dow and XMI have put in new recovery highs, which was quite expected. Also, the inflation related stuff was pretty strong, as an example, the brazilian ETF has hit at new high as well. But silver wasn't impressive, unwilling to follow gold to new highs and that despite the dollar weakness.
To resume: the liquidity is dissipating, but the psychology is another matter.

The recession has ended, but US banks don't take it seriously

A strange thing is happenning in US bank sector. The recession has ended, but banks are still reducing their loans to the real economy:

And they rise their reserves as if there is no tomorrow:

Really strange, if we look at previous recessions ends. Or may be, they just think there is still too much risk in the system.

China goes CDO

Caijing is reporting the slowdown in the big banks landing and shifting in new loan issues to smaller banks and rural credit unions. What a deja vu of Eastern Europe!
But the most interesting, in my opinion, are the packaging efforts of western bankers and spreading of financial services in non-financial firms:

Now, said a banker at a joint-stock bank, the latest trend is to bundle loans for wealth management packages.

Trust products are another increasingly popular type of investment playing a role in the credit shift. Banks have transferred credit assets to financial firms through trust companies, which then issue trust products that are in turn purchased by financial firms.

In this way, data indicate that finance companies are taking up the loan torch with enthusiasm. In September, financial firms issued 87 billion yuan in new loans, representing nearly 17 percent of total credit issued by all financial institutions and second only to the Big Four.
That marked a major change since August, when financial firms accounted for only 5.5 percent of all credit lending in China, issuing loans worth a combined 22.8 billion yuan.
Financial companies are generally attached to large enterprise groups. They mainly service capital pools held by the groups while focusing on intra-group financial needs.
A source at the petroleum financial subsidiary attached to China National Petroleum Corp. said the credit business at these companies includes proprietary lending and agent commissioned loans, all serving businesses within the group.
According to the central bank, agent commissioned loans are classified as trust loans, and include both loans issued by trust companies as well as agent commissioned loans issued by financial firms.
Financial firms also can receive credit assets transferred from banks. But, technically, financial firms and banks should sign buy-back credit asset transferring agreements.

 Good luck China!

Sell the news

The Fed was as dovish as they ever could, but we didn't managed to hold. Looking at the charts, I think the lows of 1027 (on December's SPX) should hold in the comming days. What we have seen yesterday was the most likely  wave A for those in the correction (semis, Nasdaq, small caps) and the wave (i) for, at least, Dow Industrial.
Looking bellow at charts of Dow, SPX and Nasdaq Composite we can see that only Dow didn't violate the trend line from the March lows. Moreover, Nasdaq has already put in a lower low, but it's not the case of 2 other indexes.

So, I'm still sticking to my Nasdaq's count, but may be with the correction about the year end. As for now, markets look a bit weaker than I've been expecting, so the top of this correction wave (since July's low) is closer and if this wave is the final one (I believe so)  at year end we will be significantly lower than even now.
May be a disappointing shopping season in the US and Europe will be a nail in this rally's coffin.

Running with bulls

No surprise, we're rallying ahead of the Fed decision. Just as many times before, since the bear has begun. Go ahead, load the mull and run with bulls, it's still an Indian summer, and the Fed won't disappoint until it  won't matter anymore.

So, where to go now?

Tuesdays we had an often played situation with the Europe sinking (on  the come back of bank worries) the first half of the session while SPX future was retesting previous day lows at around 1027.

And after the retest the Buffett's bet news had hit the tape. I've written recently that in my opinion the trend for transports have changed and I'm sticking with that view. While railroads may have a bright future in the long run, due to changes in the way we transport goods and travel our-self, the current situation and perspectives are far from being a bright spot.
As for the nearest future in other markets, I believe that  we have finished the correction for some and the first impulsive wave down for others. It will be interesting to see the quality of the rebound. The leadership is clearly changed since the techs and especially semis as well as most financials are no more. So I think some good upside is still in cards for inflation related stuff (gold and silver are leaders as usual), especially if Benny doesn't disappoint markets with his words about exit strategy.

The wind of change

So, the expected correction has finally started and, as for me, did the most of its job last week. In my opinion the trend change is  now  confirmed for semis, small caps, home builders and transports. For Nasdaq my scenario seems to be followed with an exception of starting point. The only broad group where the top is clearly not in are big caps with DOW Industrial and XMI as benchmark indexes.
For inflation related stuff  things are a bit trickier. On one side the GSR (Gold to Silver Ratio) indicates the bottom is in.

On another, gold price and USD index charts still looks uncompleted. The same story for emerging markets ETFs. They had such a strong momentum before the correction has begun, that I can't see them not to make new highs before we'll actually roll over.