S&P 500 - technical breakout ahead

Having traded sideways since earlier in May when the index tested the 930 resistance levels we have now unwound the overbought conditions created back then. RSI is now back to around 60. I think it is interesting that the oscillators are now getting a lot more interesting: the stochastics have firmly crossed over and MACD is still in a bear signal given earlier in the month but the distance between the lines is narrowing. I think we will see a bullish crossover coincide with a breakout of the 930 level. The Parabolic SAR is giving a buy signal today (the green dot under today's price candle).

I am long June 1000 SPX calls.

Here's the chart I'm looking at.

http://tmd.it-finance.com/MDLight/itcharts.phtml?uid=D18F4BA1E5FCAABB&locale=en_GB&key=94fb9000ae9f0b901b350a8c85b6bf6e&epic=TM.D.SPTRD.DAILY.IP&timezoneOffset=0&webSiteId=igi

PPIP - harm or good?

I attach an e-mail sent to a macro economics consultant who says his client base uniformly thinks PPIP does more harm than good. I am of the conviction that it is very harmful to tax payers but not to equity holders - it is a boost to equity holders because the non-recourse loan is a subsidy from taxpayers to shareholders of banks.

from e-mail conversation....

but harm to whom?

i am a rational investor so all i care about is what ends up in my pocket

looking at the PPIP plan it is clear that it is a win-win-lose situation, banks win, investors win, taxpayers lose

i'm not a US taxpayer but I do invest in US assets

i have considered the following articles from

http://www.voxeu.org/index.php?q=node/3593 by dennis Snower - an economist at University of Kiel (a heavyweight...)

http://krugman.blogs.nytimes.com/2009/03/23/geithner-plan-arithmetic/ by Paul Krugman

http://voxeu.org/index.php?q=node/3339 by Jeffrey Sachs of Columbia University

http://www.nytimes.com/2009/04/01/opinion/01stiglitz.html

by Joseph Stiglietz of Columbia University, Nobel prize winner for economics in 2001

http://www.ft.com/cms/s/0/3e985de0-1ee7-11de-a748-00144feabdc0.html by Payton Young

http://globaleconomicanalysis.blogspot.com/2009/03/geithners-galling-and-dangerous-plan.html by Michael Shedlock

i am concerned with financial assets, from what the guys above are saying the PPIP is a massive transfer of wealth from taxpayers to shareholders in banks - so why aren't we buying the hell out of them and why and to what are your clients thinking its more harm than good?

i continue to view the PPIP as a massive boost to the equity market - as I wrote in my march investment letter

VIX

I came across a nice blog on the VIX falling below 30. To many that's a sign of more confidence in markets as this is the level of Lehman's default in September 2008.

Hat tip Condor Options:

HOW MEANINGFUL IS A VIX BELOW 30?

Not very. The relevant refrains here are:

1. Absolute VIX numbers don’t communicate much of anything, especially since the VIX is nearly impervious to technical analysis. In another time, another era - namely, 2008 - a VIX at 30 was widely viewed as a sign of panic and capitulation, i.e. as a signal that equities may be due for a bounce. Today, that same 30 handle is being touted by some as a sign, not of panic, but of confidence gradually returning. Neither interpretation is particularly sensible if based solely on the quoted value of the index.
2. Spot VIX relative to longer-dated implied levels - like VIX futures, VXV, and the new ETFs - can be meaningful, but really only when the ratio of short and long term levels reaches an extreme, and even then usually only for a quick trade.
3. It’s always helpful to know how tomorrow’s implied volatility stacks up against today’s realized volatility. A 30 VIX is a cause for concern if the prior 30-day realized volatility was in the neighborhood of 15, but not if realized and implied vol are at about the same level.

We follow all of these relationships in our weekly Volatility Tracker, and one way we try to make sense of the VIX is to relate its level 30 days ago (or 21 trading days, to be exact) to the 30 day realized volatility we can observe today. As indicated in the chart below, the 30-day annualized realized volatility of the S&P 500 is at about 26%. Had you been a net seller of implied volatility 30 days ago (which is something we teach in our iron condor newsletter), you would have pocketed the spread between realized and implied volatility over that period - illustrated by the dotted lagged VIX line ticking consistently above the red 30-day line. Moreover, with realized volatility at 26.64 as of this post, a spot VIX of 28.80 manages to look slightly dear.

Of course, economic or political developments could inject more volatility into market action at any time. But given what we know today, there seems little reason to regard implied volatility as a compelling buy.

Chinese Financial Markets Liberalisation

http://www.nuwireinvestor.com/articles/how-the-new-yuan-carry-trade-will-impact-investors-52962.aspx

Hat tip NuWire Investor blog.

An incredible look at the future of debt markets as China approve issuance of USD denominated bonds. Implications are huge but little noticed by non-Chinese analysts/ press:

- Realise Chinese ambitions of taking over assets outside China. Thoughts are on the Japanese shopping spree in the US in the 80'ies.
- The Chinese have an overt intention of acquiring minerals and basic resources and are already well underway. This is to avoid production bottlenecks when economic growth returns to trend again and supply becomes restrained as it was in 2007/2008. Some also speculate China is acquiring commodities because they want to diversify away from USD and are concerned US QE efforts is increasing inflation and thus erodes the value of their FX holdings. A USD denominated bond will accelerate this trend and the opening up of Chinese financial markets is a huge positive for commodities.
- Bearish gold as Chinese funding in USD validates USD as reserve currency and could actually end up leading to demand for USD.
- Serves to diversify the burden of excessive USD reliance in Chinese FX reserves.
- Shifts balance of power even further to the east and away from Wall Street and DC...

Norway II

Following yesterday's blog post on Norway it is worth highlighting that the government announced the 2009 revised budget today. This is the most expansionary fiscal budget in 30 years and comes on top of the 475bp cut in rates to 1.5% only since October 2008. The fiscal and monetary stimulus now present is enormous. The fiscal spending is financed with oil revenues. Key takeaways are:

- Unemployment is expected to rise from currently 3.5% to 3.75% in 2009 and up to 4.75% in 2010.
- GDP is expected to fall 1.9% in 2009 and rise 0.75% in 2010. Note these numbers are highly dependent on oil price developments.
- Retail spending is expected to rise 6.75% in 2009.

The budget is accompanied by a statement that the global financial crisis is affecting Norwegian economy 'hard' and that Norway's trading partners are affected severely.

In my opinion the politicians are offering far too much far too late... I continue to believe this to be policy overkill and expect now is a great time to invest in Norway. Embedded in this view is a bullish oil price view. As noted in the previous blog fiscal and monetary stimulus is likely to achieve the highest efficacy in economies with solid financial standing. Chances of policy overkill is present when size of stimulus appear to be modeled on Anglo Saxon efforts. I favour domestic equities, NOK and short end of the interest rate curve.

Here's a link for further details:

http://www.statsbudsjettet.dep.no/Statsbudsjettet-2009/English/

Effects on financial markets looks pretty neutral with equities up in line with European markets and NOK trading steady versus USD and EUR.

Norway

As a first go on this spanking new blog, here's an outline of the bullish case for anything Norwegian....

The Norwegian Central Bank cut interest rates on Wednesday May 6^th by 50bps to 1.5%, the lowest level in the Central Bank’s 193 year history. This means rates have come down 425bps from its peak of 5.75% in October 2008. Within an international context Norway enjoys the following:

o Net external creditor to the tune of $500bn.

o About $75bn of FX and gold reserves.

o A $350bn sovereign wealth fund.

o A current account surplus of about $85bn.

o About $85bn annual budget surplus.

o Underlying inflation of about 2.75%.

o Unemployment of about 3.5%.

These numbers put Norway together with an enviable group of nations of the world where monetary and fiscal stimulus will actually work well, rather than be counteracted by budget deficits and excessive public sector debt (US and UK). The fiscal strength of Norway is obviously due to the abundance of petroleum resources in Norway but also due to a strict fiscal regime over a long period of time. The petroleum wealth has been collected in a sovereign wealth fund and is invested in international capital markets. So, rates at 1.5%? I don’t think so.. it will be proven to be a huge policy mistake! With rates this low we are likely to see a significant boom in retail spending and house prices in Norway. Remember that only 3.5% of the population are unemployed! The positive interest shock from the 425bp reduction in rates is very significant and leaves the average consumer significantly better off financially even in the midst of a major global recession. Unemployment may continue to rise in line with international trends for a bit more but note that the Norwegian labour force is 65% or so employed directly or indirectly by the government. I am a huge fan of NOK, domestically orientated equities and the short end of the interest curve.