Sage Weekly Letter – 6/24/2012

• Posted by Robert Sinn
• on June 24th, 2012

For financial markets June has been an interesting month to say the least. On June 4th at $SPX 1266 the outlook was bleak and it was exceedingly difficult to generate a bullish thesis for equities other than the usual “everyone else is bearish and stocks are oversold”. Last Tuesday, just 15 days and 97 S&P points later (7.66%) a sense of optimism had returned to markets – optimism that the Fed would initiate a new round of policy easing combined with a growing sense that Germany was willing to bend a bit on certain issues to which it had previously remained staunchly opposed (eurobonds, renegotiation of Greece bailout terms, additional growth boosting measures, etc.).

The Fed delivered a mild disappointment on Wednesday with its “let’s twist again” announcement, however, Chairman Bernanke made it clear that the Fed has more “tools” at its disposal should conditions warrant additional action over the coming months. The ECB also made an important step forward last week by lowering collateral requirements and allowing financial institutions to pledge a wider range of assets. Moreover, there is also increasing speculation that the ECB will cut rates at its July meeting. With economic data continuing to deteriorate across the globe (including in former economic juggernauts such as Germany) along with the constant overhang from the eurozone debt crisis and the impending US fiscal cliff, one might wonder how equities are still north of $SPX 1330.

It seems to me that markets are firmly in the grasp of a central bank (ECB and Fed) catch-22: If markets sell-off then central banks are more likely to initiate new monetary policy accomodations which would in turn cause markets to rally again, however, as long as markets stay reasonably well bid and with limited stress then central banks are more likely to stand pat and await further data. Of course it isn’t quite so simple as central banks could also be proactive and pre-emptive. However, the ECB in particular has always proved to be reactive and in need of evidence that the patient is without a pulse before approving the administration of any additional medicine. With another EU summit scheduled for the latter half of this week markets are also mired in the “crisis cycle” which David Einhorn pointed out in his latest letter to investors:

 

In moments like the current one (with a well above average number of scenario permutations) I believe it is even more important than normal to filter the noise and to focus on the message of markets – let’s go to the charts:

 Click to enlarge (notes on charts)

$SPX 60-minute

 

Russell 2000 ($IWM) 60-minute

 

$GDX Daily – The sharp sell-off in the gold miners on Thursday was one of the more troubling signs that emerged last week.

 

$CAT Daily – Caterpillar is always an excellent indicator of the health of China & emerging markets, the CAT chart isn’t painting a pretty picture.

 

$FCX Daily – Another excellent indicator of the situation in the Chinese economy….not good

 

$AUDUSD Daily

 

Shanghai Composite ($SSEC) Daily

 

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German $DAX Daily

 

Best Ideas

• Short rallies in AUD/USD (such as the one we saw last week), eventually targeting a move back below .9800 in the Aussie
• July bull put spreads in crude oil ($CL_F $USO) using the thesis that $75/barrel is the maximum downside over the next 1-2 months

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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