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The Promise of Quantitative Easing

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As a fresh five session set begins, eyes turn to the FOMC.

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It seems like just yesterday that we powered up following our requisite respite to offer the tape shoulda, coulda, and woulda gone down the previous Friday but the reaction to the news -- we didn't trade considerably lower -- warranted respect. Wash and rinse, Pete and repeat, the story remains the same.

Way back when, we spoke of how the game was changing (insert snarky comment: "That's the problem with you Wall Street guys, you thought it was a game in the first place!). What was once a profession that was more of an art than a science -- an active assimilation of the fundies, structural, technical, and psychological metrics) -- morphed into a big game of chicken, with cumulative imbalances on one side and a motivated agenda on the other.

We know certain truths; if the market were left to its own devices, the schvitz would have hit the fan long ago and free market meritocracy would have separated the winners from sinners and rewarded those who did the right thing. We haven't been in Kansas for over ten years now and there's always been a "legitimate" reason for government intervention: The Asian Contagion, LTCM, Y2K, the dot.com crash, real estate, China, banks, yada yada yada. I'm reminded of the adage, "It's always something, isn't it?"

There's a reason for that; risk hasn't been destroyed, it's simply changed shape and -- here's the kicker -- it's cumulative still. We often draw your attention to this ongoing dynamic in Minyanville during these historic times. Some get it, others don't and many others, dare I say the majority, still subscribe to the "tell me where to buy and when to sell mentality" because they "don't have the time" to focus on the financial equation. To each their own, I suppose; which is what it is until moral hazard skews the outcome.

I wrote a column last week about some savvy seers "going dark" and it touched a nerve. Some asked "How does that help our cause?" Others -- one of them a potential big ticket client-offered that it was one of the best articles in recent memory. My takeaway? There's a wide range of emotion permeating throughout society at present. Regardless, we'll always give it to you straight (think "prolonged period of socioeconomic malaise" in 2006 and the "financial industry insolvent" in 2007).

Here and now? Some bullish news out of Germany (Europe is up 1-2%), coupled with the muted reaction to the horrific stateside employment data on Friday, has the tape better bid in the early going. We, of course, have the FOMC meeting tomorrow with all sorts of chatter that we'll get a wink or a nudge regarding the much-anticipated QE2. Engine room, more drugs? Perhaps, but if we don't get something tomorrow, the bulls could very well be left holding their, uh, bag.

Turning a Cruise Ship in a Canal



The theme song in Matador City is brought to you by the Grateful Dead. It represents the "hope" trade in front of QE2, also known as quantitative easing. The stage is seemingly set following James Bullard prologue; what remains to be seen is "what," "when," and perhaps most importantly, "how" the world will react to this still invisible catalyst.

Once upon a time, Fed officials went out of their way to stress they don't target asset prices. I think we can all agree that in a finance-based interwoven global economy, they have no choice but to do just that. As we said in 2007, however, credit of a different breed -- credibility -- is the issue at hand for markets at large.

The specter of yet more game-changing regulation kept a bid under the tape after the jobs data confirmed that the economic malaise continues. After the requisite downdraft on Friday, the bulls put on a brave face and recaptured the all-important S&P 1115-1120 into the closing bell. That level -- coupled with BKX 50 (still above) and VXO 20 (now below) -- are technical toggles worth watching in the week ahead.

I would offer that the bears are scared -- twice bitter, thrice shy -- and while I don't have empirical evidence of a shallow short base, my sense is that it's not what it once was. Should that prove true, a layer of demand would be non-existent (via short covering) when the tide again turns lower.

And finally, do I think the "little dandruff-big dandruff" dynamic ("works to S&P 1130 before "working" to S&P 860) could unfold? Sure do; we touched S&P 1129 last week and other than the specter of more drugs from Washington, I don't see much to get excited about in the back half of 2010. We offered in our Ten Themes that this year could be a mirror image of 2009 and thus far, that's on track.

Random Thoughts:

R.P.

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