Blog Posts by Jeff Macke

The Fed's verbiage today was jumbled and generally impenetrable; not particularly useful to traders. Operation Twist is in effect. The Fed sees "significant downside risk" to the economy and everything else is more or less right where the Fed left it in August. Of much more importance to those trading in the near or intermediate term is listening to what the market is telling us through its price action.

Right now the tape is saying it doesn't care all that much about our recession or Greece's drawn out tragedy. Now, in the interest of full disclosure I'm tired of assessing the inevitable Greek debt default as well as the recession I think started this quarter. I may come in tomorrow to find out that some utterance from the ECB has sent futures lock-limit down and poised to drop through the August Fed meeting lows of 1,100 on the S&P500. But I really doubt it.

I think the price action over the last couple weeks is incrementally bullish and I'm walking the talk by getting long Apple (AAPL), Costco (COST), and Ralph Lauren (RL) this week. Yes, I'm buying three stocks very near 52-week highs with the broader tape above, rather than at, 1,140 support. Was I wrong, crazy, bored, undisciplined or am I simply not that bright? It could be any or all of the above according to Todd Schoenberger, managing director at Landcolt Trading.

Schoenberger regards the glass as not half-full but totally empty and being hurled at the wall like a plate at a Greek feast. By his own admission he's not alone. "On the trading floor there's one optimistic guy and he's locked up and tied in the basement right now," he says. To which I say "great." Traders want the consensus against them. The best market moves, higher or lower, are the result of surprises. In this environment the biggest possible surprise seems to be that the economy doesn't stay in a recession for the next 20 years.

The issue may have been moved off the front page of the newspapers, but the government's reprisals against those even tangentially connected to Standard & Poor's downgrade of US debt continues. The latest development reported yesterday, is the SEC allegedly issuing subpoenas to hedge funds and other firm that placed "unusually large bets that markets would decline" ahead of the ratings agency's August 5th downgrade.

S&P itself is already under assault from local governments, the US Senate, the Treasury Department, and perhaps most daunting, the new Czar of Financial Morality, Warren Buffett. Curiously none of this official outrage is being directed at the entire ratings industry for its nakedly conflicted business model or its role in the housing crisis. The government (and Mr. Buffett) are targeting Standard & Poor's exclusively because the agency had the audacity to point out the obvious fact that betting on America is no longer the "sure thing" it once was.

It's worth noting that the ratings industry got a pass on the 2008 financial crisis because the government upheld their First Amendment rights to an opinion. Now S&P exercising that same right in regards to American debt is unleashing hell upon the agency and market bears in general. It would seem the First Amendment applies optimistic self-serving idiocy, not negative views, flawed though they may be.

Did hedge funds hear rumors of a downgrade? Almost certainly. So did I (and I said so on Eric Bolling's "Follow the Money" program that day). Stifel Nicolaus wrote of "chatter" regarding the downgrade the morning of August 5th. Pretty much everyone knew, even if no one could confirm it. A downgrade of the US was in the air and had been since the move was threatened three-weeks prior to August 5th. Traders didn't need Standard & Poor's to tell them that stocks were in trouble, it was quite obvious to anyone with a brokerage account or access to a newspaper.

The anticipation has been building for over a month as economists and quant-jocks the world over wait to hear from the Federal Reserve. Now, finally the day has come! Have incremental pricing pressures slightly increased or moderated? Have economic headwinds manifested enough that the Fed must take further action? And can they do so in a manner consistent with their statutory mandate? The awkwardly-worded press release comes out this afternoon, folks, and not since the debut of the last Harry Potter film have dorks, geeks and muggles been so excited.

Breakout welcomed Hayes Miller from Baring Asset Management to talk about ramifications, if any, for the Fed Statement today and potential moves they could make. Pacing myself the way mom used to when doling out gifts on Christmas morning, I asked Hayes just how much today's announcement is going to move the tape. Miller says "the market has already made up its mind that it doesn't matter a whole bunch."

Miller doesn't think QE3 would be well received, given what he sees as a muted reaction to QE2 and a general lack of need for more quantitative easing. Another QE would also be expected and boring, making it unsatisfying from both market-supporting and dramatic perspectives. What has been bandied about, and perhaps leaked to well-placed Fed sources, is what's called "Operation Twist".

Named after the Chubby Checker song when the strategy was unveiled in the 1960's, Operation Twist is the process of the Fed buying up long-dated Treasuries in an effort to flatten the yield curve. By doing so the Fed drives down the desirability of "safe" investments, making riskier options like investing in a business instead of government debt more attractive. "The ultimate goal is to try to to improve prices on risk assets," says Miller. In an investing world where owning Treasuries actually costs you money versus inflation, getting long dividend stocks seems like a decent idea.

It seems like just yesterday that markets were waiting for Ben & the Bernankettes to save the world from the dual horrors of a recession and nearly 10% unemployment yet, here we are, all cued up for another awkwardly worded statement to be released tomorrow. Will this be the meeting in which the Fed discovers a magical liquidity elixir to cure what ails us? Most likely not, according to John Nyaradi (pronounced "Nyaradi"), publisher of Wall Street Sector Selector.

Taking charge of fixing the economy has been a bit of a "game of hot potato," according to Nyaradi. Despite no particular help from the Treasury, Executive, Congress, or even the Judicial branches of government, the Fed has done yeoman's work, while almost desperately calling for help. Nyaradi says the Fed has "been very aggressive pulling out all the bazookas." Sadly we "haven't seen any results and I don't think we're going to."

If you're in the "bare cupboard" camp, the question boils down to how you protect yourself and

He kept America waiting for 26-minutes to hear a 21-minute campaign speech. That was pretty much my takeaway from President Obama's Rose Garden jobs/deficit reduction speech. I take no joy in saying my stance is a "plague on both your houses." Regardless of political affiliation, I am critical of the president because he's an ineffectual leader in a time of crisis.

America literally can't afford both Republicans and Democrats starting their campaign efforts 14 months ahead of the elections. But a campaign speech is what we got earlier today, once the president got around to delivering it. So let's break it down as best we can given the dearth of details provided:

Tax Loopholes: Citing a tax code more than 10,000 pages long and 5-feet high, the president vowed to make tax reform a high priority. Obama also said his plan called for lowering the corporate tax rate while creating tax breaks for companies that manufacture and hire in the United States. Despite being depicted as Scrooge McDucks, CEO's are generally in favor of both of these moves. In fact, Rex Tillerson of Exxon Mobil (XOM) and Jeff Immelt (GE) have come out in support of paying higher taxes if the rate is the same for all companies. Then all we'd have to do is find work for the untold thousands of accountants and tax lawyers working in corporate America. There were no actual "details" given but the putting tax code reform on the table was and remains the highlight of the American Jobs Act to date.

Medicare/ Medicaid/ Social Security: The president is not, in fact, in favor of gutting benefits for aged and ill. This is obviously a shot across the box of Republican Presidential candidate Rick Perry and his comment that Social Security is a Ponzi scheme. The president says he will not cut Social Security. Medicare and Medicaid won't be "gutted" without tax hikes on the rich. Nothing was said about rich people being willing to pay higher taxes to actually shore up medicare.

Warren Buffett Presents The Millionaire Tax: Warren Buffett made billions off the financial crisis by getting Goldman Sachs (GS) and General Electric (GE) to pay him usurious rates in exchange for what amounted to endorsement deals. Buffett is giving his entire estate to the Bill and Melinda Gates Foundation because he is of the opinion that the government is a poor allocator of capital. Buffett would like me to pay higher taxes to the very government he's opting to stiff.

Hit 'em high and hit 'em low, says former Chicago Bear Jon Najarian, speaking not about quarterbacks but retailers. Najarian says there are two retail categories working well regardless of stock gyrations and economic woes: The merchants of high-end goods and stores offering the deepest of deep discounts.

"People that have money are still doing very well," says the co-founder of TradeMonster.com. While that may always be the case, this year the rich are actually buying again after sitting on their wallets for much of 2010. The rich "are spending, whether it's Ralph Lauren (RL), Tiffany (TIF), or Whole Foods (WFM)." And he points out that Whole Foods and Ralph Lauren hit 52-week highs just last week. It's not a coincidence.

The charts of Tiffany's, Ralph Lauren, and Whole Foods tell investors a story similar to what you'd hear if you shopped in the respective stores: You can buy, but you're going to have to pay up to do so. All three stocks have gaudily outperformed the broader stock market. Over the last 52-weeks, the troika of trendy is up over 70%, nearly 10x that of the S&P500.

The "low" part of the high/low retail stock strategy is the deep-discount segment. Offering deep discounts in lower income or rural areas, Family Dollar (FDO), Dollar Tree (DLTR), and Dollar General (DG) have been rocking higher despite the tape. Dollar General, as an example, has tacked on 20% since the beginning of August versus a greater than 7% drop in the market. Staggering.

Apparently the Eurozone is willing to take our money but not our advice. AP is reporting European officials are refusing to come up with a "decisive solution" to their debt crisis until at least October. The decision to procrastinate comes just a day after the ECB and the central banks of the US, Britain, Switzerland and Japan announced a willingness to provide three-month dollar loans to banks in order to stave off a seizure of the European banking system.

A generous view of the Eurozone's delay is that the officials are meticulously crafting a strategy of unprecedented wisdom to virtually guarantee that the free market will have enough time to work itself out in an organic way. Another take is that the member nations of the Eurozone are using the Global Super Fed's money as a band-aid for the chest wound that is their financial system, fully intending to ask for more money on or about New Year's Day.

Or maybe the truth lies in the middle. To help fill the space between my natural cynicism and bullish optimism, Breakout welcomed Jon Najarian, co-founder of OptionMonster. Najarian has a diplomatic take, albeit one with a bit of a hedge. He says the coordinated central bank move helps in the short run in that it needs follow-up to be effective. "I'd liken this to a MASH unit," he says, meaning the goal of the dollar-dump was never anything other than an attempt to "stabilize the patient."

A worst-case scenario for all concerned, including the US, is a total and uncontrolled collapse of the Eurozone or EU. The problem with an endless series of short-term fixes is that they enable the member nations to continue to put off the day of reckoning, when Greece finally does default on their debt. Like much of the rest of the world, Najarian is slightly baffled and frustrated as to why the debt is regarded as beyond downgrade. There seems to be a prevailing idea that holders of Greek scrip "have to be paid 100-cents on the dollar or 'oh, my God, the world is over!'"

Yesterday, on the third anniversary of the collapse of Lehman Brothers, Swiss bank UBS (UBS) announced a greater than $2 billion loss due to a "rogue" trader. The trader in question, London-based 31-year old Kweku Adoboli, was arrested on suspicion of fraud at 3:30 in the morning after UBS ratted him out to British authorities. He's since reportedly admitted to creating losses. The BBC reports that UBS didn't learn about the bad trades until Adoboli told them himself.

So he clearly didn't sneak into UBS and cause troubles under the veil of anonymity. Until his arrest, Adoboli was reportedly a director on UBS's "Delta One" derivatives desk. While the title of director perhaps means something different in Europe, in the States it means someone with the authority to make higher-level decisions such as "should this trading desk make a trade exposing us to a $2b loss?" Adoboli wasn't operating outside the system, but rather was very much part of it.

Was this a one-off instance of a single employee operating outside the rules or evidence of systemic issues not just at UBS but the teetering Investment Banking system as a whole? To explore the issue, or at least bandy about conspiracy theories and mock efforts to regulate an inherently risk-laden business, Breakout welcomed Jon Najarian, the co-founder of Trade Monster and Friend of Breakout.

Since UBS isn't owning the bad trades and Adoboli is busy doing things other than laying out his trading book, the most obvious question is what on earth Adoboli was trying to do that went so wrong. With markets this volatile the answer could be just about anything.

"You could have lost money a whole bunch of ways," says Najarian, quickly adding that the losses didn't come from trades made on the CBOE or via other regulated traditional exchange floors. "You couldn't have hidden it in exchange-traded products," he says. Adoboli was operating on a desk charged with creating customized products for specific clients, among other activities. In effect, these desks trade against their own clients until they can offload the risk to someone else by chopping up the trade and selling the pieces to other clients.