Market is overpricing risk (update 11) - Big stock correction on it's way

We have missed the September and October 2010 corrections. With the Fed still monetizing debt right up to the release of their next round of qualitative easing at $600billion. But we may not going to get a Wiemar inflation driven stock run yet (precursor was stocks in 2009, that rallied nice and smooth of the back of a lot of liquidity) while we have internal disputes within the Federal Reserve over the $600billion US government debt purchase, PIIGS CDS/BOND spreads widen as the ECB throws a lifeline to the Irish and Spanish/Portuguese debt markets till market auctions in 2011 and there's China's property bubble still in the background.

Does all this add up to a market correction into the final months of 2010?

Absolutely, the Dow is extremely overbought running above the 50ma, 100ma and 200ma. With it's major support being the cross of the 50MA and 200MA, or between 10300 and 10400. A slight attempt at a correction was on September 29th low @10798 and October 4th low @10711

A flash crash could send the index below 10000, but for that we need a major event. Probably one on the cards with systems/humans edgy on any sign that inflation/deflation driven collapses could lead to a major sell .

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Risk aversion coming back (update 1) - Ireland

Just when the market is going all Weimar Republic with it's inflation based US dollar going down the toilet stock-rallies. It's currently (until the US backlash against the Federal Reserve/Ben Bernanke gathers steam) all about Ireland and the the Euro Zone, with CDS spreads widening further: @Ireland's five year sovereign CDS widened 17.5 BP to 605/615 BP. This if course put selling pressure on the EUR and drove down Europe's main indexes.

This is mild risk aversion. Greece is still doomed, but it's ecomomy is no where as close to Ireland and Spain that have being fed by the Europe Central Bank. Greece so far is the only country to tap into the 1trillion EZ bailout fund, which I think appalling, as German is the economic backstop for the fund (Germany now seeks to restructure fund/clauses/approach for any future bailouts).

Recently Greece's socialist government narrowly gets back into power, the bond markets will again be watching to see if they can still budget in austerity measure, which will be impossible. Greece will eventually default, as will Ireland and Spain. The CDS market and the bond markets have still priced in a major EZ default.

Ireland may be tested with a form of sovereign debt restructure rather than a Greek style bailout. If this is the case, any major risk aversion will correct 'overbought' markets end 2010 and into next year 2011

German finance minster says what investors/traders/and human beings are feeling.

Ben Bernanke has made a grievous error with more US Dollar money printing (QE2). This global backlash against the Fed ala Fed Chief Ben Bernanke will turn into a full blown Chorus of Disapproval.

So our beloved 2009 liquidity rallies (stocks) may not take off in earnest this time in 2010, rather nice doses of volatility.

German finance minister lays it on the line from Spiegal Online 11/05/2010:

"I don't think they are going to solve their problems that way," Schäuble told German public broadcaster ZDF in a Thursday evening interview. "They have already pumped an endless amount of money into the economy via taking on extremely high public debt and through a Fed policy that has already pumped a lot of money into the economy. The results are horrendous."

Mustn't forget that the German's have a history with inflation/hyperinflation
:
"A medal commemorating Germany's 1923 hyperinflation. The engraving reads: "On 1st November 1923 1 pound of bread cost 3 billion, 1 pound of meat: 36 billion, 1 glass of beer: 4 billion."

Are HFT's supports @1.36 EUR? Refer April 15th 2010

The Greek/PIIGS debt crisis or default crisis that was brewing in the markets prior to the 6th May 2010 'flash crash' (that from all reports occurred on panic High Frequency Trading sells via a possible sovereign default in Greece) a single date comes to mind;15th April 2010, when the EUR (Euro) had just stated to slide. The high for that day was 1.36 and it closed @1.35, the EUR was then punished for 36 days of selling when it reached the low of 1.18 on the 6th June 2010

The EUR hedge fund sells started on the date of the 15th April 2010 (EUR @1.36), exacerbated by the 6/05/2010 flash crash

Are we seeing a repeat of history here, that may set off some flash selling and or flash crash. Maybe?

We will wait and see if the EUR hits 1.36 (chart below current price @1.39)

China a last resort lender to Europe re: Portugal bankrupt scenario

Can you feel the love? Hell no, just business baby. China holds a crap load of Euro's (too much) actually China is quite a bad investor. China is better off selling it's Euro's and buying a lot more gold. Still, it's all a house of cards and Europe is looking very shaky, but China cannot also liquidity pump their 'housing-market-about to-bust' forever. So it's a credit bubble (China) on top of a debt bubble (Europe).

But the reality is China just is just jawboning to keep the speculators off from shorting the EUR. Doesn't matter, Portugal gets no reprieve and joins Greece and the rest of the PIIGS (credit default swaps of junk sovereign debt blow out more), with Ireland worst than Portugal/Greece as far as a potential liquidity freeze.

http://www.ft.com/cms/s/0/85d8c5ec-e9d8-11df-9725-00144feab49a.html#ixzz14eAbk3s9)

A 'disastrous' mega bubble on the Australian dollar

Disastrous? Put it this way, if a sudden shock internally/externally occurs and we see huge outflows of monies shift out of the AUD, Australian bonds could bear the brunt of a inflow of money, decimating the high yield offering of long dated Australian bonds. Forcing yield hungry bond holders to sell. For that reason (and others) every country on earth is trying stave off hyper 'hot' inflows, except Australia.

The story of two central banks and their mentally unstable 'bosses' 1. The Fed Ben Bernanke (insane loose policy) 2. The RBA Glen Stevens (insane tightening cycle) a divergence of similarities by their sheer lunacy.

Commodity producing countries under pressure (political/economic - Brazil) - Brazil to Tim Geithner 'You and that lunatic Fed chairman are...

...fucking slugs

(update 12)

My Portuguese isn't too good, but under his breath and his subconscious thoughts would translate the above sentiment towards the joke that is America's financial custodians

CHICAGO (Dow Jones)--Brazil Central Bank President Henrique Meirelles on Thursday became that country's latest official to criticize the U.S. Federal Reserve Board's move to stimulate the U.S. economy by buying bonds from the market.
The move has "negative consequences for other countries, which is the case for Brazil," Meirelles told reporters after a speech at the University of Chicago Booth School of Business. "The quantitative easing creates excessive liquidity which overflows to countries like Brazil, and then we have to take measures to address that issue," he said. "It does create a problem."
Meirelles confirmed that Brazil, at the Group of 20 meeting next week in Seoul, will present proposals "to several countries, the U.S. and China and others, to reach a different agreement not to generate so many distortions for countries like Brazil." He did not offer specifics about the proposals.
On Wednesday, the U.S. Federal Reserve announced it would purchase some $600 billion in bonds from the market over the next eight months. The move will sharply increase liquidity in the U.S. and markets worldwide.
"The Fed is doing what the Fed thinks is right for the United States. Period," Meirelles said. His comments came after Brazilian Finance Minister Guido Mantega, speaking in Brasilia on Thursday, called the Fed decision "an error." Mantega said much of the increased liquidity will flow to emerging market countries, such as Brazil, in the form of unwanted short-term investment inflows. "The latest Fed move will lead to greater disequilibrium in world markets," Mantega said.
Brazil's government has been struggling to cut down on short-term inflows, which have led to a sharp appreciation of the Brazilian real against the U.S. dollar. The real has gained more than 30% against the greenback since March of 2009. The strong real hurts Brazilian exports.
Economists agreed that the Fed move will mean more inflows into Brazil. Brazil's government last month raised the country's financial operations tax, known as the IOF, on incoming investment in fixed-income securities to 6% from 2% previously, in an effort to slow heavy foreign portfolio investment. The government also raised the tax on guarantees for futures and other derivatives operations.
Meirelles and Mantega are slated to accompany Brazilian President Luiz Inacio Lula da Silva and President-elect Dilma Rousseff to the G-20 conference. Mantega said they "will try to convince the U.S. to change its position [on Federal Reserve purchases of bonds]."

Massive capital control protectionism via South America in full effect. It's going to get really nasty very quickly.