Oil on a 25mth cyclical bull run. Update 11 - 'Ultra' bullish markets push oil to $90.00.

It really doesn't matter what the US Federal Reserve does now, apart from successfully maintaining a trading range for stocks more notably the Dow trading within 11255-11500; a widen range with thin volume (...and you tell me that is stable?). The Feds/POMO operations (daily) has been an attempt, with $600billion printed money to buy short/mid dated US Treasuries (namely from dealers sold via oversubscribing), to lower the yields on UST's. Of course this has been a complete failure, with yields on most UST's fluctuated on a steeping curve. The 10yr heading towards 4.00% and the 2yr heading towards 1.00%.

So we have a bullish sentiment on the 'ultra' side, namely stocks, but most assets classes are now rallying, with bullish commentary accompanying a 'buy' signal into 2011. But as most indices are bubbles and are oversold, namely US stocks that weren't able to correct in October, November and now December 2010; what we are observing is the thin volume on marked up buys e.g 3 shares bought for 1 sold. This is not a dip buying market, but rather a 'stabilized' High Frequency Trading market, that can meltup and meltdown just as quick.

So if we have bubbles forming now in stocks (US) and bullish sentiment has clouded judgment, with the possibility of dumb and smart 'dumb' money buying into tight HFT trading ranges. What could possibly cause the market to shift south rapidly?

China.

And it's all about oil. With a $90 a barrel inflation break point for China (being oil import dependent). China has an over stimulated economy, vast over capacity, property bubble and possible bank liquidity problems. China will need to see oil much lower, any higher after a 90.00 breach will inevitably increase China's chance to go into hyperinflation, since China is now domestically driven by massive credit expansion. It will either need to crash parts of it's economy or head into an inflationary meltdown if oil climbs upward.

China crashes, the global economy crashes.

After a 20mth bull run oil hits 90.00 (Dec 2010):
*Note USD divergence.

10-yr UST up 3.4550% crushes S&P500 rallies - 'Iceberg' coming (update 2)

As pointed out in The markets are entering a 'Fog of War' - Yields going upwards after the Feds QE2, when most of the market claimed that the the Fed's QE2 was going to flatten yields, especially the short end and propel stocks into hyperspace. This much is true, with some positional adjustments and bulltraps, stocks have resumed upward. With the Dow now breaking the 10400 resistance but as a yield blowout continues and US Treasures were sold, it sent the S&P lower now at 1241. The Feds QE2 experiment has been a flop, as mortgages pegged to the 30yr UST are moving upward and the very important 10yr UST now heading towards 4.00%.

But stocks are rallying (albeit thin liquidity: note S&P500 sell off) with money going mostly into risk buys on short term/rapid trading (HFT's). This extreme bullishness (with dashes of volatility) that has crept into the markets of late will end in tears, as the global economy moves closer to an iceberg.

10yr UST:



S&P500

10-yr UST 3.1650% crushes Dow and S&P500 rallies (update 1).

Just when we thought that the excess liquidity pouring into Wall Street via the Federal Reserve could maintain a forever rally in stocks, but it has to be realized that if US Treasuries are getting abandoned (to go into risk trades, like stocks) this in turn forces UST yields upward, which in turn makes the US dollar bid, this sends stocks lower; all on the expectations that interest rates will start to go up, as mortgage/credit interest rates will start to climb.

As discussed in An interest rate wipe-out coming (update 1) the volatility in the stock market is a sharp volatility (daily) which will continue with an interrelationship with UST yields and USD dollar going upward, as the yield on short/mid/long term UST's effects USD trades (buy). So any expectations, say buying into an open (stocks) for a continued rally maybe disappointed as a sell is most likely towards the end of close, this has 'unlimited' time frame as the market is now trading in a high frequency trading environment/s that is all about scalping on tight bid/offer spreads. But one should be aware that the 'unlimited' time frame (buy (stocks) open sell close counter relationship to yields bid, USD bid), is only unlimited once the structural collapse of financial markets begins, which is probably occurring now. As the global economy is completely dysfunctional i.e inflation problems in China, sovereign debt problems in Europe as the US prints money and remains an economic basket-case.

10yr yield



Dow



S&P 500

'Madman' Ben Bernanke is ensuring that China and US are on a collision course ('Bernanke' sends oil to $89)

Ben Bernanke on CBS/60 mins has stated that he hasn't ruled out further bond purchase beyond the current $600billion of US debt monetization by the Federal Reserve. On the 3rd December 2010 the markets were briefed earlier via the Bernanke/CBS transcript sending stocks and risk/commodity/Asian currencies upward and the USD was sold. The best part? Oil going from $87.14 to $89.49, moving closer to the $90+ (in my opinion): a break point for China.

As China is going into hyper inflation based on food and energy (China being a net importer of oil), it certainly doesn't need oil to go upward in price, whilst a 'mad' Federal Reserve chief (Ben Bernanke) devalues the US dollar, at the same time exporting inflation to China. China will not be happy.

The longer this nut devalues the USD the more tensions will arise between China and the US, the more expensive oil becomes China and the US will edge closer towards their collision course.

Chart: Oil/USD (self explanatory)

10-yr UST yield is up again

As discussed in 10-yr UST 2.9110% crushes attempt at Dow and S&P500 rallies

After the thanksgiving (US) when every second person says there is going to be a stock market rally...yeah a contrarian play again.

The 10yr is going upward again, could it breach 3.00%?

10-yr UST 2.9110% crushes Dow and S&P500 rallies.

10yr UST



S&P500

Dow

Yes, the fog has descended. With yields rising the Fed's idea to propel stocks upward is failing miserably, even though we are at two days of the $600billion buy up of US Treasuries by the Federal Reserve. The plan is going haywire

from Reuters:

A rise in 10-year Treasury yields to a three-month high pushed the dollar, with the Wall Street Journal reporting that a group of Republican-leaning economists was launching a campaign calling for the Federal Reserve to drop its plan to buy $600 billion of Treasuries.

So we have some internal disputes occurring namely the Republicans who correctly are concerned with long term ramification of printing excess liquidity into the system, debasing the US Dollar and leading the US economy further into inflation.

From Market Watch

NEW YORK (MarketWatch) -- U.S. stocks struggled to hold their gains late Monday as Treasury prices fell sharply, denting cheer that came with a jump in retail sales and after Caterpillar Inc. announced a sizable acquisition.

"Treasury's are getting splattered and 10-year yields are at three-month highs; if rates are going up, it's not a good thing for equities. This is the Fed's worst nightmare," said Peter Boockvar, equity strategist at Miller Tabak.

The grinner's in all this are the foreign debt holders, whose currencies have been over bidded on a weak USD, a somewhat sigh of relief. But major stock sell off's (globally) which could speed up towards the end of 2010 may lead to a further monetization from the Fed, still this should be offset with confusion, turmoil and internal disputes at the direction of the US ecomomy. Europe and China will also add to the tensions (economically), that may further lead to economic/trade conflict/s.

The fog of war falling over the markets may only get worst as the global economy reaches closer to it's tipping point.

Market volatility will be extreme towards the end of 2010 and into 2011

The markets are entering a 'Fog of War' - Yields going upwards after the Feds QE2

As discussed in Contrarian play on the upcoming Permanent Open Market Operations (POMO) by the FED ala 600billion buy up of US Treasuries and Risk aversion coming back (update 2) - Ireland bailout looming I was correct on the contrarian view on the beginning of the Quantitative Easing 2 and the warning signs from April/May/June 2010 when yields on short term to long term bonds went upward and stocks were sold, despite the Feds constant monetization of US debt. Although incorrect in my counter view on QE2 was that gold would rally.

The general belief of the QE2 effect (on stocks and UST yields) from blogs, to various commentary was that QE2, in it's beginnings which occurred on 12th November 2010 would propel stocks into a hyper buy-up on the back of POMO operations and send yields downward. As we are now all aware what did occur after the 1st day of the Feds QE2, yields moved up, stocks were sold off. This is the fundamental dilemma that sometimes what we think should happen actually doesn't happen, much like Nicholas Taleb's Black Swan theory for the markets. Essentially what we are looking at is the markets reacting to inflation expectations with the very real chance of cyclical inflation returning and retuning hard, with nice doses of risk aversion from both Europe and China. The simple explanation of US yields (apart from the major jump on the 30yr UST) moving slightly upward, whilst the Fed attempted to crush yields on short term US debt, is why would you want to hold it US debt (short/mid term) as yield payments decrease: say China?

The other factor too, this reminds me of the fantastic documentary The Fog Of War, is that you can run statically models, charts and try and calculate a percentage of what is needed to get the desired effect. The problem of course is the unpredictable and psychology of emotion and changing environments that if you cannot adapt to, you are lost. This happened in the Vietnam War, when the US government utilized advisors, the Fog of War discusses this re Robert McNamara (the former US Secretary of Defense). McNamara and others thought they could calculate an outcome for the Vietnam conflict; of course they failed and hence the term the Fog of War. So it's the adaption that is missed on unpredictability

What we may be entering now within the markets is a sort of Fog of War and unclear patten emerging that is occurring from geopolitical/and or political tensions. If Brazil's Guido Mantegasaid that we are now in a 'currency war', then conflict (defined by the term 'war') in the markets could extend into other aspects, such as trade protectionism and so on. Mix this with a descending 'fog' and expectations or statistical modeling to try and figure out the cause and effects will be rendered useless.