Credit Writedowns

Gold’s 30 percent parabolic move from July 1 to September 6 is beginning to falter. Maybe the yellow metal is just out of gas and needs to consolidate a little or maybe it’s something bigger, such as the liquidity issues in the European banking system.

Smells like Kentucky Fried Takeout to us. Yes, we’re talking our book, but for good reason. Nevertheless, keeping both hands on the ripcord.

So, our friends, a few questions. Which rates are the result of financial repression, capital flows, and/or stellar credit risk? And what is the best carry trade, assuming you can borrow close to the sovereign?

Our post of August 22nd, S&P500 Faces a Fork in the Road, noted the S&P500 faced a fork in the road. One path, the 2010 bullish trajectory bolstered by Jackson Hole; the other, the bearish 2008 trajectory, the result of, say, a European sovereign induced banking crisis. From the post to yesterday’s close, the S&P500 was up almost 8.5 percent generating its “best eight-day gain since 2009.“ Not a lot of fundamental news to explain the rally so let’s just call it for what it is/was, a Robert Frost rally.

After posting the W bottoms on the S&P500 and the Brazil ETF here is our favorite, the Korea ETF (EWY). We learned during the 1997 Asian Financial Crisis never to short Korea and never underestimate the resolve of the Korean people.

Not the classic trajectory and confirmation, not to mention the compressed time frame, but you’ve got to respect the price action. The macro swans are still out, so the question is are they priced? We don’t know and not willing to make a huge bet either way. The next negative headline and tape bomb will be the true test.

Wow! Just came across this piece from the FT about the concerns of the International Accounting Standards Board (IASB) of how European financial institutions have not reserved enough against potential credit losses on their Greece sovereign bond holdings.

In July, the employment-population ratio for youth—the proportion of the 16- to 24-year-old civilian noninstitutional population that was employed—was 48.8 percent, a record low for the series.

Reports that hedge funds, with almost no tolerance for short-term pain, have opened the biggest net short positions since early 2008 has driven a relatively low volume short covering rally. We even heard predictions of a 400 point drop in the Nasdaq if Mr. Ben didn’t announce QE3. We guess they were positioned for it and had a front row seat at Friday’s performance of the Nutcracker

The Greeks are starting to play hardball on their private sector debt swap warning the deal could crater if the 90 percent participation is not met. We think there are other reasons why it is trouble.

Timing couldn’t be more perfect, no? Maybe we get a bottom in equities on the release date. Go here to the movie’s official website.

Lots of chatter out there about the 2008 and 2010 analog for the S&P500 so we constructed a tracking chart for you.