BERNANKE PONDERING QE3 ATTACK STRATEGY / ETF DIGEST ( RECOMMENDED READING )

BERNANKE PONDERING QE3 ATTACK STRATEGY

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There was better employment data Friday which, at 117K, beat much lowered estimates for new jobs. The unemployment rate fell modestly to 9.1%. Estimates had ranged between 25K and 125K with consensus at 75K jobs added. So this report caused a sharply higher opening rally. However, immediately there was profit-taking which drove indexes. This was no doubt due to overnight mutual fund redemption requests needing to be filled. With volatility still high we climbed higher in the afternoon before the HFTs took over driving prices all over the map.

Below is a chart featuring “quotes per second” from various exchanges listed in the upper left of the chart. As you can see “quotes per second” rose as high as 500 indicating what’s called in the trade “quote stuffing”. This creates potentially artificial bids and offers in an attempt by the algos to manipulate prices. It creates volatility and program trades. And, it turns you off certainly.



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Friday there were a lot of complaints about the existence of these HAL 9000 driven HFTs. This is understandable. But where were these whiners when markets were being driven up by these very same systems?

Anyway, Merkel and Sarkozy had lunch together. The inference was that perhaps beyond double dating in the future they might just come up with more euros for the needy like Italy. They also suggested that both Spain and Italy get busy “reforming” their economies. In Italy Berlusconi and the Italian government asserted there was no budget problem but, in a snit, ordered their justice department to seize records of rating agencies. We all don’t admire previous rating agency sins but now they’re not the problem “now”.

Gold prices resumed an upward climb; the dollar was much weaker overall; commodity prices were mixed and bond prices were lower.

Goldman Sachs, like many other firms, have chimed-in reducing their GDP estimates to 2% annualized 2011 and first quarter 2012 and see a “one in three risk of new recession”. They like Morgan Stanley now expect some form of QE3 to come from Bernanke’s Jackson Hole Summit. These implied bended-knee appeals to the Fed will only encourage Bernanke to give it to us one more time.

Stocks finished the day uncertain with high volatility right to the closing bell.

Volume was huge Friday but breadth per the WSJ was still quite negative. This means we’re still short-term oversold from a breadth perspective.

We are short time oversold and fear levels are high. It’s becoming more widely expected and even encouraged that Bernanke & Co launch another round of QE which might include interest rate caps on two year maturities as some have suggested or buying maturities even further out the yield curve. It’s beyond my ability to know their path. But this Fed is an activist Keynesian lot and they’re “all in” as they say.
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It’s a shocking week for most investors who are wondering what the hell just happened. It’s more about what isn’t happening and that’s strong, coherent and engaged leadership.

Let’s see what happens.