Weekly Review and Outlook Risk Recovery Short Lived, Dollar to Extend Rally in a Busy Week ahead

Risk markets attempted a recovery last week on some positive news as Germany and Finland approved expansion of the EFSF while Troika returned to Greece finally. However, strength of the recovery was far from impressive and lost momentum towards the end of the week. While major US and European stock indices managed to hold well above recent low, the CRB commodity index made a new low on Friday and closed below 300 level for first in almost a year. Dollar index's retreat was rather shallow and was contained at 77.30 while Friday's rally put the index back pressing recent high of 78.86. This could also be reflected in major dollar pairs which lost momentum. Commodity currencies also turned weak with Canadian dollar and New Zealand dollar making new record low against US dollar.

Markets are facing a number of even risks this week and it's great opportunity for traders to watch the reactions, and thus, get a sense on the underlying sentiments. China manufacturing PMI was released on Saturday and has surprisingly rose to 51.2 in September. More importantly, this marked the second consecutive months of increase, though little. There have been much worries on hard landing in China. While PMI only showed little improvements in the outlook, at least, it's not deteriorating and indicates that economic development is stabilizing.

EU finance ministers are not likely to approve the disbursements of next EUR 8b tranche of Greece bailout this week. However troika, the EU/IMF/ECB inspection team will complete an evaluation as early as on Monday and thus give the signal on whether Greece has done their austerity jobs satisfactorily. Also, as the Bundestag has now passed the bill for expanding the EFSF, there would possibly be some news on how the fund would be enlarged to a size that's capable to contain Italy and Spain eventually.

While the surprised surge in inflation dented hope for a rate cut from ECB, the bank would nonetheless announce new stimulus measures in Trichet's last meeting as President this week. The unconventional measures to be adopted would include resumption of the one-year refinancing operations and restart of covered-bonds purchase. These should be positive to the markets.

While these events might trigger some recovery in risk markets, we'd anticipate that the impact would be short-lived. We're staying bearish in risks and bullish in dollar. The technical developments suggest that dollar is ready for another round of rally this week while stocks would likely revisit recent lows. Market sentiment would once again be proved to remain bearish if the above mentioned events fail to provided sustainable boost to risk markets. And, extension in decline in the CRB, if accompanied by a break of 10600 level in dow, and a sustained break of 79 in dollar index, should confirm the trend of risk selling in the first half of Q4.

The week ahead

In addition to the above events, Fed will also start the operation twist program on October. Fed will purchase a total of $44b of longer-mautrity treasuries and sell that same amount of short term debts. Four central banks will meet including RBA, ECB, BoE and BoJ. In addition, there will be key economic data release including Japanese Tankan, UK PMIs, US ISM indices and Non-farm payroll, Canadian job report. So, be prepared for a busy and volatile week.

• Monday: Japanese quarterly Tankan; Swiss retail sales, SVME PMI; Eurozone PMI manufacturing final; UK PMI manufacturing; US ISM manufacturing
• Tuesday: Australian building approvals, trade balance, RBA rate decision; UK construction PMI; Bernanke speech, US factory orders
• Wednesday: Australian retail sales; Eurozone PMI services final, retail sales; UK services PMI, GDP final; US ADP job, ISM services
• Thursday: BoE rate decision; ECB rate decisions; Canada building permits, Ivey PMI; US jobless claims
• Friday: BoJ rate decision; Swiss unemployment; UK PPI; Canada employment; US non-farm payrolls

Technical Highlights

Dollar index's strong rally on Friday suggests that recent rise from 72.69 is ready to resume. Initial focus is on 78.86 resistance today and break there will confirm this bullish case and should send the index through 80 psychological level to 50% retracement of 88.70 to 72.69 at 80.69 next. Break of last week's low of 77.30 will delay this case and bring more consolidations but we'll stay bullish as long as 76.06 support holds. 

The CRB commodity index extended recent down trend to close at 298.15. Near term outlook will remain bearish as long as last week's high of 312.26 holds and further fall should be seen to 50% retracement of 200.15 to 370.70 at 285.43. The main focus would indeed be on whether the current decline would accelerate again. That's crucial in determining whether CRB could draw support inside 247.25/293.75 zone and rebound. 

S&P 500 stayed in recently established range last week but felt strong pressure well ahead of 55 weeks EMA at 1230.3. While the 38.2% retracement support at 1101.7 might provide some more support in near term, it shouldn't last long. Friday's fall puts initial focus this week on 1101.54 recent low. Break there will resume whole decline from 1370.58 and should send the index through 1010.91 support within October. In any case, we'll stay bearish as long as 1258 head and shoulder resistance holds. 

EUR/USD Weekly Outlook

EUR/USD turned into brief recovery last week but such recovery was likely finished at 1.3689 already. Initial bias is mildly on the downside this week for 1.3362 first. Break will confirm resumption of recent decline and should target 161.8% projection of 1.4939 to 1.3969 from 1.4548 at 1.2979, which is close to 1.3 psychological level. On the upside, above 1.3689 will delay the bearish case and bring more consolidations. But recovery is, nonetheless, expected to be limited below 1.3936 resistance and bring another fall eventually.

In the bigger picture, current development indicates that medium term rise from 1.1875 has completed with three waves up to 1.4939 already. That also suggests that it's merely part of the consolidation pattern that started back in 2008 at 1.6039. Further decline would now be seen to 1.2873 support first and break will target 1.1875 and below. On the upside, above 1.4548, resistance is needed to confirm completion of the fall from 1.4939 or we'll stay bearish in EUR/USD.

In the long term picture, EUR/USD turned into a long term consolidation pattern since reaching 1.6039 in 2008. Such consolidation is still in progress and we'd expect range trading to continue for some time between 1.1639 and 1.6039.

EUR/JPY Weekly Outlook

EUR/JPY formed a temporary bottom at 101.93 last week and recovered to 104.95. Such recovery is treated as consolidation in recent decline only. Hence, while another rise cannot be ruled out yet, even in that case, we'd expect upside to be limited by 106.98 resistance (50% retracement of 111.93 to 10.93 at 106.93) and bring fall resumption. Below 103.00 minor support will flip bias back to the downside. Further break of 101.93 should target 100 psychological level next.

In the bigger picture, whole down trend from 2008 high of 169.96 is still in progress and is building up downside momentum again. Sustained trading below 100 psychological level should pave the way to 100% projection of 139.21 to 105.42 from 123.31 at 89.52, which is close to 88.96 all time low. On the upside, break of 111.93 resistance is needed to be the first signal of medium term reversal. Otherwise, we'll stay bearish.

In the long term picture, up trend from 88.96 (00 low) has completed at 169.96 and made a long term top there. Based on the five wave structure of the rise from 88.96 to 169.96, we're favoring that fall from 169.96 is corrective in nature. Hence, look for reversal signal ahead of 88.96 low.

USD/CHF Weekly Outlook

USD/CHF's consolidation form 0.9182 continued last week but drew some support from 4 hours 55 EMA and recovered. The development suggests that retreat from 0.9182 might be cover already and initial bias is back on the upside this week. Break of 0.9182 will confirm resumption of the whole rise from 0.7065 and should target 161.8% projection of 0.7065 to 0.8246 from 0.7710 at 0.9621 next. On the downside, below 0.8917 minor support will delay the bullish case and bring more consolidations first. But we'll stay bullish as long as 0.8647 support holds and extend another rise eventually.

In the bigger picture, medium term down trend from 1.1730 is already completed at 1.7065. But there is no indication of long term reversal yet. Rebound from 0.7065 is treated as part of a medium term consolidation pattern. Such rebound would possibly extend to 0.9916/1.1730 resistance zone. But strong resistance should be seen there and bring reversal. On the downside, break of 0.7710 is needed to indicate completion of the rebound from 0.7065. Otherwise, we'll stay near term bullish in the pair for the moment.

In the longer term picture, long term down trend from 2000 high of 1.8305 is still in progress and there is no indication of a reversal yet. Such down trend would still extend to 100% projection of 1.8305 to 1.1288 from 1.3283 at 0.6266 after finishing the consolidation from 0.7065.

GBP/USD Weekly Outlook

GBP/USD's recovery from 1.5327 extended to 1.5715 last week and lost momentum since then. Such recovery might be finished already and initial bias is cautiously on the downside this week for retesting 1.5327 first. Break will confirm resumption of recent fall from 1.6746 and should target 161.8% projection of 1.6746 to 1.5780 from 1.6618 at 1.5055 next. On the upside, above 1.5715 will delay the bearish case and bring another recovery. But upside should be limited by 38.2% retracement of 1.6618 to 1.5327 at 1.5820 and bring fall resumption eventually.

In the bigger picture, rise from 1.4229, which is treated as the third leg of consolidation from 1.3503 (2008 low) should be finished at 1.6746 after GBP/USD completed a head and shoulder top reversal pattern (ls: 1.6298, h: 1.6746, rs: 1.6618). Fall from 1.6746 could be the fourth leg of the consolidation pattern from 1.3503 (2008 low) or resuming long term down trend from 2.1161 (2007 high). In either case, retest of 1.4229 resistance should be seen. Break of 1.4229 will bolster the down trend resumption case and would possibly push GBP/USD through 1.3503 low. On the upside, break of 1.6618 resistance is needed to invalidate this view. Or we'll now stay cautiously bearish in GBP/USD.

In the longer term picture, the corrective nature of the multi-decade advance from 1.0463 (85 low) to 2.1161 as well as the impulsive nature of the fall from there suggests that GBP/USD is now in an early stage of a long term down trend. Another low below 1.3503 is anticipated after consolidation from 1.3503 is confirmed to be completed.

USD/JPY Weekly Outlook

USD/JPY sideway trading from 75.94 continued last week and outlook remains unchanged. Stronger recovery might be seen initially this week but upside is expected to be limited by near term falling trend line (now at 77.71) and bring fall resumption eventually. Below 76.11 will turn bias back to the downside and break of 75.94 low will confirm resumption of whole fall from 85.51 and would target 70 psychological level.

In the bigger picture, USD/JPY is still staying well inside the falling channel that started back in 2007 at 124.13. There is no indication of trend reversal yet even though medium term downside momentum is diminishing with bullish convergence condition in weekly MACD. Such down trend is still in favor to continue to 70 psychological level. In any case, break of 80.23 resistance is first needed to indicate completion of fall from 85.51. Secondly, break of 85.51 is needed to be the first signal of medium term reversal. Otherwise, we'll stay cautiously bearish in the pair.

In the long term picture, current decline suggests that the long term down trend in USD/JPY is still in progress. Such down trend is expected to extend further into uncharted territory with 70 psychological level as next target. In any case, we'd at least need to see sustained break of 85.51 before considering trend reversal.

EUR/CHF Weekly Outlook

EUR/CHF struggled around 1.22 level for most of last week but finally gave up and dipped to close at 1.2155. More sideway trading would be seen in near term with bias mildly on the downside to send the cross back below 1.21 level. Nevertheless, note that SNB has made it clear about their intention to keep a floor at 1.2 and any decline attempt should be contained by this level. On the upside, even in case of another rise, strong resistance should be seen in 1.2399/3243 resistance zone to limit upside unless there is a drastic turn in risk sentiments.

In the long term picture, so now after SNB intervention, the long term down trend in EUR/CHF is put into a halt at 1.0061. But there is no scope of a trend reversal yet before a break of 1.3243 resistance. EUR/CHF should stay in range for sometime.

USD/CAD Weekly Outlook

After brief retreat, USD/CAD rally resumed last week and jumped to as high as 1.0502 so far. Initial bias remains on the upside this week and further rise should be seen to 161.8% projection of 0.9406 to 1.0009 from 0.9725 at 1.0701 next. On the downside, below 1.0372 minor support will turn bias neutral and bring consolidations. But retreat should be contained above 1.0142 support and bring rally resumption.

In the bigger picture, sustained trading above 55 weeks EMA affirms the case that whole down trend from 2009 high of 1.3063 has finished at 0.9406 on bullish convergence condition in weekly. Current rally from 0.9406 should now target 1.0851 resistance (38.2% retracement of 1.3063 to 0.9406 at 1.0803). Break there will extend the rebound to 61.8% retracement 1.1666 and above. On the downside, break of 1.0009 support is needed indicate completion of the rally from 0.9406. Otherwise, we'll stay bullish in USD/CAD.

In the longer term picture, there is no clear indication that the long term down trend from 2002 high of 1.6196 has reversed even though bullish convergence condition was seen in monthly MACD. The fall from 1.3063 to 0.9406 looks corrective and could either be part of a sideway pattern from 0.9056, or a corrective to rise from there. The long term outlook, i.e., the possibility of taking out 1.3063 high, will depend on whether rise from 0.9406 would eventually develop into a strong impulsive wave. We'll wait and see.

EUR/GBP Weekly Outlook

After brief consolidations, EUR/GBP dived to as low as 0.8578 towards the end of the week. The development affirmed the case that rebound from 0.8529 is already finished at 0.8795 after failing to sustain above 55 days EMA. Fall fro 0.9083 should be ready to resume. Initial bias remains on the downside this week for 0.8529 first. Break will target 100% projection of 0.8884 to 0.8529 from 0.8795 at 0.8440 next. On the upside, above 0.8651 minor resistance will delay the bearish case and turn bias neutral for more consolidations first.

In the bigger picture, price actions from 0.9799 (2008) should be unfolding as a consolidation pattern in the long term up trend. The first leg is completed with three waves down to 0.8067. Second leg should also be finished at 0.9083. Fall from 0.9083 is treated as the third leg and should now target 0.8067 first and possibly further to 61.8% projection of 0.9799 to 0.8067 from 0.9083 at 0.8013 (which is closes to 0.8 psychological level). Nevertheless, we'd expect strong support from 0.7693/8186 support zone to contain downside to finish off the consolidation. On the upside, break of 0.8884 resistance is needed to invalidate this view or we'll stay bearish now.

In the long term picture, long term up trend from 2000 low of 0.5680 shouldn't be over yet and the choppy fall from 2008 high of 0.9799 should be a correction only. We'd expect such correction to be contained by 0.7963/0.8186 support zone and bring up trend resumption. Rise from 0.5680 is still expected to extend beyond 0.9799 high eventually.

S&P 500 at 1,000?

After an embarrassing and quite disastrous meeting of European Finance Ministers last weekend, all hopes were hanging on the Federal Open Market Committee meeting and the well anticipated launch of “Operation Twist”.

Yet, the outright downbeat assessment issued by Fed Chairman Ben Bernanke poured cold water on a market that was still hoping for a re-acceleration of growth after the summer in a repeat of what happened last year.

We are therefore left with a potentially crumbling European financial system with a backdrop of sharply heightened downside risk on global growth.

On the bright side, it must be noted that after falling off a cliff from February 2011, the Citigroup Economic Surprise Index for the U.S. is slowly recovering:

Citigroup US Economic Surprise Index – source: Bloomberg

This is of course a function of sharp downward revisions to expectations after a disastrous year on the economic front. This remains a factor to watch however.

The crux of the argument remains that the slow death scenario in Europe has to be addressed as an emergency but after the EcoFin meeting we fail to see a sense of unity of purpose in the European Community.

Of course, announcements over the coming weekend might still happen although the probability remains fairly low. Greece of course springs to the top of minds in this respect.

The European Central Bank also stands ready to cut rates in an emergency and there is no doubt that it will do so if we experience another bout of stress next week. But one has to wonder what good this would bring for the fundamental issues that plague Europe right now. Not much more than a very temporary relief on the announcement, in our view.

Clearly, the technical picture on both sides of the Atlantic calls for sharp downward moves in the near future.

At the time of writing, the S&P 500 futures look to be headed for a slight pullback, having avoided an outright bearish close overnight:

S&P 500 Dec. 11 futures contract – daily chart – source: Bloomberg

Still, we would not expect the rebound to exceed 1,150/60 at the very best before the downtrend resumes.

Indeed, the volatility index for the S&P 500 paints a bleak picture as the fear index breaks out of a consolidation pattern. This could open the way for much more upside for the “fear” index:

S&P 500 Volatility Index – source: Bloomberg

Last night’s break to the upside may well be heralding a sharper downward move in equities within a short period of time.

Looking at the weekly chart of the S&P 500 weekly chart, the picture is also bleak: 

S&P 500 cash index – weekly chart – source: Bloomberg

Indeed, the cash index is on course to print a bearish weekly engulfing pattern that would put an end to what had all the attributes of a suckers’ rally. The Friday close will be highly informative in this respect.

On balance, and unless we get a significant announcement from the Europeans over the coming weekend, we expect to see U.S. and European markets much weaker next week and the area of 1,050-1,000 looks like a realistic target.

In Europe, the technical picture looks even heavier for obvious reasons and the mooted reaction to the upside we are seeing this Friday morning is not encouraging.

The congestion area we highlighted in previous posts was met with heavy selling activity and real money accounts have been bailing out all week.

DAX 30 cash index – daily chart – source: Bloomberg

The “double-bottom” formation is therefore the line in the sand for a sharp move lower.

In conclusion, bar an unlikely surprise announcement from the European side, the downside risk remains wide opened.

Hang on to your hats!

Stocks Rally On Hopes for Greece; US Housing Permits Surprise

S&P 500 Index futures are currently up 0.7 percent indicating a higher open as investors are hanging their hopes on the Federal Reserve's announcement of "Operation Twist" and maybe something more which could lower the interest rate the Fed pays commercial banks on their deposits with the Fed. Operation Twist is a balance sheet maneuver where the Fed buys treasuries further out on the yield curve than 10 years against selling those with shorter maturities.

In pre-market investors got numbers on U.S. housing starts for August which came out at 571K annual rate compared to 590K expected. More importantly the leading indicator building permits rose 3.2 MoM compared to minus 1.8 percent expected. Despite today's numbers it is fair to say that housing will not drive the economy forward in any meaningful way for the next many quarters.

Greece debt talks productive; Italy downgraded by S&P with negative outlook
In Europe, the Euro STOXX 50 Index is up 1.5 percent driven by gains in Banco Santander (+2.9%), BASF (+3.4%) and Siemens (+2.3%) as Greece said its debt talks with the Troika were productive and amid growing optimism ahead of tomorrow's Federal Open Market Committee meeting outcome.

Early this morning Italy's debt was downgraded by S&P from A to A+ with a negative outlook which we must say reflects that rating agencies remain behind the curve. Prices on Italian bonds and credit default swaps have long shown that the market thinks Italy's debt is of a deteriorating nature. In fact we would argue that with the size of Italy's structural deficits and 0.2 annualised growth rate in the last decade the country should have an even lower credit rating.

Adding further to the negative news stream, the Zew Survey (index of investor and analyst expectations) for September came out at -43.3, the lowest reading since December 2008 as Europe's debt crisis continues to worsen. Today's Zew numbers support that the probability for a recession in Europe is higher than in the U.S. The biggest problem for Europe right now is that the lack of market dynamics within the ranks of policymakers are resulting in too slow reactions to the problems. Europe is slowly approaching the critical point where the situation could get out of control if the prophecy of Europe's downfall materialises among corporates and individuals.

More stock specific, Deutsche Lufthansa is out announcing that it is cutting its full-year forecast as economic concerns are hurting bookings. The announcement comes after very confident statements from management that earnings would increase. The shares are down 5.9 percent in Frankfurt trading

Another Round of Bad US Economic Data; Greece Backed up?

S&P 500 Index futures are up 0.2 percent indicating a higher open as risk continues its now three-day long relief rally.

The amount of bad economic data continues to pile up with today's worse than expected job and manufacturing data. U.S. initial jobless claims came in higher than expected at 428K compared to 411K estimated signalling that the world's largest economy is still not generating enough jobs on a net basis. Empire manufacturing data for September came out at -8.82, worse than the -4.00 expected, signalling that manufacturing in the New York region is contracting faster than initially expected. The pre-market data hit risk, taking stock futures down a bit.

Later investors will get the important U.S. industrial production for August which is expected (13:15 GMT) to show that industrial production was unchanged last month. Based on the recent downward revisions do not be surprised if industrial production from July is also revised down from the 0.9 percent MoM reading. Finally, investors will get the Philly Fed Business Outlook for September expected (14:00 GMT) to come out at -15.0 compared to -30.7 in August.

Germany and France behind Greece; UBS trader loses USD 2 billion on unauthorised trading
In Europe, the Euro STOXX 50 Index is up 2.5 percent and EURUSD is strengthening as official assurances from Germany and France that Greece will stay in the Euro is somewhat fuelling investor confidence. Also adding some positive flavour to stocks is the Italian Parliament's final approval of the EUR 54 billion austerity package that is put in place to fight contagion risk from Greece's bond market and secure balanced budgets in 2013.

Early this morning a new trading scandal surfaced with the arrest of a UBS trader in London due to around USD 2 billion losses on unauthorised trades, which according to rumours were presumably revealed as the trader was trying to exit naked short positions in an ETF silver instrument. The trading losses may cause UBS to announce a third quarter loss and as a result the bank's shares are down 8.6 percent in Swiss trading.

Stocks are Down With Yesterday's Speeches Changing Nothing

S&P 500 Index futures are currently down 0.5 percent ahead of the open. With all the highest ranking politicians' and central bankers' speeches done this week we can now settle the score as we head towards weekend.

QE3 is not very likely at the September FOMC meeting
Fed Chairman Ben Bernanke did not mention QE3 in his speech yesterday and only said that the Fed was ready to use additional monetary tools to help the economy if necessary. We expect the Fed to keep the powder dry, thus disappointing the market again at the September FOMC meeting, and wait for stronger indications that the economy is sinking pushing the unemployment rate up. The Fed know that additional QE programmes will have increasingly lower marginal impact on the economy so it absolutely imperative that QE3 is only iniated if the economy is falling into a recession again. However, please remind that the 10 year yields are already below 2 percent, the U.S. money supply is already growing at 8.2 percent YoY and the inflation is coming down, so all the important factors are already supporting the Fed's goal of stimulating the economy as much as possible through monetary tools.

Obama is trying something he cannot impact anyway
Whereas Ben Bernanke did not give the market anything, Barack Obama's job speech gave more than anticipated with a job plan worth USD 447 billion, which he first of all will not get through Congress, and secondly if a smaller programme gets through it will not materially change the job situation in the short timespan that he has to the next election in 2012. On a net basis this is insignificant for investors and the economy.

Later today the only economic data coming out is U.S. wholesale inventories for July is expected (14:00 GMT) to come out at 0.7 percent up from 0.6 percent in June. This indicates that companies are still forecasting decent demand from consumers as the re-stocking of inventory is still running at a very high pace compared to previous levels since september 2001.

Europe down on concerns over the Economy; Porsche down on postponement of Volkswagen merger
Euro STOXX 50 Index is down 0.7 percent snapping back from previous lows but still reflecting growing concerns over the global economy and the situation in Europe's credit markets; both Spanish and Italian 10 year yields are coming back above 5 percent.

Porsche is down 9.8 percent in today's session as pending lawsuits in the U.S. are dragging out the expected deadline for the merger with Volkswagen which was expected to be within year-end but now investors are looking at 2012.

Making $22 Million the Easy Way

 http://www.moneyandmarkets.com/

How would you like to make $22 million? No matter how wealthy you may be, that’s a nice amount of money.

Better yet … how about making $22 million with no extra work? Seriously — it’s free cash for labor you’re already doing.

Your answer is probably something like “Where do I sign up, Ron?” Today I’ll tell you how a company every investor knows made that much (and more) just last year. First, let me give you some background …

Pennies Add Up
In the ETF Business

You know I love ETFs. One reason is their relatively low fees compared to traditional mutual funds. “Relatively low” is not the same as “zero,” however.  

Money management is lucrative because it is scalable. Managing $1 billion isn’t ten times as expensive as managing $100 million. But it can bring the manager ten times more revenue.

Pennies add up in the ETF business.

Fund fees are usually expressed in annualized “basis points.” Each basis point is 0.01 percent, which looks like a tiny amount. But do the math: $1 billion times 0.01 percent is $100,000. That’s more than most households make in a year!

So if you are managing $100 billion, a fee difference of two or three basis points can quickly add up to millions. And thanks to the economies of scale, the lion’s share of it will be pure profit.

Every Player Gets Paid

As I explained in a column last year, “You’re the Winner in the ETF Price War,” ETFs have both internal and external costs. ETF expenses tend to be lower than actively-managed funds because most follow an index. They don’t need to pay for stock-picking.

What investors often forget is that indexes aren’t free. They belong to an index provider, who gets paid by the ETF. And this brings us to that $22 million easy-money deal I mentioned above.

The largest, most actively-traded ETF was also the first U.S. ETF: SPDR S&P 500 (SPY), based on the Standard and Poor’s 500 Index. According to its prospectus, SPY pays S&P an annual licensing fee of $600,000 plus 3 basis points on the ETF’s assets. This added up to $21.9 million for the year ended September 30, 2010, and it’s on course to rack up even more this year.

This is a great deal for S&P! They created the index way back in 1957. They still have to calculate and maintain it, of course, but that’s fairly simple. What do SPY investors get in exchange for their $21.9 million? Answer: The same list of stocks that is freely available to everyone.

Being the inventor of a popular index is like winning the lottery every year!

Now dig a little deeper. SPY’s total operating expenses in that year were $79.2 million. That means about 28 percent of the fees paid by SPY investors went to S&P … which did practically nothing but cash the check!

Don’t get me wrong — I think S&P has a right to make money from its proprietary knowledge. But I would also argue that most SPY shareholders don’t know how much “their” ETF is paying its index provider. The numbers are buried in fine print. And the 28 percent figure isn’t there at all unless you can do the math.

This means that even at what seem like rock-bottom fee structures, the ETF business is immensely profitable for sponsors and other service providers. And that’s why we’ve had a flood of new ETFs the last few years. Others want a piece of the action.

BlackRock: Bringing the
Index Action Home

If creating an index is so simple, why don’t ETF sponsors just do it themselves? Good question. The answer is that the SEC likes the idea of keeping the index provider separate from the fund sponsor. They think it helps avoid conflicts of interest.

The regulators have a point. But is avoiding a potential problem worth sending $22 million out the door every year? BlackRock (BLK) — the world’s largest money manager — doesn’t seem to think so. 

Last week, BlackRock filed a request with the SEC to let its iShares ETF family follow in-house indexes instead of those run by third parties like S&P. 

The SEC has granted similar requests to other firms, notably WisdomTree and Russell Investments. But BlackRock wants to go even further and handle all indexing functions internally.

So if the SEC says “Yes,” will BlackRock reduce its fees to reflect the savings? I doubt it. Their goal is to help their own bottom line. Any benefit for ETF shareholders is an added bonus.

In this regard, the ETF industry is following the same path as countless other sectors. Big companies grow by cutting out intermediaries. In theory, the competition helps consumers get a better deal. Time will tell what happens in this case.

Meanwhile, I’m grateful for the innovation of ETF and ETN providers. We have a wealth of choices — and that’s a win for everyone. 

Best wishes,

Ron

P.S. To sort through all those choices, you may want an expert on your side, someone who has been ranked by HULBERT #1 or #2 for cumulative performance among all the ETF and fund analysts Hulbert has tracked — year after year for FIFTEEN years. For the full story, click here to read this report on my International ETF Trader service.

Weekly Review and Outlook: Risk Sentiments Stabilized for Now, More Consolidations Before Jackson Hole

Risk selloff intensified initially last week in response to S&P's downgrade of US rating and the hollow statement G7 regarding the current market turmoil. Though, sentiments "stabilized" as the week went on, after Fed pledged to keep rates low until mid-2013. The attempt to extend the spotlight of European debt crisis to France was unsuccessful and that's followed by banning of shorting financial stocks in France, Italy, Spain and Belgium. Also, Spanish and Italian yields dropped sharply after ECB buying. Major world equity indices recovered strongly from intra-week lows. However, we believe that the market sentiments were just "stabilized" rather than reversed. The European debt crisis won't go way that easily. And global economies, including US, UK and Eurozone are poised to slow down on austerity measures, dragging down other parts of the world. So, risk assets will remain vulnerable to further selloff even though more consolidations would likely be seen before Bernanke's Jackson Hole Speech on August 26.

The Fed delivered a much more dovish policy statement in August as the path of recovery has been 'considerably slower than expected'. As a prelude to additional easing, the central bank pledged for the first time that interest rates will stay at exceptionally low levels at least until mid-2013 and reinvestment of maturing proceeds will be maintained. Wall Street rebounded after the report as investors looked forward for additional stimulus in coming meetings. Meanwhile, markets will be eagerly waiting for Bernanke's speech in the Jackson Hole meeting. Bernanke announced QE2 at Jackson Hole last year and there are rumors that he will also announcement something that moves market this year. That might include additional bond purchases of over $1T, targeting at long term securities like 10 year and 30 year bonds to push funds back to risk assets. In addition, Fed might remove the interest payments given to excess bank reserves at the central bank. We'll wait and see what Bernanke finally delivers.

In the currency markets, the biggest shock was the reversal in Swiss Franc's strength after SNB official talked about temporary peg to Euro. SNB Vice Chairman Thomas Jordan was quoted saying "any temporary measures to influence the exchange rate are permissible under our mandate as long as these are consistent with long-term price stability," and that could include a temporary peg to Euro. SNB's move of cutting rates, adding liquidity to the markets are so far very ineffective. Meanwhile, SNB officials should be aware of the fact that outright intervention in the markets in 2009/10 caused substantial losses with little impact and almost triggered Chairman Philipp Hildebrand to step down. While we should still have a long distance from pegging Swiss Franc with Euro, the SNB might have strong determination to defend EUR/CHF from breaching parity. A wide range of tools could still be used and as Jordan hinted, that might include creating negative interest rate environment for non-resident Swiss Franc deposits. There is also call for tax on foreign deposits.

While the Swiss franc pulled back sharply, the Japanese yen was the strongest currency last week on safe haven flows. Though, we saw some hesitation to push the Japanese yen further lower towards the end of the week, partly due to recovery in stocks. Japan's Finance Minister Yoshihiko Noda declined to comment on the effectiveness of the unilateral intervention on August 4. But he warned that Japan would consider various options to curb yen's strength if excessive yen rises persist.

The BOE lowered its economic forecasts amid global economic turmoil. In the latest quarterly inflation report, policymakers stated that the biggest risk came from sovereign crisis in the Eurozone. Risks to growth are skewed to the downside as slowdown in growth may turn out to be more persistent than previously expected. The BOE retained the view that inflation will return to a little below target in the medium-term. The BOE left the Bank rate unchanged at 0.5% and the asset purchase program at 200B pound at the meeting last week. Yet, it reiterated the flexibility to add or remove stimulus measures when conditions warrant.

Technical Highlights

S&P 500 dived to as low as 1101.54 last week before drawing support from 38.2% retracement of 666.79 to 1370.58 at 1101.73 and recovered. A short term bottom is in place. However, note firstly that price actions from 1101.54 are so far corrective which suggests it's merely consolidations. Also, please be reminded that S&P 500 completed a medium term head and shoulder reversal pattern earlier (ls: 1344.07, h: 1370.58, rs: 1339.62). The trend line from 666.79 was also firmly broken. So, we'd believe that whole up trend from 666.79 was over. Hence, upside of the current consolidation should be limited by neck line resistance at around 1260 level and bring fall resumption. S&P 500 should eventually break through 1101.54 towards 1010.91 key support and below. 

Dollar index continued to engage in range trading around 55 days EMA last week. Near term outlook remains neutral. The dollar index might continue stay in range of 74/77 for a while but the current development is still favoring more downside. Break of 74.18 will likely send the index through 72.69 towards 70.70 record low.  

GBP/CHF basically followed other swiss crosses, diving to new record low of 1.1464 initially then rebounded strongly. A short term bottom is in place after brief break of long term target of 161.8% projection of 2.4965 to 1.5112 from 1.8113 at 1.2024. More rise would likely be seen initially this week. But at this point, we'd expect strong resistance from 1.3038 cluster resistance (38.2% retracement of 1.5691 to 1.1464 at 1.3079) to limit upside. We'd expect some sideway consolidation above 1.1464 before the long term down trend finally resumes to parity. 

Australian dollar has been extremely weak in the past two weeks, just as other commodity currencies. EUR/AUD's rebound from 1.2927 extended to as high as 1.4261 but failed 1.4341 resistance and retreated. AUD/USD is at a junction as it's just hold above a medium term retracement level. And Aussie's fate would very much depends on whether AUD/USD would have another deep fall and on whether EUR/AUD would take out 1.4341 resistance. Decisive break of 1.4341 will complete a double bottom reversal pattern (1.2926, 1.2927) and would signal completion of the down trend from 2.1127 and medium term reversal. But before that, we'll stay neutral in cross first.

The Week Ahead

Risk sentiments should remain stable this week and stocks, as well as commodity currencies might extend recovery. But upside potential should be relatively limited and markets would like like stay in range for a while. Dollar, Euro and Sterling would likely stay in range against each other, going nowhere though the pound is vulnerable to some weakness considering the even risks. Swiss France and Japanese yen might try to regain some strength towards the end of the week.

• Monday: Japan GDP; US Empire State Manufacturing, TIC capital flow, NAHB housing market index
• Tuesday: RBA minutes; German GDP, Eurozone GDP; UK CPI; US new residential construction, industrial production; New Zealand PPI
• Wednesday: UK employment, BoE minutes; Eurozone CPI; UK PPI
• Thursday: Japan trade balance; UK retail sales; US CPI, jobless claims, existing home sales, Philly Fed survey
• Friday: German PPI; UK public sector net borrowing; Canada CPI

USD/CHF Weekly Outlook

USD/CHF dived to new record low of 0.7065 last week but staged a strong rebound since then as the Swiss Franc pulled back sharply after SNB comments. At short term bottomed is formed at 0.7065 and we'd expect more consolidations above this level for a while. Further rebound is expected initially this week to 0.7801 resistance and above. Though, we'd expect upside to be limited below 0.8081 resistance and bring another fall to extend the consolidations. Below 0.7548 minor support will flip bias back to the downside for retesting 0.7065 first.

In the bigger picture, while the rebound from 0.7065 was strong, there is no indication of trend reversal yet. We'll stay bearish as long as 0.8275 support turned resistance holds. Current down trend from 1.1730 is still expected to extend through 0.7 psychological level. Though, that would come after some more consolidations above 0.7065 first. Meanwhile, sustained trading above 0.8275 will indicate that such fall from 1.1740 has finished and open up the possibility of rebound back to 0.9634 support turned resistance.

In the longer term picture, long term down trend from 2000 high of 1.8305 is still in progress. There are various interpretation of the price actions. But after all, USD/CHF should be resuming the set of impulsive fall from 1.8305 to 1.1288. The current down trend might now be targeting next projection level of 100% projection of 1.8305 to 1.1288 from 1.3283 at 0.6266.

Daily Report: Greenback Drops across the Board on Disappointment of FOMC

The greenback nose-dived against the invincible Swiss franc for over 500 points or 6% yesterday to a record low of 0.7068 and selling gathered momentum after disappointment on the Federal Reserve announcement. The Fed kept rates unchanged as expected and only pledged to keep interest rates near zero until 2013, although the committee indicated they are noted that economic growth has slowed considerably, no word was mentioned on the implementation of QE3. Some traders sold dollar immediately as they found the statements with no surprises, the greenback was down across the board with EUR/USD surged to 1.4398 and cable also rebounded from low of 1.6176 to 1.6336 overnight.

Having said that, the commitment to keep rates low for 2 years helped U.S. equities to rebound strongly yesterday (DJI +3.98%, S&P 500 +4.74% and NASDAQ +5.29%), posted a best single day performance in 2-year. This rebound indirectly helped to greenback to rebound from record low against the Swiss franc back to above 0.7200 level. With the Swiss franc rallying against almost all other currencies, traders are speculating the SNB may have no choice but to take action again like last week to intervene. The SNB unexpectedly cut benchmark rate to 0-0.25% last week and reaffirm their pledge to stop the massively overvalued franc from further appreciation which they considered harmful to the country’s exports. Nevertheless, with eurozone and U.S. both in debt crisis, heavy safe-haven demand continued pushing the franc higher and higher, EUR/CHF almost hit parity yesterday and made a fresh record low of 1.0075 before rebounding. The SNB had been increasing its holdings of foreign currencies in order to curb franc’s rise, however, the policy resulted in over $21 billion losses last year (and $10.8 billion in H1 2011) which threatened the position of SNB President Hildebrand. Traders basically believe the central bank may not be able to do much to stop the franc from surging and feel quite comfortable buying the franc against other major currencies.

Another central bank that intervened the market last week was Bank of Japan, however, all the effort made vanished as the pair just dropped below the level right before BOJ started selling yen (76.78), recovery in Nikkei 225 had little impact on the currency pair. Verbal warnings from Japanese officials had no impact at all to the forex market, traders need to see some concrete action and they believe just by BOJ itself, it would not be enough to stop the yen from rising and a retest of record low formed in March at 76.25 looks quite possible. MOF Noda said he is still watching the market closely and will continue to talk with other countries for cooperate actions to encounter speculative and disorderly moves. Once again, Japanese margin traders are reported to start building long USD/JPY positions at current level just like what happened last month, hoping the MOF would defense the post earthquake record low of 76.25 and sizeable stops remain at 76.20 and 75.90-00.

Although the unrest and youth riots in London together with soft UK production hurt sterling yesterday and pressed cable down from 1.6411 to as low as 1.6176, cable rebounded overnight on dollar’s broad-based weakness. Some traders also refrained from selling the pound to heavily ahead of today’s Bank of England inflation report to be released at 9:30GMT. Investors are closely watching the report with concerns that BOE Governor King may lower the economic forecast and provide a more dovish tone in the report in wake of current turmoil in financial markets. There are also some speculations that the BOE may expand the QEP from the current GBP 200 billion.

USD/CHF Daily Outlook

Daily Pivots: (S1) 0.6983; (P) 0.7288; (R1) 0.7509;

USD/CHF's decline extends to new record low of 0.7065 so far, meeting mentioned target of 261.8% projection of 0.8519 to 0.8081 from 0.8277 at 0.7130. Intraday bias remains on the downside with 0.7361 minor resistance intact and further fall should now be seen to medium term target of 138.2% projection of 1.1730 to 0.9462 from 1.0065 at 0.6931 which is close to 0.7 psychological level. Above 0.7361 minor resistance will turn bias neutral and bring consolidations first.

In the bigger picture, long term down trend from 1.1730 is still in progress and is accelerating by taking out the medium term falling channel support. There is no signal of bottoming yet. Such decline is expected to continue for 138.2% projection of 1.1730 to 0.9462 from 1.0065 at 0.6931 which is close to 0.7 psychological level. On the upside, break of 0.8275 resistance is needed to be the first sign of medium term bottoming or we'll stay bearish in the pair.

Why The Stock Market Is Plunging

Gary Gibson, Geneva, Florida…

Slow news day, huh?

We are kidding, of course, good patrons. There’s been some pretty big news.

The S&P was forced to admit what we fringe pundits and kibitzers have been saying for years: U.S. debt is not quite as sound as the official ratings agencies would like you to believe.

The S&P 500, Dow and Nasdaq all took the official admission pretty hard. The S&P and Nasdaq are down 5%, the Dow nearly 4%.

Gold meanwhile is all smiles and back-slapping. We pulled up the charts this morning and due to our ingrained bias we immediately looked at silver. Nothing much going on there…

We usually don’t even bother looking at the gold price. Silver is where the big moves usually happen. Whatsoever gold does, silver often does twice as much…

And silver is what we’re counting on to increase our purchasing power as gold does little better than protect it…

But it was gold that made the big boy moves today! Up over $1700. We check our records. And our pulse. As near as we can tell this is a first.

As we put the finishing touches on today’s little ditty gold is at an all-time high of $1718. Gold is almost as expensive as platinum right now.

Silver meanwhile is feeling lethargic. It can’t seem to be bothered to get out of bed even as gold is circling the block a second time on its morning run. Silver remains just below $40 again today, and only a dollar above its Friday close around $38.

Gold’s Friday close was about $1650. That’s a 4.2% gain against the Dow’s 3.8% loss (again, as of this writing)…

None of this should come as any surprise, however. Things are happening as they ought.

Adjusted for inflation, gold is still nowhere near its 1980 high of a nominal $850, or about $2400 in today’s dollars.

Securities meanwhile are inflated in value, pumped up for at least a generation by the actions of the central bank. These actions have been eroding the value of the dollar, long cut free from its golden moorings. Gold’s price has failed to reflect this reality for longer than you’d think was possible.

But now stocks can’t keep up despite the dollar’s sacrifice. The dollar’s decay, however, lends gold renewed strength.

The Dow and gold are seeking each other out, planning a rendezvous at price parity somewhere. Their meeting point might have been 3000 before the Fed opened the spigot. It point may be 5000 as things stand right now. It could be 10,000 or more if the Fed keeps easing.

Of course at that point, anyone holding U.S. dollar or U.S. debt or corporate shares won’t be happy. The reason for the dollar and debt may be obvious, but what about the stock markket? Robert P. Murphy explain answers the question below…

Whiskey & Gunpowder
by Robert P. Murphy
August 8, 2011
Nashville, Tennessee, U.S.A.

Why Is The Stock Market Plunging?

Investors the world over are still reeling from last Thursday’s massive plunge in the US equity markets, in which the major indices all gave up more than 4 percent. It was the worst day for the US stock market since December 2008. [And today's markets are down over 4% again.--Ed.]

None of this should surprise those conversant with Austrian economics. The “fundamentals” of the economy have been and remain awful because the government and Federal Reserve are consistently doing the wrong things. The apparent recovery, fueled by Bernanke’s sheer money creation, has been bogus all along.

Bubble, Bubble, Bubble

For some reason, people still cling to the vague hope that — at least if we wait long enough — the market always goes up, and “buy and hold” is a great strategy. Let’s look at a long-term chart of the S&P 500:

Does the above chart really look like the US stock market is in store for smooth sailing? Just about everyone except Chicago School economists now recognizes, after the fact, that the United States obviously went through a tech and dot-com bubble in the late 1990s and then a housing bubble a few years later. Is it really so difficult to understand that trillions in government budget deficits over the past few years, coupled with unprecedented inflation by the central bank, have set the economy up for yet another crash?

Alan Greenspan’s low-interest-rate policy in the wake of the dot-com crash spawned the housing bubble. Greenspan’s Fed didn’t actually eliminate the need for a recession, but instead postponed the crisis and made it fester. When reality hit in September 2008, Ben Bernanke was in charge of the Fed and implemented his predecessor’s failed approach times ten.

No matter how many pundits and famous economists declare otherwise, Bernanke did not save the day with his interventions. He has simply postponed the day of reckoning yet again, and we can expect the final crisis to be much worse than the mere collapse of a few major investment banks. (The short documentary Overdose makes the case in a chilling fashion.)

Ben Bernanke Engineered the “Recovery,” All Right

In a perverse way, the pundits are correct in crediting Ben Bernanke’s extraordinary programs for “rescuing” the stock market. If we zoom in on the chart of the S&P 500 and superimpose the monetary base, we can see how closely the two have moved since the crisis began.

Although the above chart shows a decent fit, in reality the stock market responded very quickly to changes in the expectations of Fed expansion. Specifically, the sharp upswing in the S&P 500 in March 2009 coincided with the announcement of the Fed’s full strategy for (what we now call) QE1, and the market rally in the late summer of 2010 began as knowledgeable Fed officials made it clearer and clearer that QE2 would kick in after the fall elections.

Of course, those economists who believe Bernanke is engaging in a tight-money policy would point to the above as evidence in their favor — the Fed just needs to print more, because it’s worked twice already! But if one believes that showering trillions of newly created dollars into the financial sector (with the specific aim of bailing out the very parties who made reckless loans and investments during the housing bubble) is notconducive to a healthy recovery, then the booming stock market of the last few years should have been an ominous sign. Note that this isn’t 20/20 hindsight; other Austrians and I have been warning that this “recovery” has been bogus all along, and that the stock market could collapse at any time.

Inflation Lifts All Boats

None of the above analysis implies that investors should dump all equities immediately. It is true that the prospects for real economic growth are terrible — especially in the Western countries — over the next decade, because of increased regulations and swollen government debt loads. But at the same time, various central banks, especially the Federal Reserve, have been all too willing to create new money as an apparent solution to every crisis. (A case in point was the absurd proposal for the Treasury to issue two trillion-dollar platinum coins to evade the statutory debt ceiling.)

In this environment, someone relying on fixed-income investments (such as private annuities or, heaven forbid, government retirement checks) could be wiped out by massive price inflation. As awful as the US real-estate and stock markets might be in the short and medium run, holding a portion of one’s wealth in assets not denominated in fiat currency may turn out to be a very wise defensive move. (The problem with shooting the moon on precious metals is that for all we know the dollar will crash next year and Obama will make it illegal to buy and sell gold.)

Conclusion

The US economy still needs to recover from the festering malinvestments that accumulated during the previous two booms. By pushing interest rates down to zero and bailing out the very people who made such bad financial decisions in the first place, the Fed and Treasury are doing everything they can to exacerbate the problem.

In this volatile world economy, investors can expect continued volatility in the stock market. The only thing we can really be sure of is that the government will use each new crisis to justify further extensions of its power. At some point the feds will probably seize the highly volatile 401(k)s and other stock-market holdings from citizens and replace them with “safe” government annuities.

Knowledge of Austrian economics doesn’t render someone an expert investor, but it certainly gives advance warning of the major trends in the economy. Those investors who rely on the Keynesians featured at CNBC think that another stimulus package or QE3 might do the trick.

Regards,

Robert P. Murphy

Robert Murphy is an adjunct scholar of the Mises Institute, where he teaches at the Mises Academy. He runs the blog Free Advice and is the author of The Politically Incorrect Guide to Capitalism, the Study Guide to “Man, Economy, and State with Power and Market,” the “Human Action” Study Guide, The Politically Incorrect Guide to the Great Depression and the New Deal, and his newest book, Lessons for the Young Economist.