Bill Gross and options trader agree

Bill Gross has mentioned recently that Ben Bernanke will deliver QE3, and, perhaps, QE4 and QE5. One GLD options trader bets that QE3 will push the GLD to at least $185 by mid-July.


GLD has erased 7% over the last month, and dropped 0.1% to $161.28 on Thursday, as the lack of a third round of Federal Reserve monetary easing damps demand. The ETF is off nearly 13% since hitting $184.59--the ETF's all-time high--on Aug. 22.

"It looks like they are thinking GLD will make a new high around July expiration," said Todd Salamone, director of research at Schaeffer's Investment Research. "It could be someone expecting a breakout and betting on QE3 by July."

The trader set up a strategy known as a "debit spread" on Gold Trust options, according to Salamone, buying 20,000 July $185 calls, while selling 20,000 $210 calls of the same expiration. The strategy, which has a break-even at about $185.70, requires the ETF's shares to jump 15% by July 16.

The trader maximizes profit at nearly $50 million before commissions and fees if the shares rise 30% to trade at $210 by July expiration.

Gold posted a record of $1,925 an ounce in the New York futures market last September, went into consolidation phase and finished at $1,652 an ounce Friday.

 Less than four weeks earlier, gold had tumbled--shedding almost $100 an ounce in a single day--as a statement about the economic outlook from the Fed's rate-setting committee undermined hope for further easing. On Monday, Bernanke gave gold a boost, saying the U.S. labor market was still unstable--a comment some market watchers interpreted as a sign that he had left the door open for QE3.

Reinhart Sees Seven More Years of High Unemployment

Play Video

Carmen Reinhart, economics professor at the University of Maryland in College Park, talks with Bloomberg's Michael McKee about the outlook for U.S. growth, the labor market and Federal Reserve policy.

Reinhart and her husband Vincent Reinhart presented a paper at the Fed's annual symposium in Jackson Hole, Wyoming, today that finds the U.S., Germany and other advanced economies may face a decade of slow growth and high unemployment if the aftermath of the 2007 financial crisis tracks other post-crisis recoveries of the past century.
(Source: Bloomberg, August 27, 2010)

The dollar, utilities, health care and technology stocks make up "the safety trade."

by Howard Penney, Managing Director, www.researchedgellc.com

It's a cruel world out there and in this business you need to be critical to survive, stand up for what you believe and be factually correct. Most importantly, people want you to "make a call."

I agree that Ben Bernanke is completely compromised and Tim Geithner is out of his league and should never have been appointed to Treasury. At the same time they are the two people in Washington that have "inside information."

During this past week Ben had already said the U.S. economy faces "formidable headwinds" and then yesterday, we learned that the Treasury Secretary notified Congress that he is extending the Troubled Asset Relief Program through Oct. 3, 2010. Why? What do they know that I don’t? A lot, because they have "inside information!"

I don't have inside information, but I have the Research Edge Macro Models and this is what I do know…

(1) The U.S. dollar is establishing a new level of support with the trend line at 76.41--the buck is bottoming and is still a safe haven.

(2) The Semis are rallying--up 11 of the past 12 days.

(3) Oil is falling--it's currently trading at a two-month low--the reality of supply and demand.

(4) Gold has fallen just over $100 (9%) in a week--just a bubble?

(5) Copper has fallen for six straight days (the longest losing streak in a year)--the reality of supply and demand!

(6) Financials have underperformed the S&P 500 by 660 basis points over the past three months--this could be trouble!

Seeing the financials dramatically underperform is unnerving and could be a leading indicator of things to come. Whether or not Ben and Tim know something that I don't about the health of our financial system, Mr. Market is trying to tell us something. The banks are not lending and the FDIC continues to close more doors, while the "son of subprime" is going to hit with another wave of defaults in 2010. Ben can't raise rates and the Treasury Secretary is going to need TARP in 2010! We are in a very bad situation.

Have the financials truly absorbed all of the asset deflation in the system and are the current capital ratios real?

I believe technology, utilities and health care are part of the new "safety trade." Utilities have yield and growth and are a stealth play on green technology. Health care is safe from the perils of Washington and selected technology names are beneficiaries of deflation.

Paul Krugman: The Chinese Disconnect

Senior monetary officials usually talk in code. So when Ben Bernanke ... spoke recently about Asia, international imbalances and the financial crisis, he didn’t specifically criticize China’s outrageous currency policy.

But he didn’t have to: everyone got the subtext. China’s bad behavior is posing a growing threat to the rest of the world economy. The only question now is what the world — and, in particular, the United States — will do about it.

Some background: The value of China’s currency, unlike, say, the value of the British pound, isn’t determined by supply and demand. Instead, Chinese authorities enforced that target by buying or selling their currency in the foreign exchange market — a policy made possible by restrictions on the ability of private investors to move their money either into or out of the country.

There’s nothing necessarily wrong with such a policy, especially in a still poor country whose financial system might all too easily be destabilized by volatile flows of hot money. ... The crucial question, however, is whether the target value of the yuan is reasonable. ...

Many economists, myself included, believe that China’s asset-buying spree helped inflate the housing bubble, setting the stage for the global financial crisis. But China’s insistence on keeping the yuan/dollar rate fixed, even when the dollar declines, may be doing even more harm now.

Although there has been a lot of doomsaying about the falling dollar, that decline is actually both natural and desirable. America needs a weaker dollar to help reduce its trade deficit, and it’s getting that weaker dollar as nervous investors, who flocked into the presumed safety of U.S. debt at the peak of the crisis, have started putting their money to work elsewhere.

But China has been keeping its currency pegged to the dollar — which means that a country with a huge trade surplus and a rapidly recovering economy, a country whose currency should be rising in value, is in effect engineering a large devaluation instead.

And that’s a particularly bad thing to do at a time when the world economy remains deeply depressed due to inadequate overall demand. By pursuing a weak-currency policy, China is siphoning some of that inadequate demand away from other nations, which is hurting growth almost everywhere. The biggest victims, by the way, are probably workers in other poor countries. In normal times, I’d be among the first to reject claims that China is stealing other peoples’ jobs, but right now it’s the simple truth.

So what are we going to do?

U.S. officials have been extremely cautious about confronting the China problem, to such an extent that last week the Treasury Department, while expressing “concerns,” certified in a required report to Congress that China is not — repeat not — manipulating its currency. They’re kidding, right?

The thing is, right now this caution makes little sense. Suppose the Chinese were to do what Wall Street and Washington seem to fear and start selling some of their dollar hoard. Under current conditions, this would actually help the U.S. economy by making our exports more competitive.

In fact, some countries, most notably Switzerland, have been trying to support their economies by selling their own currencies on the foreign exchange market. The United States, mainly for diplomatic reasons, can’t do this; but if the Chinese decide to do it on our behalf, we should send them a thank-you note.

The point is that with the world economy still in a precarious state, beggar-thy-neighbor policies by major players can’t be tolerated. Something must be done about China’s currency.

(from NY Times, October 22, 2009)