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By Art Cashin Director of Floor Operations at UBS

April 10 (King World News) - “On this day (+2) in 1814, Napoleon Bonaparte stood in the hands of captors.  Just three years earlier he had been the self-proclaimed Emperor of France, de Facto ruler of most of Europe and the proud father of a new-born son by his second wife.  In addition, even his enemies had conceded him a unique sense of governance - his Napoleonic code stands to this day on two continents.


But he had an aggressive M & A department that told him to gamble all this for a hostile takeover of Russia.  It wasn't junk bonds that did him in.  Instead it was junk weather.  When his victorious army found itself forthright but freezing, he was forced to retreat.  And even though he fought off old enemies in incredible ways - once they touched French soil he abdicated to save his people.


So, here he was, a short Corsican kid with a great mind and a lousy stomach who had come up just short of ruling the world in a way Alexander and Caesar never quite made.


Unable to accept this fall from grandeur, he secretly asked his private doctors for poison, that he might die rather than be humiliated.  Once he had taken the potion, he decided to move for the melodramatic.  Why die in your room alone when you could make a grand gesture.


He summoned his guards and demanded a meeting with his counterparts, the leaders of his captors.  Once in audience, he would speak of the great work he had done and then die dramatically at the feet of these Lilliputians.


At the audience the medicine began to take its effect.  But it was counterbalanced by the medication for his ulcer.  Before his magnificent speech began, he developed -- hiccups.  So the nearly emperor of the world did not die defiantly at the feet of his captors.  Instead he hiccupped and stammered until he had to be helped - incoherently and inaudibly back to his bed.


Doubly lost, he quietly went into exile at Elba, but a year later when the medication wore off, he escaped and within 100 days, he had nearly recouped all his former glory.  But then came Waterloo - but that's another story, for another day.


The market had no hiccups yesterday.  It did have an almost flawless performance, however.


Timing, Timing, Timing – After Tuesday's somewhat half-hearted reflex rally, the bulls got their act together yesterday.  Shrugging off continued weakness in Tokyo, U.S. markets homed in on the general strength in other markets, managing to start the day with mild follow-up gains.  That somewhat limp bounce held into mid-morning.  Around that time, I sent this note to some friends:


Picture remains a bit murky.  The Dow and S&P clearly failed to take out Monday's high (as mentioned in Comments).  The Nasdaq made it higher but only marginally so.


The morning softness in the dollar, gold and U.S. treasuries suggest that any geo-political concerns fail to inspire a search for safety.


If the bulls make a second effort, Monday's high in the S&P was 1865/1866 and in the Dow it's 16413/16415, will be key levels.


Shortly, thereafter, as if they read the note, the Dow and S&P inched toward those levels.


About a half hour after the first note, I sent this out:


Bulls encouraged by continued nibbling on selloff victims.  Biotechs (IBB) replicate Nasdaq by marginally taking out Monday's highs.


Quiet trading sends traders to talking about looming earnings and possible pressure on profit margins in the non-financials.


In this vacuum, the Fed Minutes (2:00) will force instant analysis/commentary.


Run rate well below recent volumes.  At noon it projects to 660/740 million share final.


(The NYSE final volume was 710 million shares.)


The averages continued to edge higher going into the Treasury auction at 1:00.  The auction was a bit of a non-event and stocks eased back into "wait and see" mode awaiting the release of the FOMC Minutes at 2:00.  (The slight pullback may have been due to a number of comments on the tape that FOMC Minutes have mostly brought an initial negative reaction over the last two years.)


Although they did not know it at the time, the stage was perfectly set for the bulls.  The Dow and S&P sat just below two possible fulcrum points I had noted to friends earlier.


When the Minutes hit, and their dovishness was noted, there was an instant reaction across asset classes.  Treasuries jumped and yields fell.  Gold jumped.  And stocks – well they spiked through those "Monday high" levels setting off what looked like a brief frenzy of short-coverings.  They closed virtually right on the high tick of the session.


These Numbers Are Stunning – Earlier this week, I alluded to the terrific speech that Richard Fisher, the President of the Dallas Fed gave on Friday, in Hong Kong to the Asia Society.  It contained facts and numbers that boggle the mind – at least my simple little mind.


Early on, he refers to the fact that much of the easing the Fed has done – QE and otherwise – has tended to lie fallow.


Thus far, much of the money we have pushed out into the economy has been stored away rather than expended to the desired degree. For example, we have seen a huge buildup in the reserves of the depository institutions of the United States. Less than a fifth of commercial credit in the highly developed U.S. capital markets is extended through depository institutions. Yet depository institutions alone have accumulated a total of $2.57 trillion in excess reserves—money that is sitting on the sidelines rather than being loaned out into the economy. That’s up from a norm of around $2 billion before the crisis.


Wow!  That's $2.57 trillion versus a customary $2 billion – basically well over a thousand times more than normal.  And, note that sits in the accounts that provide "Less than a fifth of commercial credit…."


Mr. Fisher has a few more numbers up his sleeve.


Thus far, inflation has yet to raise its ugly head, and inflation expectations as measured by consumer surveys and market-traded instruments have remained stolid. However, with each passing day, constantly adding massive amounts to the monetary base will inevitably present a significant challenge to the FOMC, which must ultimately manage this high-power money so that it does not become fuel for sustained inflation above the committee’s 2 percent target once it is activated and flows into the economy.


Thus, I was more than supportive of the collective decision of the FOMC to begin cutting back on our rate of accumulation of assets beginning in December. Over the course of our recent meetings, we have cut back from accumulating $85 billion per month in Treasuries and MBS to a present rate of $55 billion per month. This is still somewhat promiscuous. Even with the taper, the recent decline of mortgage supply has driven our absorption of the MBS market to 85 percent of fixed-rate MBS issuance. The fall in net MBS supply is outpacing the taper.


"The fall in net MBS supply is outpacing the taper."  So, even though they are tapering, they are having a greater influence on the mortgage markets than before they started tapering.  But, as they say on TV – "Wait!  There's more!"


At the current reduction in the run rate of accumulation, the exercise known as QE3 will terminate in October (when I project we will hold more than 40 percent of the MBS market and almost a fourth of outstanding Treasuries). We will then be back to managing monetary policy through the more traditional tool of the overnight lending rate that anchors the yield curve.


That's 40% of all mortgage bonds and 25% of all Treasuries.  As I said earlier, the mind boggles – at least mine does.


Overnight And Overseas – Bank of England stands pat.  European markets off but not sharply.


Asian markets flat to higher with China and Hong Kong leading the way on rumors authorities may free up trading between them.


In U.S., incredibly, yield on the ten year moves even lower (circa 2.65%).  Stock futures are soft.  Gold is up and the dollar is off a smidge.

© 2014 by King World News®. All Rights Reserved. This material may not be published, broadcast, rewritten, or redistributed.  However, linking directly to the blog page is permitted and encouraged.

IMPORTANT - KWN has many more interviews being released today.

The audio interviews with Gerald Celente, Dr. Marc Faber, Egon von Greyerz, Rick Rule, Ben Davies, Rob Arnott, Dr. Paul Craig Roberts, Andrew Maguire, Art Cashin, Eric Sprott, Bill Fleckenstein and John Mauldin are available now. Other recent KWN interviews include Jim Grant and Felix Zulauf -- to listen CLICK HERE.

Eric King

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