Saturday, December 20, 2008

The Outlook for Home Prices is Grim

Excellent presentation on the Real Estate situation from T2 Partners, LLC.
An Overview of the Housing/Credit Crisis And Why There Is More Pain to Come

The Outlook for Home Prices is Grim


"We Estimate That Home Prices Are Only a Little More Than Half Way Finished Declining"

CLICK HERE TO READ REPORT:
http://www.designs.valueinvestorinsight.com/bonus/pdf/T2_Housing_Analysis.pdf

Low Interest Rates DESTROY - Financial Sense Article

Article from Financial Sense that can be found here: http://www.financialsense.com/fsu/editorials/shepherd/2008/1217.html
Low Interest rates DESTROY

by Ceri Shepherd, Trendinvestor.info | December 17, 2008

Where do these Wall Street MBA,s and so called “economic experts” get their degrees from? A kinder surprise egg? A Christmas Cracker?
Dropping interest rates is never good it is always bad. It is the sign of a weak economy and it always leads to a weak currency. What does that do for wealth preservation? Import Costs? and eventually inflation?

Imagine Mr or Mrs Average on Main street earning an average wage and lets assume they have $10,000 a year that they can spend on a MORT = Death GAGE = Loan.

If interest rates are set at 10% they can afford $100,000 worth of death loan, if the wonderful, helpful, and above all caring central bank the privately owned Federal Reserve which is neither Federal or a Reserve “help” by lowering interest rates to 1% then with the same $10,000 they can now afford a $1,000,000 loan.

One very simple question? Would you rather for yourself, OR YOUR CHILDREN a $100,000 debt or would you rather if you, OR THEY were “helped” into $1,000,000 of debt? Over time you can attack and pay off the $100,000 debt it will be impossible to get out of the $1,000,000 debt, without hyperinflation.

The Federal Reserve now control you lock stock and barrel you have effectively become an indentured debt serf. A bank tenant in a highly leveraged property as the implicit leverage built into a $1,000,000 debt with $10,000 available to pay is vast. Any slight increase in interest rates for whatever reason and you are foreclosed. They hold and control your financial destiny.

This is the whole essence of the American Economy over the last 20 years a gradually decreasing interest rate that has led to a perpetual debt production machine. We now have insane and unsustainable levels of debt apparent in every aspect of the so called economy, Private, Corporate and Government.

What message does all this devaluation send to savers that highly unfashionable breed of people who put off current consumption for a future income stream and some financial security? When savers interest rates are now not only derisory but below the true inflation rate and have been for a considerable period of time. Saving is not only a virtue, it is very necessary to provide the capital for productive investment and work. Saving is now treated as a cardinal sin by Government, consumption is King, I guess next they will use the “Patriot Act” against savers in the name of “Homeland Security”, consume or you are a terrorist!

The only reason they dropped interest rates yesterday is to try and “stimulate the economy” with the production of NEW DEBT which they hope will then be spent in the economy. That is the only reason! THEY DESPERATLY NEED YOU IN MORE DEBT. It is like a prostitute dropping her price to hopefully attract more punters. You will hopefully take up this offer of new debt at the “attractive new low interest rate”. This new debt will be denominated in freshly produced new dollars and will therefore devalue the purchasing power of all the existing dollars whether physical or electronic already in circulation. Because of the inevitable currency depreciation everything that America now imports has become more expensive, but everything that America exports now becomes cheaper. However America imports a lot more than it exports, so it’s not a good trade.

My advice to Obama is to immediately close the fashionable MBA “production line” factories and university economic departments as they are frankly producing people who are not only clueless but dangerously clueless. The books they read and the curriculum followed is simply WRONG. It never made any logical sense and is on a daily basis being exposed for the rubbish it always was.

For example, We had the Greenspan “Tech boom” whereby web sites with no earnings whatsoever were achieving stratospheric valuations IT INEVITABLY BUST, IT WAS A SCAM so Greenspan panicked and dropped interest rates RATHER THAN TAKE THE PAIN.

So we then have a much bigger and destructive “housing boom” where houses were sold to anybody who was warm and breathing. Guess what? IT WENT BUST, IT WAS ANOTHER SCAM!. So now they drop interest rates again RATHER THAN TAKE THE PAIN, they are looking desperately for the next bubble to try and inflate.

This is called “modern” or “structured” Finance and Economics and you can actually pay to get a degree in this stuff. Bizarre? I would describe it as completely wacko; I mean you cannot make this stuff up. If printing money, and constantly dropping interest rates, as well as bailing out everybody was some kind of economic Nirvana. I suggest that every society in history would have done this? Many of them have and it always ends in the same predictable way RUINATION.

The mantra taught and repeated of perpetual debt production by always easing interest rates until you end at 0% , Leveraged balance sheets and constant deficit spending wrecks real economies and peoples lives. How much more mayhem and destruction needs to be wrought on what is left of the real economy until this fact becomes plainly obvious to all.

Federal Reserve is Damned Either Way...

I’ve been saying for the last couple of years that the Fed is caught between a rock and a hard place. We have now arrived at ZIRP. “Quantitative Easing” (QE) is all that’s left. The unintended consequences of which will become clear within the next year.

For growth to occur, this year’s credit creation must be larger than the last year’s, then the next year’s must be larger and so on. The securitization of debt process created that exponential growth and that bubble has now burst. Since that debt creating process was unregulated and untracked by the government, the size is not directly quantifiable. However, if the growth rate in the derivative world is any guide, to create growth at this point, the amount of QE is, I would contend, far greater than the clowns in the government realize. The math does not work. To create growth at this point will require extreme amounts.

The fundamental problem with Bernanke’s theory is that we have reached macro debt saturation. The amount of income generated by our economy cannot handle the current debt, much less exponential future debt (Please read my article “Death by Numbers:” http://economicedge.blogspot.com/2008/11/death-by-numbers.html).

There are two and only two ways to pay back debt. The first is to pay it back (with interest), the other is to default. The correct thing to do was to let the holders of bad debt default. That’s why we have bankruptcy laws. Instead, the government is passing the bag of bad debt from those who hold it onto the taxpayer. The debt never went away, it’s still there and still has to be serviced. This is the end of the growth line whether we like it or not. That said, yes, it is possible to crank out sums so vast as to create growth going forward, but those sums are vastly greater than the trillions being discussed so far. And, the velocity of money has fallen to extreme low levels which means that when people get dollars they are simply using them to make debt payments instead of putting them to work in the real economy.

And because the tax payer is on the hook for those debts, the burden by the taxpayer is going to increase dramatically (those taxpayers are still saturated with debt, so now they are saturated twice). Thus the government needs more money while at the same time less money is actually available to them. That’s why we now see our deficits doing a moon shot. Those debts are already beyond the math that can service them, thus they will be defaulted upon at some point. The question WAS who defaults? Them (the banks) or us (our nation). Our leaders already chose us. As this article from the U.K.’s Telegraph points out, the ship is upside down:
Federal Reserve is damned either way as it battles debt and deflation

We know what causes a recession to metastasize into a slump. Irving Fisher, the paramount US economist of the inter-war years, wrote the text in 1933: "Debt-Deflation Theory of Great Depressions".

By Ambrose Evans-Pritchard
Last Updated: 6:34PM GMT 18 Dec 2008

"Such a disaster is somewhat like the capsizing of a ship which, under ordinary conditions is always near stable equilibrium but which, after being tipped beyond a certain angle, has no longer this tendency to return to equilibrium, but a tendency to depart further from it," he said.

Today we call this "Gladwell's tipping point". Once it goes, you can't get back up. This is why the Federal Reserve has resorted to emergency measures that seem mad at first sight.

It has not only cut rates to near zero for the first time in US history, it is also conjuring $2 trillion of stimulus out of thin air. This is Quantitative Easing, or just plain 'QE' in our brave new world.

The key is the toxic mix of high debt and deflation. An economy can handle one at a time, but not both.

The reason why it "departs further" from equilibrium is more or less understood. The burden of debt increases as prices fall, creating self-feeding spiral. This is what Fisher called the "swelling dollar" effect. Real debt costs rose by 40pc from 1929 to early 1933 by his count. Debtors suffocated to death.

Brian Reading from Lombard Street Research has revived this neglected thesis and come up with some disturbing figures. US household debt is now $13.9 trillion, down just 1pc from its peak last year. Meanwhile household wealth has fallen 14pc as property crashes, a loss of $6.67 trillion. The debt-to-wealth ratio is rocketing.

Clearly the US is already in the grip of debt-deflation. "The obvious conclusion is that the Fed should print money to purchase private sector assets so as to drive up their price," he said.

Fed chief Ben Bernanke does not need prompting. He made his name as a Princeton professor studying the "credit channel" causes of depressions. Now fate has put him in charge of the channel.

Under his guidance, the Fed has this week pledged to "employ all available tools" to stave off deflation - and damn the torpedoes. It will purchase "large quantities of agency debt and mortgage-backed securities." It will evaluate "the potential benefits of purchasing longer-term Treasury securities," i.e, printing money to pay the Pentagon.

Put bluntly, the Fed is deliberately stoking inflation. At some point it will succeed. Then the risk flips quickly to spiralling inflation as the elastic snaps back. There will be a second point of danger.

By late 2009, if not before, the bond vigilantes may start to fret about the liquidity lake. They will worry that the Fed may have to start feeding its holdings of debt back onto the market. The Fed's balance sheet has already risen from $800bn in September to $2.2 trillion this month. It will be $3 trillion by early next year.

"The bond markets could go into free fall," said Marc Ostwald from Monument Securities.

"The Fed went into this all guns blazing just as the Neo-cons went into Iraq thinking it was a great idea to get rid of Saddam, without planning an exit strategy. As soon as we get the first uptick in inflation, the markets are going to turn and say this is what we feared would happen all along. Then what?" he said.

New Star's Simon Ward said all three measures of the US broad money supply are flashing recovery. M2 has risen at annual rate of 17pc over three months.

"It has all changed since the Fed began buying commercial paper in October. If the money supply is booming at 20pc in six months, inflation will become a concern. Given that public debt ratios are already on an explosive path, we risk a debt trap," he said.

For now, the bond markets are quiet. Futures contracts are pricing five years of deflation in the US. Yields on 10-year US Treasuries have halved since early November to 2.09pc, the lowest since the Fed's data began. Three-month dollar LIBOR has plummeted to 1.53pc.

It is the same pattern across the world. 10-year yields have fallen to 1.27pc in Japan, 3pc in Germany, 3.2pc in Britain, and 3.49pc in France.

The bond markets seem to be betting that emergency action by central banks will take a very long time to work, if it works at all. By cutting to zero, the Fed has come close to shutting down the US 'repo' market that plays a crucial role in providing liquidity. It has caused havoc to the $3.5 trillion money markets - as the Bank of Japan, burned by experienced, had warned. It has become even harder for banks to raise money. Some argue that extreme monetary policy is already doing more harm than good.

Mr Bernanke is known for his "helicopter speech" in November 2002, when he nonchalantly talked of the Fed's "printing press" and said it was the easiest thing in the world to "reverse deflation."

Less known is his joint-paper in 2004 - "Monetary Policy Alternatives at the zero-bound". By then doubts were creeping in. He admitted to "considerable uncertainty" as to whether extreme tools will actually work. Liquidity could fail to gain traction.

Put another way, the Fed is flying by the seat of its pants. It should never have let debt grow to such grotesque levels in the first place.

Hedge funds gain access to $200bn Fed aid

Obviously we can't let any more ponzi schemes like Madoff's unravel, so we'll just add to the biggest ponzi of them all...

From the Financial Times:
Hedge funds gain access to $200bn Fed aid
By Krishna Guha in Washington
Published: December 20 2008 05:01 | Last updated: December 20 2008 05:01

Hedge funds will be allowed to borrow from the Federal Reserve for the first time under a landmark $200bn programme intended to support consumer credit.

The Fed said on Friday it would offer low-cost three-year funding to any US company investing in securitised consumer loans under the Term Asset-backed Securities Loan Facility (TALF). This includes hedge funds, which have never been able to borrow from the US central bank before, although the Fed may not permit hedge funds to use offshore vehicles to conduct the transactions.

The asset-backed securities to be funded under the programme are pools of credit card receivables, automobile loans and student loans.

The idea is to increase the supply of these loans and reduce borrowing rates by ensuring that the companies that make the loans can sell them on to investors who have guaranteed access to low-cost funding from the Fed.

The TALF is a key plank of the unorthodox strategy set out by the Fed last week as it cut interest rates virtually to zero. Washington insiders expect the programme will be dramatically expanded next year with further capital support from Treasury once the Obama administration takes office.

A senior official in the outgoing Bush administration told the Financial Times it could also be broadened to include new commercial and residential mortgage-backed securities.

The Fed thinks risk premiums or “spreads” for consumer loans are much higher than would be justified by likely default rates, even assuming a nasty recession.

It attributes this to a lack of buying interest in the secondary market where the loans are sold on to investors. By making loans to these investors on attractive terms it aims to increase market liquidity.

Making the scheme open to all US companies is a radical departure for the Fed, which normally supports financial market liquidity indirectly by ensuring banks have adequate liquidity to make loans to other investors.

However, the liquidity the Fed is providing to banks is not flowing through to financial markets, because banks are balance-sheet constrained and risk-averse. So it is channelling funds directly to investors.

The scheme is not designed specifically for hedge funds and a wide range of financial institutions are likely to participate.
Nonetheless, Fed officials hope that hedge funds will be among those investors that take advantage of the low-cost finance to drive down spreads.

The loans will be secured only against the securities and not the borrower. However, the Fed will lend slightly less than the value of the securities pledged as collateral. The Treasury has committed $20bn to cover potential losses.

Since the credit crisis erupted, hedge funds have complained that they cannot get the leverage they need to arbitrage away excessive spreads and meet high hurdle rates of return.

“Demand is there for leverage but not supply,” said Sylvan Chackman, head of global equity financing at Merrill Lynch.
In effect, the Fed will now take on the role of prime broker – the lead bank that lends to a hedge fund – for specific assets.

Friday, December 19, 2008

End of Day/Week 12/19

It took great self-restraint, but instead of writing a seven page rant about the ills of government intervention, I focused my energy on writing about solutions. It’s not easy; in fact real solutions are very difficult to accept. People are still in denial and until it becomes perfectly clear, real solutions may sound unnecessary or even “out there.” People hate change, but change is coming, count on it. I just don’t think you’re going to want an America that is even more controlled by the current crop of private central bankers.

For the day the DOW lost 25 points (-.3%), the S&P finished well off its highs but managed to gain .3%, the NDX gained 1%, and the RUT gained 1.5%. Noteworthy is that the SPY finished down 1.23%, and the DIA finished down 1.16%. The dollar was higher on the day, gold was down.

It's possible that today's action may have produced a small change in the McClelland Oscillator; I'll have that data later. Once again the indices failed to close over the 50 day moving average.

The weekly charts produced another spinning top candlestick just like I showed earlier today.

Below is a 6 month daily of the Diamonds, DIA (DOW ETF). Note the blue arrows I drew in. They are telling the story more than anything else. When the declines are happening volumes are rising. When rallies are in progress the volume falls off until that price level is no longer supported and then we collapse to the next lower level. Does it look like that trend has changed? Want to bet on it?! If you are long equities, you are. Go ahead, look at the entire chart… rally equals no volume, sell off equals increased volume – volume confirms price. Also on that chart note the new sell signal on the stochastic and the failure to maintain a level over the 50dma.



Next let’s look at the VIX. Below is a six month daily view. Again, just like I mentioned earlier a hammer was formed right on the lower Bollinger. Normally that would be a reversal indicator, however, if you look further back in the year (not pictured here) you can find two examples where the VIX declined further after similarly producing one of these. We’ll see, I think that urges for caution if you’re long the market.



This next chart is a six month view of TLT (20 yr. bond). It is still in its upper range but managed to get back beneath the daily upper Bollinger. Volume is diminishing on rising prices the past 3 days, but on the shorter time frames it may be tracing out another triangle pattern. Still watching this closely, still in the trade short. Noteworthy is that there were times today when equities were moving down at the same time that TLT was moving down. That’s a trend you do not want to see continue for long, but that’s exactly what happened following the first year of the Great Depression. I know there are those out there who believe that bonds will not crash this time – I am unconvinced. I see a parabolic chart and I see foreign inflows moving down. Yes, the government can print and buy their own debt, but at some point the unintended consequences will catch up to that fantasy. Maybe it’s not today, but it’s not 40 years out into the future, that I can guarantee you.



Finally, let’s look at a one month SPX daily. Again, note that we threw a pin at the 50dma but failed to close above it. There’s a fresh sell signal on the stochastic. Also note that it slammed into the bottom boundary of our new orange triangle which is getting further away from the light blue bear wedge (the DOW is beneath this same triangle). The double red lines are the inverted H&S neckline. On the SPX we finished the week above the neckline, but on the DOW we finished on the other side. Then there’s the same old dark blue lines that make up the old triangle I’ve been talking about for the past 3 months… the lower boundary is now at 862 and prices have not been allowed to deviate far from that line.



So, the big picture from my point-of-view is that we are simply killing time before the decline continues. We were deeply oversold after crashing more than 50% in the past year (twice as fast as the year 2000), and the technicals needed the time to catch up. The bulls on teeeeveeee will tell you that it’s a great sign that we haven’t been collapsing under the weight of such horrific economic data. “It’s a GOOD sign,” they say! Yeah, okay… hand them your money if you want – enjoy the donation to Wonderland, Alice and the Mad Hatter will take good care of it for you!

I’m working on a couple more articles, and I’ll post important news if it develops. Today’s bank failure Friday, we get to see if we can catch Paulson in yet another lie, this time inside of one week!

Have a good weekend,

Nate

Update - Danger, Will Robinson!

The DOW gave up all its gains, the dollar is higher, the VIX descended down to 41 but has since bounced dramatically back to 44 and could produce a hammer right on its lower Bollinger band. The indices just can’t seem to make it back above their 50 day averages. BTW, I want to point out that we are now nearly a month from the "Head" of the inverted head & shoulders pattern. This shoulder is now out of proportion to the time of the other shoulder and we are still caught at the neckline. My confidence in that pattern is waning (which probably means its break higher is imminent! {sarcasm}).

Last Opex we had a ram job higher into the close. Will it happen again? I wouldn’t bet on it. In fact, I’m not – I exited my small long position earlier and am now back to almost all cash. This is a very dangerous tape. The bullish follow through has not been there, the bad news just keeps rolling in, interest rates are at zero, the auto industry is now on life support, what’s next? Oh, yes, Hank Paulson going back to get the second half of the “TARP” money.

Have they not figured it out yet, or have YOU not figured it out yet? I think we’re witness to the largest heist in the history of mankind, but that’s just me. Don’t worry, it will all be over soon, once wave ‘C’ begins, there will be no more pretending.

We are still caught in a dangerous area between support and resistance, but that area is getting narrower. We’ll see what the close looks like, my inclination is to not do anything until the new year, although I don’t rule out a large move in the near future. It is apparent that bailout after bailout have simply made the unworkable math only more unworkable, yet all the “experts” seem to believe that more and more stimulus is needed. I say that less and less stimulus is needed to go along with less and less government. Change is needed at the roots level. Obama said he would bring it, but so far I don’t see it.

I think it’s highly likely wave ‘B’ may be over before most people think. A lot of people are targeting the March time frame, but I’m a skeptic, I think the market knows what’s coming and may get ahead of it. Thus, my position is now neutral. If we zoom to 1,000, fine, but my inclination is to start preparing for “The Great Ungluing.”

Update

The DOW is currently up 65 points – gee, I guess $13 billion doesn’t buy much these days, no?

The real point of my update here is to point out that we just generated sell signals on the daily stochastic of ALL the major indices except the RUT. Below are 1 month daily charts of the DOW and SPX:





This does not mean that I am short yet... the 60 and 30 minute stochastic are on fresh buy signals.

I note that TLT is down this morning and back inside the range of the daily Bollinger, but still outside the upper weekly Bollinger. The VIX is continuing down, it has given up 7% already and is at 44, just beneath the bottom Bollinger band.

So, we’re beginning to see some short term signs that this “rally” is getting tired. I note that the market is still where it was 2.5 months ago. Take a look at this 9 month WEEKLY chart of the DOW below. I turned off all my drawings so you can see the pattern more clearly. Note that if we close in this range that we will have our second weekly “spinner” in a row. The weekly stochastic is on a buy, but looks weak, and note the “Death Cross” above, where the green 50 week moving average crossed the red 200 week moving average last month. Of significance, also note that the 200 week moving average has turned down. This is very rare. Once a moving average has turned down, it becomes stronger in terms of resistance. Not that we go that high, there’s no way we get there in this environment. Also take a look at the volume pattern here for the weekly bars. I still see declining prices equals more volume. This corrective move will be over when the volume can no longer sustain prices at this level. We are getting closer to that point in time.

Morning Update 12/19

Good Morning Comrades!

$13.4 billion is all? Gee, that’s going to be lunch money here real soon.

Is anyone besides me NOT SURPRISED that this announcement comes on the morning of options expiration? This market is so rigged that you can now completely bet on it. Glad I went long yesterday at the close, look at my reasons to be bullish at yesterday’s end of day update and you’ll find it there. When I see George Bush open his lips, what I see is Hank Paulson talking! This country is completely run by the central bank, when is America going to wake up? When they figure out that they have no future, maybe.

At any rate, the bailout sent the DOW up more than 100 points, but once Bush began talking it started to come back down. Futures are now up about 70 points with 10 minutes to the open.

You can see the technicals in yesterday’s End of Day Update: http://economicedge.blogspot.com/2008/12/well-that-was-interesting.html

Be careful if you are playing the markets today, I expect it to be volatile. I am long but will be exiting that position at some point during the day, it may be soon.

Sorry, I don’t have a lot more to say than that – I feel a 7 page rant coming on…

Have a great bail out day, WHERE’S YOURS?

Nate

$13.4 Billion to Bailout GM and Chrysler

We truly have become a bailout nation. Has the entire planet gone collectively insane? Perhaps we need asylums where sane people can go to get away from all the craziness?! Can people really not see the damage that is being levied on our system. Damn the future. I have never been so ashamed.

"We are abandoning free market principles in order to save free markets!" - George Bush

Here was the immediate result in the market:



GM and Chrysler Will Get $13.4 Billion in U.S. Loans

Dec. 19 (Bloomberg) -- General Motors Corp. and Chrysler LLC will get $13.4 billion in initial government loans to keep operating in exchange for a restructuring under a rescue plan that President George W. Bush will announce this morning.

The money will be drawn from the Troubled Asset Relief Program and the automakers will get an additional $4 billion from the fund in February for a total of $17.4 billion in assistance, according to a statement from the Bush administration. The money would allow GM and Chrysler to keep operating until March.

Under the terms of the plan, if the companies can’t demonstrate financial viability by March 31 the loans will be called and the money must be returned, the statement said. The government’s debt would have priority over any other debts. The companies also must provide the government with warrants for non-voting stock.

The companies also must accept limits on executive compensation and management and labor must negotiate new wage and benefit agreements by the deadline, according to an administration official who briefed reporters on the plan.

Government officials will examine all financial statements and records of the car companies. The government has the authority to block any transaction over $100 million.

The package is intended for GM and Chrysler initially; Ford Motor Co. has said it can continue operations under current circumstances.

Bush is scheduled to announce the plan at 9 a.m. Washington time from the White House.

To contact the reporters on this story: John Hughes in Washington at Jhughes5@bloomberg.net; Robert Schmidt in Washington at rschmidt5@bloomberg.net;

Last Updated: December 19, 2008 08:54 EST

Thursday, December 18, 2008

Japan Breaking News - BOJ cuts rates to .1%

Competitive ZIRP, it's a race to the bottom. Rate cut is meaningless, but buying of commercial paper is more of the same long term market destroying crap:
*(JP) BOJ CUTS OVERNIGHT RATES BY 20BPS TO 0.10% (UNEXPECTED): 7-1 DECISION
- To start outright purchase of commercial paper

Bloomberg Update:
Dec. 19 (Bloomberg) -- The Bank of Japan cut its benchmark interest rate to 0.1 percent and said it would buy corporate debt as a deepening recession chokes off funding for businesses.

Governor Masaaki Shirakawa and his colleagues lowered the target for the overnight lending rate from 0.3 percent in a 7- to-1 vote, the central bank said in a statement today in Tokyo. The bank will buy commercial paper temporarily and increase its monthly purchase of government bonds.

The central bank’s second reduction in two months came after the Federal Reserve this week cut its target rate as low as zero, driving the yen to a 13-year high against the dollar. The Bank of Japan’s move to buy corporate debt is designed to ease the cost of borrowing for Japanese companies struggling to obtain financing amid a global credit crunch.

“Whereas the Fed is dramatically expanding its balance sheet to offer support to financial institutions, the Bank of Japan is now expanding its balance sheet to support the corporate sector,” said Glenn Maguire, chief Asia-Pacific economist at Societe Generale SA in Hong Kong.

The yen traded at 89.17 per dollar as of 2:56 p.m. in Tokyo from 89.28 shortly before the decision. Bonds rose, reversing earlier declines, sending the yield on the 10-year bond down 3.5 basis points to 1.225 percent. The Nikkei 225 Stock Average slid percent and has lost 44 percent this year.

Share Purchases

The government also decided to purchase commercial paper outright last week, and today said it would buy as much as 20 trillion yen ($223 billion) of shares held by banks to boost their capital.

Prime Minister Taro Aso and Finance Minister Shoichi Nakagawa said over the past week they wanted the bank to play its part in adding cash to the economy to help companies borrow. Commercial paper markets this month touched the highest in at least the past four years.

Tadao Noda was the sole board member to oppose today’s rate decision. Shortly before the announcement, investors saw a 50 percent chance that the central bank would lower the key rate, according to calculations made by JPMorgan Chase & Co. based on interest-rate swaps trading.

The central bank said it will raise its monthly government bond purchases from lenders, its main tool for adding funds into the banking system, to 1.4 trillion yen ($15.6 billion) from 1.2 trillion yen, the first increase since October 2002. It will broaden the range of debt it buys to include 30-year, floating- rate and inflation-indexed bonds.

Economy ‘Deteriorating’

The policy board cut its assessment of the economy, saying “conditions have been deteriorating and are likely to increase in severity.” In November, it said growth had become “increasingly sluggish.”

The global economy is in the worst state since the Great Depression, intensifying the risk for a prolonged slump in Japan, Shirakawa told parliament on Dec. 16.

“Japan’s economy has declined at an unprecedented pace in the current quarter,” said Jun Ishii, chief fixed-income strategist at Mitsubishi UFJ Securities Co. in Tokyo. “In particular, the auto industry, which widely affects other sectors and is vital for economic growth, is heading for a decline.”

The Fed’s reduction brought the U.S. key rate lower than Japan’s benchmark for the first time since 1993, making the yen a higher-yielding currency. The Japanese currency has gained 25 percent this year, eroding profits for exporters that are already cutting jobs, production and spending as global demand collapses.

‘Swift Action’

Honda Motor Co. cited the yen’s gains and slumping sales as reasons for slashing its full-year profit forecast by 62 percent this week. President Takeo Fukui described the currency’s level of around 89 yen to the dollar as “abnormal” and called on the government and central bank to take “swift action.”

Confidence among Japan’s major manufacturers fell the most in 34 years, the central bank’s quarterly Tankan survey showed this week, indicating the first recession since 2001 is likely to deepen.

The world’s second-largest economy could shrink 0.8 percent next fiscal year if the government doesn’t implement stimulus measures, Economic and Fiscal Policy Minister Kaoru Yosano said today. The Cabinet Office today predicted zero growth for the year starting April 1.

To contact the reporter on this story: Mayumi Otsuma in Tokyo at motsuma@bloomberg.net

Last Updated: December 19, 2008 00:59 EST

Japan Planning to Buy $227 Billion in Their Own Stock Market

This will not end well. Captain says, "Buckle up, this flight is about to experience severe turbulence!" This type of direct intervention into the equity and currency markets will further destabilize global markets. Japan has already actively been manipulating the Yen. Direct intervention in equity markets will completely destroy trust, it is in direct conflict with the word "free." Competitive devaluing of currencies is a new marker on the path to the transformation of our entire economic system. Get ready.

According to MarketWatch:

NEW YORK (MarketWatch) -- Japan's government said Thursday it is submitting a bill to parliament allowing for the purchase of 20 trillion yen ($227 billion) in stock to help stabilize the Japanese stock market, Kyodo news reported. Under the bill, the Banks' Shareholding Acquisition Corporation, originally created in January 2002, would resume buying shares from banks and other entities, the Japanese news agency reported. The bill would be introduced early next month "with an eye to implementing the measure by the end of March," the report quoted lawmakers as saying. The Liberal Democratic Party had intially considered just 10 trillion in stock purchases, but the size was roughly doubled to 20 trillion yen at the request of its ruling coalition partner, the New Komeito party, the report said.

Credit Card Crackdown? Ahhhh, yeah...

where's a good old fashioned Rebellion when you need one?

Yes, these provisions are a step in the right direction, but...

The banking industry managed to turn the bankruptcy laws completely in their favor and lately have been taking advantage of the fact that they have debtors by their you-know-whats. People can no longer discharge all their unsecured debt in the bankruptcy process, they must work out a repayment plan. That has unwittingly hurt the banks as people caught in a job loss or medical situation, for example, will simply abandon their secured asset first, their home. When that happens the loss to the bank is far greater.

Credit card companies have been ABUSING people for far too long. Funny, but people in this country seem to have forgotten the concept of USURY. There used to be laws against that! For example, in Washington State the usury law prohibited the charging of interest greater than 12%. Of course all that changed in the mid 80’s when the government itself was forced to raise rates to near 20%. That’s the evil of inflation. Now 12% almost seems quaint when discussing credit card debt.

Note that these new rules don’t take affect until 2010. Why not now? Who makes the laws? Uh, huh, that’s what I thought. And does this really accomplish that much? No. And before you go off me for slamming the “free market” industry, you better think again. I don’t see anything free market about it. The credit rating agencies and credit card industry are going to face a true rebellion soon. Can’t wait…


Here's the CNN article:

Fed OKs credit card crackdown
Regulators approve a number of key protections for credit card customers.

By Jessica Dickler, CNNMoney.com staff writer
Last Updated: December 18, 2008: 5:29 PM ET

NEW YORK (CNNMoney.com) -- Cash-strapped consumers got some welcome news on Thursday when regulators voted to rein in controversial credit card practices. But they'll have to wait another year and a half to get relief - the new rules won't take effect until July 1, 2010.
The Federal Reserve Board, the Office of Thrift Supervision and the National Credit Union Administration approved the regulation, which prohibits banks from certain practices like applying interest payments in ways that maximize penalties, and forces lenders to be more transparent about their billing practices.

"These protections will allow consumers to access credit on terms that are fair and more easily understood," Federal Reserve Chairman Ben Bernanke said in a statement.
The regulations mark an end to double-cycle billing, which averages out the balance from two previous bills. That means that consumers who carry a balance will no longer get hit with retroactive interest on their previous month's bill. And credit card companies will no longer be able to raise the interest rates on pre-existing credit card balances unless a payment is over 30 days late.
Consumers will also be given a reasonable amount of time to make payments, and payments will be applied to higher-rate balances first, to reduce interest penalties and fees.
Credit card statements will clearly list the time of day that a payment is due, and any changes to accounts will be in bold or listed separately.
And, finally, no more universal defaults - a policy that allowed credit card issuers to increase the interest rate on one card if a customer missed a payment on another card.

End of Day 12/18

Well, that was interesting. A very mixed day for me, I’ll be glad when we get out of this same old range.

On the day the DOW closed down 220 points – satisfying the large price move called for by the small movement in the McClelland Oscillator yesterday. The S&P finished down 2.1%, the NDX lost 1.7%, and the RUT was down the least, losing 1.5%.

Noteworthy was IYR which lost 7.9% today. That’s what happens when people get too excited about rate cuts that really don’t mean much of anything because short term rates were already zero, before the Fed moved – they are followers, not leaders. Funny, that same thing can be said about children in general.

Also noteworthy was a further decline in oil beneath $37 a barrel, and gold gave back some of its recent gains.

XL Capital – an old favorite short of mine – jumped a little today on speculation that Uncle Warren would be interested in buying. Without government backing, XL would have been a zero quite some time ago. Buffett can have ‘em, good luck.

A mixed day technically, let’s run it down in a bearish and bullish fashion, okay?

Bearish:

1. Major indices gave up the 50 day moving average. This is typical bear market action that has preceded previous declines in the past year.
2. Volume today was higher than yesterday’s decline. Volume confirms price, but today’s volume did not exceed our last positive day’s volume on Tuesday.
3. The SPX fast stochastic just entered overbought.
4. We have attempted several times to break 920 on the S&P and have failed.
5. The VIX reached its bottom Bollinger Band and bounced, producing a potential hammer.
6. Fundamentals suck (sorry to be blunt, but that sums it up nicely).

Bullish:

1. Buy signals on the weekly, daily, and 30 minute stochastics.
2. Tomorrow is Opex.
3. Small positive divergence on RSI.
4. Positive divergence with the VIX down on a down day.
5. Potential new bullish triangle, just bounced off of bottom.
6. Inverted H&S still in play.
7. Seasonality.
8. Turn date after Christmas.

As you can see, it’s a mixed bag and I can still see both sides. For those who may be new to following my updates, you can trust me when I say that I call a spade a spade when I see one! When I turn all bear, look out.

So, let’s go to the charts. Below is a weekly 1 year chart of TLT (20 year bond). Note the parabolic move and the extent to which the current candlestick is above the upper Bollinger. The chart below that is a TLT daily, 3 month chart. Again note that we closed above the upper Bollinger, day two in a row. Now, I know it’s not the brightest thing to stand in front of a freight train, but some of my very best plays have come from extreme conditions outside of the Bollingers. So, I did something I normally don’t and added a little to my short position here. I know, I know, breaking one of my own rules, but I am doing it very, very small only with money in my speculative account – this is not a big play yet and it is still high risk as rates can (and probably will) stay low for some time. However, if you look at the bond market during the Great Depression, equities had declined for a little more than a year and THEN the bond market came apart. Could the same thing happen here? Well, the government is now at zero, how much lower can rates go? Maybe I’m early, that’d be the story of my life!





Next chart is the SPX daily, 3 month. Note the new orange triangle. We pinned the bottom and bounced just prior to the close. Fast stochastic is overbought, and we closed beneath the 50dma. Truth is that the general shape of this formation is beginning to look bearish, but we still have the bullish things noted above in play.



Last chart is the VIX daily. Note the oversold stochastic. Also note that we bounced off the lower Bollinger band today and produced what may be a reversal hammer. It’s not perfect, but close, and needs confirmation. The other side of that, though, is why did the VIX go down on such a big down day for equities? Perhaps it’s a little too much complacency. With that in mind, I note that the TRIN closed all the way up at 2.23, pretty high.



So, I still see a mixed picture. I put on a very small long position when we hit 875 and will use that as a stop. Tomorrow is Opex, so I expect interesting things. We are oversold on the 60 and 30 minute stochastic and just rose out of oversold on the 10 minute. Thus I think the odds for some sort of a rally tomorrow are probably good, but I’m still bearish overall and not buying the BS.

Have a great evening,

Nate

update

Getting more selling into the close… the DOW did break that orange triangle bottom, but the SPX is coming up on the same formation at about 875ish…



If that doesn't hold, then I get more bearish...

Update going into the Close

Well, GE got put on ratings watch, that’ll cost the market a few points!

Below is a 30 minute chart of the DOW. Note the orange triangle… that would be a bullish triangle since it was entered from below. Also note the stochastic just curled up from the bottom with the fast crossing the slow – a buy signal. Also note the RSI at the bottom; the last peak is higher than the previous peak, yet if you look up you’ll see that price wise the last peak was lower than the last peak. That’s a positive RSI divergence – a small one, but positive none-the-less (it can also be seen on the 60 minute chart).



I also note that the SPX has not gotten to the same place in its chart and thus more downside is possible before turning.

We STILL have not gotten away from that double red line, the inverted H&S neckline! Note that it now is in the same place as the bottom of the new orange triangle. Does it hold? I think it probably will. We also have a positive divergence in the fact that the VIX is down 6% at the same time that equities are down. I still don’t like the behavior and am still playing small.

Will have another update after the close.

Update

Large dislocation in the currency markets, with the dollar moving higher. The VIX has continued to move down, but equities have not been able to gain ground.

The 900 area on the SPX is providing support so far, but if that level fails to hold, downside momentum could pick up although I note that the 30 minute stochastic fast made a trip to the bottom range and has turned up while the slow is still pointing down with room for more decline. The 60 minute fast is pointing straight down and the slow is still just coming off overbought:

Update

Very interesting action so far…

The dollar is strengthening, sending stocks off their highs, and commodities lower.
At the same time the VIX is continuing lower and bonds are still at their elevated price levels. It seems that the dollar’s gain is coming at the expense of the British Pound.

Looks like a dangerous tape to me. Still see crosscurrents and without a clear sign of direction it looks like a good way to give money back to the fiat currency gods!

The DOW is now DOWN 22, the SPX is down 3, reversing overnight gains. Remember that we have some economic data coming out in a few minutes.

Morning Update 12/18

Good Morning,

It’s another white and snowy one here in the great Northwet… beautiful, actually, unless you have to slog your way to work.

This morning the weekly unemployment filings for last week came in less than the week prior by 21,000, but still at a very elevated 554,000 new claims level.

Later this morning we get the leading economic indicators and the Philadelphia Fed Survey at 10:00 eastern.

Rumors are that Chrysler’s 30 day manufacturing shutdown may be extended and more rumors were floating around that Chrysler would merge with GM. This morning GM denied that rumor.

DOW futures are higher by about 50 points with a little more than a half hour to the open. The dollar is slightly lower, but climbing up off its lows, bonds have moved down in yield/up in price but still within the range of yesterday.

Speaking of yesterday, the action produced a small movement on the McClelland Oscillator which tells us there is likely a large price movement coming in stocks either today or tomorrow. It does not, however, tell us direction.

With the VIX now well below its channel, the signals are still saying to me that the direction is likely to be up. The world is still living in a fantasy where the government can print unlimited money with no consequences. That fantasy will eventually turn into a nightmare. That’s what happens when children run the economy.

Below is a daily chart of the VIX. Note the clean breakdown beneath the triangle. That move could easily pick up steam now and head down sharply. That would bring the price of options down considerably and would set up a good opportunity coming into the end of the month.



The next chart is the SPX. Note that the daily stochastic produced a new buy signal as I mentioned yesterday, but that it doesn’t have too far to go before it reaches over bought. I still see pretty strong resistance in the 940 area.



I note that the 30 & 60 minute stochastic has room to go on the downside, but that the 10 minute is oversold. That says to me a little higher, then a little lower.

DOW futures are now up 25 points, the SPX is up 6. I note that the dollar is climbing pretty good just prior to the open, that warrants keeping an eye on.

Have a great day,

Nate

Wednesday, December 17, 2008

The Four Big Bears...

Updated and very interesting comparison by Doug Short. His site can be found here: http://dshort.com/

California Slashes Spending on Infrastructure...

Those who believe that infrastructure companies are going to shoot the moon under an Obama Administration had better take a harder look around (from Bloomberg):

California Cuts Off $3.8 Billion Funding Over Budget Crisis

By Michael B. Marois and William Selway

Dec. 17 (Bloomberg) -- California officials cut off funding for $3.8 billion of construction on schools, roads and other public works as a political stalemate over how to close a record budget shortfall threatened to drain the state of cash.

The California Pooled Money Investment Board, made up of the controller, the treasurer and the governor’s finance director, took the step to save money a day after the Legislature failed to approve tax increases for a second time. The impasse may hamper the state’s ability to raise funds by selling bonds, and the officials said it may cost tens of thousands of jobs in a state already reeling from the housing market’s collapse.

“California’s fiscal house is burning down,” Treasurer Bill Lockyer said in a statement. “The people still wait for their elected leaders to pull them out of the fire, stop the blaze and rebuild the house on a solid, lasting foundation. Until that happens, the infrastructure work so vital to getting our economy back on track will lie crippled.”

California, the most-populous U.S. state, will run out of money as soon as February unless lawmakers end an impasse over how to replace revenue lost amid the recession. Governor Arnold Schwarzenegger’s administration has said the state may begin paying bills with IOUs as early as February, a measure used only once since the Great Depresssion.

Without a budget in place, Lockyer has said the state can’t raise money from investors by selling bonds to replace the funds that are being drawn down for construction. By cutting off the funding, the state is preserving money that can be used to pay its bills. Schwarzenegger faulted the Legislature.

Bills Fail

“It’s outrageous that Republicans and Democrats would continue to play politics while tens of thousands of hardworking Californians face the possibility of being laid off this holiday season,” said Aaron McLear, a spokesman for the Republican governor. “Californians have seen enough politics and posturing from the Legislature. It’s time for them to negotiate and reach a compromise.”

Last night, Democrats were unable to pass bills to cut $7 billion of spending while raising $11.3 billion with higher taxes on retail sales, oil production and alcoholic beverages. The tax increases, similar to those backed by Schwarzenegger, were blocked by Republicans, a minority that still commands enough power to prevent the two-thirds vote needed to pass a budget.

Chrysler to Shut Down for One Month...

A ploy to force the government's hand??? Once again real people get caught in the middle of bad policy and greed...

Breaking news from Bloomberg:

Chrysler to Idle Entire Manufacturing Operation for 1 Month

By Mike Ramsey

Dec. 17 (Bloomberg) -- Chrysler LLC, the third-largest U.S. automaker, will close all 30 of its plants for at least a month at the end of shifts on Dec. 19 as it combats plummeting demand for vehicles.

The earliest the operations will come back on line is Jan. 19, the Auburn Hills, Michigan-based company said in a statement today.

Chrysler’s decision to suspend production comes after a 47 percent decline in U.S. sales in November. The automaker has asked for emergency bridge financing from the U.S. government to avoid collapse.

Two factories in Toledo, Ohio, that make the Jeep Liberty, Dodge Nitro and Jeep Wrangler will be closed until Jan. 26. The minivan plant in Windsor, Ontario and the Dodge Viper operations in Detroit will shut until Feb. 2, said Shawn Morgan, a Chrysler spokeswoman.

To contact the reporter on this story: Mike Ramsey in Southfield, Michigan, at mramsey6@bloomberg.net

Last Updated: December 17, 2008 16:54 EST

End of Day 12/17

Got the little bit of selling into the close that I mentioned earlier. The overbought stochastic once again won out in the short term.

For the day, the DOW closed down 100 points even, the SPX closed down 1%, the NDX lost 1.4%, and the RUT actually managed to finish in the green, UP .8%. Again, the fools rush in! The crowd seems to believe that small caps and commercial real estate will do well – HA, HA, good luck.

IYR finished up 2.5%, and SRS is the ugly stepchild all of a sudden, closing down another 7.4% at the $57 mark. It was nearly $300 just 3 weeks ago! If you are short SRS, be careful, today was a high volume day that could be a turning point.

Both the DOW and the S&P managed to stay above and close above the 50 day moving average. That’s a bullish sign. SPX 1 month daily is below:



The 60 minute and 30 minute stochastic still have room on the downside. Still crosscurrents, don’t see anything that gets me excited one way or the other besides the action in the bond and currency markets.

Have a good evening,

Nate

TLT

Here is a one year daily chart of TLT. Note that it has not spent more than two days above the Bollinger Band like it is now… there is also a large gap here as well as one way down in the $100 range (disclosure, I am scaling in short TLT, but I understand that parabolic runs can go way further than expected).

Update into the Close...

The market is having trouble getting over the 912 SPX pivot point. You can see in the 30 minute chart below that the stochastic has come out of overbought and is now pointing down. This type of action could produce further selling into the close.



Below is a one month daily chart of the DOW. Note the fresh buy signal here, that aligns the daily buy signal with the weekly, but the daily will be back in overbought soon. Volume on the day is lighter than yesterday and it looks like the market is consolidating.



From a fundamental perspective people are wondering if they should own assets due to the printing the Fed announced, but I think they are going to be disappointed in the long run. The bond and currency markets continue to show signs of turbulence and turmoil.

It looks like the short term indicators are going to finish the day mid-range. I still think this is a good time to play small, I can make a short term case for either direction, but favor the upside until Christmas is over. You can see how making money short at this time is not being rewarded, but neither is being long. It’s a sideways grind.

Economic Snake Oil!

Come one, come all, get ‘em while they’re red hot!

Doesn’t that type of come-on just sound sleazy? Well, that’s exactly what the entire stock market pump job sounds like to me, and since we have so many bottom callers out there AGAIN, I just want to remind everyone that we are simply in the eye of the storm, wave ‘B’ up/sideways that will be followed by wave ‘C’ down – at least if I’m correct about where we are Elliott wave wise. And many experts agree that’s exactly where we are: http://economicedge.blogspot.com/2008/12/when-math-no-longer-works.html.

Yesterday I saw two things that made me feel sick, as in stomach turning, gut wrenching, if I had a shoe in my hand to throw, I would, sick!

Let’s start with some comments from our hapless leader (source; CNN):
"I've abandoned free-market principles to save the free-market system," Bush told CNN television, saying he had made the decision "to make sure the economy doesn't collapse."

…"I am sorry we're having to do it," Bush said.

…"I feel a sense of obligation to my successor to make sure there is not a, you know, a huge economic crisis. Look, we're in a crisis now. I mean, this is -- we're in a huge recession, but I don't want to make it even worse."

This has got to go down as one of the most frightening quotes in the history of mankind. This is the best the country who leads the “free” world can produce?

"I've abandoned free-market principles to save the free-market system!" Can you believe that? This has got to be a shoe-in for the Darwin awards – yes, real people have and will die over this type of stupidity. Think I’m over-reacting? Look at the “events” that follow economic upheaval throughout history! It’s NOT funny, it’s deadly serious and our leaders are acting like clowns.

And speaking of clowns, I received this email yesterday that is typical of the crap being disseminated by supposed “experts.” America’s financial system is NOT about securing your future, it’s become nothing but snake oil salesmen trying to make a buck on your back! The companies that employ these snake oil salesmen are the same companies that are owned by the central bankers of the world. They also own and control a very large percentage of the mainstream media! Does saying such things make me a flake? Or, does saying such things as, “subprime is contained,” or “our economy is fundamentally sound,” make them a flake? YOU MUST DECIDE WHO IS CORRECT. Here’s a hint, read my book, research the calls of people like Dr. Robert McHugh or Karl Denninger, then make an important decision about your future!

So, here’s the email I received, I’m going to insert my rebuttal in blue:

Another Great Depression?
Or Your Greatest-Ever Buying Opportunity?


Here's why. . .
• This economic mess is nothing like the 1930s.
• Why it's time to start buying, NOW!
• What quality stocks will out-perform the coming rebound.


Buy, buy, buy! NOW! Can’t you feel the excitement? You must act NOW! Look, the underlying math simply does not work (http://economicedge.blogspot.com/2008/11/death-by-numbers.html). The debt has not gone away. This bear market is NOT over, it is an animal that is drawing in fiat money and destroying it by returning it to where it came from – the ether. The psychology here works against most investors – “how low can it go?” “I’m in it for the long haul!”

Well, it can go a lot lower and it can stay there for decades! Look at Japan's Nikkei from 1990 to today - 18 years later. Look at the fact that it was 1955 before stocks reached the same level they were at in 1929!

Don’t think this is as bad as the Great Depression? It’s NOT! It’s MUCH, MUCH worse! Per capita, inflation adjusted debt levels are 2.5 times greater than the roaring twenties!

According to the experts who have been most right, this is a “grand supercycle correction” that is on a higher level than the “supercycle” correction of the Great Depression. Are you going to risk your future based on the cat calls of a bunch of clowns, or on people with actual track records of being right, like Jim Shepherd http://jasmts.com/.

Hey, I am NOT writing this nor am I recommending people like these for money. I have been investing my entire life and have tracked the people who are correct and do not live in a fantasy world. Ignore them at your own risk.


Don't let the media's short-term, micro-view blind you to what's really going on in the world. Put aside fear and negativity and get set to rake in unimaginably-huge profits
as you cash in on the. . .

3 Unstoppable macro trends about to reshape the world!


Dear Reader,
First, let's get rid of the number one reason so many investors are still afraid of this market.

We're not on the verge of another great depression. The sky is not falling!

No way. Not even close, for a lot of reasons. It's worth taking the time to compare what happened in 1929 and what's going on now:
Back in 1929, investors could be on 90% margin, resulting in the most costly margin call of all time. After the crash, 8,000 banks failed vs. only 25 (be they some very prestigious names) so far. Back then, there was no FDIC insurance, so when banks failed people really did lose everything. Your bank deposits are now guaranteed up to $250,000 or $500,000 in a joint account.

Back then there was not $1.4 quadrillion worth of derivatives! People who do not understand the shadow banking system or how big and out of control it became do NOT see the real picture. Total debt levels FAR exceed those prior to the Great Depression!

After the crash, the Federal Government raised interest rates, whereas now it's lowering them, and in the 1930's the answer was to get rid of government debt whereas now, the Feds are willing to go even deeper in debt to stop the bleeding.

Raising interest rates in the year 2000 or earlier would have prevented this mess to begin with. Pouring more fuel on the fire will NOT solve the problems. Have the historic cuts to date solved them? NO, and now we are at zero. The gun is empty and all that’s left is to print, but the numbers are staggering if they wish to create growth. To do so, they would have to print larger and larger sums each year, but the world is already saturated in debt and thus does not have the income to service that debt. Game over.

The rest of this email is just drivel. As you get things like this, and you will be bombarded, please do yourself a favor and remember that the largest credit bubble in history will not be undone in one year! My conservative timeline says that equities are about half way through their correction time wise. It could be longer and I DO NOT expect a roaring rebound that amounts to anything more than the destruction of your currency.

They will try to “inflate” growth under the false belief that you can “inflate” away debt. You cannot, that is a myth. Attempting to do so will simply rob you of your earning power and purchasing power of your currency and thus you will pay the debt back via stealth. That is their game plan, but it will fail as all attempts to do the same throughout the history of mankind have likewise failed.

I believe wave ‘B” will last a little while longer, then wave ‘C’ will come. You have a decision to make… who are you going to believe or trust? But let me ask you this? What is the risk if you are out of the market? You miss a few percent more of rally? What if I am right again and you’re in? Then the risk is severe! Logic dictates being conservative. There is NO PANIC TO GET BACK IN. We have long term indicators that will tell us when that time is truly here. NO, you will not catch the exact bottom, it would be most foolish to try.

I have a theory… when bricks are falling from the sky, I do not want to stand under them and try to catch them! I think it’s far more wise to stand off to the side and watch them land. Once they have safely landed, THEN I go over and pick them up, not before! Now, if this logic doesn’t work for you, I simply remind you who is asking for your money and who is not?

Yes, I think the market goes a little higher, but it is short term only. Buckle up, don’t believe the lies. It’s time to cut the crap. You are welcome to visit the download section of my site at http://economicedge.blogspot.com/ to learn about unbiased reality, not fantasy…


Say what you like about Paulson and Bernanke and the bailout, the fact is that, imperfect as it may be, the government is taking huge and aggressive steps to keep the U.S. and world economies from falling off the cliff.

So what can we learn from a comparison of then with now?

Lesson #1 we're due for a 50% rally!
From its October 1929 highs, stocks nosedived approximately 50 percent before bottoming the following month. From that November, low share prices then staged a rally on the order of 50 percent, erasing about half of the losses from the prior decline.

Lesson #2 What Obama must not do.
It was only after the market rebound that the real bear market of the Great Depression began in earnest as the government's ill-conceived actions started to take their toll on the economy. These moves included trade restrictions, tightened credit, higher taxes and balancing the budget. The new Administration has already backed down from its campaign rhetoric and made it clear it won't be raising taxes anytime soon.

Lesson #3 What's different this time.
We've learned valuable lessons from the 1930s (and Japan in 1990s). Say what you like about the leadership (old and new) in Washington, in the wake of this market's 40%-plus meltdown, a lot has been done to avoid a prolonged period of deflation. Governments worldwide have slashed interest rates and are spending heavily to stimulate their economies.

The message from the latest G20 meeting in Washington and from recent Barack Obama interviews is that governments will take whatever steps are necessary to jump start the economy. The new administration shows few signs of curtailing deficit spending.
Lesson #4 the rubber band effect.

Get ready for a spectacular and sudden rally. Markets typically bottom when the news is at its worst. Clearly the economy is in terrible shape. As a result, we're very likely in the sweet spot in terms of the stock market's upside potential relative to its downside risk. And that ratio isn't likely to ever get better than it is right this minute. Investors look over the horizon and our view is that things will get better sooner rather than later.
While we think stocks are close to a bottom, we won't discount the possibility of the Dow slipping a bit further to say the 7,500 region in a worst-case scenario. We're not expecting that to happen, but we acknowledge this is the downside risk.

$4 Trillion side-lined cash could send the
Dow soaring to 12,000!


That said, the powerful rally we expect to unfold, be it today or at some point in the next few months, could carry the Dow back to 11,000, if not 12,000. What's needed is a spark to unleash the record amounts of liquidity locked up in the banking sector and the $4-plus trillion in cash on the stock market's sidelines waiting for a bit of stability.

Once market starts to rally, money managers aren't going to be content earning 11 basis points on their cash. Instead, they're going to come flooding into the stock market again.
Lesson #5 Look at the "Big Picture."

One thing is certain, this market has been and will continue to be totally unpredictable for the short term. I mean when crude hit $147 a barrel this past summer, who would have thought that it would trade below $45 a barrel by Thanksgiving?

But, while in this crazy market, it's difficult to say with certainty what individual stocks will lead the near-term market charge, we know with absolute certainty that an all-encompassing, wide-lens view of the world situation will help us identify the major trends and paradigm shifts that will dictate the long-term shape and direction of the impending recovery.

That's what The Complete Investor is about. If could join me as we examine the fundamental and unstoppable changes taking place in the world's economy. . .you'll discover the keys to long-term profits that will erase the pain of the recent stock market massacre.

Click Here To Learn More


Get it while it’s hot = Snake oil!


Digg it here to spread the word, thanks!
Digg my article

Update - Bonds Continue Big Move...

Huge move in the bond market this morning… TLT jumped nearly $4! The TNX gapped down. So, now with rates at zero, bonds continue to move up in price and down in yield… That move must be getting close to over!

Short term rates as measured by the IRX (3 month Treasuries) are still flat lined near zero.

Below is a 3 month chart of TLT. Look at the opening print, it's above $120! It's also above the upper Bollinger, so this is worth watching.



Parabolic move? Check out these 5 minute charts... the TNX on left, TLT on the right. Look at the move since yesterday afternoon's FOMC announcment:

Morning Update 12/17

Are the drugs already wearing off?

The DOW is currently down about 110 points in the futures market this morning after being down more than twice that amount earlier.

This morning Morgan Stanley (MS) reported a much larger loss than expected, losing $2.2 billion in the past quarter or $2.24 per share. The entire concept of investment banking has died. Yesterday, Hank Paulson came out and said that there would be no more bank failures! Do you believe him? He’s the one who will be leaving office in a month, remember? No, there will be plenty more bank failures, sorry. In fact, Bank Failure Friday is just around the corner.

From a technical perspective the market finished yesterday oversold and thus some pullback is expected. However, yesterday was a 90% up day that finished above the 50 day moving average on all the indices. That cannot be ignored. That said, a pullback beneath the 50 with subsequent failure to get back above would be bearish. In other words, it needs confirmation and follow-through.

The inverted Head & Shoulders pattern is still very much on the table and the target is up around 1,000+ on the S&P (10,000ish on the DOW). It is possible that this morning’s pullback is a good long entry spot, that’s how I would play this as I don’t think the “drugs” of rate cut euphoria have completely worn off yet, but we’ll see. Again, I don’t like playing counter trend moves, they are difficult, it’s probably more wise to wait for the rally to reach its target and run out of steam, then go short with the primary direction of the bear market. Hey, that requires patience…

Gold and the miners are higher this morning… gee, I wonder why? Could the Fed’s outright intention to print be the reason?

The Point & Figure charts produced bullish breakouts yesterday on the primary indices. I do think we’re destined for wave B higher prices in the short term. Options expiration is Friday, the year is coming to a close, and thus I believe the next real excitement is likely to come sometime after Christmas.

Below is a three month daily chart of the DOW. We are getting close to the upper Bollinger already, but you can see that it’s beginning to curl up away from charging prices. Also note the higher volume on the advance yesterday and the upturned fast stochastic. You can also see the clean break of the 50dma (green line).



Bottom line; even thought the futures are down, I think the play is in the long direction for a few more days. Again on the chart you can see the double red lines (inverted H&S neckline) and the 50dma are in the same location. I'd use that as a stop point for a long entry.

Have a good day, it’s snowing more here this morning, a white wonderland!

Nate

Pushing on a String...

What did everyone expect? Rates were already at zero, the Fed simply followed. We have reached the Macro Debt Saturation point, and thus the Fed is pushing on a string. That's what happens when numbers grow at a parabolic rate. They became huge, so huge that it has become impossible to service the existing debt, who needs new debt?

Banks Show No Signs of Easing in Step With Fed’s Cuts

By Liz Capo McCormick and Gavin Finch

Dec. 17 (Bloomberg) -- For all their efforts to liquefy credit markets, the Federal Reserve and the Treasury show no signs of ending the 18-month freeze, as evidenced by the unprecedented gap between what banks and the U.S. government pay to borrow money.

The difference between the London interbank offered rate, or Libor, that banks charge each other for three-month loans and Treasury bill rates is six times wider than before markets began to seize up in June 2007. Even though the so-called TED spread narrowed to 1.55 percentage points from 4.64 percentage points in October, prices of contracts to borrow money months from now show investors don’t expect lending to recover until at least the second half of 2009.

“If you take a full assessment of the credit markets, conditions have certainly eased from their worst, but they still are at extraordinary tight levels, which are far from normal,” said Michael Darda, the chief economist at MKM Partners LP in Greenwich, Connecticut. “Short-term funding spreads are all still very wide relative to historical norms. There is a massive pullback going on in the private sector.”

While the Standard & Poor’s 500 Index is up 23 percent from last month’s low and the Fed promised to use all tools at its disposal to end the longest recession in a quarter century, investors remain wary of any securities except Treasuries. As banks hoard cash, businesses are struggling to refinance debt and consumers can’t get loans, restraining an economy forecast to shrink 4 percent this quarter, according to the median estimate of 79 strategists surveyed by Bloomberg.

Treasury Flight

Consumer credit fell $6.4 billion in August and $3.5 billion in October, making 2008 the first year with at least two declines since 1992, according to Fed data. August’s decline was the biggest in at least 65 years.

Bond sales by companies rated below investment-grade fell 57 percent to $63.3 billion this year from 2007, according to data compiled by Bloomberg. The extra yield investors demand to own the debt instead of Treasuries rose to a record 21.4 percentage points yesterday from 1.32 percent 18 months ago.

Instead, investors are committing more money to government bonds. Treasury three-month bill rates fell below zero percent for the first time last week, meaning investors were willing to pay the government to protect them from further losses. Yields on 30-year Treasuries dropped as low as 2.68 percent after the central bank yesterday cut the main U.S. interest rate to a target range of between zero and 0.25 percent from 1 percent.

‘Desperately Trying’

Personal bankruptcies rose 34 percent in the third quarter from the same period of 2007, according to the American Bankruptcy Institute in Alexandria, Virginia. Moody’s Investors Service predicted in November that corporate defaults in the U.S. will surge threefold to 11.4 percent in the next 12 months.

“There are a lot more requests for loans than we are granting, particularly from real estate developers who are desperately trying to raise money,” said Wes Sturges, president of Bank of Commerce, a Charlotte, North Carolina, bank with $107 million in assets. “We can’t do that because they are tied so closely to the housing economy.”

Traders don’t expect lending to improve until mid-2009 at the earliest, based on the difference between Libor and the expected average federal funds rate over the next three months, known as the Libor-OIS spread. The spread, now at about 1.4 percentage points, may narrow to about 0.84 percentage point by June, forwards contracts show.

Former Fed Chairman Alan Greenspan said in June that the measure was the best way to tell when lending returned to “normal.” He said it would need to narrow to about 25 basis points, or 0.25 percentage point, for that to happen.

No Demand

“There is no demand coming from the interbank market at all,” said Patrick Jacq, a senior fixed-income strategist for Paris-based BNP Paribas SA, France’s largest bank. “Banks are borrowing straight from the Fed and hoarding that cash till they need some and then returning to the Fed. We don’t expect a return to normal conditions in the coming six months.”

The average spread was less than 10 basis points this decade through June, 2007, when markets started to unravel as losses on subprime mortgages caused two Bear Stearns Cos. hedge funds to collapse.

Banks suddenly became wary of lending to each other amid concern that the same securities that ruined Bear Stearns would cripple other banks. Financial institutions reported almost $1 trillion in losses and writedowns since the start of 2007, according to data compiled by Bloomberg.

Assets Doubled

Fed Chairman Ben S. Bernanke and Treasury Secretary Henry Paulson are taking steps to make it easier for banks and companies to get cash through $8.5 trillion of commitments. The Treasury’s $700 billion Troubled Assets Relief Program is providing capital to the biggest U.S. banks. The Fed more than doubled its assets since August to $2.21 trillion with emergency-lending programs.

Libor, which rose as high as 4.82 percent on Oct. 10, tumbled to 1.58 percent, the lowest level since July 2004. Even if banks aren’t providing each other with loans for that long, the rate sets values for financial contracts valued at $360 trillion, according to the Bank for International Settlements in Basel, Switzerland.

Commercial and industrial loans at banks surged to $1.61 trillion in the week ended Oct. 22 from $1.51 trillion on Sept. 10 as companies wary of losing access to capital in the wake of Lehman Brothers’ collapse drew on lines of credit arranged before markets seized up.

Blockbuster Loan

Blockbuster Inc., the world’s largest movie-rental chain, borrowed $135 million from its credit line in October to ensure the Dallas-based company has enough cash in case access to credit worsens, Chief Financial Officer Thomas Casey said.

“We said to ourselves, it’s prudent for us to come up with a backup plan that says in a worst case scenario that we want to be able to continue to fund the business” through August 2009, when the revolving credit facility expires, Casey said on a Dec. 10 conference call with analysts.

The increase in loans doesn’t mean credit is getting easier. The Fed said last month that large businesses faced the tightest lending standards on record over the previous 90-day period as the risks of a deeper economic downturn increased.

About 85 percent of domestic banks tightened lending standards on commercial and industrial loans to large and mid- size firms, the highest since the survey began in its current format in 1991, the Fed said in its latest quarterly Senior Loan Officer Survey conducted between Oct. 2 and Oct. 16.

“There isn’t a community banker in America who doesn’t want to make good loans,” said James McKillop, chief executive officer of the Independent Bankers’ Bank of Lake Mary, Florida, which provides loans to 350 community banks in Florida and Georgia. “But finding loans that they feel are going to be good is becoming more and more difficult.”

To contact the reporters on this story: Liz Capo McCormick in New York at emccormick7@bloomberg.net; Gavin Finch in London at gfinch@bloomberg.net.

Last Updated: December 17, 2008 07:38 EST

Tuesday, December 16, 2008

Having Fun with Bush and Shoes!

Does this post make me un-American? I wear a flag pin - on occasion!

Real life:



Now you can play the game!
http://www.sockandawe.com/

Have We Forgotten the Purpose?

Please listen to this video of Bernard Madoff as you read this article. It’s 33 minutes long, but keep the $50 billion Ponzi scheme in mind as you listen to how and what their business did. I do not have the exact date this was recorded, but YouTube says it was approximately one year ago.



According to Madoff, markets are, “all about gaining an advantage over others in the market place.”

Oh really? See, I always thought that the purpose of the stock market was to provide working capital so that companies could buy the capacity to produce their product. How far away are we from that concept now?

The recent trend is that less and less of the real capital in the market place actually reaches businesses who then do something productive with it – in this country anyway. Today investors are placing large portions of their capital into derivatives… things like ETFs which generally are nothing but a derivative of the underlying real asset. For example, when you buy shares of SPY, your money is NOT providing any working capital to any company that produces anything real. Oh yes, you are providing your money to financial firms who ARE NOT producing anything real – they are producing large bonuses for themselves as they skim each and every transaction.

The same goes for any money “invested” in options and futures. As more and more money goes into “alternative vehicles,” less and less money goes into real production. The bubble blowing proponents will say, no, more overall money is available to those who need it… and I say bullshit. Derivatives of all kinds have taken us so far away from the purpose of the market place that we don’t even recognize that purpose any longer, kind of like Christmas!

The markets have been commercialized beyond recognition, yet proponents of the “new and better” marketplace will claim that derivatives “increase liquidity and lubrication” making the markets more efficient. Again, bull. What has happened is that more arms length debt/credit was created using very unrealistic underlying math. Simply put, credit money was created that served no purpose to society. It was mostly just misallocated. And since the vast majority of derivatives serve NO REAL purpose to society, they are, in fact, nothing more than legalized gambling. Bernie Madoff was nothing more than a bookie.

Those who claim that derivatives like Credit Default Swaps (CDS) provide necessary “insurance” so that firms may conduct their business should ask themselves why are businesses doing business with firms that they need to buy insurance to protect themselves from in the first place! Are they not doing their due diligence? And, if they do need insurance, why not buy legitimate insurance from a regulated insurer who is required to have real reserves? You see, CDS writers are unregulated and there is no requirement for them to posses any reserves at all. Thus I could start a business and sell a CDS contract “insuring” the manned rocket launch to Mars, but if it failed I certainly wouldn’t have the money to pay. Guess what? That’s exactly what happened – the writers of CDS, like AIG, do not have the money to pay. And our great leaders continue to shovel taxpayer funds to keep them propped up. Why?

We have forgotten what our markets are for, that’s why.

So, from my perspective it would be no sad day at all, the day that derivatives are outlawed and go away. Yes, my own paper flipping would go away, but that would be a fine day with me. I’d love to be able to put my money to work in a business that makes things that serves society. I simply can’t do that now; derivatives have made the marketplace far too risky for that!

Nate

Digg my article

End of Day/End of Cutting Rates - 12/16

“Wow, man – that’s some awesome stuff, dude,” says the drug addict just before he hit the floor!

The DOW finishes the day up 359 points, the S&P up 5.1%, the NDX up 5.2%, and the RUT took the biggest toke, up an “elevating” 6.6%!

So, with rates now at zero, small caps and real estate soar, especially now that the FED is saying “print” in no uncertain terms by buying up agency paper and mortgage debt. What a wonderful day to be an American! Boy, am I ever sorry I’ve been doing mostly right things. Why would you save money? Why would you pay your mortgage?

So, how long do the drugs last? Not long, I suspect, this will be the hit that puts him on the floor. “Quantitative easing” is all that’s left. Just remember, if they make the numbers bigger this year (unbelievably massive), then they’ll have to make the numbers even larger the next. When does it end? Soon, very soon.

SRS closed at just $61! IYR gained 12%, the XLF gained 11%, and GS (who just LOST $5 per share) gained 14.3%!

Here’s a 30 day chart of the VIX with a close under the triangle. Throwunder? Looks significant, but we’ll see what tomorrow brings.



Below is a 30 minute SPX chart. Note the stochastics is overbought, making some decline likely. We broke back inside the wedge as defined by the light blue lines and note that we closed near the top of the little channel we were in the day before yesterday.



Now, when we zoom out for a 3 month daily view, I can now see what appears to be 5 waves up (wave e) off the 11/20 bottom – however, we have not broken the 12/8 high (this could also be the start of C up of 'a' up). Also note how the fast stochastic has turned up and this did produce a buy signal on the NDX. Note on this chart that there is quite a bit of resistance at the 940ish area – upper Bollinger Band, and a convergence of trend lines.



Internals were decidedly positive with advancers over decliners by about 5 to 1.

All-in-all, in keeping with wave ‘B’ up, but OMINOUS from a fundamental perspective. There will NOT be another POP like this from the next FOMC meeting – guaranteed.

You are now betting that they can create ever bigger numbers to inflate your debts away. Not only did Bernanke NOT study history far enough back in time, but evidently he failed second grade math.

We have an economy that is out of control and careening off the road while the driver punches the accelerator in a desperate attempt to keep it on the road. Remember, “It’s contained.”