Friday, October 16, 2009

More Fun with Max Keiser…

…and more truth telling.

Max Keiser – Face Off, Part I (8 minutes):

Max Keiser – Face Off, Part II (7 minutes):

Martin Armstrong - Christaan Huygens, The Father of Cycle Theory…

At the end of the New Yorker article on Martin Armstrong, "The Secret Cycle…", the author published a quip by Martin that was not taken seriously by many.
"As for pi, he had a theory, which he’d never shared with anyone, that its ubiquity had something to do with dark matter."
In fact, I saw on some other websites references to that comment as proof that Armstrong is a “quack.”

Well, you can believe whatever you want, and you can ignore nature and its influence on the markets if you wish, just as many ignored Galileo or Kondratieff, and just as many now ignore the economic warnings of us “nut jobs” who write blogs. For the rest of the truly sane people who understand how they are being brainwashed, you will enjoy reading Martin’s explanation of how cycles occur in nature and how the cycles in the marketplace fit into nature’s cycles.

I can possibly add a little to the discussion… I personally believe that when it comes to understanding our universe that we are mere infants. However, I find intriguing the modern work being done on String theory. A good introduction was a book written several years ago by Brian Green called, “The Elegant Universe.” In a nutshell, the theory goes that the very smallest constituents of the universe are made up of strings. These strings are basically energy, so much energy that you cannot fathom how much there is everywhere in everything, including the so called “vacuum” of space. Even the very poorly understood force of gravity may be explained and tied to the energy of strings. Of course this is all theory for now and will likely remain untestable for quite some time as we simply don’t have the capability to measure on that scale.

Here is a snippet from the original Nova program that aired in 2003 with the same title, The Elegant Universe:

You can watch the entire 2.5 hour program on PBS, here: PBS - “The Elegant Universe.”

My point being that strings, by theory, are full of energy and are constantly vibrating… cycles and energy are everywhere and in everything and I think that’s the point Armstrong is trying to get across. Yes, a lot of people think that string theorists are nuts too. Personally, I think anyone who claims to KNOW the answers or who excludes possibilities are the ones a little out of kilter. Science can be, and should be applied to economics, but seldom is.

Please read Martin’s article with an open mind and you may find that you start to relate more to economics and to the markets in general…

*To PRINT, click "more" then "save document" to open in YOUR .pdf viewer where you can either save or print. Printing directly from the Sbribd menu may not produce good results.

Hugh Hendry’s Lastest…

As the “Chief Risk Officer” he’s out of what he sees as a very crowded trade. No kidding, and today’s reports and market actions are a stark reminder of what happens when the wise are ignored…

If this video is not playing, please follow this link and you'll find the video working about half way down the page, thanks: CNBC - Hugh Hendry...

Treasury International Capital (TIC) Data for August – WEAK…

The net TIC data for August is positive by a paltry $10.2 billion which follows several straight very large negative flow months. Since we run trade deficits each month to the tune of still more than $30 billion, we need these inflows to finance our prodigious debts.

So, in the entire month of August we totaled $10 billion in inflows, yet we were forced to “sell” (print) more than $100 billion PER WEEK! Somebody’s not very good at math…

And this week the Treasury didn’t even offer up their report in .pdf form, lol, perhaps they are tired of seeing people like me post them on their web sites! Not to worry, technology is terrific and we have other ways of showing the data to you, isn’t the internet great!?

Below is the monthly TIC data table containing the latest data for August in the far right column. First look at the top of the page to orient yourself to the dates in discussion, then go down to the bottom and look at my color highlights…

(click to enlarge)

There you see the green $10.2 positive net figure for August, and just to the left of that are the three prior months, all hugely negative. Now, in blue, you see that in 2008, net inflows were a WEAK $410.5 billion during a year where we were still running $50 to $60 billion deficits. What’s stunning here is in dark red, showing that the net inflows for all of 2009 through August are NEGATIVE 40.3 BILLION! That's a $450 billion swing this year compared to last, or nearly half a trillion dollars!

They can claim that foreigners are still financing our debts all they want, they would be wrong. If you are wondering what’s being sold in the world, it’s anything and everything American. Kind of makes you proud, no? That’s what we get for not dragging the criminals into the streets, we deserve it and worse. Perhaps when Americans re-discover their backbones we’ll take back our country to include our money and banking systems?

Doors – Unknown Soldier:

Morning Update/ Market Thread 10/16

Good Morning,

Mark-to-fantasy wasn’t enough to save Citi from losing $3 billion, and this morning we learn that it wasn’t enough to keep Bank of America from losing $2.2 billion! The power behind our politics is becoming more and more clear and there are two companies that are seemingly a little too protected, those being JPM and GS. And now we know why Ken Lewis is on his way out and why he would concede to leaving with no pay for 2009. They all deserve prison as far as I’m concerned.

And those earnings, combined with a 45% decrease in profits at GE to go along with sales that missed forecasts, show that the financial crisis, again despite the reintroduction of mark-to-fantasy, is not over – as I’ve been pointing out time and again.

Equity futures are down sharply:

TIC data comes out this morning but too late to make it into this report, I’ll do a write up on it once it comes out. Industrial Production and Consumer Sentiment come out right before the bell and shortly after, so we’ll have to report on those in the daily thread.

The bearish divergences are growing. Yesterday we developed a new one in that the number of stocks over their 5 day average diverged downwards against prices. More signs of a top approaching everyday, you can see the momentum falling out of the market as the swings become larger.

The 1,107 pivot has not been breached, and prices have now fallen back beneath the 1,090 pivot and that makes 1,061 support.

McHugh’s wave count is progressing, but we are NOT complete yet. The rise this week was likely wave 1 up of the final 5 waves. This morning’s action, therefore, is likely part of wave 2. That means that we still have 3, 4, and 5 of 5 up to go… or it truncates on further bad news which is always a possibility.

The daily candles from yesterday did not look pretty. Large, heavy hammers on the Industrials and the S&P. The NDX did not make a new high and made a second daily hammer showing the strength of the 61.8% Fib that it's up against:

The Transports, very interestingly, failed to get over the prior candle and failed to make a new intraday high – leaving the picture for DOW Theory cloudy:

The XLF also issued a warning with a red hammer, like the NDX, though, it too is “inside” but needs to be watched to see subsequent action. The XLF is down hard in the futures:

Hey, besides Mark-to-Fantasy, there’s never been any real reason for any of this six month rally…

Head East - Never Been Any Reason:

Thursday, October 15, 2009

Bond Market Bubble Update…

Remember this article and how prescient it was?

Bond Market Hide & Seek – A Domed House & 3 Peaks...

In that article, written in January of this year, I pointed out that interest rates had reached the end of the era of leverage when they hit ZERO:

Ten months later, rates are still at zero. The Federal Funds Rate really has only one direction left – up. That’s going to happen, just a matter of time. Just remember that the PRICE of bonds goes DOWN as interest rates go up.

So, I pointed out the Three Peaks and a Domed House pattern that was playing out in the long bond, and using TLT as a proxy labeled the points accordingly…

There were very few believers in this pattern at the time and, in fact, there were open doubters who expressed their disbelief even though I clearly explained the parabolic nature of the curve and that all parabolic moves eventually collapse, usually returning AT LEAST to their base, the beginning of the parabolic rise.

And now that the collapse has happened, the question is now what? And I’ll get to that in a minute, but let’s first look at the current chart and see where we are… I can count this two different ways and am not sure which is correct:

That count has better symmetry than this count and would indicate that the parabolic collapse phase is completely over. The following chart is labeled differently and would indicate that the collapse will continue:

Which do I favor? Well, interest rates must go up and thus in the long term I’m favoring that TLT must come down much farther. When we zoom into a six month chart of TLT we see a clear channel upwards, but that an internal uptrend broke to the downside and we’re now making a run at the bottom of the channel again. That’s the point that needs to be watched. A breakdown below that channel bottom would produce a very nasty target, one that would double the move down from the top targeting the 65 area of TLT!!

What would be the result if that happens? For one thing even more money would RUN from bonds. The question then becomes, “where would that money go?” The money that doesn’t flee would vaporize, thus continuing the deflationary trend. The money that does flee could run into an already overvalued equity market, or it could flee overseas. It will go wherever it’s treated best – I doubt it’ll be used to build new factories and to hire our unemployed, it’s still cheaper to hire workers overseas and our government still encourages it. Think you’ll see wage inflation? Think again.

The flow of capital, indeed, corresponds to the relationship of bonds down, stocks up as presented in this 3 year chart of USB (U.S. 30 year Bond Fund) versus the SPX:

The correlation on this relatively short term chart is actually better than the correlation between the SPX and the Dollar. There is, however, a lag between the moves of the bond market and equities. While I don’t have a good longer term chart to correlate historical moves further back, I know that the trend is for stocks to be rising BOTH while interest rates are rising and also when they are falling, which is the opposite of what many amateurs (and even some professionals) believe. Some professionals will say that lower interest rates are good for stocks and they go up as rates go down! Well, modern history (the twentieth century) shows that they get it both ways as rates rose fell below 2% in 1930, they stayed less than 2% for 22 years until 1952! From 1932 on, stocks basically went up. As rates went down from 1980 on, stocks went up (when I say stocks, what I mean is the stock indices, not individual stocks themselves)! They did, however stagnate in the late 60's through the 70's up until rates peaked in 1980. That stagnation is refered to by Elliott Wave technitions as a wave 4, the decline during the Great Depression was wave 2... So, the lesson of the past 80 or so years is that as rates drop, stocks go up, as rates stay less than 2%, stocks go up, and when rates rise, stocks stagnate. What will rates do in the next two decades? Many say that rates will stay low, but I say the math of debt is unworkable regardless.

THERE HAS NEVER BEEN A TIME IN HISTORY WHERE THE ENTIRE COUNTRY AND EVERY SEGMENT IN IT WAS DEBT SATURATED LIKE IT IS NOW, to include the 1920’s prior to the Great Depression. And that makes this time different than any other in modern history, doesn’t it? Now, you may have alarm bells ringing in your head because you KNOW that when people talk about “this time being different” that you appropriately run for the hills! All I will say is that before you discount that this time is indeed different, take another look at the chart of interest rates… from a peak in 1980 of 20%, all the way to zero, now nearly 30 years later. Then take a look at the debt curves – Personal debt, corporate debt, and governmental debt at all levels - never been here before, period.

So, as the direction changes, you could go back and say that rising interest rates get that way because the Fed is attempting to cool off an overheating market. And you would be wrong. The Fed mostly follows the market except in rare instances. So, I am going to posit that at some point rates are going to rise but it WILL BE DIFFERENT because of the PARABOLIC DEBT CURVES. This time when rates rise, it will dramatically increase the carrying cost of debt like never before. That will cause the correlation of rates up, stocks up to break down. Once again, this is based on more than a feeling, it’s based on the math of debt…

Boston- More Than A Feeling:

Paul Mylchreest - The Thunder Road Report…

This issue is the most comprehensive issue on gold that I think I’ve ever read! He has concluded that there are two options for the quantity of gold… do you choose door number 1, or door number 2? Hmmm… in Paul’s own words:

- The gold market operates on a fractional reserve basis and a stampede to claim physical bullion could send the price soaring at any moment. It is an accident waiting to happen.


- There is far more gold in private hands than is realised. Its origin is most likely to have been the Japanese conquest of 12 Asian nations during 1894-1945, subsequent to which it has been laundered into the gold market over many years. In this case, the evolution of the current gold bull market could be more gradual, until the true extent of the upcoming dollar crisis becomes apparent.

Paul goes on to explain the case of General Yamashita’s gold – quite a story! This is a terrific read, lengthy, but take it all the way through and I guarantee that, like me, you’ll learn a thing or ten about gold and be entertained along the way. Great report, Paul, thanks for the effort and thanks for sharing!

The Ballad of Thunder Road - Song co-written by and Starring Robert Mitchum:

Dollar to Hit 50 Yen, Cease as Reserve Currency…

It would seem to me that Sumitomo has a good track record of being right… (ht Comrade)
Dollar to Hit 50 Yen, Cease as Reserve, Sumitomo Says

By Shigeki Nozawa

Oct. 15 (Bloomberg) -- The dollar may drop to 50 yen next year and eventually lose its role as the global reserve currency, Sumitomo Mitsui Banking Corp.’s chief strategist said, citing trading patterns and a likely double dip in the U.S. economy.

“The U.S. economy will deteriorate into 2011 as the effects of excess consumption and the financial bubble linger,” said Daisuke Uno at Sumitomo Mitsui, a unit of Japan’s third- biggest bank. “The dollar’s fall won’t stop until there’s a change to the global currency system.”

The dollar last week dropped to the lowest in almost a year against the yen as record U.S. government borrowings and interest rates near zero sapped demand for the U.S. currency. The Dollar Index, which tracks the greenback against the currencies of six major U.S. trading partners, has fallen 15 percent from its peak this year to as low as 75.211 today, the lowest since August 2008.

The gauge is about five points away from its record low in March 2008, and the dollar is 2.5 percent away from a 14-year low against the yen.

“We can no longer stop the big wave of dollar weakness,” said Uno, who correctly predicted the dollar would fall under 100 yen and the Dow Jones Industrial Average would sink below 7,000 after the bankruptcy of Lehman Brothers Holdings Inc. last year. If the U.S. currency breaks through record levels, “there will be no downside limit, and even coordinated intervention won’t work,” he said.

China, India, Brazil and Russia this year called for a replacement to the dollar as the main reserve currency. Hossein Ghazavi, Iran’s deputy central bank chief, said on Sept. 13 the euro has overtaken the dollar as the main currency of Iran’s foreign reserves.

Elliott Wave

The greenback is heading for the trough of a super-cycle that started in August 1971, Uno said, referring to the Elliot Wave theory, which holds that market swings follow a predictable five-stage pattern of three steps forward, two steps back.

The dollar is now at wave five of the 40-year cycle, Uno said. It dropped to 92 yen during wave one that ended in March 1973. The dollar will target 50 yen during the current wave, based on multiplying 92 with 0.764, a number in the Fibonacci sequence, and subtracting from the 123.17 yen level seen in the second quarter of 2007, according to Uno.

The Elliot Wave was developed by accountant Ralph Nelson Elliott during the Great Depression. Wave sizes are often related by a series of numbers known as the Fibonacci sequence, pioneered by 13th century mathematician Leonardo Pisano, who discerned them from proportions found in nature.

Uno said after the dollar loses its reserve currency status, the U.S., Europe and Asia will form separate economic blocs. The International Monetary Fund’s special drawing rights may be used as a temporary measure, and global currency trading will shrink in the long run, he said.

Hard to argue against, this is exactly what I’ve been saying as well – big changes to the dollar and our system are coming. Changes on that scale usually do not come without upheaval and violence on a large scale – at least that’s what history shows.

The inverse correlation between the dollar going down and equities going up does not, and I will argue will not, continue indefinitely. Below is a three year chart of the Dollar (dashed line) versus the SPX (solid line). You can see that they are inversely correlated now, but at the end of ’07 and into ’08 moved in the same direction – down.

Never moving in a straight line, the Dollar/Yen cross has seen a low in the past twenty years of only 79 and a high of 160.

If I were counting from the 160 high, I would count the 79 low as wave 1, the subsequent bounce as wave 2 and it appears to me that we are still in wave 3 down. Within 3 down, it appears to me that we are making wave 5 of 5 down, but I certainly would not expect a level of 50 to be reached on this move. I would then look for a large wave 4 movement that would be flat and should be followed by a much larger wave 5 down into a low like Sumitomo discusses, so it may take much longer than most think, unless this is a more simple A,B,C. Then again, at the rate of acceleration our government is destroying our currency, it may not be that long at all.

I might add that the demographic situation in Japan is the reverse of that in the U.S.. Following WWII, Japan did not produce a baby boom generation until 20 years after the West did as they had to focus on rebuilding their country. Their baby boom is now entering their peak earning years as ours wanes.

Gee, I wonder why the Dollar would descend against a Yen that is hardly the example for the rest of the world? Oh, wait, this might explain it… And I might add, bankers too!

The Wallflowers and Jordan Zevon - Lawyers Guns and Money:

Philly Fed and Employment to the Point…

To follow up on today’s update, Czar Point dug a little deeper into the weekly unemployment data and this is what he found:
Initial UC claims DID NOT fall last week by 10,000. Looking at the raw, unadjusted numbers, new claim filings JUMPED by nearly 52,000 to 504k over the prior week's upwardly-revised figure of 452k.

For week ending Sept. 26, total UC filings (initial and extended) totalled 917k, still way elevated, while the total number of folks receiving UC benefits (regular and EUC) remained high as well, @ 8.338 million.

The scary part is, between Sept. 19 and Sept. 26, 55k people exhausted their regular UC benefits, but only 10k were added to the EUC tally. That's a net 45,000 people who apparently had NO INCOME as October began.

Point also pointed to a Yahoo news snippet in regards to Citi’s earnings that puts their “one time” adjustments into perspective:
Regarding Citi, here's a snippet from Yahoo! Finance:

The bank reported a $101 million profit before accounting for $288 million in preferred stock dividends and the debt exchange offer that give the government a 34 percent stake in the bank. The exchange offer, which gave Citigroup a better mix of capital to withstand additional loan losses and further weakening in the economy, took earnings down $3.06 billion.

Whoa! Keep in mind that we still haven’t backed out mark-to-fantasy accounting… If the truth were revealed, all the large financial institutions in America would be complete and total toast – still, and certainly NOT making the phony billions that they proclaim.

Meanwhile, down on the streets of Philadelphia, the Philly Fed Index fell from its last reading of 14.1 in September, to 11.5 for October, lower than expected. Here’s Econoday’s spin:
Business conditions are improving for Mid-Atlantic manufacturers but only gradually. The Philadelphia Fed's general business index came at 11.5 in October, safely above the break-even zero level but indicating a slower rate of month-to-month increase compared to September's 14.1 level. But new orders did accelerate slightly, to 6.2 vs. 3.3 in September in a reading that points to extended overall improvement in business conditions for the months ahead.

Shipments, at 3.3, increased in the month but at a slower rate than September when the reading was 8.2. The modest level of shipping isn't increasing the need for manufacturers to add new hands and feet as the employment index, at minus 6.8, shows month-to-month contraction once again. Employees are a major cost for manufacturers as are inventories which continue to contract and at a much more severe rate, at minus 31.8 vs. minus 18.1 in September. The minus 31.8 reading, together with a negative reading in the inventories index of the Empire State report which was released earlier this morning, put into question the improvement recorded in the ISM's manufacturing report for September that indicated firms were beginning to shift into restocking mode. Delivery times in the Philadelphia report continue to speed up, at minus 9.3 vs. minus 8.9, to indicate slack conditions in the supply chain. Both the Philadelphia and Empire State reports show tangible rates of input inflation along with continuing contraction for output prices, a mix that's bad for profits but good for the overall inflation picture.

Though mostly positive, this report definitely has material for the bears including the six-month outlook where optimism is fading just a bit, to 39.8 for an 8 point drop. Stocks are slipping but only very slightly in reaction to the report. Indications are mixed for October's ISM manufacturing report, with this report pointing to no further gains in contrast to the Empire State report that is pointing to significant gains.

Again, these indexes are not showing the real picture. What you had was a cliff dive that lowered economic activity to extremely low levels. That cliff dive leveled out and is now growing very slightly, but still at recent history’s very reduced levels. This leveling off for now is being confused with real and meaningful growth which is not happening. People looking into the future and thinking that the future looks like the past of never ending growth are simply going to get a lesson in exponential math and how collapses behave. The government can stimulate all they want, they only make the math worse and the ultimate outcome all the WORSE. The fallacy that debt and more debt can cure a debt problem is simply INSANE. Those who believe that the government has free reign to print are INSANE. Eventually those who don’t understand math and twist the logic of Keynes will be shown the fallacy of their “thinking.”

I’m certain that the unemployed people on the streets of Philadelphia would be happy to show it to them!

Morning Update/ Market Thread 10/15

Good Morning,

Equity futures are down hard this morning following the theft report from Goldman Sachs and more losses at Citi:

The dollar had fallen further overnight but ran back higher as the markets dove this morning. Overall the dollar is nearly flat from the close, currently sitting at 75.58 after failing to regain 76. Both gold and oil are down this morning, gold is currently sitting at $1,050 per ounce after peaking near $1,072.

Goldman reported earnings that “beat,” earning a shameful and disgraceful $3.2 billion in the past 3 months. Like JPM, their mark-to-fantasy “earnings” of $1+ billion per month come through the buying and placement of politicians, the buying of regulations, and the pillage of the taxpayer:
Oct. 15 (Bloomberg) -- Goldman Sachs Group Inc., the most profitable securities firm in Wall Street history, reported third-quarter earnings that exceeded analysts’ estimates on trading gains and investments with the company’s own money.

Net income more than doubled to $3.19 billion, or $5.25 a share, in the three months ended Sept. 25, from $845 million, or $1.81 a share, in last year’s third quarter, the New York-based company said today in a statement. The average estimate of 22 analysts surveyed by Bloomberg was for $4.18 a share, with forecasts ranging from $3.48 to $4.75.

Lloyd Blankfein, Goldman Sachs’s chairman and chief executive officer, stuck with the firm’s focus on advising, trading and investing after converting to a bank last year to win the Federal Reserve’s backing. Increased risk-taking paid off, and the company’s stock climbed 128 percent this year, the best performance among the 15 biggest U.S. banks.
“Fundamentally everything’s fine and is probably going to remain strong into next spring,” Jon Fisher, a fund manager at Fifth Third Asset Management in Minneapolis, which has more than $19 billion under management including Goldman Sachs stock, said before the results. “The risk really is just on the sentiment side: political fallout or just expectations getting too bullish in the short term.”

Yep, they better beware of not political fallout, but of the ire of the people. Someday enough will have figured out the game to rise up and take back what has been stolen from them. Don’t look for the politicians to do so, they have been bought and paid for.

Meanwhile, over at Citi, even with mark-to-fantasy they couldn’t turn a profit – except when they remove “special, one time items.” This is the other bullshit game that is being played. It’s like this… Let’s say you own an old junker of an automobile that is always breaking down. You have huge repair bills every month, like clockwork, YET, you refuse to budget in extra maintenance expense and fail to consider or report to your wife how much all those repairs cost. Meanwhile you are slowly going deeper into debt and don’t have money to spend on other things in life and can’t quite figure out why!

Well, the financials and most corporations in America are doing the same thing – and the analysts who review these companies buy into the B.S. by shoving artificial Price to Earnings ratios at you that ignore all these (forever recurring) write-offs. Simply more Enron-esk accounting.
Oct. 15 (Bloomberg) -- Citigroup Inc., the lender 34 percent owned by the U.S. government, posted a $101 million profit, defying expectations for a loss, as the company slowed the pace of building reserves for future loan defaults.

The third-quarter profit compared with a loss of $2.82 billion a year earlier, the New York-based bank said today in a statement. On a per-share basis, the company had a loss of 27 cents because of a charge related to the exchange of government- and privately held preferred shares into common stock. Eighteen analysts surveyed by Bloomberg News estimated a loss of 29 cents.

Chief Executive Officer Vikram Pandit, whose bank profited in the first half by booking gains on business sales, added $802 million to loan-loss reserves, 76 percent less than the amount expected by David Trone, an analyst at Fox-Pitt Kelton Cochran Caronia Waller. Citigroup posted deficits every quarter last year and a record $28 billion annual loss.

How did all this work out for their share price? Here’s the overnight chart of both C and GS:

The CPI came in still with yoy decreases in overall price. Should the rally in energy end, you will see these numbers accelerate again to the downside. Here’s Econday’s report:
Consumer price inflation in September was mixed as the overall CPI slowed while the core rate firmed. The headline CPI rate eased to a 0.2 percent gain after jumping 0.4 percent in August. The consensus had expected a 0.1 percent uptick for the latest month. The slowing was due to a dip in food prices and a dramatically slower gain in energy costs. Core CPI inflation firmed slightly, rising 0.2 percent after a 0.1 percent increase in August. The latest number came in a little above the market forecast for a 0.1 percent rise.

Helping to soften the headline number, the food component declined 0.1 percent after a 0.1 percent rise the month before. The energy component slowed to a 0.6 percent boost in September, following a sharp 4.6 percent jump in August. Gasoline posted a modest 1.0 percent gain in the latest month after a 9.1 percent spike in August.

The moderately faster pace for the core rate was due to relatively strong gains in lodging away from home, medical care, new vehicles, used cars and trucks, and public transportation. The core rate firmed despite declines in rent and owners' equivalent rent, the first decreases in those indexes since 1992.

Year-on-year, headline inflation edged up to minus 1.3 percent (seasonally adjusted) from down 1.4 percent in August. The core rate was unchanged at up 1.5 percent in September. On an unadjusted year-ago basis, the headline number was down 1.3 percent in September while the core was up 1.5 percent.

Overall, inflation remains subdued despite slightly disappointing numbers in today's report. The weakening in housing costs especially points to a sluggish trend for inflation in the near term unless energy costs pick up.

The Empire Manufacturing index came in much stronger than expected. The trend is definitely positive, and while the reading is strongly above zero showing growth in that region, what the index does not show is at what level that activity is. Remember that overall activity fell off the proverbial cliff, therefore any uptick is likely to produce a positive number the way they index it – seeing the raw number chart would be much more meaningful here:
The month-to-month rate of increase is picking up steam quickly in the New York manufacturing region. The Empire State general business conditions index jumped to 34.57 in today's October report vs. 18.88 in September. The index first popped over the break-even level of zero in August and has since indicated, again, rising rates of month-to-month expansion.

New orders have been mirroring the overall index, now at 30.82 and pointing to extended gains for overall activity in the months ahead. Unfilled orders have finally popped over zero, now at 2.60 and reflecting the increasing level of activity that is backing up work. Shipments really jumped in the month to 35.08 vs. September's 5.34, helping to drive up employment to 10.39 in a reading that ends a long string of declines. The workweek also rose sharply, to 20.78 vs. 5.95.

An odd thing in the report is that manufacturers in the region continue to work down inventories aggressively, at -18.18 vs. -25.00 in a month-to-month comparison that only hints at a slowing rate of drawdown. The ISM manufacturing report, that samples firms from around the country, showed in its September data a pivotal slowing in destocking that is not confirmed here. And firms in the New York region expect to continue to draw inventories well into next year with the 6-month outlook for the component at -5.19, but still much less severe than the prior reading of -17.86.

Price readings are steady showing increasing month-to-month costs for inputs, at 19.48, but no pricing power for outputs (or finished goods), at -5.19. Today's data are definitely a positive, suggesting that the manufacturing sector, which was among the first sectors to contract, is poised to help lead the whole economy into recovery.

Weekly Jobless claims came in at a still horrid 514,000 which was once again “better than estimated.” Continuing claims fell, this is due to people falling off the backside of the roles and notably those on Emergency Extended unemployment is continuing to rise:
The rate of layoffs continues to ease as initial jobless fell 10,000 in the Oct. 10 week to 514,000 (prior week revised from 521,000). Continuing claims also fell, down 75,000 to a sub-6 million level at 5.992 million in data for the Sept. 26 week. The unemployment rate for insured workers, in contrast to the overall unemployment rate, continues to slip, down another tenth to 4.5 percent. Levels in this report are the lowest since the first quarter.

Special help for the unemployed is an important feature of economic policy. Emergency unemployment compensation rose a little more than 10,000 in the Sept. 26 week to 3.331 million. September's employment report proved to be a disappointment, showing greater weakness than August. But the early read on jobless claims offers a reason to be optimistic for this month's jobs report.

The Philly Fed Survey comes out at 10 Eastern.

Yesterday’s action was very interesting with DOW 10,000 acting as a magnet and actually closing over. We first reached DOW 10,000 in March of 1999, more than 10 years ago. At that time the dollar was at 100 and gold was at $300. That means that had a person kept $10,000 in the DOW and $10,000 in gold for the past decade that what they could purchase with their stock money would only buy about $7,500 worth of 1999 goods, but their gold would buy $35,000 worth of 1999 goods!

Notice the discrepancy between the fall of the dollar (25%) and the rise in gold (300%+). The disconnect is because the dollar is weighted against a basket of fiat currencies ALL OF WHICH are devaluing themselves in real terms. So, I hate to say it, but Harry Dent’s inflation adjusted call of DOW 35,000 is not that far off as the DOW would have to be at the 35,000 level today to have kept up with the rise in gold.

Below is a 10 year chart of gold from July of this year, courtesy of Kitco. Note the very obvious inverted Head & Shoulders, I don’t even need to draw the neckline in, do I? Target equals about $1,325 on that now confirmed pattern.

The daily candles yesterday are interesting. There were normal looking large candles produced on the indices, but on the ETF’s with their gap openings, they look more like topping hammers. And the NDX is very ugly looking as it has set itself up for an island reversal, and with this morning’s gap down open could verify that if prices were to stay below yesterday’s candle all day. That makes the price action today very important:

The XLF has the same set up.

Exxon Mobile (XOM) broke upwards out of a fairly large consolidation triangle yesterday. I am wary of that break out, but note that the oil P&F now has a bullish target on oil of $94 a barrel. This is pure dollar weakness and speculation with cheap money as demand is simply not there to justify that move, yet it bears watching for sure.

The Transports did a rocket shot on CSX’s earnings yesterday. No, that move was not justified. Rail traffic is way, way down and the price of the Transports is relatively much too high compared to traffic levels. Nonetheless, the Transports ran smack into the upper Bollinger Band stopping at a new rally closing high. It did not, however, break the prior intraday high. So, did that confirm the DOW Theory buy signal or is the non-confirmation still a possibility? This is a gray area for me… some technicians base everything on closing numbers and some on intraday numbers. I look at it like this; it’s possible either way and it needs to be watched. I am never convinced until both the intraday and closing high/low is exceeded.

Yesterday’s move obviously satisfied the large directional move the McClelland Oscillator was looking for. McHugh believes that was likely the beginning move of the final wave higher and that it’s likely to peak in the next couple of weeks, landing on the high about in time for his Fibonacci turn window at the end of the month or by the Bradley turn date on the 9th of November. We’ll see, again his count has been tracking very well and his count is in agreement with Tony Caldero’s count, something that when they are sync, I simply do not ignore.

We finished yesterday obviously WAY overbought on all time frames through daily and even the weekly and monthly are overbought as well. BIG, BIG divergences all over the place, namely on the advance decline lines, on volume (yesterday was higher volume than the past several days, but still very low), and interestingly in the segments of the markets. Last night I was looking at the big picture of the bear market over the past couple years to get a better perspective and something really jumped out at me. Here are some charts, pay attention to the percent Fibonacci retrace for the entire bear market to date:

NDX, right at the 61.8%, a very important point:

IYR, the Commercial Real Estate ETF has retraced 38.2% and is sitting right underneath:

The XLF, touted as being the strongest of the recovery is NO SUCH THING when looking at its rebound. Yes, from its pathetic bottom it has jumped the most in percentage terms, yet it has failed to even reach the 38.2% retrace level of its peak!!! Math is a bitch, pay attention! Also note the very clear volume pattern… that’s a huge, HUGE divergence:

The Transports have mysteriously risen way more strongly than traffic would dictate. They have retraced more than 50% of the bear market and are approaching the 61.8%. Note again the perfect rising wedge – that is NOT a channel, it is a rising wedge with volume tapering off, confirming the pattern:

Here are the DOW Industrials. Again, rising wedge, volume divergence, having retraced up to nearly the 50% level:

The SPX has also nearly reached the 50% retrace level which is at 1,125. Note the classic rising wedge, it’s volume is pattern confirming as well although not pictured, and you can also see the diverging RSI on this daily chart:

So, we have the NDX up against very powerful resistance at the 61.8%, and yet the financials, despite the resumption of mark-to-fantasy, not even back to the 38.2%. That’s a huge red flag to me, yet another split in the market. As the primary indices get into or above the 50% retrace level, the overhead resistance becomes much greater as the volume resistance at those levels is much more recent with much higher volume.

This morning’s decline is likely a subwave of the final wave higher. It will likely continue to move higher but can still end anywhere in here (watch the NDX and XLF today), or can overthrow those rising wedges. I’m still being patient and not playing the game in here. It looks like playing with nitro to me… we have major disconnects between what’s happening in the real economy and what’s happening in the technicals. And, we have major disconnects in the technicals as well. Personally I like to put the odds in my favor when investing, that means that the fundamentals, technical, and psychological all get in alignment. They are getting in alignment right now alright, and its extreme…

But, hey, in the meantime we might as well party like the DOW… in 1999!

Prince – Party Like It’s 1999:

Wednesday, October 14, 2009

Dylan Ratigan Lecturing the President of the Chamber of Commerce…

The Chamber of Commerce has a new campaign for “free enterprise.” They correctly point out that 7 million jobs have been lost in the past two years and that we need 1 million per year to accommodate population growth, plus there are about 3 million more underemployed, so the conclusion is that we need to generate 20 million jobs in the next decade! It sounds good on the surface, but Dylan calls them out on their interests and where they derive their lobbying money ($20 million from AIG).

A lot of grandstanding by Dylan, but he is shouting the truth. Have to wonder how long this job will last…

State of the FHA – Critical…

Whitney Tilson, of T2 Partners, does a great job explaining the trouble that the FHA is in, but joins the brainless in praising the bailouts of the banking system. When will people see that it is these very bailouts that have caused the mess to begin with? At the end, the interviewer nails him on this point, but he simply does not get the cause and effect. The “utter calamity” that he thinks the government avoided is going to be a certainty because of people who think like that.

At any rate, Tilson explains that the FHA has gone from being only 2% of the mortgage market to now being over a quarter! AND, the default rate of FHA loans is soaring, the ’07 vintage are already at a 32% delinquency rate! Thus, Whitney explains, the FHA is likely to become the next bailout using your dollars and future earnings. Yet another Trillion dollar disaster brought to you by your own government.

The Next Big Bailout? FHA Facing "Cataclysmic" Default Rates

Morning Update/ Market Thread 10/14

Good Morning,

Stocks are considerably higher this morning following a good report from Intel and a marked to complete fantasy report from JPMorgan:

The dollar broke support at the 76 level and sits at 75.55, yet another .5% move. Those are huge moves for currencies. Now that the 76 level has been broken, I would expect it to be tested from below, and then the descent to continue into the 71/72 level. Oil is higher, gold went on to set a new high, but then descended back to even. Bonds are lower as rates move higher.

The report from Intel was better than forecast, but it was still a year over year decline of revenues of nearly 8%. Last year at this time Intel was at $16, now it is at $22 with lower earnings. Which is the more overvalued market? They are pricing in a future that isn’t going to happen.

JPM profit grew a sickening six fold, or $3.6 billion!! $1.9 billion came from their investment banking division, the one that makes bets on theirs and Goldman’s market manipulations. The rest, I’m sure, came from fees on the consumer and from marking their assets to fantasy in accordance with the rules they created/paid for. Great job, that’s quite the business model. Keep in mind that these fantasy games, tax payer backed, artificially low interest rate (taxpayer funded), “profits” jack up the “earnings” of the entire market making earnings look far better than reality. These phony paper earnings are nothing but a lie and that lie will eventually be exposed for what it is… The politicians won’t expose it - it will be up to the people at some point to put an end to the pillaging.

The ridiculous MBA purchase applications “index” fell 5% in the past week – and that means??? Don’t know, they don’t give the data so yoy and historical comparisons are impossible, just the way they want them.

Retail sales fell 1.5% in September, the consensus was for a 2.1% fall following the end of cash for clunkers, thus producing a “beat.” Note in Econoday’s chart, that yoy retail sales are down about 6%, much greater than either the Redbook or Goldman ICSC numbers – oh, and Econoday will not talk about the yoy numbers, only the short term pop:
The consumer pulled back sharply in September-but it was mostly due to the post-"clunkers" drop in auto sales. Otherwise, the numbers were surprisingly healthy for the most part. Overall retail sales in September dropped 1.5 percent after a 2.2 percent spike the month before. The September drop in sales was not as severe as the market forecast for a 2.1 percent fall. The decline was led by a 10.4 percent plunge in auto sales after a 7.8 percent boost in August. Excluding motor vehicles, retail sales advanced 0.5 percent, following a 1.0 percent jump in August. The consensus had expected a 0.3 percent rise for September.

Checking on the other volatile component, gasoline sales provided lift, gaining 1.1 percent in the latest month. Nonetheless, excluding motor vehicles and gasoline, retail sales rose 0.4 percent, following a 0.6 percent gain the previous month. Although core components were mixed, they were mostly positive and reflected sizeable gains. Apparently, the consumers that have jobs are a little more optimistic and are willing to spend.

We now have had two months of unexpectedly healthy core sales. Components outside of autos and gasoline were actually led by furniture & home furnishings, up 1.4 percent; general merchandise, up 0.9 percent; and health & personal care, up 0.8 percent. Gains were also seen in food & beverage stores, clothing & accessories, sporting goods & hobbies, and food services & drinking places. Declines were seen in building material & garden shops, miscellaneous stores retailers, and nonstore retailers.

Overall retail sales on a year-ago basis in September improved marginally to down 5.7 percent, from down 5.8 percent in August. Excluding motor vehicles, the year-on-year rate increased to minus 4.9 percent in September from down 6.3 percent the previous month.

Equities should like today's report since the number beat expectations but also should get a lift from Intel and JP Morgan beating estimates after yesterday's close. The dollar firmed on today's news as did Treasury yields.

Import and Export prices were just reported. Import prices rose .1%, while export prices fell .3%. Year over Year, export prices have plunged 5.6%, while import prices have cliff dived 12%. This is an improvement from a 15% cliff dive the month prior and is due, I believe, to an easier yoy comparison as prices had already fallen this time last year.
Import prices are posing evidence that the weak dollar is increasing inflation pressures. Key readings are import prices excluding petroleum, up 0.4 percent in September following a 0.3 percent rise in August, and import prices for industrial supplies excluding petroleum, up 1.5 percent following August's 1.1 percent rise. Pressures may now be beginning, in a mild way, to find their way to finished goods with prices for consumer goods excluding autos up 0.1 percent following two prior months of decline and prices for capital goods up 0.1 percent to end a long string of no changes.

But the headline readings are tame. Total import prices prices rose only 0.1 percent reflecting a 1.1 percent downswing in prices for petroleum products. But with oil prices now back above $75, the petroleum reading for October is likely to show an upswing. The report also includes export prices which fell 0.3 percent reflecting a downswing in agricultural prices of 2.8 percent. Finished goods prices for both consumer and capital goods exports rose 0.1 percent. Today's overall results pose little trouble for the September consumer and producer price headlines though they do indicate rising pressures for crude and intermediate goods in the producer price report.

Oh yeah, that’s quite the inflation… maybe in a monetarist’s hopeful never ending fiat fantasy dream, but it’s not happening on that chart.

Business inventories come out at 10 Eastern, more earnings and data the rest of the week will also be important.

Today’s movement looks to be satisfying the small movements in the McClelland Oscillator. We are now running up into the 1,090 pivot area, the next higher is at 1,107. Support, for now, is at 1,061. The earlier inverse H&S target is 1,125 and that is coincident with a 50% retrace of the entire bear market. Yes, despite the largest and fastest rally in history, we still have not regained even 50% of the losses. That will be a very strong area of resistance, as I’m sure the 10,000 area on the DOW will also provide some resistance as well.

Prices have now risen into the upper Bollinger band again with extremely overbought readings.

By the wave count, we are very near the end of this rally, wave B. I know this rally has turned a lot of people into believers, that’s exactly the way the psychology is supposed to work to take in as much money as the market can. We are at an extreme, the place where contrarians make their money. It is good to run with the crowd in the middle, but at the extremes is where the contrarians are finally proven correct – it’s coming. In the mean time let all the people see the magical and mystical bank profits and wallow in the mythical blue skies… just as the pigmen wallow in their hard bought and paid for “profits” and bonuses, the purchasing power of your money erodes away.

ELO - Mr.Blue Sky:

Tuesday, October 13, 2009

Bond (Debt) Disease Spreads to Washington State…

Under pressure and after witnessing California botch their latest auction, Washington State proactively reduces their bond offering knowing that higher rates are here.

The spin masters are all talking that higher interest rates are good, they are a “sign of recovery.” What they are not discussing is the MASSIVE amount of debt that needs to be rolled over and that debt levels have risen to the point that any increase in rates severely impacts the budgets of those debt holders who is nearly everyone. Muni bonds are a high risk proposition in this environment, rates WILL rise, it’s just a matter of when.

States falling short by billions of dollars is a symptom of the credit bubble and subsequent collapse. Those who believe that debt can continue to grow at the present rate are simply living in a fantasy world. Governments at all levels are way overextended, they grew as the credit bubble grew and now they must shrink but they are too slow to react. The economy will force them to shrink…

Washington Slashes Muni Offering With Investors ‘Overstretched’

By Jeremy R. Cooke and Michael McDonald

Oct. 13 (Bloomberg) -- Washington state will cut the size of its tax-exempt bond offering by 36 percent after borrowing costs rose from a 42-year low.

The state that is home to Microsoft Corp. will shrink a planned $875.7 million offering tomorrow to $563.9 million, said Chris McGann, a spokesman for the treasurer’s office in Olympia. Washington is rated AA+ by Standard & Poor’s, Aa1 by Moody’s Investors Service and AA by Fitch Ratings.

State and local government bonds extended their declines today, pushing higher benchmark yields tracked in a daily survey by Municipal Market Advisors of Concord, Massachusetts. Yields on 10-year debt rose 6 basis points, the most since June 10, to 3.16 percent. A basis point is 0.01 percentage point.

Morgan Stanley Smith Barney said dealers are becoming less willing to take on inventory that may undermine a profitable year. Issuers plan to sell about $8.5 billion of fixed-rate bonds, down from the eight-week high of $11 billion last week, based on data compiled by Bloomberg.

Washington originally planned to sell $1.38 billion of general obligation securities this week. In addition to the tax- exempt debt tomorrow, Goldman Sachs Group Inc. and JPMorgan Chase & Co. are to market $500 million in taxable Build America Bonds Oct. 15, according to data compiled by Bloomberg. The issues will fund capital improvements and refinance debt.

Rebounding yields may reduce the savings states including Hawaii and Mississippi get from refinancing taxpayer-supported debt. Investors balked at low payouts while anticipating a Federal Reserve rate increase. The Bond Buyer 20 index of 20- year general obligation securities climbed to a three-week high of 4.06 percent after reaching 3.79 percent, the lowest since 1967, on Oct. 1.

“It’s pretty obvious, interest rates are not going to stay at zero in any kind of economic recovery,” said Joseph Deane, who oversees the $4.9 billion Legg Mason Western Asset Managed Municipals Fund at Western Asset Management in New York. The fund’s five-year average return of 5.7 percent is best among its peers, according to Bloomberg data.

Fed Fund Futures

Trading in federal funds rate futures today implied a 57 percent chance the U.S. central bank will raise its target for overnight lending between banks by April 2010. The Fed’s target has been for a range of 0 to 0.25 percent since December, easing the way for credit markets to rally.

“The first time the Fed finally tightens, I think that’s the best news you’re going to get in a long time,” Deane said in a telephone interview. “They’re telling you the economic crisis is abating.”

The Municipal Master Index from Bank of America Corp.’s Merrill Lynch & Co. is up 14.9 percent for 2009, better than any other year-to-date period since the total-return gauge began in 1989. The index fell 1.2 percent last week.

The municipal market “got overstretched,” Deane said. “Everybody was just grabbing every bond they could get.”

The gains were driven by investors pouring a record $65.5 billion into municipal bond mutual funds, according to data cited in an Oct. 9 report by George Friedlander, municipal strategist at Morgan Stanley Smith Barney in New York, a joint venture of Citigroup Inc. and Morgan Stanley. The previous full- year record was $42.9 billion in 1993.

‘Don’t Mess It Up’

“The mantra now seems to be ‘don’t mess it up,’ so some dealers and traders appear to be paring back their bid side significantly,” he said.

Bondholders sought offers for almost $2 billion in securities Oct. 7, the highest since late June, according to a bids-wanted index compiled from Bloomberg data.

California, the lowest-rated and most-populous U.S. state, reduced its bond deal last week by 8 percent to $4.14 billion and raised tax-exempt yields as much as 60 basis points, or 0.6 percentage point, from initial discussions. Delaware, one of seven states with the highest credit ratings, decreased the size of its refinancing by 9 percent to $314 million.

“We were able to get a $4 billion-plus deal in a cold and inhospitable market,” said Tom Dresslar, a spokesman in the California state treasurer’s office. “We believe that is a significant accomplishment.”

Extra Yield

The extra yield investors get for buying municipal bonds rated BBB instead of AAA widened by about three basis points last week to 228 basis points, after tightening from 446 basis points at the end of 2008, according to Merrill index data.

The falling yield premiums led Deane to reduce investments in riskier bonds “the past month, month and a half,” he said.

“We’ve been diminishing our risk profile somewhat because we felt that this has been a terrific run, we’ve hit it on the screws and we’re willing to take a few chips off the table,” Deane said.

Friedlander in his weekly report recommended against reaching for yield on general obligation bonds by “going down too much in credit quality.”

“Budgetary pressures at the state and local level are likely to continue for at least two years, and this should lead to more downgrades, even if defaults are limited as we expect,” he said. “Consider revenue bonds.”

The largest municipal bond insurers by new issues this year sustained credit-rating cuts yesterday. Fitch Ratings reduced its financial strength grade on Assured Guaranty Corp. to the fourth-highest grade of AA- from AA. Assured’s Financial Security Assurance Inc. unit was downgraded to AA from AA+.

Municipal issuers have scheduled at least $15.9 billion in fixed-rate bond sales during the next 30 days, 35 percent more than this year’s $11.8 billion average, according to a visible- supply index compiled from Bloomberg data.

Charles Biderman on Government Statistics Versus Tax Receipts…

Charles explains, as I do every day, why government statistics are not reliable… (ht CWB & ZH):

Must See - Simon Johnson and Rep. Marcy Kaptur on Bill Moyers…

A great interview of two people who get it, Simon Johnson and Rep. Marcy Kaptur. Follow the link below to watch (29 minutes – ht Jon):

Simon Johnson and Rep. Marcy Kaptur on Bill Moyers…

Separate corporations and their money from Government!

Morning Update/ Market Thread 10/13

Equity futures are down this morning, with the DOW and S&P futures down more than the NDX and RUT:

Note in the /ES chart on the right that I drew a line at what appears to be a small neckline of H&S pattern that’s worth about 8 points or so. If prices drop below that neckline I would target about 1,060. The 1,070 area is acting like support… 1,061 is the current support pivot and 1,090 is overhead.

The dollar dipped below 76 this morning but bounced back above once again and is currently at 76.16. It keeps knocking on that 76 door, if it stays down here long enough eventually it will break through. Gold ran up to 1,069 overnight before pulling back a little. Oil is also higher, reaching $74 a barrel. Bonds are also higher.

Meredith Whitney downgraded Goldman giving it about a $4 per share hit and the XLF a bit of a bruising as well.

Johnson & Johnson missed on Revenues, be nimble as there are a lot more earnings coming out this week.

The Redbook reported a yoy increase in chain store sales of .6% for the previous week. Sorry, but I just don’t believe this report even though the year over year comparison is now much easier than before. Sales tax revenues are way down, I call B.S., and again will point to substitution bias.

Once again there are many Treasury auctions this afternoon, we’ll keep an eye on those. Tomorrow we’ll see Retail Sales, Purchase Applications, Import and Export Prices, Inventories, and we’ll get to peak at the FOMC minutes, something that the investment community gives far too much credence in my opinion.

There was yet another small movement in the McClelland Oscillator yesterday, meaning that the spring is being wound to produce a large directional move. McHugh’s count is still saying that the final wave up is not over, so any correction in here, unless it’s quite large, is likely just a subwave on the way up.

We did make a new high in the Industrials yesterday without making a new high in the Transports. That sets up the possibility of a DOW Theory non-confirmation should the turn occur prior to the Transports making a new high. I would expect something like that as wave C begins, to go along with all the other divergences that are occurring right now.

Below is a daily chart of the DOW. Note the declining volume, and even lower yesterday. This volume for September and October so far are RECORD low volumes for modern history. That’s a pretty big clue, its a screaming divergence from price.

You can also see that the daily Stochastic is overbought once again, and that yesterday’s candle could be a top indication. If prices decline below the level of yesterday’s low, then it may indeed be at least a short term top, and McHugh is open to wave B being complete, but we would both expect that wave C would likely begin with a pretty good down movement and we just haven’t seen that yet, obviously. The 60 minute stochs are sitting on a fresh sell while the 30 and 10 are sitting on a buy…

Warren Zevon - Excitable Boy:

Monday, October 12, 2009

Doing the Wrong Things with Derivatives – Stiglitz has the Right Idea…

This is a critical issue, one that is central to our current economic crisis and the debt that has saturated our society… so please forgive the length of this article, I hope you will take the time to read and understand what’s happening with the unregulated and untracked shadow banking world of financial engineering, profiteering, and looting.

Estimates run as high as $1.4 Quadrillion (!) for the notional value of the world’s derivatives. Prior to 1990 there was basically no market whatsoever. The only agency to track a portion of the U.S.’s derivatives is the OCC (Office of the Comptroller of Currencies). They only track a PORTION of the derivatives and only those held by commercial banks. Here’s their quarter 2 report:

The total notional value of derivates that they track appears to have continued going up, but in fact have been going down recently. The reason they report total derivatives still going up is that several key big companies, formerly Investment Banks, filed to become Commercial Banks so that they can receive government handouts like the rest of the Commercial Banks. The largest of these is Goldman Sachs.

If you subtract those newly reported derivatives back out, this curve would no longer be positive, it would be collapsing:

Here’s their Executive Summary:

Executive Summary
• The notional value of derivatives held by U.S. commercial banks increased $1.5 trillion in the second quarter, or 0.7%, to $203.5 trillion.
• U.S. commercial banks reported revenues of $5.2 billion trading cash and derivative instruments in the second quarter of 2009, compared to a record $9.8 billion in the first quarter.
• Net current credit exposure decreased 20% to $555 billion.
• Derivative contracts remain concentrated in interest rate products, which comprise 85% of total derivative notional values. The notional value of credit derivative contracts decreased by 8% during the quarter to $13.4 trillion.
Note that bullet one says the notional value increased by $1.5 trillion… in Q4 of ’08 they increased by $24.5 Trillion mainly due to the previously mentioned IB’s becoming CB’s, but take that effect away and you would have net negative derivative growth as you are seeing in the remainder of the bullets with revenues cut nearly in half, net current credit exposure decreased 20%, and credit derivatives decreased 8%.

Do you see those decreases in the monetary aggregates reported by the Fed? No? That’s because their monetary aggregates do not capture the entirety of the shadow banking system, they only capture a portion of it indirectly when credit dollars are deposited in institutions. Leverage is dramatically increased as derivative contracts (most with no real backing – as in no real ability to pay) as companies pretend that their positions are backed or hedged – in most cases a catastrophic loss could not be paid, that is exactly what happened with the collapse of AIG and why the Government stepped in to bail out the central banks.

And the central banks, the Primary Dealers (WFC is not a P.D.), DOMINATE the world of derivatives. Remember, these are the banks WHO ARE THE FED. They are the ones who influence the Treasury and politicians to get their rules made into law (using phony money they created from thin air).

*Current List of Primary Dealers (Nomura Securities recently added??):

BNP Paribas Securities Corp.
Banc of America Securities LLC
Capital Inc.
Cantor Fitzgerald & Co.
Citigroup Global Markets Inc.
Credit Suisse Securities (USA) LLC
Daiwa Securities America Inc.
Deutsche Bank Securities Inc.
Goldman, Sachs & Co.
Securities (USA) Inc.
Jefferies & Company, Inc.
J. P. Morgan
Securities Inc.
Mizuho Securities USA Inc.
Morgan Stanley & Co.
Nomura Securities International, Inc.
RBC Capital Markets
RBS Securities Inc.
UBS Securities LLC.

Remember Denninger’s lesson in exponential math from the previous post? Here’s a paragraph taken from the OCC’s latest report:
Credit derivatives grew rapidly over the past several years as dealers increasingly used them to structure securities to help meet investor demand for higher yields. From year-end 2003 to 2008, credit derivative contracts grew at a 100% compounded annual growth rate. However, notional credit derivatives volume has fallen $2.5 trillion, or 15.5%, since peaking at $15.9 trillion in the fourth quarter of 2008.
One hundred percent compounding rate of interest? Ha, ha, that’s a double every single year. Think that’s sustainable? It’s not. Again, note that derivative VOLUME peaked in ’08 and is now down 15.5% in less than a year.

The clues are there, and they are telling me that net derivatives have peaked and are, in fact, falling backwards executing a classic parabolic collapse. Don’t see it? Let’s look at the top 25 holders of notional derivatives and see what’s happening…

When we zoom back in time to the end of ’07, here’s the way the list of the top 25 holders looked:


Note that JPM was #1 with nearly $92 Trillion in notional derivative value, more than 65 times their then (market to fantasy) total assets of $1.4 Trillion! Today their fantasy assets total a little more than $2.0 Trillion (down from $2.2 Trillion, Q3 of ‘08), and yet their notional derivatives have fallen to ONLY $80 Trillion, or ONLY 40 times their marked to fantasy assets! That’s a huge deleveraging, on the order of 13% in terms of notional value, but a whopping 38.5% in terms of leverage.


Now take a look at the composition of the top 5 again… you’ll find Goldman at #2 with $40 billion where they were not on the list at all before. Next up is Bank of America who has grown their derivative portfolio not by taking on more derivatives positions, but rather by acquiring other companies. Then there’s Citi whose derivatives portfolio has shrunk by over $2 Trillion, but despite nearly going the way of the Dodo bird in-between, their deleveraging has not progressed along the lines of JPM or GS, the two most highly leveraged large companies in the history of the planet. In 2007, Citi was running a paltry 15.5 to 1 ratio compared to JPM’s 65 and today is down to about 16.8 to 1 (comparing OCC derivatives to latest balance sheet assets). Although Citi’s notional derivatives value has declined, their marked to fantasy assets have declined faster, falling from $2.2 to $1.9 Trillion.

The above figures come from their own balance sheets. When I use the OCC's numbers from the top five list above, we find derivative to (mark to fantasy) "asset" ratios as follows:

JPM = 48 to 1
GS = 405 to 1(!)
BAC = 27 to 1
C = 28 to 1
WFC = 4.6 to 1

That's some range of derivatives to assets... I'd say that JPM and GS are in a "special" class of their own.

So, the shadow banking system has actually been shrinking more than is known or acknowledged by most. In JPM’s case, I think this is intentional. The truth, however, is that there are very few legitimate purposes for these derivatives other than to find new ways to charge fees and to increase “credit,” that, of course, being someone else’s debt.

And speaking of fees, they have found a new game to send fees and commissions into the stratosphere, it’s called “Cap & Trade.” Goldman, in particular, has placed themselves at the head of a new market, one that will be larger than even the currency markets and they will skim transaction fees every step of the way (shhhh, Cap & Trade is really just another derivative market, shhhh!). Of course this is sold as being good for the environment! LOL, what bunk! It’ll be good for Goldman and more expensive for everybody else. This same lie is told about derivatives in general, some even claim that derivatives makes things less expensive! What baloney, they DRASTICALLY increase overall costs and ADD RISK to the system, they certainly do not lessen it.

Now that the systemic risk has become wider known, Congress (owned by the central banks) is pretending to do something about them for the benefit of the show. One particularly pretentious, and yet ignorant, bought-and-paid-for Congressman, Barney Frank, took this pretending to a new level by introducing legislation to “real in” derivates that basically changed NOTHING! Of course he and the bankers know this, they don’t want real regulation or oversight of derivates as that would mean real and substantial deleveraging and they know that they economy would revert to a lesser leveraged state (appropriate and going to happen regardless):

Derivatives Lobby Links With New Democrats to Blunt Obama Plan

By Dawn Kopecki, Matthew Leising and Shannon D. Harrington

Oct. 9 (Bloomberg) -- As President Barack Obama vowed in a Sept. 14 speech in New York’s Federal Hall to correct “reckless behavior and unchecked excess” on Wall Street, Mike McMahon and Barney Frank sat in the audience discussing how to ease proposed rules for the $592 trillion over-the-counter derivatives market.

Side by side at 26 Wall St., across from the New York Stock Exchange, freshman congressman McMahon told House Financial Services Committee Chairman Frank he was worried that Obama’s derivatives plan, released in August, would penalize a wide swath of U.S. corporations and could push jobs in his home district overseas, McMahon said in an interview.

“It’s not just the farmers, and it’s not just the Wall Street guys,” said McMahon, a member of the New Democrat Coalition, a group of 68 self-described pro-growth Democrats in the U.S. House of Representatives. “It’s across the nation. American industry uses these products for a very useful purpose, which keeps down prices and makes consumer products cheaper.”

McMahon said Frank agreed it was important to protect so- called end-users, the corporations that rely on derivatives to hedge everyday operational risk, such as fluctuations in foreign currency rates, interest rates and commodity prices. The Obama plan would subject companies to higher collateral requirements whether they trade standardized or customized contracts. It also calls for most trades to be executed on an exchange or an “alternative swap execution facility.”

‘Working Together’

“He said we’d be working together on this,” said McMahon, who represents a large constituency of Wall Street workers on Staten Island and in southwest Brooklyn. “We never had a philosophical difference.”

It’s not just end-users who won concessions from McMahon and Frank. JPMorgan Chase & Co.,Goldman Sachs Group Inc. and Credit Suisse Group AG lobbied McMahon and fellow New Democrat Coalition member Representative Melissa Bean of Illinois, among others, to expand the ways the legislation allows dealers and major investors to trade the contracts, according to people familiar with the matter.

Bean’s spokesman Jonathan Lipman rejected the notion that the New Democrats made any changes to the bill at the behest of banks.

“New Dems have promoted strong regulatory reform that institutes trade and price reporting, capital requirements, and margin requirements, all of which puts mandates on these institutions that they don’t like,” Lipman said. “New Dems have been focused on increasing transparency, reducing systemic risk, and preserving the ability for end-users to hedge their risk.”

JPMorgan spokesman Justin Perras, Goldman Sachs spokesman Michael DuVally and Credit Suisse spokeswoman Victoria Harmon declined to comment.


The battle over derivatives legislation is a test for the Obama administration’s efforts to tighten financial regulation to prevent a repeat of the financial crisis that shook the global economy -- a crisis exacerbated by derivatives trading.

Frank, a Massachusetts Democrat who rose through the ranks in Congress fighting homelessness and advocating for gay and consumer rights, found his handiwork panned by administration officials after he released draft legislation last week that they criticized as too friendly to business. Frank’s bill allows for no change in how standardized over-the-counter derivatives are traded as long as they are reported to regulators.

Commodity Futures Trading Commission Chairman Gary Gensler and Henry T.C. Hu of the Securities and Exchange Commission said Frank’s “discussion draft” created too many loopholes and had the potential to exclude all hedge funds and corporate end-users from oversight.

Shrinking Spreads

The change could protect billions of dollars in profit for the dealers. When securities or derivatives are traded on exchanges -- where investors can see real-time prices, rather than indicative prices sent by e-mail in the over-the-counter market -- it can shrink the amount that dealers make on each trade, known as the spread.

“Having more discretion for the dealers in the regulations gives an extra benefit to them by staying away from narrower spreads,” said Darrell Duffie, a finance professor at Stanford University in California.

The top five U.S. commercial banks, including JPMorgan, Goldman Sachs and Bank of America Corp., were on track through the second quarter to earn more than $35 billion this year trading unregulated derivative contracts, according to a review of company filings with the Federal Reserve and people familiar with the banks’ income sources.
Real-Time Pricing

The banks are arguing that an exchange or trading-system mandate that publicizes large trades could make it too expensive or impossible to execute customer orders and hedge those trades at the same time, according to the people familiar. Publicized large orders may dry up the willingness of dealers and investors to buy or sell contracts, they said.

That argument might not get a sympathetic ear at the Commodity Futures Trading Commission. Its chairman has several times called the regulated platforms “electronic trading systems,” suggesting that U.S. officials may seek to require banks and investors to use them like exchanges with real-time, public pricing.

“People viewed it as tantamount to an exchange,” said Robert Pickel, chief executive officer of the International Swaps and Derivatives Association, a New York-based group that sets standards in OTC derivatives markets.

‘Into the Weeds’

While the concerns were raised through both Republicans and Democrats, “the New Democrats have played a central role here both in terms of interacting with the end-users but also being able to take that concern to Chairman Frank,” Pickel said.

A half dozen New Democrats pressed Treasury Secretary Timothy Geithner to expand the administration’s exemption for end-users in an Oct. 1 meeting.

“We got into the weeds on the derivatives bill,” said Connecticut Representative James Himes, a former investment banker at Goldman Sachs and a member of the New Democrats, who attended the meeting along with McMahon, Bean and chairman Joseph Crowley of New York.

Unlike Obama’s plan, Frank’s bill doesn’t require derivatives users or dealers to execute standardized over-the- counter contracts on a regulated exchange or trading platform, which would force greater price transparency. Instead, it gives them the option to decide if they want to use an exchange or a trading platform, or merely report the transaction to regulators by the end of the day.

“We’ve seen a steady parade of all of the big dealers, all of the major money-center banks have come through Congress,” Himes said in an interview.

In other words, the big banks are not going to let any real changes get passed. They don’t want limits or regulations, and they don’t want exchanges because they have the world’s largest market for debt cornered and they want to keep it that way.

This next article, out on the same day, describes how regulating derivatives WILL reduce “sorely needed liquidity.” No duh, too much “liquidity” (in the form of debt) has been and is the problem – yet they are fighting for more (and Barney Fife, err, I mean Barney Frank, is sure to give it to them, just like he gave them more access to FNM and FRE!
‘Maddening’ Derivatives Reform May Harm Loan Market, LSTA Says

Oct. 9 (Bloomberg) -- Proposals to regulate privately negotiated derivatives may reduce “sorely needed liquidity” in the high-yield, high-risk loan market, according to the Loan Syndications and Trade Association.

Draft legislation introduced on Oct. 2 by U.S. House Financial Services Committee Chairman Barney Frank may increase capital charges tied to derivatives known as total-return swaps, the LSTA said today in a weekly note to the 296 institutions among its membership. The swaps enable banks to pass on returns or losses from a pool of loans to investors.

“Derivatives reform is complex, maddening and esoteric - and is also quite important to the loan market,” the New York- based trade association wrote.

The draft House bill would direct bank regulators to require the firms to hold capital protecting derivatives trades from losses.

The highest capital requirements, while not defined, would be imposed for derivatives that aren’t backed by clearinghouses, which would likely include total-return swaps because they differ from deal to deal. “TRS, which are customized, could see punitive capital charges,” the association wrote. “In turn, this could reduce sorely needed liquidity in the leveraged loan market.”

Lawmakers should revise the draft to instruct regulators to set capital charges based on historic or predicted losses, Dave Hall, chief operating officer of Chatham Financial Corp. said in prepared remarks to the committee on Oct. 7.

The charges should not be “a penalty to discourage the use of OTC derivatives,” Hall said.
Of course having any capital requirements at all for derivatives is heresy to the central bankers! That would limit their profits! It would also mean that companies like AIG couldn’t write endless amounts of contracts with no money behind them in the event they are on the losing end. The current system is like a homeless, penniless man walking into a casino and using a multi-million dollar line of credit to gamble - if he wins he gets to keep the winnings and if he losses, oh well! There’s currently no difference between him and what AIG did other than the government will bail AIG out.

But Frank’s phony plan for show was too obvious, so yet another half-hearted attempt is being made. Obama always talks a good game, but the actual results never look anything like the talk sounds (remember executive pay limitations? Boy, did that sound good… what happened? NOTHING!). The same thing is happening with derivatives… he talks tough but his proposals have more central banker holes than Swiss cheese:

Derivatives Proposals in U.S. House Move Closer to Obama’s Plan

Oct. 10 (Bloomberg) -- House Democrats offered new proposals to regulate the $592 trillion over-the-counter derivatives market after Obama administration officials said an earlier plan left loopholes.

Representative Collin Peterson, head of the Agriculture Committee, presented his draft legislation yesterday. Hours later, Representative Barney Frank, chairman of the House Financial Services Committee, circulated among colleagues changes he had promised in an effort to “tighten up” the plan he announced a week ago.

President Barack Obama’s administration proposed regulatory changes in August, including imposing higher capital and margin requirements on derivatives markets and requiring certain contracts be processed through clearinghouses. The legislative proposals laid out yesterday hewed more closely to the overhaul sought by the administration than did the draft Frank offered on Oct. 2.

“Some of the perceived loopholes in the Frank bill, it looks like Peterson plugged a number of those up,” said Kevin McPartland, a senior analyst in New York at Tabb Group, a financial-market research and advisory firm, in an interview.

Maneuvering over the legislation is a test of the administration’s call to tighten regulation in an effort to prevent a repeat of the global financial crisis. Opaque financial products, including derivatives, have contributed to almost $1.6 trillion in writedowns and losses at the world’s biggest banks, brokers and insurers since the start of 2007, according to data compiled by Bloomberg.

Everyday Risks

House lawmakers say they are trying to protect so-called end-users, corporations that rely on derivatives to hedge everyday operational risks, such as fluctuations in foreign currency rates, interest rates and commodity prices. The Obama plan would subject companies to higher collateral requirements whether they trade standardized or customized contracts.

Frank’s original proposal would exclude companies if they use derivatives to hedge risk.

Gary Gensler, chairman of the Commodity Futures Trading Commission, told lawmakers Oct. 7 that the provision could free from oversight all hedge funds and corporations that use derivatives, including mortgage-finance companies Fannie Mae and Freddie Mac.

“Some of the stuff was inadvertent,” Frank said in an Oct. 7 interview. “We didn’t mean to undo this or undo that. It’s an ongoing process. Things go through many drafts.”

‘Significant’ Credit Losses

The revised draft that Frank, a Massachusetts Democrat, circulated among colleagues and staff at the Capitol would continue to exclude most corporations that use derivatives to mitigate operational risk. In the new version, derivatives users that are large enough to “expose counterparties to significant credit losses” wouldn’t be eligible for the exclusion.

Peterson’s measure would exempt all except the largest end- users from new disclosure, collateral and clearing requirements.

Peterson, a Minnesota Democrat, gave Gensler much of what he asked for in an Aug. 17 letter to lawmakers, including tougher execution requirements for standard contracts and the authority to regulate over-the-counter foreign currency swaps.

While this three-ring-circus continues to put on a show, Joe Stiglitz has the right idea in my opinion…
Stiglitz Says Banks Should Be Banned From CDS Trading

By Ben Moshinsky

Oct. 12 (Bloomberg) -- Large banks should be banned from trading derivatives including credit default swaps, said Joseph Stiglitz, the Nobel prize-winning economist.

The CDS positions held by the five largest banks posed “significant risk” to the financial system, Stiglitz said at a press conference in Brussels. Big banks should have extra restrictions placed on them, including a ban on derivative trading, because of the risk that they would need government money if they fail, he said in a speech today.

“We will have another armed robbery unless we prevent the banks, the banks that are too big to fail,” Stiglitz said. “We should say that if you’re too big to fail then you are too big to be. They need more restrictions, such as no derivative trading.”

Derivative trading and excessive risk-taking are blamed for helping to spark the worst financial crisis since World War II. American International Group Inc., once the world’s largest insurer, needed about $180 billion of government money after its derivative trades faltered and pushed the company toward bankruptcy.
Financial markets should be subject to taxes that will discourage “dysfunctional” trading and help pay for the effects that the global crisis had on poorer nations, Stiglitz said last week.

U.S. and European regulators have pushed for tighter regulation of the $592 trillion over-the-counter derivatives market, amid concerns that it could create systemic failures in the financial system. Lawmakers have called for global rules covering derivatives to prevent financial institutions from exploiting jurisdictional differences in regulation.

Stricter Standards

Former German finance minister Hans Eichel said in an interview today that global regulation would ultimately be needed. The European Union should enforce tougher legislation, even if the U.K. is reluctant to adopt stricter standards, he said.

“The Eurozone is strong enough economically to go it alone,” Eichel said. European legislation could then become the blueprint for global rules, said Eichel.

Stiglitz is right, but even he doesn’t go far enough. There is almost no useful purpose for derivatives in our society, in fact they almost all work against society and thus should not be allowed… at all, and especially for Cap & Trade. Yes, this would mean deleveraging and that is exactly what needs to happen to return to a sane world of finance.

One argument for derivatives goes that they make doing trade easier… for example, the company that does business with another large company, say to transport their goods, might “cover” or “hedge” a large contract with credit default swaps that would pay off if the company they are doing business with should go under, thus reducing their risk!

What they fail to realize is that the company they are buying this “insurance” from is not regulated and has no assets to back up the “insurance” they are selling! Thus it’s a FALSE SENSE OF SECURITY, and in fact it produces a systemic risk and is a moral hazard to boot!

How about this… if they need insurance, buy insurance from a real and regulated insurance company? Or, how about this… if they are doing business with marginal companies, perhaps they should spend more energy getting to know who they are doing business with and assess their economic condition PRIOR TO entering into business with them! How quaint, I know!

They will kick, and scream, and argue, and sadly it’s true that nothing will happen to end their fraud… that’s because they create money from nothing but cut the politicians in on their schemes at the exclusion of everybody else.

What’s happening in this “shadow banking” world is extremely important. It’s the reason most economists and supposed experts have been wrong about the economy and markets and it’s why they will be wrong going into the future. The world of derivatives, despite kicking and clawing, is getting smaller. That’s because the limits of the exponential math were reached. They were so good and so fast at pulling everyone’s future earnings into the here and now, that they quickly reached the point that incomes can no longer support the debts. And now that they have the government using your money to keep the bankers going, the government is likewise now in an impossible math situation where future income cannot possibly pay back current debts. Devaluing the dollar will not work, there is no solution other than to do the right things – shrink the size of government, reduce spending and work to balance the budget. How do we accomplish that in reality? It’s going to take some serious event, that’s for sure – I’d sure like to see the end result be the separation of corporations and their money from state. It would be a lot easier to say “NO” to the banksters when your job doesn’t depend upon it!

Derivatives were engineered by people desperate to keep never ending credit growth on a growth path. Cap and Trade is invented by the same desperate types born in the same paper shuffling non-productive industry.

The Eagles – Desperado: