Saturday, January 23, 2010

Weekend Update…

It would appear that we are at an important juncture in the markets. I wish I had more time to work on and report on technical analysis for you, but I am choosing instead to focus my attention on trying to enact change. I am still organizing volunteers, developing the new website, and working on strategy. Again, any help along those lines is appreciated.

Friday was an 87% down day on the NYSE by volume.

The DOW lost 217 points on the day, 572 points top to bottom for 5.3% on the week.

The S&P lost 25 points on the day, 60 points top to bottom for a 5.2% loss after topping at 1,150.

The NDX lost 55 points on the day, 105 points top to bottom for a 5.5% weekly loss, and the RUT performed slightly better.

The major uptrend lines are clearly broken and the topping technical patterns we’ve seen develop, namely the smaller rising wedge and expanding megaphones, proved prophetic and are now obviously confirmed.

Next week there is a lot of important data coming out with the 4th quarter GDP being the most important. Expectations are north of a trumped up and laughable 4% plus. There will also be the FOMC meeting beginning on Tuesday.
Of course the battle of Bernanke’s reconfirmation rages. This is nothing but a distraction from my perspective. The puppet gets played by the puppet masters and the media and people are all confused, worked up, and distracted from the bigger and more important reality. That being that it doesn’t matter who is running the Fed, they work for the central banks. Replacing Bernanke won’t fix anything, ending the Fed and our debt backed system will. Keep your eye on the debt and the purveyors thereof.

Here are the games being played:
NEW YORK (CNNMoney.com) -- With only a week left before Federal Reserve Chairman Ben Bernanke's term ends, the Senate lacks the 60 votes to force a confirmation vote.

And the White House and Senate leaders are starting to scramble, as more Democratic senators say they plan to vote against giving Bernanke a second term as Fed chief.

Sen. Barbara Boxer, D-Calif. and Sen. Russell Feingold, D-Wis., both said Friday that they plan to vote against Bernanke. Several other Democratic senators told CNN they're undecided.

"It is time for a change -- it is time for Main Street to have a champion at the Fed," Boxer said in a statement. "Dr. Bernanke played a lead role in crafting the Bush administration's economic policies, which led to the current economic crisis. Our next Federal Reserve Chairman must represent a clean break from the failed policies of the past."

But the Senate can't even start the process of considering Bernanke until 60 senators sign off, because a few senators who oppose his confirmation filed official "holds" delaying the process.

The math to 60 -- at this point -- looks bad for Bernanke," wrote Chris Krueger, an analyst for Concept Capital Washington Research Group in a report. "Chaos is reigning on the Hill right now and Democratic members are in severe anxiety over their own re-elections."

Some are really starting to wonder whether Bernanke will be confirmed before Feb. 1. If the vote is delayed, there's a question as to whether Bernanke can be temporarily re-appointed as acting chair. If not, Fed Vice Chair Donald Kohn would serve as acting chairman.

Senate leaders were unsure Friday how the votes were going to play out or when they'd start the procedure to force a vote.

Again, this is a distraction, look up and you will see the strings. Look down and you will see our chains being pulled. Darn, those shackles are really beginning to hurt! Oh yeah, we know when our chains are being pulled and you knew it was coming the day of Goldman’s record profit announcements (bad cop) that was obviously coordinated with Obama’s slap down routine (good cop). Pleeesssse.

Surprise! The market goes down hard. Who could have guessed? Now we have to figure out the next stage of the game, and make no mistake, they are playing games in what has become the world’s largest unregulated thug casino.

If you got short on a break of that megaphone, about 1,130ish, congratulations, I hope you were wise enough to take some profits into the close yesterday. The short term stochastics are WAY oversold, a place were we could receive EITHER a rip roaring rally on Monday, or a continuation of downward motion crash style. This is the danger zone – room on the daily stochastic, below the bottom Bollinger, fresh sell signal on the weekly charts, but very oversold short term. Bounce or crash – with this setup there’s usually not a lot in-between. All out crash is a very low odds event, but the action looks very bearish and the doorway can get awfully small awfully fast. Hard down on Monday could lead to an intraday reversal, so be careful. Reconfirmation of Bernanke, or at least proceeding forward on a vote would likely be considered bullish, and visa versa.

The DOW is down more than 500 points off the high, remember that the last 3 times we received VIX sell signals that we had selloffs of 1,000 points or more over the course of the next several weeks. Once again that signal was prophetic. In case you are wondering, do not expect a Hindenburg Omen for quite some time. This is due to the fact that stocks are so far off their 52 week lows that it will take a lot of that action to produce new lows. Although I do note that many names have given back sizable chunks already, selloffs are coming on relatively good earnings, another sign of a major top.

I’m noticing that the Elliott Wave people I follow are all in agreement on the short and mid term. It would seem that we are beginning wave C or wave 3 down depending on their primary wave count. Whatever they label the move, they are all expecting a sizable move. Prechter is looking for 1,000ish on the DOW, that would be a giant Zig-Zag. McHugh is looking for the same but is open to a flat type of formation or a Zig-Zag towards zero. And Tony Caldaro is looking for a flat type of formation that would likely double bottom near the March ’09 lows. I think it depends on events between here and there, there are still choices to be made and hopefully we can help give a kick in the pants so that those choices are good ones. I am keeping my eye on the debt, that is the tell for progress or lack thereof.

Heading over to the charts, the SPX just rammed through support in the 1,115 area and landed on the next level of support just above 1,090. You can see it’s well below the 50dma, well below the bottom Bollinger, and nearing oversold on the daily. Again, the weekly chart just produced a fresh sell signal. The support pivots are right here at 1,090, and then not again until 961 where there is a massive volume void, an area that may draw prices towards it if the heavy support is broken in the 1,080ish and just below area. That 1,080ish area is the next key location:



On the SPY you can see the same detail but note the volume. Much higher and confirmatory volume. What is different about this descent is that the first volume spike was followed up by the second. That has not happened during this entire B wave rally:



The DOW is actually a little more bearish looking than the SPX at this point, having broken beneath the entire previous support shelf:



Next up is a one year non log chart of the DOW. Clearly the large rising wedge and uptrend line are broken, there is no denying that. This is a good perspective of the continuous 10 month long volume divergence and 6 month long RSI divergence – both are historic. Prices on the DOW are already back to where they were in mid October:



The DOW Industrials triggered a triple bottom breakdown flipping the prior bullish target to bearish with a 9,650 initial target:

DOW P&F:


The NDX also has a bearish target but that initial target was already reached. The Wilshire 5,000, the widest market index, produced a bearish target also that is quite a ways down:

WILSHIRE:


As is typical at major turning points, there was a non-confirmation between the Industrials and the Transports near the top where the Industrials made another new high but the Transports did not. Below is a one year chart of the Transports, uptrend is now clearly broken:



The XLF made its high for the rally way back in October, made a new double top and is now being rocked once more with very heavy volume selling despite positive (trumped and casino manufactured) earnings. A break below $13.70 is very bearish:



The dollar is in either leg 3 or c up, stalled slightly, but still looking to target 81ish with a potential gap fill up to 82. After that we’ll have to evaluate later. According to Prechter the dollar is beginning a longer term uptrend:



You can see the opposite happening in the Euro which is targeting roughly 1.35 on this current leg:



The Japanese Yen has actually been strengthening a little, that will wind up hurting the Japanese who need it to continue to lose value.

Troubling is that as equities are selling off hard all of a sudden, bonds are rising a little, but not strongly. This is what I’ve been expecting, that as stocks decline, bonds prices flatten or go up a little, but during times that stocks go up, bonds prices drop dramatically, thus ratcheting their way up in yield.



Oil has again broken below support, a bearish looking breakdown:



Gold is trying to find support in the $1,080 area and held up relatively well on Friday compared to the rest of the market. Should it break support in that area, the next support level is down around the $1,030 area, and then just under $1,000.



The XAU is oversold and landed on up sloping support:



The Point & Figure chart pattern for gold is targeting $930:

GOLD:


Of course the pundits will be saying the correction is healthy... And at some point we’ll bounce, but my suspicion is that the new higher high may not be there for quite some time. Again, Monday is a dangerous day either way, so please be careful as desperate people do desperate things, that includes central bankers who own quant computers.

Below is the latest version of Monetary Trends:

Monetary Trends 2-10

Note the wild swings that are now appearing on the CPI chart. Those are lagging the wild swings elsewhere, like in equities and oil. Do they now get the wild swings under control, or do they swing larger until the system breaks? I say it breaks:



Consumer credit is still falling and take a look at non financial commercial paper, now down nearly 50% on the year? Wow.



Total Loans and Leases as well as Commercial and Industrial loans at commercial banks continue to decline:



The trailing P/E is back to another all time record high just under 150. This is the historical number guys, do not believe for a second future forecasts or P/E’s that are based upon “operating” earnings where the latest trick is to take “one time” huge write-offs under another name each and every quarter. This number should come down as the current earnings season progresses, but it will be nowhere near normal historic levels:



Below is the latest M2 expressed in YoY change in billions. M1 and MZM look similar:



Below is YoY change in institutional money funds:



Retail Money Funds:



Oh yes, we could go on and on, but I’ll leave it here for now. Enjoy your weekend… but don’t fear the equity market Reaper, in this instance change is good.

Blue Oyster Cult – Don’t Fear the Reaper:

Friday, January 22, 2010

Morning Update/ Market Thread 1/22

Good Morning,

Equity futures are mostly flat to down a little in the overnight session, DOW and S&P activity are shown below:



The dollar and bonds are roughly flat overnight, both oil and gold are down some more. Oil is back into the $75 range and gold is approaching the $1,080 support level, there’s more support for gold about $1,050, then again at the $1,000 level. We are definitely seeing deleveraging of the speculative plays.

Amazing how fast it comes off, isn’t it? More than 400 points on the DOW and 44 on the S&P gone in just the past couple of days. Pretty bearish action overall, the volume is much heavier on these down moves than on the up moves. Remember, volume confirms price. There was, and still is, a historic divergence in place with volume shouting that the primary direction is still lower.

Yesterday Obama got up and supported “the Volcker Plan” whose stated intention would be to limit commercial banks to staying only in banking and out of the hedge fund and speculation business! That would be terrific and should have happened a looooonnnng time ago. This is the very reason our markets have been completely taken over by them and their massive computers. But the worst part is that they have been using YOUR money to trade against YOU. So YES, absolutely, commercial banks have NO business speculating and levering up.

Now the real questions are; do they mean it, can they implement it, and if they do, are there going to be so many loopholes that it effectively means nothing but allows the Administration to look tough once again? Well, we need simply look at the past year and what is a clear trend is Obama standing up and delivering a beautiful oration with the correct principles, but then the action never materializes. Again, the timing of the announcement yesterday on the same morning as Goldman’s earnings was absolutely orchestrated to play the public. I DON’T ENJOY BEING PLAYED, do you? In fact I’m sick of it.

Since everyone has probably seen the mainstream twist on the proposals, I want to share an alternative perspective from Business Insider:
Big Banks Have Already Figured Out The Loophole In Obama’s New Rules

John Carney
Jan. 21, 2010

Big banks have already begun poking the holes in Obama’s new rules—holes they expect their banks to pass through basically unchanged.

The president promised this morning to work with Congress to ensure that no bank or financial institution that contains a bank will own, invest in or sponsor a hedge fund or a private equity fund, or proprietary trading operations unrelated to serving customers for its own profit.

But sources at three banks tell us that they are already finding ways to own, investment in and sponsor hedge funds and private equity funds. Even prop trading seems safe.

A person familiar with the operations of one big Wall Street bank said it expects that new regulation will affect less than 1% of its overall business.

The key phrase is “operations unrelated to serving customers.” The banks plan to claim that much of the business in which it engages is related in one way or another to serving customers. Even proprietary trading, for instance, can become related to customer service if it is done through internal hedge funds in which some outside clients are permitted to invest.

One insider at a bank pointed to JP Morgan Chase’s ownership of the hedge fund Highbridge Capital. It is thought that under a strict “no hedge funds” rule, Highbridge would have to be sold off. But under the rule proposed by the Obama administration, Highbridge can be retained by JP Morgan because outside clients are permitted to invest in it.

A still more devious way is to have a banks own employees be the customers who are invested in the internal hedge funds. That way trading operations can remain closed to outsiders while the regulatory requirement of relating the trading to customer service is met. Goldman Sachs is rumored to be considering this approach. (Goldman isn't commenting on the regs right now.)

“This thing is about showing the public that Obama is standing up to Wall Street. So the rhetoric is heated. But the implementation will require far less change than people think right now,” a person familiar with the thinking at the upper echelons of one of our largest banks said.

“The market is getting this wrong by selling off the megas,” a person at another bank said.

So, there are many who believe that it simply will not come to pass and then there are those who believe if it does come to pass you can drive a truck through the loopholes. The power structure of America is simply turned upside down, again, until that is changed we will continue to pay the price for it.

It's difficult to know what's real and what's Memorex in these markets, that's for sure. That's why technical analysis is so important. Forget what they are telling you, what is the volume pattern telling you?

Then there’s the possibility that if Obama is really going to support Volcker and really lets him get in there and close up the loopholes, then the banks with their money and computers will just flip the direction of their bets changing the direction to down to pressure Obama until he shouts "Uncle." It works nearly every time, and it's worked that way throughout history every time the bankers get in charge of creating this nation's money. Again, this is why what’s so important is WHO controls the quantity.

And yesterday a huge decision was handed down by the Supreme Court that got very little play in the media. Hmmm… wonder why? Could it mean more money for them? Hmmm.
WASHINGTON (AP) -- The Supreme Court has ruled that corporations may spend freely to support or oppose candidates for president and Congress, easing decades-old limits on their participation in federal campaigns.

By a 5-4 vote, the court on Thursday overturned a 20-year-old ruling that said corporations can be prohibited from using money from their general treasuries to pay for their own campaign ads. The decision, which almost certainly will also allow labor unions to participate more freely in campaigns, threatens similar limits imposed by 24 states.

It leaves in place a prohibition on direct contributions to candidates from corporations and unions.

Critics of the stricter limits have argued that they amount to an unconstitutional restraint of free speech, and the court majority apparently agreed.

"The censorship we now confront is vast in its reach," Justice Anthony Kennedy said in his majority opinion, joined by his four more conservative colleagues.

However, Justice John Paul Stevens, dissenting from the main holding, said, "The court's ruling threatens to undermine the integrity of elected institutions around the nation."

Justices Ruth Bader Ginsburg, Stephen Breyer and Sonia Sotomayor joined Stevens' dissent, parts of which he read aloud in the courtroom.

The justices also struck down part of the landmark McCain-Feingold campaign finance bill that barred union- and corporate-paid issue ads in the closing days of election campaigns.

Advocates of strong campaign finance regulations have predicted that a court ruling against the limits would lead to a flood of corporate and union money in federal campaigns as early as this year's midterm congressional elections.

The decision, written by Justice Anthony Kennedy, removes limits on independent expenditures that are not coordinated with candidates' campaigns.

The case also does not affect political action committees, which mushroomed after post-Watergate laws set the first limits on contributions by individuals to candidates. Corporations, unions and others may create PACs to contribute directly to candidates, but they must be funded with voluntary contributions from employees, members and other individuals, not by corporate or union treasuries.

Can’t think of a worse thing to do for America than to allow corporations to spend unlimited funds on campaigns! This is 180 degrees out. Again, the power structure is already upside down, this only cements it there and makes it far worse. Of course individuals cannot compete with the money these large special interests are able to generate. There is NO balance of power, and that statement is true right through the judicial system.

Notice that they limit contributions to PACs, but meanwhile corporations and other large special interests are spending unlimited funds on lobbying and in support of political campaigns. This is making people slaves to these interests instead of making those entities work for the people. The very purpose of corporations and allowing capital to concentrate has been lost.

Freedom of speech? Are corporations and other business entities really people with the same rights in that regard? We need to find some type of balance in this matter, and I believe that the political reforms suggested in Freedom's Vision would help to balance that structure out fairly without putting onerous restrictions on business, and in fact the other provisions would greatly help and support business by clearing out large portions of the debt that is choking our economy.

With a large percentage of earnings from gambling in the marketplace, the negative implications for the big banks of Volcker’s proposed limits really hit the financials yesterday. Many think this is overdone. Here’s a 6 month chart of the XLF, you can now see what looks like a double top in place and note the very heavy volume on the sell off yesterday:



Remember, the large banks are still riddled with bad debt and they are still hiding toxic derivatives all over the place that have been mispriced via deceptive accounting practices and mark to model. Well, if that’s all they have, it isn’t much is it? Oh yes, they still have very wide spreads to arbitrage, but how can they take advantage of that when all their potential customers are already saturated with their poisonous debts? People don’t want and can’t service more debt, and the banks look at them and finally realize that you can’t just give debt away to just anybody.

And yet the pundits are telling you there’s never been a better time to buy the banks, that they are a steal, a bargain.

A general pattern is emerging with earnings coming out. Some are strong and are beating estimates, these are mainly tech companies and financials with their gambling profits and mark to fantasy accounting. The trend here is that on the beats they are being sold hard anyway. This is another indication of topping behavior. The other trend is that things in the REAL non high tech world are NOT doing well. Cargo and transportation is down below the levels of last year. GE reported a beat, but sales fell 10% year over year and “fourth- quarter net income attributable to GE fell 19 percent to $3.01 billion, or 28 cents a share, from $3.72 billion, or 36 cents.” GE is actually up about 3%, one of the few companies to actually increase on their down 19% “beat.”

Now let’s look at a discretionary consumer item, Harley Davidson Motorcycles. Here is where we find the debt saturated citizen motoring into the proverbial debt wall. Remember that Buffett just threw big money into Harley last year. How are sales? “Sales fell 40 percent to $764.5 million.” Forty percent! After falling off a cliff the year before that? No wonder I am getting so many emails spamming me about their sales. “The loss of $218.7 million, or 94 cents a share, compared with net income of $77.8 million, or 34 cents, a year earlier.” Again, this is the real economy here not one that is marked to any model and a drop in sales of 40% in one year says it all.

Can’t you just see the psychology at work? Isn’t this exactly the psychology that played out during the Great Depression? A 50+% retrace, oh we’re saved, ohhh what’s happening, oh it’s only a correction, 10 to 20% is healthy, see it’s coming back, well maybe just another couple percent correction, not to worry it’s coming back, ahhh what the heck just happened?

Wave C During the Great Depression:


It’s called debt saturation, it’s what occurs at the peak of a credit (debt) bubble when incomes are no longer able to support even more credit. The banks managed to super saturate the entire globe with debt.

It’s simple from here. If they want this debt backed money game to continue, then they must let enough debt default through deflation that they can then do it all again. If they are not smart enough to allow deflation to continue, then they are simply ushering in a new money system. That is obviously the path we are headed down just observing their actions and the math at play.

So what’s going on technically right now?

In the very short term, like 60 minute time frame and down, the oscillators are all oversold meaning that we could see some sideways or bounce to work that off. However, that’s going up against what looks like it could be a wave 3, possibly of wave 1 down of C down. Here’s a 60 minute chart of the SPX, you can see that we have just fallen beneath what was support back into the area that was the sideways zone where we spent so much time. That means the volume support in this area is heavy:



Here is a 3 month daily snapshot of the SPX at the close yesterday, it was sitting right on support after having convincingly broken down from the megaphone pattern I had been showing. Note, too, that it closed just above the 50dma and the bottom Bollinger as well:



The DOW actually closed below the 50dma and below the lower Bollinger, a place that means we probably need a break to give the Bollingers and oscillators time to catch up to the action. Note the fresh sell signals on the daily oscillators and the heavier volume:



Here’s a 6 month chart of SPY, the S&P 500 ETF. Yesterday’s volume was the heaviest on this chart. If you draw a horizontal line from yesterday’s close back in time, you will find that we are now already back to the same price level we were at in mid November:



And here’s a chart of the VIX. Note that we closed above the upper Bollinger yesterday and are continuing to push it up today. Very bearish action, remember this follows the VIX market sell signal we received, that was a very important clue, wasn’t it? Those who were long and did not listen are paying the price:



Events are unfolding quickly. More deleveraging in Europe, Portugal being the latest to have their debt come under heavy pressure as the waves continue to propagate from Dubai, Greece, the Baltic States, etc. Those who were thinking we were in the clear, simply were not logically keeping their eyes on the debt and on the math thereof.

Supertramp – Logical Song:

Thursday, January 21, 2010

VELOCITY ZERO - Yet Ripples Propagate Through Time…

Velocity Zero
To download a .pdf for printing, please click here.



VELOCITY ZERO -Yet Ripples Propagate Through Time…

Please allow me the discretion to begin this discussion seemingly far removed from the primary topic of Velocity Zero. Not to worry, we will circle back around.

You see, my last surviving grandparent, Marion Temple, passed away this past weekend. She was the quintessential grandmother, the perfect one with the gumdrop jar on the counter in which little hands were welcome. She made it to 90 years of age living independently on her own terms and passing on her own terms too. She was a model American of the 1950s era, and could have played the part of June Cleaver, today’s Martha Stewart, or yesteryear’s model on the black and white television introducing the latest in modern appliances and time saving conveniences.

An interesting note about her is that she worked for 33 years at Chaffee’s department store in Everett, Washington. Chaffee’s was then like Nordstrom’s is today for that area. She retired after all those years and began drawing her defined benefit monthly pension. Not more than six months after retirement, and after dedicating the prime of her adult life to the store, they went bankrupt. With no P.B.G.C. at the time, she never received another penny of her benefit plan, living her later years certainly not at the standard she deserved. And yet she found a way to send money to a grandchild in business and flight school. Splash, a Ripple propagates through time.

Her passing, of course, leads to introspective thinking. Again, please allow me some latitude.

It occurs to me that everything in nature is made up of energy and ALL energy moves in cycles and waves, passing from one state to the next. Modern theories even tie energy to the force of gravity. A person carries with them a “life force” if you will; it is their being, their energy, their soul, or what have you. But no matter what you believe – each person, and their energy, interacts with all the other people and energy, influencing others along the way. That influence ripples through time. My grandmother’s energy and influence will ripple through time for centuries, through me and through her other grandchildren, and great grandchildren.

When Freedom’s Vision has a profound effect on society, her life force will have contributed greatly to its success, and yet she may not have realized the role she played.

The same is true for everyone reading this. You all have roles to play in the shaping of America. Many of you feel that implementing change is beyond your power or is even beyond our collective power. It is not. The change that is coming will be forged by you and the direction in which you cast your ripples through time.

Everything in nature moves in cycles, the markets and economy are no different. Yet we can’t currently model the economy effectively because current beliefs are built upon so many half truths and totally false notions. Also because the data we use to measure the economy is now skewed beyond recognition. Scientific research in the field of economics is nonexistent not because it’s not possible, but because it would provide transparency and hinder the current power structure’s insider advantages. Not taught about economics or money in school? No money for research? Gee, ever wonder who sets those priorities?

This lack of priority, in turn, fosters a lack of understanding of how our money system is backed by debt and controlled by central bankers. This, I believe, has caused the entire world economy to become “DEBT SATURATED.” The current crop of politicians and mouthpieces do not understand the concept of debt saturation. Debt, of course, is leverage that pulls future earnings forward in time. Splash, ripple.

Anyone who has ever Spent Time with the Good Dr. Bartlett knows, things that grow over time compound upon themselves and eventually that growth will lead to an exponential rise and parabolic shaped curve. That is currently happening to our money and to our debt. Below is a classic parabolic shaped curve, that of the Total Current Public Debt which is now more than $12.2 Trillion:



All exponential growth eventually ends with the curve collapsing. That’s just a fact of nature, our money system is no different, and eventually this curve will begin to roll over just as the following chart of Household Credit Market Debt Outstanding is now:



Another classic parabolic shaped curve, household debt came very close to reaching $14 Trillion before rolling, and rolled it has. Most parabolic rises result in collapse down to the base of the beginning of the parabolic move. Will these curves collapse to that extent? Well, what matters for debt is the ability of incomes to support it – not GDP or anything else! What’s happening to people’s income? Stagnant or down. Here’s the same chart showing how dramatic the fall off in Household Credit (Debt) has been over the past couple of years:



More than $1.5 Trillion removed top to today. This is what happens when incomes can no longer support the debt, and this is with interest rates at all time historic lows.

What’s happening to our own government’s income? Crashing, having fallen $400 Billion in the past year alone, and nearly $800 Billion in the past two years:



The velocity of money is simply an expression of how fast money moves through the economy – in other words, how many hands possess it in a given time frame. When debt levels are low, adding debt (new money) works to accelerate economic activity. But when debt levels near the saturation point, then the VELOCITY of money begins to tumble. This is only common sense. When any entity has the maximum amount of debt that their INCOME can support (with legitimate and conventional financing), then adding more debt onto that entity can only result in a future default. That is the definition of Debt Saturation.

Once saturation is achieved, then any entity receiving new money, through whatever means, MUST use that new money to service existing debt. In other words, new money simply circles right back around to the bank to service prior debt – zero velocity. Yet, DEBT is not even a component in most of economic theory’s major calculations, velocity is one! Here is a typical two page paper that presents the classic money quantity equation with velocity formulas taught at many business schools and most economists are familiar with – don’t be frightened, I show these formulas only to demonstrate that major components of REALITY are missing:



Do you see where the quantity of debt is any part of those equations? Well you might be surprised to know that these equations, such as the income equation MV = PY [M(oney supply) V(elocity) = P(rice) Y(eild)], which is an offshoot of the classic monetary exchange equation MV = PQ where;
• M is the total dollars in the nation’s money supply
• V is the number of times per year each dollar is spent
• P is the average price of all the goods and services sold during the year
• Q is the quantity of assets, goods and services sold during the year
…are straight line calculations that do not vary as debt enters into the equation. That’s because debt is not a part of the equation!

Below is the most recent chart of money velocity produced by the St. Louis “Federal” Reserve. These velocity reading have not been this low since the Great Depression:



MZM is currently the most broad money measurement, M2 is the second largest.

Related to velocity, the “Multiplier” measures the banking system’s ability to multiply new money using their fractional reserve ability. To my knowledge, the M1 multiplier has never been lower than it is right now:



For the uninitiated, M1 is: “The sum of currency held outside the vaults of depository institutions, Federal Reserve Banks, and the U.S. Treasury.” It is much narrower than M2.

The “monetary base” is an even more narrow measurement than M1 that measures currency, coins and the banks’ required reserves. It is what most people think of when they think of money, but is, in fact, a very small percentage of the actual overall money supply. To say that the velocity of the monetary base has stalled is an understatement of massive proportions:



Of course attempting to force more debt into a fully saturated system can only result in lower real velocity and also rising unemployment! This is deceptive because the relationship changes as more debt enters the system… there is a phase transition that occurs as the saturation point nears. That transition has lulled the “Keynesian” or neo-classically trained economists into believing that their debt money stimulus ways are successful. And they have generally worked up until now, but the phase transition has already occurred now that all levels of the economy are saturated.

This relationship between debt and employment has not been recognized because of the non-linear relationship. However, again if we apply some common sense, then we will understand that once debt saturation occurs, attempts to force more debt into entities will not produce more employment, it will produce less as the burdens of carrying and servicing prior debts stalls real economic and thus job growth.

Note that we have lost 6 million jobs in the past year alone from the civilian employment rolls, not the “2 million jobs saved” as claimed by our current administration who has taken the art of spin a little too far:



One reason they are able to claim an unemployment rate of only 10% (comparable historical figures are double that) is that people are leaving the working environment in groves causing the civilian participation rate to plunge:



Funny that the shape of this curve is the exact opposite of the debt curves above. This is not a coincidence.

Here are the charts that back the assertion that saturation has been reached. This first one shows the diminishing GDP returns from each dollar of new debt and runs through the end of 2008:



The above chart is based on yearly Z.1 data from the Treasury. The trendline is clearly targeting the year 2015 as the time at which each new dollar of added debt produces ZERO positive impact on GDP (Gross Domestic Product). This relationship is not tracked by the Fed as far as I’m aware, yet it is a critical measurement for an economy whose money is entirely debt based (only exception is coins). Fortunately I have a friend named Christopher Rupe who plots the data quarterly and there is a very unpleasant break of trend that occurred in the 3rd quarter of ’09 – you might even call it a phase transition. Again, this chart is a simple function of GDP growth over debt growth. The Q3 figure is NEGATIVE 15 cents:



That’s right, for each dollar of new debt produced it SUBTRACTED 15 cents from GDP. That is overall economic debt saturation, it has been reached. This is the result of the phase transition in the way the economy now behaves to more debt based stimulus.

While the Fed’s velocity formula produces a still barely positive number, the velocity of new debt is now subzero. By extension, since most money is backed by debt, the actual velocity of money is also for all practical purposes zero. This is no small or minor detail! It is the end, the limit has been reached. This is exactly why our Fed has had to resort to buying up trillions of dollars worth of GSE mortgage debt and has been buying our own debts via “quantitative easing,” otherwise known as money printing or what I prefer to call piecemeal default. However, that method of default does NOT cleanse the debt from the system, and arbitraged wages (competition from overseas) means that servicing more debt becomes impossible.

If that were not enough, there is also a crisis coming in upper-end housing that is going to rock the banks just as hard as subprime did. Of course this is in addition to CRE problems, states who are running out of money and the list goes on and on. Here is the latest version of the option-ARM reset chart, you can see that we are in the valley now:



Think back through your knowledge of history and recall how many currencies have ever reached the point where the base unit of expenditures reached into the Trillions. In just one lifetime, since our money became backed by debt, the units of government expenditures have risen from the thousands, to millions, then billions, and now onto trillions. What currency has ever survived to the next step in the progression, quadrillions?

NONE.

Zimbabwe was the last to attempt it. They reached the quadrillions, but their monetary system did not survive. There have been no exceptions, and obviously the Dollar will not be the first.

Why have the politicians allowed our money system to get to this point? That is at the heart of why it is incumbent upon us to separate special interest money from politics.

Why should you support Freedom’s Vision?

Because without intervention our country’s current monetary system is rapidly headed into dustbin of history. And I am certainly not the only one who sees massive change ahead. Author Mark Hodgins just published a book titled The Great Reset.

I just finished reading his book and can tell you that he is on the same page. It’s a swift 192 page read that walks you through what’s happened, what is happening, and what is going to happen – The Great Reset! Here’s hoping that Freedom’s Vision will be the way in which The Great Reset does happen! In fact, Mark is a public supporter of Freedom’s Vision and is joining in with many other notable supporters who will all be listed on our new web site. If you’re interested in learning more from Mark’s book, you can pick it up at Amazon.com by following this link to The Great Reset.

Make no mistake, failure to act now means that we quietly sit by and watch the coming historic events unfold. Instead, we can stand up the way that Americans do and ensure that we remain in control of our own destiny. The height of crisis is not a time that we will be thinking clearly about the roots of our problems, it is a time that people act emotionally, the exact opposite of what is needed for a superior outcome. However, with crisis comes opportunity and a historic opportunity is upon us.

“The Chinese use two brush strokes to write the word 'crisis.' One brush stroke stands for danger; the other for opportunity. In a crisis, be aware of the danger - but recognize the opportunity.”
John F. Kennedy (1917 - 1963)
Deleveraging the bogus “paper economy” gives the world an unprecedented one time opportunity to turn the deflationary forces of clearing out the leverage into a counter force and directional change. Our world economy is built on an unsustainable platform of debt and leverage. One way or another, this over-leveraged system is going to be replaced by something else. Those who believe in the march of human freedom have a historic opportunity to guide humankind into a new money system which is sustainable because it is just.

Freedom’s Vision is a program that realistically controls the quantity of money, allowing the monetary needs of the world to be satisfied, while also allowing the prices of goods and services to remain steady overall and over time. Real economic growth is thus enabled, but growth in prices is not. Shocks are absorbed, but then cleansed. In this way, a dynamically stable and enduring system is built and is passed on to future generations.

SPLASH! We must cast our collective ripples through time, creating a tsunami of change!

Love you Grandma, our ripples will meet again…

Somewhere over the Rainbow - Eva Cassidy:



Artwork by AZ Rainman

Morning Update/ Market Thread 1/21

Good Morning,

Equity futures are lower again to flat this morning but the 1,133 pivot is still supporting prices so far, here’s the overnight on the DOW and S&P:



The dollar is higher at new recent rally highs. It appears as if the dollar has begun either wave 3 or c up, and thus we can expect something that’s probably at least equal in size and duration from the first leg up. Bonds are up slightly, but are already up against the upper Bollinger band. Oil is up slightly, gold continues to correct, and the Euro continues to fall.

Ebay reported good earnings and is higher following their report. The NDX is managing to fare better overnight than the rest of the indices, and is about level.

The big report was, of course, Goldman Sucks, err Sachs, who swung from a $2.12 billion loss the year prior to a $4.95 billion, or $8.20 per share profit! Sweet! Thank you Uncle Sugar! Looove that Ferrari. And da fools on the Street were looking for only $5.18, what were they thinkin’? Don’t they know that we own D.C. and also control the world’s markets? Really…

But someone is yanking on my chain and I don’t really like it because I know when there are games being played and there is definately a game being played this morning as President Obama, just coincidently, oh yeah, a total and complete coincident that it’s on the morning of Goldman’s blowout $1.65 BILLION PER MONTH report (wonder where your money went?), comes out with the following:
NEW YORK (CNNMoney.com) -- Later this morning, President Obama is expected to publicly give a thumb's up to a message that former Federal Reserve chief Paul Volcker has been saying for a year: Let's limits the big banks.

Volcker, an economic adviser to Obama, is set to join the president Thursday in announcing measures to narrow the "size and scope" of banks and their investment activities, according to a senior administration official.

Details were scarce, but Obama is expected to propose higher capital requirements for some financial products like derivatives, preventing commercial banks from trading for their accounts and limiting or preventing bank investments and ownership in hedge funds, sources said.

The proposals are mostly aimed at the nation's largest banks including J.P. Morgan Chase (JPM, Fortune 500), Citigroup (C, Fortune 500), Bank of America (BAC, Fortune 500), Wells Fargo (WFC, Fortune 500), Goldman Sachs (GS, Fortune 500) and Morgan Stanley (MS, Fortune 500).



Hmmm… what game is being played here? Time to take the markets down, reel in the boys a little now that they've stolen all those trillions? Let Volcker come in and play the part of the adult again? While this sounds like an obvious thing that should have happened long ago, the timing leaves me knowing that we are simply witnessing a political ploy. Sorry, I am not buying it. And I’m not buying that anything meaningful will truly come from it, for if it did, the banks would be broken up at a minimum. Again, I’ll be watching what they do, not what they say to placate the public on the day of an outrageous release – a crime against Americans who don’t even know that they are being robbed every time the market moves against them taking their hard earned dollars in what is now a casino but was meant to be a functioning capital market.

And exactly how are jobs being helped? Still, after all this time, they are not. The weekly jobless report grew by 36,000 to 482,000. Digging into the report, “The advance unadjusted number for persons claiming UI benefits in state programs totaled 5,716,608, a decrease of 299,837 from the preceding week. A year earlier, the rate was 4.2 percent and the volume was 5,651,117.” In other words, there are 60,000 more people in state programs now than at the height of the crisis last year, yet the reported numbers are shrinking way down from peak as they are not reporting those filing emergency claims.

Here’s Econoday’s spin, see if you can pick out the outrageous factor in this report:
Highlights
Distortions cloud what on the surface is a negative jobless claims report. Initial claims jumped 36,000 in the Jan. 16 week to 482,000, marking a third straight increase and the fifth increase in five weeks -- not a streak that points to improvement in the labor market (Jan. 9 week revised 2,000 higher to 446,000). The four-week average, at 448,250, rose 7,000 in the week to snap a long streak of uninterrupted improvement going back to August.

Now the special factors. The Labor Department said claims piled up due to short holiday staffing at state processing centers. Market News International is quoting a Labor Department analyst as saying the week's gain is "not economic, but administrative." Starting with the next report, the government analyst expects the effect to reverse making for a steady decline in coming weeks. An implication here is that short-staffing this year was greater than prior years and is not offset by seasonal adjustments. Note also that data from an unusually large number of seven states had to be estimated for the current report.

Continuing claims, data available for the Jan. 2 week, did show improvement or at least did decline for a fifth straight week, down 18,000 to 4.599 million. But the decline in continuing benefits reflects, at least in part, the expiration of benefits as the unemployed fall out of the insured workforce.

Other data show a nearly 40,000 drop in those receiving extended benefits while more than 650,000 received emergency compensation. The markets showed no significant reaction to this report, a report that will be very closely watched for improvement next week.



Oh, “a Labor Department analyst as saying the week's gain is "not economic, but administrative." That’s nice. So, what they are saying is that they withheld data pre-holiday to make the reports look better? Hate to ruin everyone’s holiday… and the manipulations continue to stack up, one upon the other. But no one will be prosecuted for manipulating the markets, because it’s in the “good direction,” everyone likes a positive Prozac person.

Leading Indicators and Philly Fed are out at 10 Eastern.

Below is a 30 minute chart of the SPX, a clear megaphone, it is nearly a complete pattern and the odds favor a downward break. It could break down from somewhere in the middle, or may run all the way to the top again. McHugh's count shows that it should be the last run inside. You can see that the 30 minute RSI is approaching overbought, but the 60 has a way to go still:



Here's a 30 minute NDX chart. Perfect megaphone formation. They are a directional change formation, that means lower. If that formation breaks up, you will know that the markets are not acting "naturally" once again:



That’s about all I can stand to talk about this morning, excuse me, time to go take a happy pill… LOL.

Bad Company – Can’t get enough:

Wednesday, January 20, 2010

PBS Video – Saving American Media…

Professor Bob McChesney and journalist John Nichols talk about the perils of a shrinking news media landscape, and their proposal to save journalism with (ugh) government subsidies. They have some very valid points of discussion, especially the part about the shift from true investigative journalism to corporate and government propagandas.

Their discussion of the importance of free press to democracy is mostly valid. Of course directly subsidizing media is controversial. I would contend that what they advocate is a much more important function for government support than what we are currently experiencing by subsidizing the financial, insurance, mortgage, housing, auto, and insurance industries. Did I leave any out? Of course I did, there are the farmers, the military industrial complex, the list goes on and on.

I will point out again, though, something that they do not discuss. That is that by pandering to special moneyed interests, the “mainstream” media has largely made itself irrelevant to thinking Americans. A cleansing was due, and as long as CNBS is still on the air, the cleansing is not yet complete. Actually, this supports their notion that the model may work better when government subsidy underlies FREE CHOICE in receiving media.

It seems to me that what is occurring in the media should be an important subject of debate. (ht Backwardsevolution)

Morning Update/ Market Thread 1/20

Good Morning,

Equity futures are lower this morning following yesterday’s very suspicious looking ramp. Yet another save following a broken trend line. That was the 18th of the last 20 first day of the trading week ramp jobs. That is NOT a natural phenomenon. What was so sick and perverse about it to me is that the brokerage houses that I get updates from (you know, where the “professionals” hang out) sent out one drivel report after the other pinning the blame on this or that. Oh yeah, a republican wins a seat, shifts the balance of power on health care and that kicks off a rally to new highs. Give me a break. At any rate, the overnight action following the ramp job can be seen in the chart below (I did not capture the open, this is half an hour after the open, and it plummeted):



The dollar is rocketing higher, having broken upwards from its latest formation. This is largely against the Euro, but keep in mind that a rising dollar also likely means that deleveraging is occurring somewhere. This rises the demand for dollars in order to pay back debt. Where is this occurring? In Europe ignited by the happenings in Greece where their markets just broke beneath key support and where the costs of financing their debts is soaring. This has produced a breakdown out of the flag on the Euro that I previously forecasted would happen and the target on the break is about 1.33 to 1.34:



Bonds are also higher showing money flowing to safety. Both oil and gold are sharply lower. The action in oil is bizarre. Yesterday was a huge ramp and today most of it is gone.

We are now in the busiest part of earnings season. IBM had a good report yesterday, but just like Intel, it sold off on the report instead of jumping. This tells me that the market knows how overstretched it is. While nefarious activity may be occurring in the futures market, there is no way that the entire market can be supported forever, that is just not going to happen.

The rail company CSX had a terrible report yesterday and has broken support. It is a key component of the Transports index which has failed to confirm the latest new highs. Most of the large banks have reported, and most have reported large losses. Bank of America lost $5.2 billion blamed on paying back the TARP, they claim they “only” would have lost a couple hundred million. No, if they would have marked their assets to market value, they would be out of business. This is the same story with Citi and all the rest. There were high hopes for Morgan Stanley who did produce 14 cents a share profit, but missed the high expectations.

In the other manipulated realm, we head off to economic reporting. Oh joy, I love explaining every time how trumped and just flat out deceptive most of this data is. I would stop reporting on it, but it’s important for people to know how they are being deceived.

The worthless MBA purchase index rose 4.4% in the last week, measured how and against what base we do not know because they won’t tell us. The weekly swings have become WILD with 20% and even 30% moves in their “index” in just one week. Is that truly possible? NO. And this week we get a 10.7% jump in the Refinance portion of the index. Riiiiight. Again, totally worthless information you cannot compare this to anything in the past nor do you have any clue as to the overall level of activity, the complete opposite of transparent, yet places like Bloomberg and the rest of the media do not call BS on it, instead they go with the pump:
Highlights
Low rates are giving a boost to mortgage demand. MBA's purchase index rose 4.4 percent in the Jan. 15 week while the refinance index jumped 10.7 percent. Thirty-year mortgages are averaging 5.00 percent, down 13 basis points in the week. These results are a badly needed positive for the housing outlook which has been clouded by recent data: a plunge in pending home sales and yesterday's dip in the home builders index. Housing starts will be posted today at 8:30 a.m. ET.

Whatever MBA... Please go away soon, can’t wait for you to be weeded out and sent into the dustbin of history where you will be found lying among the same pages that talk about Enron.

Housing starts, a number that is at least mostly real, continues to disappoint. The consensus was 579,000, and the actual number of new starts came in at 557,000, while the prior was 574,000. Keep in mind that at the peak we were talking 1.6 million! Despite the miss, Econopray tries to spin the positive:

Highlights
Starts and permits are showing divergent movement in the latest housing starts report with starts down and permits pointing to growth. Housing starts in December fell back 4.0 percent after rebounding 10.7 percent in November. December's annualized pace of 0.557 million units fell short of the consensus projection for 0.579 million units and was up 0.2 percent on a year-ago basis. The December dip was led by a 6.9 percent drop in single-family starts, following a 4.0 percent rise in November. Meanwhile the multifamily component advanced 12.2 percent after a 69.8 percent surge the month before.

Despite weakness in starts in the latest month, homebuilders are a little optimistic based on permits. Housing permits continued last month's rebound rising 10.9 percent in December after a 6.9 percent comeback the month before. The December pace of 0.653 million units annualized was up 15.8 percent on a year-ago basis. Both single-family and multifamily permits were up monthly in December.

Today's report is mixed and basically points to the volatility of starts during winter months but also to moderate improvement in coming months. Housing is still in slow recovery. On the news, there was little reaction in the markets. Of course, markets have other news to digest-the loss of the supermajority by Democrats in the U.S. Senate in yesterday's loss of a Massachusetts' senate seat and also the impact of Bank of America's losses announced yesterday.



Again, look at that chart and how the numbers have fallen and they have stayed down. Staying down is actually positive because the very last thing that is needed is more inventory. There is far more inventory than people are being led to believe and there’s much more pain ahead for housing, especially in the upper end homes where a large percentage were financed with option-ARM loans that are increasing in resets as we speak.

The totally and completely worthless Redbook and Goldman ICSC showed their usual weekly advances. Here the data is so bad that it’s not even worth discussing for the 52nd time in the past year, so I won’t.

Prices in the PPI are now back into positive territory, year over year, as we are now comparing numbers against their lows in early ’09. This advance is largely due to the speculation that has re-inflated oil prices. The YoY rate has jumped to a very high 4.7%. Yes, this number swung from negative to positive quickly, however, I still fall squarely in the camp that we will see further deleveraging of debt and I do still expect another wave of deflation and am seeing signs of that already in the reports of credit, the money aggregates, in the debt markets, and in the world of derivatives.
Highlights
Headline and core PPI inflation slowed sharply in December. The headline number did not improve as much as hoped while the core eased more than expected. The overall PPI rose 0.2 percent after spiking 1.8 percent in November. The latest gain was a somewhat warmer than the consensus forecast for no change in the index. At the core level, the PPI eased to a flat reading after jumping 0.5 percent in November. The market had expected a 0.1 percent up tick. The headline increase was led by a 1.4 percent jump in food prices as energy dipped 0.4 percent. The core was kept soft in part by a 1.2 percent drop in prices for light trucks.

For the overall PPI, the year-on-year rate increased to 4.7 percent from 2.7 percent in November (seasonally adjusted). The core rate year-ago pace edged down to 0.9 percent from 1.2 percent the previous month. On a not seasonally adjusted basis for December, the year-ago increase for the headline PPI was 4.4 percent while the core was up 0.9 percent.

Net, PPI was in line with expectations. The latest CPI and PPI reports let the Fed continue to characterize inflation as subdued and keep policy on hold. There was little market reaction to today's report but the PPI report had to compete with a lower than expected housing starts number, offset by higher permits.



Note once again that they focus on the month over month data instead of the more useful year over year presentation. Claims are that month over month figures remain low and subdued, while a 4.7% jump is working its way through the pipeline. When the citizens of America are saturated with debt, it really doesn’t matter whether inflation comes along and robs their purchasing power, or if deflation comes along and sends them into unemployment. The bottom line is that the debts are going to be repaid with interest in one way or the other and it’s going to be painful unless we can get on with clearing out the false nature of our economy and that means clearing out the debts. The debts have not been cleared and they are going to be one way or the other.

Meanwhile, outside the world of accounting gimmicks, paper shuffling, and phony accounting, rail traffic and sales taxes continue to ratchet lower. The disconnect between the real and the paper has never been larger. This disconnect is having a profound effect on investor psychology. Those who understand the disconnect are being disenfranchised while those who don’t are simply being led to their eventual slaughter… again. It is simply amazing how short people’s memories are.

Technically the divergences are simply historic and they are stunning. Even more divergences yesterday with the advance decline line declining against rising prices. This is BEARISH. I could go on and on about volume divergences, RSI, MACD, whatever, we have all heard it and know it’s there.

I’ll say that all the Elliott Wave experts I know seem to be saying the same thing – that THE top should be close at hand. When they are all on the same page, I listen and would NEVER bet against them. I may not take immediate action, but I would not bet against them. When they do not agree, I pull back and trade with less confidence. Here’s what Bob Prechter produced in terms of a chart… his target on the DOW 1,000. Now, you can accuse the man of being so early as to not be useful information for trading, but note that he has always gotten the direction correct and that he acknowledges the time aspect is the most difficult to pin down:



Note that he was 4 years early in 1978 predicting a powerful bull market. He was also 6 years early predicting a crash (in "Conquer the crash") in 2002. However, he was spot on with the March bottom and was early in calling a top this past November.

And while I’ve been typing all this out, the markets have given back the entire ramp from yesterday plus some. Amazing, what a rollercoaster.



This is not a market that is functional. It is a market that is broken and manipulated. The purpose of the equity markets is to provide capital so that real businesses can produce real goods and services, and then to provide a means of ongoing price discovery and a vehicle through which people can make exchanges. We are so far removed from that it’s not even funny. There is FAR MORE transparency in the Las Vegas casinos than there is here and than there was looking at the books of Enron or Bernie Madoff.

Supertramp – Crime of the Century: