Monday, December 21, 2009

"Corporate Democrats"

On Friday, Bill Moyers had an incredible interview on PBS with Matt Taibbi and Robert Kuttner.

BILL MOYERS: Welcome to the Journal.

Something's not right here. One year after the great collapse of our financial system, Wall Street is back on top while our politicians dither. As for health care reform, you're about to be forced to buy insurance from companies whose stock is soaring, and that's just dandy with the White House.

Truth is, our capitol's being looted, Republicans are acting like the town rowdies, the sheriff is firing blanks, and powerful Democrats in Congress are in cahoots with the gang that's pulling the heist. This is not capitalism at work. It's capital. Raw money, mounds of it, buying politicians and policy as if they were futures on the hog market.

Democrats are very frustrated with Obama

MATT TAIBBI: … (A) lot of what the Democrats are doing, they don't make sense if you look at it from an objective point of view, but if you look at it as a business strategy- if you look at the Democratic Party as a business, and their job is basically to raise campaign funds and to stay in power, what they do makes a lot of sense.

: I think the other problem, frankly, is that those of us who consider ourselves progressives invested so much in this remarkable figure, Barack Obama. And we read our own hopes into him. We saw him as a potentially great president. We saw this as a potentially transformative moment, I certainly did, where he could've chosen to be the kind of President Roosevelt was. And it turns out that's not who is characteralogically and that's not how he chose to play the moment.

Corporate Democrats vs “The Little Guy”
ROBERT KUTTNER: Now, you have a group of Democrats, and this is the real pity of it. The Democrats are supposed to be the party of the average person. You have the so-called New Democrats who are really the party of Wall Street. And then you have the Blue Dogs who are fiscal conservatives. And if you look at what happened in Barney Frank's committee to the financial reform bill, he's a pretty good liberal, he ended up looking like a complete stooge for industry because in order to get a bill out of his own committee, he had to appease the 15 New Democrats, so-called, who were put on that committee mostly by Rahm Emanuel when he was the-

MATT TAIBBI: Sort of as a means to raise money.

ROBERT KUTTNER: As a means to raise money. So Melissa Bean, who's a two-term Democratic Congressman ends up being the power broker because she controls 15 votes on Barney Frank's committee of what she's going to allow out of committee and what she isn't.

BILL MOYERS: Why does she control 15 votes?

ROBERT KUTTNER: Because there are 15 New Dems, and this is the centrist caucus that particularly specializes in taking money from the financial industry.

BILL MOYERS: You call them centrist, don't you mean corporate Democrats? I mean-

: Corporate, yes, sorry. That's too kind. They're corporate Democrats who were put on that committee because Rahm Emanuel felt that there's no better place than the House Financial Services Committee if you want to shake down Wall Street, to put it bluntly.

: If you were Barack Obama in a city that's overrun by money, how would you try to fix it?

ROBERT KUTTNER: I would go over the heads of the special interests to the people. I think there's a lot of sullen apprehension, frustration out in the country. And I think the people are hungry for leadership. He's not doing that sufficiently.

Obama, Corporate Democrats and Wall Street
MATT TAIBBI: It's absolutely a political winner for the president to hit Wall Street very hard and do all the things that he's supposed to be doing right now. You know, that all the things that FDR did. If he did those things, if he remade Wall Street in the way that it needs to be remade, he would do nothing but gain popularity. And I think that's the strategy he should have pursued.

BILL MOYERS: But what if by nature, that's not what he wants to do? What if, by nature, he prefers to head the establishment, than to change it?

ROBERT KUTTNER: Then he runs the risk of being a failed president. And I do have the audacity to hope that he's a smart enough, principled enough guy, that some time in his second year in office, he's going to realize that he's at a crossroads.

: This is the fundamental question. Is there a way that we can have a politician get elected without the sponsorship of special interests? Can we get somebody in the White House who's independent of the special interests that are in the way of real reform? And that's the problem. We haven't been able to have that happen. And we need to find a way to have that happen.

ROBERT KUTTNER: Right. And I think it's not accidental that the last three Democratic presidents have been at best, corporate Democrats. And one hoped because of the depth of the crisis and the disgrace of deregulation and ideology, and the practical failure of the Bush presidency, this was a moment for a clean break. The fact that even at such a moment, even with an outsider president campaigning on change we can believe in, that Barack Obama turned out to be who he has been so far, is just so revealing in terms of the structural undertow that big money represents in this country. The question is: Is he capable of making a change -- he's only been in office less than a year -- in time to redeem the moment, redeem his own promise?

Obama on 60 MINUTES
Obama was on 60 MINUTES and he said...

PRESIDENT OBAMA: I did not run for office to be helping out a bunch of fat cat bankers on Wall Street.

BILL MOYERS: Then on Monday afternoon, he had this photo opportunity in which he scolded the bankers and then they took it politely and graciously, which they could've done because the Hill at that very moment was swarming with banking lobbyists making sure that what the President wants doesn't happen. I mean, what did you think as you watched him on 60 MINUTES or watched that press conference?

ROBERT KUTTNER: I was appalled. I was just appalled because think of the timing. On Thursday and Friday of last week, the same week when the president finally gives this tough talk on "60 Minutes," a very feeble bill is working its way through the House of Representatives and crucial decisions are being made. And where is the President? I mean, there was an amendment to put some teeth back in the provision on credit default swaps and other kinds of derivatives. And that went down by a handful of votes. And to the extent that the Treasury and the White House was working that bill, at all, they were working the wrong side. There was a there was a provision to exempt foreign exchange derivatives from the teeth in the bill.

A Social Movement on the order of The New Deal or The Abolition Movement
ROBERT KUTTNER: The other thing that's missing, if you compare him with Roosevelt or LBJ or Lincoln, the other thing that's missing is a social movement. In all of these great periods of transformation, you had social movements doing a complicated dance with the president, where sometimes they were working with him, sometimes they were beating up on him. That certainly describes the civil rights movement and Lyndon Johnson. It describes the abolitionists and Lincoln. It describes the labor movement and Roosevelt. Where's the movement?

ROBERT KUTTNER: … I was invited to speak to the House Democrat caucus a couple a weeks ago. And they are furious. They can't publicly embarrass their president, but they go home on weekends and they talk to their folks and they hear the individual stories of suffering. And they feel that certainly the Treasury, to some extent the White House, just doesn't get it and the Republicans are going to end up with a narrative and the Tea Party folks, it's the far right that is on the march when ordinary people need a champion.

ROBERT KUTTNER: Democracy is the only possible counterweight to concentrated financial power. And ideally, that takes a great president rendezvousing with a social movement. One way or another, there is going to be a social movement. Because so many people are hurting, and so many people are feeling correctly that Wall Street is getting too much and Main Street is getting too little.

Taibbi and Kuttner are progressive Democrats, but they are extremely frustrated and disenchanted by Obama.

Obama’s Big Sellout
Taibbi wrote the following article for Rolling Stone a few weeks ago. It is worth the read –

Taibbi is interviewed here –

“Barack Obama ran for president as a man of the people, standing up to Wall Street as the global economy melted down in that fateful fall of 2008. He pushed a tax plan to soak the rich, ripped NAFTA for hurting the middle class and tore into John McCain for supporting a bankruptcy bill that sided with wealthy bankers "at the expense of hardworking Americans." Obama may not have run to the left of Samuel Gompers or Cesar Chavez, but it's not like you saw him on the campaign trail flanked by bankers from Citigroup and Goldman Sachs. What inspired supporters who pushed him to his historic win was the sense that a genuine outsider was finally breaking into an exclusive club, that walls were being torn down, that things were, for lack of a better or more specific term, changing.

Then he got elected.

What's taken place in the year since Obama won the presidency has turned out to be one of the most dramatic political about-faces in our history. Elected in the midst of a crushing economic crisis brought on by a decade of orgiastic deregulation and unchecked greed, Obama had a clear mandate to rein in Wall Street and remake the entire structure of the American economy. What he did instead was ship even his most marginally progressive campaign advisers off to various bureaucratic Siberias, while packing the key economic positions in his White House with the very people who caused the crisis in the first place. This new team of bubble-fattened ex-bankers and laissez-faire intellectuals then proceeded to sell us all out, instituting a massive, trickle-up bailout and systematically gutting regulatory reform from the inside.”

“Fair Share Tax”
I am not the only one frustrated that Wall Street has taken over Washington and the SOBs we elected allowed them to loot the country for several Trillion Dollars. People aren’t stupid – they are getting fed up. A major societal change is coming, where the social contract between the Government and the Governed is rewritten. It will change Medicare, Social Security and Health Insurance.

Look at what the geniuses in Pittsburgh are doing –

“On Wednesday, the City Council is expected to give preliminary approval to Mayor Luke Ravenstahl’s proposal for a 1 percent tuition tax on students attending college in Pittsburgh, which he says will raise $16.2 million in annual revenue that is needed to pay pensions for retired city employees. Final Council action will be on Monday.”

Our country is choosing to harm the welfare of our youth to pay for the welfare of our politically-well connected aging. That is about as backwards as you can get, but the Baby Boom has always been the “Me Generation”, so their actions are not new. We are also electing corrupt politicians who borrow in the name of our kids to make bond holders whole and then bonus the bankers who sold the toxic waste in the first place.

Credit Suisse on Home Foreclosures
Credit Suisse estimates that 4.3 million homes are set to be foreclosed on in 2010. That is 3.3 million more than the Market can bear. So the government will need to step in and prevent these 3.3 million new foreclosures, or else the housing market will collapse again. How much is that going to cost us...

China Says it's getting harder to buy US Treasuries

The trade has always been the US consumes and Asia saves, so they buy our Treasuries to keep Interest Rates down to make Consumer Credit cheap so that we can keep borrowing and consuming.

Now that we are buying less (losing our jobs and houses and saving for a rainy day), the Chinese have fewer Dollars with which to buy US Treasuries. This decrease in demand for Treasuries is coming at the same time that the Supply of Treasuries is going through the roof.

This leaves the Fed with two options - let Interest Rates rise or print money to buy your own Treasuries - Quantitative Easing). They will have to print money and that will be good for Gold.

2010 is going to be a political war and whoever is smart enough to take on the Wall Street, and explain in simple terms what is really going on, will walk away with all landslide victory.

Sunday, December 20, 2009

Oh yes, that Dubai thing…

What the heck has been going on in Emerging Markets?

Oh yes, that Dubai thing…

China ($SSEC) looks like a retest of the July highs is setting up to fail. Other proxies for participating in China are not looking so hot – Hong Kong (EWH), Australia (EWA)and the ETF for China (FXI).

Austria (EWO) is below the 50-day and looks like it has just confirmed a fairly significant top. Austria’s Banking Industry is ridiculously highly leveraged in toxic Real Estate lending. It is considered the gateway to Eastern Europe and the chart looks terrible.

Also keep a close eye on Emerging Market Junk Bond Funds. Internals continue to deteriorate and many Leaders are starting to look toppy or are outright confirming that tops have been formed. I know that the markets in 2009 have been notorious for breaking down and then immediately going vertical, as if no damage had ever occurred, but at some point that game will end and the selling of the big boys will overwhelm the computers of Goldman Sachs, JP Morgan and The President’s Working Group on Capital Markets. You will not want to be in anything illiquid or risky when that occurs.

I am continuing to roll high-Beta into low-Beta and am buying fewer and fewer individual stocks. I want to participate if there is another leg up, but also want to be in the best position to play defense if the much-anticipated correction arrives.

Secular Bulls and Bears and Potential Trades

I seem to always be working. Whenever I am out in a social setting (many parties this time of year), people always ask me the same question – “If things are so bad and everybody knows it, then how does the Stock Market keep going up?” This is normally followed by – “How high does the Stock Market go before it cracks again?”

These are questions that people never would have dreamed of asking in 2000. Back then they were programmed to “buy every dip”, because the Markets never seemed to go down. But things have changed, and people who haven’t played defense are frustrated about having been through two brutal Bear Markets in the last decade and they are terrified about it happening to them yet again.

I want to review the reality that is the Markets today. You can either look at reality and deal with it or pretend it doesn’t exist and suffer the consequences.

Here are two charts. One is a Secular Bull Market and one is a Secular Bear Market. I removed the symbols, because who the stocks are is unimportant. What is important is to recognize that Assets Classes move in long term patterns. These patterns normally play out over 18 to 20 year periods.

It is pretty clear where your money needed to be over that 20-year period. I think you can guess what these two charts are. The Secular Bull sequentially made higher highs, meaning that even if the timing of your purchases was wrong, you got bailed out and still made money over time. The Secular Bear Market was in a brutal trading range, where if you bought wrong you got crushed and even you bought right, if you did not sell, then you probably ended up breaking even after 20 years.

Since 1998, you can see that the roles have reversed and you now have one in a new Secular Bull Market and the other in a new Secular Bear Market. Interestingly enough, they are both now at approximately 1,100. I am pretty confident that the top chart will be a lot higher over the next 8 – 10 years than the bottom chart.

The top chart is Gold. The bottom chart is The S&P 500 Index (Stocks). Look at the 20-year charts above and ask yourself if the long-term fundamentals justify an extension of the Secular Bull market in Gold and the Secular Bear Market in Stocks. I believe that they do and will manage money accordingly.

People have convinced themselves that all stocks will ever do is go up in a Secular Bull and never correct or underperform for an extended period – remember the misinformation that Real Estate never goes down…

Stocks can have horrible performance over extended periods. Especially the Markets of economies where the Governments decide that nothing will fail. This is what has happened in Japan since 1990. Take a look at how the Nikki has performed since 1990 –

If you don’t think the same thing can happen here, then take a look at the NASDAQ ($COMPQ), with a very similar Post-Bubble chart. You can easily see Real Estate Prices and Financial Stocks tracking out similar charts over the next twenty years.

Someday, the chart of Gold will look like the Nikki and the NASDAQ, but I don’t think we have arrived at the point where the Gold Market has hit a multi-Generational high. The fact is that THE enemy right now is falling Real Estate Prices. The best way to pump them up is to keep Interest Rates near zero, so that the cost to borrow is cheap, thus propping up Real Estate Prices.

The Fed has chosen to do this by buying Mortgage Backed Securities and US Treasuries. Other countries have chosen to do the same in their countries. Each time there is a crisis, you will see more money printed to buy whatever asset class is being delevered. That is bullish for Gold.

What This Means to You
Stocks are in an extended trading range. They are by definition TRADES, unless you want to hold them for 20 years and potentially have no real appreciation in your holdings. So there will be a time when you must sell. We probably are not there yet, but you should be preparing your holdings for the future need to play defense.

Fewer Stocks Are Working
You can see that the price of the S&P 500 Index ($SPX) is at new highs, but the Bullish Percent ($BPNYA) and the Summation Index (NYSI) are well off of their highs. Bullish Percent measures the percent of stocks in uptrends and Summation is a cumulative total of the number of advancing stocks versus the number of declining stocks.

As trends mature, fewer and fewer names participate in the rally and ultimately the final leaders top and the market rolls over. We aren’t at that stage yet, but leadership is narrowing.

Here is a comparison of Large Cap ($SPX) versus Small Cap ($SML). You can see that $SPX is at new highs, while $SML is several percent below its highs.

Here is a comparison of US Large Cap ($SPX) versus Developed International Large Cap (EFA). SPX is outperforming EFA.

Here is a comparison of SPX versus Large Cap Technology (QQQQ). You can see that they are basically the same chart. So, Large US is performing in line with Large Technology.

THE US Dollar
Near Term, the US Dollar has a very big decision to make. If resistance holds here, then we could see a retest of recent lows and that would be good for Carry Trade items like Gold and potentially Stocks. I am open to anything happening and will have in stops to participate if the Dollar rolls over for a few days or weeks.

This is important because shorting the Dollar has been the engine for the massive US Dollar Carry Trade, which has propped up all kinds of risky asset classes.

I am watching Gold closely for a trade and the ability to sell more of my holdings into any bounce (I wish I had sold it all on Dec 3). If there is no bounce from here, then things could get real nasty very quickly.

Let’s see how well Gold (GLD) manages to bounce if the US Dollar weakens next week. It didn’t take long for Gold to tag the 50-day, did it?

Gold Stocks (GDX) are now at the bottom of their trading channel.

Here is the hourly chart of the Dow Jones ETF (DIA). You can see how it has held support on 3 other occassions at about $102.10 After each successful hold, it has gapped up about 100 points an ventured back to the top of the trading range. I would not be surprised to walk in tomorrow with the Dow up or down 100 points before the open of trading. You can also see where your stop should be if you own DIA.

The NASDAQ 100 (QQQQ) has been leading the markets. See how it is challenging the top of its trading range, while DIA is near the lows of its range? I don’t own much QQQQ, but have stops in to buy a breakout.

Friday, December 18, 2009

Jingle Mail, Jingle Mail...

Jingle all the way to Wall Street!

Morgan Stanley has decided to turn in the key on 5 San Francisco high rises, because these five buildings are about 50% in The Red.

Jingle Mail is where a homeowner is so upside down on a loan that they simple walk away from the home and mail the keys in to the bank.

I don't know who Morgan Stanley stuck with these keys, but there will no doubt be a serious hit to somebody's CRE MBS (Commercial Real Estate Mortgage Backed Security). Ouch...

How freakin' stupid is Morgan Stanley? If they are mailing in their keys, then what is to stop all of those Millions of homeowners currently with Negative Equity?

According to the Wall Street Journal today, here are the current percentages of homeowners with Negative Equity (WSJ) (keep ion mind that these are 2008 numbers and 2009 are far worse)-

California 31%
Nevada 27%
Arizona 24%
Florida 22%

Do you wonder why people are angry with Wall Street when they pulling stunts like this? Check out he Huffington Post today -

If Morgan Stanley Walks Away, Why Shouldn't You?

"To the extent that Morgan Stanley is leading by example, the securities colossus is sending an unlikely message to underwater homeowners: Walk away."

"In Thursday's Wall Street Journal, John Courson, the head of the Mortgage Bankers Association, played up the moral argument against walking away, telling the paper: 'What about the message they will send to their family and their kids and their friends?'

'It highlights the double standard we have in this country,' White says. 'Businesses strategically default all the time and, in fact, they should -- they're obligated to maximize profits and minimize losses. But so should homeowners.'"

The collective greed of Wall Street is staggering. This makes them so deaf to their public image and is such an albatross around Obama's neck.

Now you have Citigroup, Wells Fargo and BofA repaying TARP, not because it helps their shareholders (See Citi down -14% in 3 days on a massively dilutive sales of stock) but because it allows then to get out from under the Pay Czar. The bankers are doing whatever they can to make as much money as they can and the public is getting pretty upset about it - check Obama's Poll numbers.

2010 will be a referendum on Washington's conduct towards Wall Street. So expect the anti-Wall Street rhetoric to pick up in Washington after the Health Care socialist-wealth-transfer-scam is passed or shelved.

Sunday, December 13, 2009

Illinois Downgraded _ Can California Be Far Behind?

Substitute “California” or “The United States” for “Illinois” and you get an idea of where this is all going…

“Standard & Poor's Ratings Services lowered its rating on Illinois's general obligation bonds, reflecting the state's budget gap.

The legislature's difficulties in passing a fix before the end of the fiscal year on June 30 are heightened by a constitutional rule requiring a supermajority of 60% to pass any law taking effect before June 1 of the following calendar year, Moody's said.

S&P said Thursday the state has made limited progress in addressing this year's budget gap and next year's budget balancing depend on uncertain savings from spending reductions and debt restructuring. “

"The downgrade reflects what we view as the state's deteriorating liquidity and financial position," said analyst Robin Prunty. "Illinois failed to address its fiscal 2009 deficit, which was carried into fiscal 2010. Similar to many other states, revenues are performing below originally forecast levels."

“The firm has a negative outlook on the debt, now rated at A+, largely because the credit rater has doubts about the government's willingness to implement politically unpopular measures to close the gap. The new grade is four steps below AAA.”

Illinois did what California did in 2009 and blinked. They decided to borrow from 2010 to pay for 2009 and not make any real cuts. They will have to make difficult decisions in 2010, or they will have to pay more to borrow in 2011.

Oh wait, that’s not true. Because they US Government will bail the states out by giving Municipal Bonds implicit guarantees of the US Government, moving the obligations for state spending from the states to the US Taxpayer…

I don’t know if this stuff all hits the fan after the Mid-Term Elections of 2010 or the Presidential Election of 2012, but at some point, investors will start to sell their US Treasury holdings and the US will have to devalue the US Dollar. It is simply a matter of when.

Watch the likes of Greece, Ireland, Spain and the UK to get an idea of how things will be done when the US devalues the Dollar.

US Treasury Yields Up, Commodities Down

The Demand for US Treasuries is slowing, causing Bond prices to fall…,-You-Think-Youre-Gonna-Crank-Out-Bonds.html

And Interest Rates ($TYX) on US Treasuries to rise…

Which causes the US Dollar ($USD) to rise (because you want to own currencies that pay higher yields)…

Which kills the Dollar Carry Trade, and forces sales of Crude Oil ($WTIC) and Gold ($GOLD) …

The lower cost of Energy helps Airlines ($XAL) and Retail (XRT)

Here are the charts above on one chart, for easy viewing. Since approximately December 1st, you have had $TYX, $USD and $XAL up and $GOLD and $WTIC down.

And Stocks remain in a trading range, with The Bullish Percent ($BPNYA) and the Summation Index ($NYSI) well below their highs of September. So you have fewer names in uptrends, holding the markets up.

This can’t last. We either need to see a selloff, to clear the decks for another rally attempt, or we need to see new buyers show up and break the markets out of this trading range on big volume.

You have to ask yourself, if asset price appreciation and the Global Recovery is predicated on a falling US Dollar, and the Dollar is weak because of low Interest Rates on US Treasuries, then how far can a Dollar rally and a Commodity selloff really go?

A second theory is that everybody is short the US Dollar and when you get crises like Dubai and the Credit downgrade in Greece and the downgrade watch on the Credit of Spain, then people need to cover their shorts and you get a vicious rally in the US Dollar. Moreover, you get fear that countries in the Euro (Greece, Ireland, Spain) are going to leave, so that they can start printing their own money to deflate away their debt – putting pressure on the Euro and benefiting the US Dollar.

In my mind, that makes the Dollar rally Cyclical (Trade) and the Commodity rally Secular (Buy and Hold).

Sunday, December 6, 2009

Is the Dollar Carry Trade Dead?

I wrote the following about the ETF for Gold on Tuesday -

“I started to sell some of my Gold stocks. They have had some impressive runs and I have moved out of some extended names and into some new names breaking out of bases.”

“It has been a heck of a run, but I am looking for a near term pullback in Gold. I will be selling some here. I think the easy money has been made and will look to reload on a breakout of the next base or pullbacks into the 50-day or the +15% Band (Blue Line).”

Gold was hammered on Friday. GLD was down -4.17%! That is what happens when prices gets extended. It is normal. GLD is now at its first level of support. I mentioned two potential entry points if price pulled back. If the big boys don’t show up to defend the price of GLD at these two levels (Blue and Pink Arrows), then I will get concerned. But as of right now, in my opinion, Gold is in a once-in-a-generation Bull Market with strong fundamentals.

I think GLD is in its first real correction of this move. That would put it into a correction similar to the one in late 2007 (Black Circle). It could be that this advance is more mature that I think and GLD will have a shorter correction (Black Arrow). I do not think the move is over, but if it is, then GLD will fail to rally and a correction like the one in March 2008 should be expected (Green Circle).

The bottom line is that people have just started to believe that Gold is now an asset class that they need to own. GLD currently represents 0.4% of the Market Cap of the S&P 500, so it has a long way to go before it is a significant portion of most investors’ portfolios.

Here is how several Gold Stocks did this week. Yikes…

Is the Dollar Carry Trade Dead?
The Dollar had a strong day on Friday and is again touching the 50-day (Black Line). You can see that every time the Dollar has touched this line since April, it has failed and made lower lows. There has been an obvious correlation between the falling Dollar and rising Risky Asset prices.

The speculation this week has been that the Yen Carry Trade is back on and that it will now become the engine for driving Asset Prices higher. The Yen is also now at an obvious level of support. I was short the Yen for most of this week, but sold my positions in YCS on Friday.

The Euro is sitting at the bottom of a 1-month trading range. The Euro has been the anti-Dollar.

The S&P 500 is still in a trading range (now 16 trading days). It is either going to break out and we have a nice Christmas present, or it breaks and gives us a shot to buy it at lower prices in January.

This should be an interesting week. I am also noting a number of potential setups in Asian Country-specific ETFs.

Tuesday, December 1, 2009

Many Potential Setups for Year End

The S&P 500 has been stuck in a narrow trading range for 14 trading days. The last few consolidations like this have led to rapid advances in short bursts. You also have Crude Oil and several other Commodities in multi-week consolidations and Gold in a vertical rise of panic buying.

Needless to say, a lot can happen between now and the end of the year, so this is a very comprehensive and long post. I cover a lot, but I think these charts indicate how I will be positioning money over the next 4 to 6 weeks, if the big boys show up to push prices higher into year end.

Here is the trading of the S&P 500 over the last 3+ months (Hourly Chart). There have been three rallies and three consolidations. Breakouts from the consolidation have been accompanied by breakouts in the RSI(14). This has been the flattest of the three consolidations, which tells me that the big boys just weren’t interested in selling. There is a pretty obvious entry point on this chart.

Do you see why I consider this to be a trader’s market? In October, price on SPX went from 1,020 to 1,100 (+7.8%) and then back to 1,030 (-6.4%). That’s nasty. A 6.3% drawdown in 7 trading days is brutal.

Here is the daily chart of SPX. I have highlighted the three consolidations. I want in if SPX breaks out.

Gold (GLD)
I started to sell some of my Gold stocks. They have had some impressive runs and I have moved out of some extended names and into some new names breaking out of bases. I’ll get to them in a minute. First, I wanted to look at a longer term chart of the Gold ETF (symbol GLD).

In late 2007, GLD broke out of an 18-month base and went vertical. In November 2007, GLD hit the +20% band above its 200-day (Red Line and Red Arrow). At this time, RSI(14) got up to about 80 (Green Vertical Line). This is normally a zone of being so overbought and stretched above a key moving average that a pullback or consolidation is to be expected. RSI (14) measures Momentum and often peaks before the final peak in price.

GLD sat around for 6 weeks and then started another leg higher. On this second rally, RSI (14) put in a lower high. Price then sat around for only 3 weeks (Secondary Bases are normally shorter than the first) and then GLD had its final rally of the move. On this rally (Black Vertical Line), ADX shot up to and peaked at over 50. ADX measures the strength of the trend and ADX at over 50 is where trends go to die.

Look where GLD is now. ADX is only at 27! But RSI (14) is at 82 and price is +20% above the 200-day. It has been a heck of a run, but I am looking for a near term pullback in Gold. I will be selling some here. I think the easy money has been made and will look to reload on a breakout of the next base or pullbacks into the 50-day or the +15% Band (Blue Line).

RGLD has rallied 25% in a month and ABX is up 35% in about a month.

While SSRI and GFI are just starting to break out of bases. It is easier for me to play defense on SSRI and GFI if things turn unexpectedly sour. I am also looking closely at Anglogold Ashanti (AU).

Crude Oil ($WTIC)
Crude Oil has been sitting in a narrow trading range for 7 weeks. It has stalled out right below the 38.2% retracement of the Bear Market (who says that the computers and their Algorithms aren’t driving trading in 2009…). It tagged the uptrend line on Friday’s Dubai panic (Red Arrow).

RSI(14) has stalled out for the last 6 months at 60. RSI doesn’t stall out at 60 – it either breaks to 80 or 90, or collapses back to 30 or 20. A big move is coming! Hopefully soon…

ADX is now at 16 (Black Arrow). I keep telling you how I run screens to find stocks that are basing. I like a reading of 15 or less for ADX, but will take a reading of 16 on the weekly chart…

I sold my USO (Crude Oil ETF) yesterday. I’m not worried about missing out on a dollar or two. I will be heavily invested in Crude when it does break out. I may also be heavily invested in the short of Crude if it breaks down. I expect a very dynamic move in the not too distant future and I want in! That 50% level sure looks like a magnet on the upside (Green Arrow), as does the 200-day (Blue Line) at $66 on the downside.

During the time Crude Oil has been in a trading range, Energy stocks have also been consolidating. Large Cap Energy (XLE) has been consolidating right on top of its 50-day and has a fairly obvious entry point, while the Energy Explorers ETF (XOP) has been consolidating below the 50-day.

Normally, the smaller Exploration companies have more volatility on the way down and up, than the large Energy companies. I expect the Energy stocks to move out of their bases (either up or down) at about the same time as Crude Oil. The higher octane way of participating in the moves of Energy Stocks is DIG/DUG, but the SEC frowns upon owning leveraged ETF’s for anything more than a “Day Trade”. Buyer beware!

The Agricultural Commodity ETF (DBA) broke out of its recent trading range today. However, the action was weak and DBA actually closed below its opening trade of the day. That said, it still definitely has my attention.

The Total Commodity Index ETF (DBC) is the textbook example of why I wait to buy breakouts. Remember what I have been telling you since I started this blog – stocks tend to make big moves over short periods and then sit around for a long time, before either reversing or reinitiating their trend in another violent move.

The big moves on DBC have only taken a few weeks (Parallel Green Lines) and the consolidations have taken a few months (Blue Lines). I expect the next move on DBC to be pretty violent and if the big boys show up and buy it hard tomorrow, then I will be interested. Today’s action was pretty lame.

Take a look at how Gold has traded over the same period versus DBC and DBA. Which one would you rather own? GLD has been a core position for a reason!

Chemicals and Fertilizers
Mosaic (MOS) has broken out of a nice base

Celanese (CE) broke out of a secondary base today

Leaders in Bases

Large Companies in Bases

Sectors in Bases

Sunday, November 29, 2009

Vacancy Nation

Last week, I went to lunch with some friends and they asked me how many vacant houses there were in the USA. Here is the data from the US Census Department –

130,302,000 Total Housing Units
18,843,000 Vacant

Or a 14.5% Vacancy Rate!

How many years of inventory is that?
How much of that inventory is not for sale and being held off the Housing Market at places like FHA and Citibank?

The big issue going forward for Real Estate is that there is an enormous pile of debt that will have to be refinanced in the next few years. Because Real Estate prices have fallen so sharply, many of these Commercial Loans and Residential Mortgages will not be able to be refinanced.

Here is a chart of the oncoming wave of Residential Option ARM mortgages that will have to be refinanced in 2010 – 2012. If the house you own is worth less than you paid for it and your bank calls to tell you that you need to refinance your mortgage, will you A) walk away from the house or B) walk away from the house?

The deflation we are seeing in asset prices is simply a function of contracting credit and too much inventory (Supply) for not enough buyers (Demand). I think the big Recast wave for Option ARMs will be a big weight on housing prices in 2010 – 2013.

Commercial Real Estate
There is $1.4 Trillion coming due in Commercial Real Estate (CRE) loans over the next 5 years. These properties have the same issue as Residential Real Estate (RRE) – Negative Equity, limited available credit, too much Inventory for current Demand.

To put $1.4 Trillion in perspective, that equals all of the CRE paper maturing from 1994 – 2009!

All of this tells me that the Fed will continue to print several $100 Billion per year for the next three to five years. Call it Quantitative Easing or call it Government creating artificial demand to prop up asset prices and allow banks to offload newly financed debt to the US Taxpayer.

Any way you slice it, the prospects of the US Economy finally being able to focus its resources on real growth and job creation seem to be bleak, at best.

Kick Me

Health 'Reform' That Burdens Our Young

“We have become a society that invests in its past and disfavors the future.”

I can’t believe that I am quoting a Newsweek article… But this one addresses my concern that the Government is stealing from our kids, instead of actually making sacrifices to current consumption. This article focuses on how the current “Healthcare Reform” legislation will dramatically raise healthcare premiums paid by the young to subsidize the premiums paid bt those over 55.

“In fiscal 2008—the last "normal" year before the economic crisis—Social Security, Medicare and Medicaid (programs wholly or primarily dedicated to the elderly) totaled $1.3 trillion, 43 percent of federal spending and more than twice military spending. Because workers, not retirees, are the primary taxpayers, this spending involves huge transfers to the old.”

$1.3 trillion is about what we will run as a Deficit in 2010. I have no doubt some smart, young politicians are looking at those numbers and saying “I can balance the Budget in one shot”…

“Now comes the House-passed health-care "reform" bill that, amazingly, would extract more subsidies from the young. It mandates that health insurance premiums for older Americans be no more than twice the level of that for younger Americans. That's much less than the actual health spending gap between young and old. Spending for those age 60 to 64 is four to five times greater than those 18 to 24. So, the young would overpay for insurance that—under the House bill—people must buy: Twenty-and thirtysomethings would subsidize premiums for fifty-and sixtysomethings.”

No wonder AARP is in favor of this bill.

“Whatever the added burden, it would darken the young's already poor economic prospects. Unemployment among 16- to 24-year-olds is 19 percent.”

19% unemployment is the stuff of revolutions. That is a staggering figure! At some point, some smart, young politician will let his fellow young people know that he can bring back a heck of a lot of middle class jobs if he lowers the value of the Dollar and increases Tariffs on China.

“Working Americans—the young and middle-aged—already pay a huge part of the health costs of the elderly through Medicare and Medicaid. These will grow with an aging population and surging health spending. Either taxes will rise or other public services will fall. Already, all governments spend 2.4 times as much per capita on the elderly as on children, reports Julia Isaacs of the Brookings Institution. Why increase the imbalance?”

At some point in the not-too-distant future, the young will flex their political muscle and start to cut the entitlements offered to those over 50.

Neil Howe (The Fourth Turning) commented on this article -

“At last count the official unfunded liabilities for Social Security and all parts (A-D) of Medicare is roughly $100 trillion. So who’s even going to count the extra nickels and dimes we borrow to fill the Part D doughnut hole? And the fiscal stimulus keeps the economy moving and the Fed is handing out free (zero-interest) money. For me, this is certainly the most interesting and unanticipated fiscal, economic, and political environment I have ever seen in my life. For much of the country, there is tremendous unease that the vaunted “courage” of our national leaders always seems to result in borrowing from our kids, keeping our benefits up and our taxes low, and kicking most of the painful choices (”health care reform”) down the road. What happens when the music stops?”

The IMF tells us that if there is another bank bailout, then there will be revolutions –

So if the bankers only get one shot at a bailout, then they will print infinite amounts of money and hope that hyper-inflation will bail them out of their past lending mistakes.

Back to Neil Howe…

“Many informed Millennial (born 1982-200?) will want to ask why — after all their struggles to find jobs, the higher tuitions, the extra debt, and the open faucet on federal debt that they will have to pay back—they also need to pay a new hidden tax to benefit Boomer (born 1943-1960) nearing retirement. Millennials like to be regarded as more civic minded. But I don’t think they like to have a “kick me” sign attached to their backs. If this goes through, some national leader is going to discover this issue and push it in ways that could get ugly. One could, for example, see low-income, go-bare Millennials heavily featured in the Tenth Amendment challenges that will inevitably occur on the mandate. I’m not looking forward to any of this.”

All of this tells me that more money will be printed and taxes will continue to rise in order to pay enough entitlements to placate the unemployed masses for as long as possible.

Tuesday, November 24, 2009

0.01% and Reality

Bill Gross (PIMCO) is musing about how bad it is to earn 0.01% on his Money Market accounts and suggests placing his riskless money into Utilities…

He talks about how the designs of the Fed are to keep Interest Rates so low that they force you to move your money into risky assets.

“The Fed is trying to reflate the U.S. economy. The process of reflation involves lowering short-term rates to such a painful level that investors are forced or enticed to term out their short-term cash into higher-risk bonds or stocks. Once your cash has recapitalized and revitalized corporate America and homeowners, well, then the Fed will start to be concerned about inflation – not until.”

I think the key issue will be when your Purchasing Power is getting ravaged by Inflation, then you will have to do something to protect yourself. But, with Inflation at effectively Zero, there isn’t much cost to staying in Cash, if your overall goal is to keep your money SAFE.

One Month US Treasury Bill yields actually went negative last week and the Three Month Yields were even worse. So are people really buying US Treasuries, even as the Fed tries to force people to put their money into riskier assets?

You bet they are. FDIC Insured balances (Money Market Funds) actually increased about $400 billion last month.

Why? Because they don’t trust the number reported by the Government and Wall Street. They want to know that they still have money and will worry about Inflation after they actually see it.

Morgan Stanley is telling you that the Yield on the 10-Year US Treasury will pop 2.20% higher next year. I am guessing that there is not a chance in **** that Rates will rise that far, because if they do, then housing prices collapse again. If TBT breaks out, then I will change my opinions and change my allocations…

This weekend, two Fed officials talked about extending the Fed’s programs to buy mortgages beyond their current expiration date of March 2010. This is their vehicle for capping Interest Rates. Do you think they want Rates to go higher or lower?

If rates will be capped, then there are a lot of investors who would rather buy guaranteed safety and forgo the extra percent or two they could get by taking what may be substantial risk.

Money printing to keep Interest Rates down = good fundamentals for Gold…

Sunday, November 22, 2009

Wells Fargo and FHA "Guarantees"

Over the last 18 months I complained a lot about how the decisions of policy makers we designed to move a lot of worthless debt from the balance sheets of the banks to the balance sheet of the US Taxpayer. Wells Fargo pretty much now embodies the consequences of what I was said would occur.

“Wells Fargo & Co. (NYSE:WFC), in its most recent 10-Q, discloses that it need not bring on balance sheet ANY of the $1.1 trillion in conforming residential OBS exposures that are the subject of the new FASB rule eliminating the "Qualified Special Purpose Entity" designation. Why? Because the loans inside these securitization vehicles are insured by FHA, so goes the thinking of WFC and its auditor, thus the bank has no liability to these entities or the securities they have issued to investors. Pretty neat trick, eh?”

You read that right, because Wells Fargo knows that the US Taxpayer will clean up their mess (via the FHA), they think it is okay to not even bother discussing $1.1 TRILLION in mortgages they originated and OWN! Why? Because they figure, how can you take losses on something that is guaranteed by the US Taxpayer?

How stupid are we? Why do we put up with this stuff? When is one of these SOBs going to go to jail?

As of last week, 17.71% of all FHA mortgages are in default. 8.52% are more than 90-days delinquent.

Do the math - Wells Fargo has $1.1 Trillion of Mortgages off the books and another $700 Billion of Mortgages on the books. At an 8.5% default rate, that means they should be reserving about $153 billion for future losses. That would make Wells Fargo bankrupt. They are telling all who will listen that $93.5 billion in losses are going directly to the US Taxpayer!

Bank of America (think Countrywide) also has tons of these toxic Mortgages on their books and they are carrying these loans at artificially high values too.

Think of all the other smaller banks that aren’t reserving for the real losses in these FHA mortgages…

When the FASB got rid of “marked to market” accounting, they bought the banks and the Central Banks of Asia and Europe enough time to unload Trillions of Dollars of worthless mortgages onto the balance sheet of the US Taxpayer – via Agencies (Fannie Mae, Freddie Mac, FHA) and the FRBNY.

Now the Fed is saying that buying $1.25 Trillion in Mortgages is not enough and that is would be a good idea to have the US Taxpayer buy still more of this toxic waste.

But we can’t audit the Fed, because it needs to remain “independent”…

Do you wonder why I keep buying Gold?

Friday, November 20, 2009

Fed "Independence"

A quick note on this topic -

The only thing the Fed is independent of is oversight from those who fund it.
If you think that the Fed is independent from the banks who use it to fund their speculation and clean up their messes, then you are either not paying attention or are bought and paid for by these same banks (Barney Frank, Chris Dodd or a CNBC anchor).

Why Is The T-Bill Yield Negative?

The yield on the 1-month T-Bill went negative yesterday.
The yield of the 3-month T-Bill slipped below that of the 1-month - an invested yield curve. Yikes…

There is a lot of speculation as to why this occurred. Here are my two cents –

Ukrainian Railway defaulted on a bond payment on non-government guaranteed debt. There is speculation that it will now default on a note guaranteed by the Ukrainian Government.

The Bearish camp would say that there is a new panic forming and investors are willing to pay the Fed to find safety in Treasuries.

If things are so bearish and a new panic is setting in, then why was LIBOR actually DOWN yesterday?

The Dollar Carry Trade is in full force. The trade is that you buy US Treasuries and leverage the hell out of them. Your cost to borrow is the yield on the security you are leveraging. With a negative yield, you are now actually GETTING PAID to borrow Treasuries and hold them to maturity.

The Bullish camp would say that Treasury yields are now negative because so many people want to borrow them that they are driving the yield negative. Bond Price Up = Bond Yield Down

I tend to be more in the Bullish camp and think that people are loading up on leverage for one last speculative push into Year End 2009.

The fact that the Carry trade may be so crowded that T-Bill Yields are now negative may be a good indicator that prices will reverse soon (the law of large numbers and all), so be on your toes. Everything still needs to be a trade.

We’ll see how things shake out, but I am looking to buy stuff with the money I raise by selling SLV and HL earlier this week, not sell more stuff to raise more cash.

I will be posting a lot of charts this weekend.

Do You Really Think These Students Will Put Your Social Security Above Their Cost Of Living Expenses?

UC Regents voted to raise fees by 32% yesterday.
They cast the vote at UCLA.
A lot of students showed up to protest.

“We weren’t allowed to leave,” said Student Regent Jesse Bernal. “(The situation) just became a little too intense for the police officers.”

They took over a building.

They held signs like -

Bailout Education
First (crossed out) Last Gen College Student

There is no way that the kids hit college today will pay for the Retirement (Social Security and Public Pensions) or Health Care (Medicare). They will have to figure out how to pay for their own lives on incomes that will not match what their parents made.

You better be planning on how to self-finance your retirement years, because those checks you were expecting from the Government will be a lot smaller than you thought, if they show up at all.

Monday, November 16, 2009

Nice Day Today

Today was a great day. It felt like NASDAQ 1999 – “ 2.0”... This is a glorious Commodity Bull Market.

I’ve been working since 5 am. I knew this would be a busy week and I wanted to make sure that I was ready for it. Most of my preparation for this week was done last week, when I bought gold stocks (NEM, ABX, RGLD), Silver (SLV) and Natural Gas (UNG).

The Dollar keeps imploding and virtually anything else with potential risk goes higher. So my logic is that if prices are moving up because the Dollar is going down, then why not own the pure plays that benefit most from a falling US Dollar.

Silver (SLV) pulled back into the 50-day and then exploded higher today.

Natural Gas (UNG) has been THE lagging Commodity. I have been watching it for months, waiting for a potential entry point. It looks like UNG is trying to put in a Double Bottom at $9. There is a big divergence between Price and Momentum (Green Line). UNG had a nice pop today.

Hecla Mining (HL) is a riskier Gold stock. It has been leading and broke out last week. I have tracked it for some time and got paid off huge today. Again, very 1999 tech-like.

Singapore (EWS) has been holding up like a champ, simply building new bases each time the markets pull back. Another nice move today.

Industrials have been in a multi-week base and finally started to break out today.

There were lots of breakouts and now I go to work looking for the next round of potential breakouts. Again, I want to only buy when I have an exit strategy. Look at what is again showing up –

Metals and Mining (XME). Does this remind you of the chart of XLI? It should.

Russia (RSX)

I refuse to chase price higher and buy when the markets are extended. I prefer to do more homework and find other setups that can be bought with reasonable risk.

If you have not participated in this leg, don’t get antsy and do something risky. Do you homework and look for the newly emerging potential setups.