Is a Liquidity Trap Coming?

The term liquidity trap is used in Keynesian economics to refer to a situation where monetary policy is unable to stimulate an economy, either through lowering interest rates or increasing the money supply.

In its original conception, a liquidity trap resulted when demand for money becomes infinitely elastic (i.e. where the demand curve for money is horizontal) so that further injections of money into the economy will not serve to further lower interest rates. Under the narrow version of Keynesian theory in which this arises, it is specified that monetary policy affects the economy only through its effect on interest rates. Thus, if an economy enters a liquidity trap, further increases in the money stock will fail to further lower interest rates and, therefore, fail to stimulate.

In the wake of the "Keynesian revolution" in the 1930s and 1940s, various neoclassical economists sought to minimize the concept of a liquidity trap by specifying conditions in which expansive monetary policy would affect the economy even if interest rates failed to decline. Don Patinkin and Lloyd Metzler specified the existence of a "Pigou effect," named for English economist Arthur Cecil Pigou, in which the stock of real money balances is an element of the aggregate demand function for goods, so that the money stock would directly affect the "IS" curve in an ISLM analysis, and monetary policy would thus be able to stimulate the economy even under the existence of a liquidity trap. While much of the economics profession had serious problems with the existence or significance of this Pigou Effect, by the 1960s academic economists gave little credence to the concept of a liquidity trap.

The neoclassical economists' assertion was that, even in a liquidity trap, expansive monetary policy could still stimulate the economy via the direct effects of increased money stocks on aggregate demand. This was essentially the hope of both the Bank of Japan in the 1990s, when it embarked upon quantitative easing and of the central banks of the United States and Europe in 2008–2009, with their foray into quantitative easing. These policy initiatives attempted to stimulate the economy through methods other than the reduction of short-term interest rates.

However, the concept returned to prominence in the 1990s when the Japanese economy fell into a period of prolonged stagnation despite the presence of near-zero interest rates.[1] While the liquidity trap as formulated by Keynes refers to the existence of an horizontal demand curve for money at some positive level of interest rates, the liquidity trap invoked in the 1990s referred merely to the presence of zero interest rates (ZIRP), the assertion being that since interest rates could not fall below zero, monetary policy would prove to be impotent in those conditions, just as it was asserted to be in a proper exposition of a liquidity trap.

While this later conception differed from that asserted by Keynes, both views have in common first the assertion that monetary policy affects the economy only via interest rates, and second the conclusion that monetary policy cannot stimulate an economy in a liquidity trap.

Much the same furor has emerged in the United States and Europe in 2008–2010, as short-term policy rates for the various central banks have moved close to zero.[2]

Next Stop 1010 on S and P

Housing Prices will force lower equities

Last hope for the bear case....

Next Week ISM report could be ugly - GS

The next U.S. ISM manufacturing and services reports, to be released by the Institute for Supply Management this Monday, could be pretty ugly, says Goldman.

How do they know? They've built their own 'GSAI' indicator that shares much of the same data that goes into the ISM release, and thus provides a potential early warning:

Goldman's Jan Hatzius:

The Goldman Sachs Analyst Index fell 6.1 points to 55.4 in July, indicating less widespread economic growth than in June. This decline is consistent with recent weakness in other recent economic indicators. The GSAI now stands at its lowest level since November 2009.

...

Most of the movement in the GSAI this month is attributed to significant declines in the sales and new orders indices, which fell 12.3 and 9.7 points respectively. The new orders index is now at its lowest level since July of last year. In this context, July’s slight increase in the inventories index may not be a good sign as it suggests production may have moved ahead of demand at a time when orders may be flagging. The gap between the new orders and inventories indices, which provides a rough leading guide to future strength in industrial output in ISM-style surveys, is the narrowest it has been since May of 2009.



The only reminder here is that their indicator remains in growth territory, indicating continued economci expansion, but just of a far slower nature.



Read more: http://www.businessinsider.com/goldmans-leading-indicator-plummets-to-a-seven-month-low-predicts-an-ism-collapse-2010-7?utm_source=Triggermail&utm_medium=email&utm_campaign=CS_COTD_073010#top#ixzz0vIzW1SOS

EURO - DOLLAR and US CREDIT RATING

The euro (U.S.:EURUSD) rose to $1.3094, near its highest in about three months, from around $1.2985 in North American trading late Wednesday.

The euro touched $1.3106 on an intraday basis, eclipsing the high of $1.3094 on May 10, the first business day after the European Union and the International Monetary Fund announced a nearly $1 trillion loan program designed to keep the debt crisis from spreading beyond Greece to other vulnerable countries.

The dollar index (BOARD:DXY) , which tracks the U.S. unit against a basket of major currencies, stood at 81.559, down from 82.139 late Wednesday.

The dollar fell against the yen (U.S.:USDYEN) to ¥86.92, down from ¥87.35 Wednesday. The greenback extended losses as U.S. stock indexes turned negative.

The euro (U.S.:EURYEN) gave up earlier gains to buy ¥113.83, versus ¥113.44.

Since the credit crisis began, the dollar has tended to react more to movements in equities as an indication of investor demand for the relative safe-haven status of the dollar and other low-yielding currencies, including the yen.

The dollar stayed down in afternoon action as traders position themselves for Friday's report on U.S. economic growth. The gross domestic product is expected to have grown at a 2.5% in the second quarter, according to a survey of economists by MarketWatch. That's down from predictions closer to 4% earlier and would be a slower pace than the 2.7% rate in the first quarter. See preview of GDP.

'We're consolidating before tomorrow's GDP," said John Doyle, a currency strategist at Tempus Consulting. "If it turns out stronger, it may have a positive effect on equities, which would weaken the dollar."

Two Federal Reserve officials said the U.S. is may grow at a "suboptimal" pave and is close to experience Japanese-style deflation. Read Fed comments on deflation.

The gains in the euro started in the European session, as earnings releases boosted European stocks, contributing to an increase in overall risk appetite to the detriment of the dollar, said Manuel Oliveri, currency strategist at UBS.

The dollar wasn't helped by a report that Moody's Investors Service top sovereign analyst for the U.S. reiterated that the nation's triple-A credit rating could eventually come under scrutiny unless the government presents a credible fiscal consolidation plan, Oliveri said.

All week, the euro has failed to recapture levels "last seen on May 10 as the world woke up to news of the $1 trillion EU bailout," strategists at RBC Capital Markets said. "The suggestion that the U.S.'s AAA rating could come under question was enough to trigger a spike higher in euro-dollar."

Separately, the European Commission's economic-sentiment indicator rose for July, supporting the rally in the shared currency. Read about euro-zone sentiment.

Equity Market Being Propped Up As Market Remains Last Line Of Defense Against Deflation

By MatrixAnalytix
Created 07/29/2010 - 14:43
3:20PM EST

Recent 1 to 1 Treasury to Equity correlation continues to break down as we noted monday...note Treasuries holding near high of the day as equities rally back into green...something is amiss in the financial markets right now with one of these markets being artificially skewed...again most likely culprit is equities as this market is much more easily manipulated due to lower liquidity profile relative to the treasury market....believe equities are being artificially propped up as a defense against widespread acceptance of deflationary pressures for if headlines start to cross that equities are cratering due to deflation, consumer spending will certainly come to a screeching halt (due to perception of lower asset prices in the future) which will certainly give deflation the green light to take hold of this economy...ultimately believe equity market pricing is the last line of defense against the reality of deflation which is why we are seeing such a strong defense against lower prices....in the end however, deflation is such a strong force that any attempt at short-term manipulation of asset prices will fail.

http://www.matrixanalytix.com/live-market-analytix.html

Bank Ratings: BofA, Citi, Wells Fargo Outlook Negative: Moody's - CNBC

Bank Ratings: BofA, Citi, Wells Fargo Outlook Negative: Moody's - CNBC
Moody's on Tuesday changed its outlook on Bank of America, Citigroup and Wells Fargo to negative, from stable, citing lessened government support for the institutions under new U.S. regulations.


A negative outlook indicates the banks are more likely to be downgraded over the next 12 to 18 months. The credit ratings agency also said it may cut its ratings on ten regional banks on reduced government support.

Moody's has boosted its debt and bank deposit ratings on large financial institutions by between 3 and 5 notches since early 2009 on the assumption that they would receive government support in a time of trouble because of the risks they pose to other financial firms and the economy as a whole.

The new financial reform bill, however, is intended "clearly to eliminate government—i.e. taxpayer-support to creditors," Moody's said. Some support, however, is likely to remain for large institutions as regulators work to implement new laws, it added.

"Over the next 12 to 24 months ... we expect that our support assumptions for systemically important banks will likely revert to pre-crisis, or even lower, levels—though we do not anticipate that we would completely eliminate support from these firms' senior debt and deposit ratings," Moody's said.

Moody's rates Bank of America's senior debt A2, the sixth highest investment grade, Citigroup A3, the seventh highest investment grade and Wells Fargo A1, the fifth highest investment grade.

Moody's also said it may downgrade subsidiaries of BB&T, Capital One, Fifth Third, KeyCorp, PNC, Popular, Regions Financial, SunTrust Banks, U.S. Bancorp and Zions Bancorp.

Wag the Dog « BondSquawk

Wag the Dog « BondSquawk

Large Swings

Anytime there are large swings like this in the market, it is usually a bearish sign and precedes a larger decline. Just something I have observed. So don't look at the futures....remember, stay the course.

S and P Long Term Chart - slope of hope

Most likely scenario is barely above the 666 lows but if it starts to look ugly - 450 is next.

Homebuilder Confidence Falls, Signaling Slow Growth - CNBC

Homebuilder Confidence Falls, Signaling Slow Growth - CNBC

Here we go again | zero hedge

Here we go again zero hedge: "Risk assets plunged today, with Nikkei futures seeing a 250 point drop Thursday overnight, as the Yen was bid heavily across all pairs, with funds flocked to safe haven and carry trades reversing course. Several commodity FX yen crosses are on the precipice of head and shoulders breakdowns, after selling off heavily back to their necklines. Today's biggest mover in FX was CAD/JPY in fact, which is very deflationary. Commodities in general are losing their fundamental bid. Intermarket corrs are at 1987 crash highs, eliminating the diversification premium investors offer for commodities. And global growth slowdowns, austerity, and deflationary threats in Eurozone, USA, & Japan are bearish for commodities, the nations that export them, and risk in general.
Speaking of commodities, the Aussie Dollar suffered big selling as well, both against JPY & USD. The skyrocketed nominal housing prices and very hawkish rate policy since crash lows could turn out to be more bearish than bullish if exports to China slow, as Chinese economic data and the one-time nature of its stimulus package suggest. With the Baltic Dry Index posting record consecutive losses, global trade probably will not be a “way out” of bearish developments in the forthcoming months.
On a technical basis, the AUD/USD seems to have double-topped at its June highs and was unable to break up to or back above its 200DMA (which price has had very high confluence to), leading to its current bear flag formation. As my technical analysis and FX Concept's Jonathan Clark's views suggest in the charts below, it appears to be a great short. The AUD/JPY does as well, as it found selling at its 55DMA and appears primed for a move down to 72.50 and 70.00 support levels, the latter of which corresponds to April 2009 levels."

Look out below - it's still coming......

Declining volume - bearish sign

Although Alcoa had decent earnings and everyone is predicting a big run prior to earnings which start tomorrow...I see a market approaching some technical levels where resistance is present and a recent run up on low volume which is bearish...let's see if we break to the upside or begin to retrace as I believe....

Begining to approach resistance

Look at the chart from AlphaTrends.net - it clearly shows the 3 next resistance areas. I expect one of these resistance points to hold up and the downward pressure to pick up.

The Economy is headed for a Double Dip

I am looking for a short term bounce up to 1080 on S & P

Let's see if we can make it that high or we just sell off as usual. I am hoping to get short after the next resistance level.

We are range bound 1010-1040. Then we go lower...from T3 website.

By: Scott Redler

The market opened up this morning and quickly went right to the 1040-1042 area. It almost looked too easy to short that area once again. This was your "classic retest" and the market then reversed to downside.

NASDAQ:AAPL and some key stocks could not hold their gaps. Today was a very unimpressive attempt by the bulls.

We now have a new micro range of 1010-1042. The longer we stay here below 1040 the better the setup is to break 1010 and give us another leg to my downside targets of 940-970.

We were very oversold and we had decent news today. The market yawned! Listen to the tape, it doesn’t lie. We have some new points of reference to trade against.

NY Times - A Market Forecast That Says ‘Take Cover’ ByJEFF SOMMER

A Market Forecast That Says ‘Take Cover’By JEFF SOMMER
WITH the stock market lurching again, plenty of investors are nervous, and some are downright bearish. Then there’s Robert Prechter, the market forecaster and social theorist, who is in another league entirely.

Mr. Prechter is convinced that we have entered a market decline of staggering proportions — perhaps the biggest of the last 300 years.
In a series of phone conversations and e-mail exchanges last week, he said that no other forecaster was likely to accept his reasoning, which is based on his version of the Elliott Wave theory — a technical approach to market analysis that he embraces with evangelical fervor.

Originating in the writings of Ralph Nelson Elliott, an obscure accountant who found repetitive patterns, or “fractals,” in the stock market of the 1930s and ’40s, the theory suggests that an epic downswing is under way, Mr. Prechter said. But he argued that even skeptical investors should take his advice seriously.

“I’m saying: ‘Winter is coming. Buy a coat,’ ” he said. “Other people are advising people to stay naked. If I’m wrong, you’re not hurt. If they’re wrong, you’re dead. It’s pretty benign advice to opt for safety for a while.”

His advice: individual investors should move completely out of the market and hold cash and cash equivalents, like Treasury bills, for years to come. (For traders with a fair amount of skill and willingness to embrace risk, he suggests other alternatives, like shorting the market or making bets on volatility.) But ultimately, “the decline will lead to one of the best investment opportunities ever,” he said.

Buy-and-hold stock investors will be devastated in a crash much worse than the declines of 2008 and early 2009 or the worst years of the Great Depression or the Panic of 1873, he predicted.

For a rough parallel, he said, go all the way back to England and the collapse of the South Sea Bubble in 1720, a crash that deterred people “from buying stocks for 100 years,” he said. This time, he said, “If I’m right, it will be such a shock that people will be telling their grandkids many years from now, ‘Don’t touch stocks.’ ”

The Dow, which now stands at 9,686.48, is likely to fall well below 1,000 over perhaps five or six years as a grand market cycle comes to an end, he said. That unraveling, combined with a depression and deflation, will make anyone holding cash “extremely grateful for their prudence.”

Mr. Prechter is hardly the only market hand to advocate prudence now, but nearly everyone else foresees a much rosier future, once current difficulties are past.

For example, Ralph J. Acampora, a market analyst with more than 40 years of experience, said he moved entirely out of stocks and into cash late last month. Now a partner at Alverita, a wealth management firm in New York, he said recent setbacks suggested that the market would drop another 10 or 15 percent, probably until September or October, before resuming another “meaningful rally.”

Over the next several years Mr. Acampora expects an “old normal market,” characterized by relatively short-lived swings that will provide many opportunities for smart investors — one that resembles the markets of the 1960s and 70s. “I’ve lived through it,” he said.

Like Mr. Prechter, he is a past president of the Market Technicians Association, the leading organization of technical market analysts, and he said that his colleague has done “some very good work.” But Mr. Acampora doesn’t agree with Mr. Prechter’s long-term theories, either intellectually or emotionally.

The “mathematics don’t work,” Mr. Acampora said, because such a big decline would imply that individual stocks would need to trade at unrealistically low levels. Furthermore, he said, “I don’t want to agree with him, because if he’s right, we’ve basically got to go to the mountains with a gun and some soup cans, because it’s all over.”

Still, on a “near-term” basis, he said, “We’re probably saying the same thing.”

Similarly, Larry Berman, who co-founded ETF Capital Management in Toronto and recently ended his term as the president of the technicians association, says he sees a “classic” short-term negative market trend developing now. But he doesn’t use the Elliott Wave theory, saying Mr. Prechter is trying to “measure the market in decades, which is too long a time frame for practical trading purposes or for risk management.”

Mr. Prechter, 61, lives in Gainesville, Ga., where he runs Elliott Wave International, a forecasting and publishing firm. He graduated from Yale as a psychology major in 1971, dabbled as a singer, drummer and songwriter in a rock band and became a technical analyst for Merrill Lynch.

He became fascinated by Mr. Elliott’s writings, which suggest that the market moves in predictable if complex patterns. Along with A. J. Frost, Mr. Prechter wrote “Elliott Wave Principle,” a 1978 book that predicted the emergence of a great bull market — a forecast that was largely fulfilled. By 1987, he was widely regarded as an expert in technical analysis. Articles in The New York Times said he was known as “the market’s leading technical guru” — and more. An article in October that year said he had “emerged as both prophet and deity, an adviser whose advice reaches so many investors that he tends to pull the market the way he has predicted it will move.”

He has far less day-to-day influence now, after years spent developing a theory he calls “socionomics,” which holds “social moods” as the cause not only of market cycles but also of economic and political events. A grand cycle is ending, he says, and the time for reckoning is near.

In 2002, he published “Conquer the Crash,” which predicted misery ahead. Even so, he said in 2008 that the market would soon rally sharply — then said late last year that stocks were about to fall and that the great decline would resume.

Since 1980, the advice in his investing newsletters, when converted into a portfolio, has slightly underperformed the overall stock market but has been much less risky, losing money in only one calendar year, according to calculations by The Hulbert Financial Digest. Mr. Prechter said he disagreed with the methodology used in these measurements, but offered none of his own.

For his part, Mr. Acampora says that the Elliott Wave has some validity as an indicator but that “it’s only part of the story” of technical market analysis, which also needs to be buttressed by economic and fundamental research.

Mr. Prechter says his unifying theory, socionomics, is a “young science.”

“We’re quantifying it,” he said. “We’re working on it.” In the meantime, he contends, it has enabled him to “look around the corner” and prepare for a dangerous future.

What is the bond market telling us?

TLT is holding on strong during this rally, GS is not moving higher after its higher open, Gold is going lower, oil is moving significantly off its highs, this is an obvious bear market rally....Treasuries are telling me something is wrong, this is a technical bounce. Hold your shorts but buckle up, its going to be an interesting ride. I think the treasury market is telling me that we are going lower in the near future, FAZ will be back at 19 by next week, no doubt!

Dow Repeats Great Depression Pattern: Charts - CNBC

Dow Repeats Great Depression Pattern: Charts - CNBC The Dow Jones Industrial Average is repeating a pattern that appeared just before markets fell during the Great Depression, Daryl Guppy, CEO at Guppytraders.com, told CNBC Monday.

“Those who don’t remember history are doomed to repeat it…there was a head and shoulders pattern that developed before the Depression in 1929, then with the recovery in 1930 we had another head and shoulders pattern that preceded a fall in the market, and in the current Dow situation we see an exact repeat of that environment,” Guppy said.

The Dow retreated 457.33 points, or 4.5 percent last week, to close at 9,686 Friday. Guppy said a Dow fall below 9,800 confirmed the head and shoulders pattern.

The Shanghai Composite is seeing a very rapid collapse, falling below 2,500, which suggests the major fall in the Dow, he added.

In the European markets, Guppy says Frankfurt's Dax is witnessing a different pattern to London's FTSE.

Guppy uses the broad trading band as measurement- giving the Dax a downsize target of 1,500. The same head and shoulders pattern seen in the Dow can also being seen in the FTSE, he added.

Peter Navarro's Thoughts

Market Pulse: Mixed Signals


There is no ambiguity left about the direction of this market - the trend is decisively down. This trend is consistent with all of the leading indicators featured in my Always a Winner forecasting model: Consumer confidence and housing sales are down. The long end of the yield curve is at historic lows. The one bright spot - the ISM Manufacturing Index - has now started to turn down.

On the net export component of the GDP equation, the stronger dollar will catch up to us soon in the form of slower growth. As for government spending, Congress is finally beginning to turn the spigot off - so that is contractionary as well.

On the broader macro front, the Chinese real estate bubble appears to be on the verge of collapse while the Chinese economy is faltering. Europe will be buying less of U.S. and Chinese exports so that will contribute to the global slowdown. Here in the U.S., voter concerns over the BP "sick to my stomach" spill, the debacle in Afghanistan, the specter of muni bond failures in key states, continued high unemployment, job and pension uncertainty, and a congress still intent on passing bad laws and higher taxes all add up to difficulties ahead.

The danger is not a double dip recession necessarily. All we need have for a vicious bear market is 1% to 2% GDP growth in the rest of 2010 and all of 2011.That is increasingly likely. What's a trader to do? In what may be a kamikaze move, I am slowly building a position in TBT to short the long bond in the belief that absent a Great Depression, TBT can't go much lower - and at some point because of sovereign debt issues, TBT must go higher.

I have also begun to nibble at the short side for gold. While it has been booming because gold has begun to replace the dollar as the de facto world reserve currency, gold can't keep rising when all the other metals and commodities are falling with a softening economy.

I continue to dabble in several small cap biotechs, including SNT, CYPB, and NRGX - but beware, NRGX is VERY thinly traded.

On a daily basis, I've also been posting some short term swing trades in videos prepared for TheStreet.com. These trades are strictly for pros, however, as they require sophisticated money management techniques and move quickly. (Please visit this link on a daily basis to follow these trades.)

I wish I had better news. Many of my readers are stuck in U.S.-centric long portfolios that are likely to bleed more over the next 3 to 12 months. That's why I always say cash is king when the trend is down - if you are not experienced enough to short (which is far more risky because markets move down a lot faster than they move up).
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Sell the rally! Tomorrow will be a big head fake - or we head straight down..

The technicals are awful. The S&P is now on the verge of hitting something everyone is calling a death cross – a pattern created when the 200 day moving average crosses the 50-day; it’s another bearish signal. I think the market is broken, sure we can rally if tomorrows jobs numbers are better than expected? Perhaps but sell into it. I’m firmly of the belief that every rally should be sold. Ultimately I believe we’re heading down to the low 900’s on the S&P, for now then LOWER!

What Now?

The head and shoulders pattern that everyone thinks can't happen - it's happening. We closed today well below the much talked about $1,040 level that every technician is eying as the neckline of a broad head and shoulders pattern, considered to be the most reliable reversal pattern in technical analysis. Now that everyone sees it, it shouldn't happen right? Wrong. The S&P has made an 8 month low but TLT (Bonds) are making a 16 month high. The price action the market seems easily headed for more downside with some violent bear market rallies along the way for the shorts. We are getting deeper into the summer which are historically poor months for market performance. Bob Prechter has called this deflationary market environment about as well as anyone over the last few years. Prechter says now is the time to sell the dollar, buy Francs and expect a minor bounce in the S&P. But don’t be fooled, he thinks the bear market is continuing and that stocks have much lower to move over the longer-term.

TLT and EURO showing short term bullish for stocks

It's 11:50am and TLT is moving lower and the EURO is showing strength. This is bullish for equities short term...be careful on shorts, keep them tight and buy more as we know this market has much lower to go in the future. Watch these two leading indicators to tell you the market direction.

Listening to everyone now predicting the support levels tells me we haven't even sniffed the bottom yet...

We have not seen anything close to what is coming....when the bottom is near, we will all want to go outside and throwup. This is not funny, this is nothing to be proud to predict...this is and will be very, very bad.

Has China shown us the way? Leading Indicator?

One blog I read often, Charts and Coffee explains howe he uses China
as his my primary indicator. Part of the reason he pulled out of the market at the end of April was because FXI broke below its 200 DMA. Recently, we had a failed breakout over the 200 DMA and now the index is trading below its 200 and 300 DMA. I won’t rehash all of his prior posts, but I believe he may be right that the long side will not work so long as China is not working.
Also note that the double bottom breakout on many of the indexes such as the S&P 500 has failed.

Crash Coming?

The next couple of trading sessions could spell disaster for the S&P 500 and investors should watch the index very closely for early warning signs of a crash, technical analyst and independent trader Bill McLaren told CNBC Friday.



"If the index goes to 1,040 and only bounces one day and the next day goes to a new low, be very careful because the time cycles in that pattern indicate there could be a crash scenario," McLarer said. "I doubt it, but if it occurs, look out."

The S&P [.SPX 1076.76 3.07 (+0.29%) ] closed 1.7 percent lower Thursday at 1,073.69 points after a late-session selloff dented the index. It has now seen four straight days of declines.

"The manner in which we got down has me really cautious. We had a large gap down, followed by follow-through, that's not a very pretty picture," McLaren said.

"I'd like to see the market hold in here today and then rally into September," he added.

Even though there is a risk of a severe decline, McLaren expects stocks to remain range-bound in the near term.

"I still think we're in a sideways move in indexes, but let's hope so," he said.

"Our forecast calls for this period of time to be a period of distribution because we're looking at a two-year bear trend once this distribution is complete," he added.

We are getting real close....to the armageddon I have been predicting..

I was at a barbeque/family function this weekend and it hit me....everyone knows the inevitable is coming....its just a matter of when. The smart money is on the sidelines waiting for it to happen - they are playing around with hard assets, gold, oil, nat gas, silver, etc...because they know - IT'S COMING! Technical analysis tells me its real, real close....and its going to be UGLY. I am looking at 660 on the S and P...but lower is possible....its going to be a throw up, vomit of epic proportions! I have been early to the party and lost...but I think its coming....so prepare! Short if you dare or miss the biggest short of your life....but this will also present the biggest buying opportunity ever seen....Our nation is in trouble, our world is in bigger trouble....the technicals are painting a very clear picture...IT's over, time to reset.

As 1.3 Million Americans Are About To Lose Their Jobless Benefits This Week, The Unemployment Rate Will Surge To 10.5%

Article Posted on Zerohedge.com
As we reported on Friday, a critical bill that was unable to pass this past week was the extension of unemployment benefits to millions of Americans currently collecting a $1,200 average monthly stipend from the US government for sitting on their couch and not paying their mortgage. As a result of this huge hit to endless governmental spending of future unearned money, the WSJ reports that "a total of 1.3 million unemployed Americans will have lost their assistance by the end of this week." Furthermore, the cumulative number of people whose extended benefits are set to run out absent this extension, will reach 2 million in two weeks, and continue rising: as a reminder the DOL reported over 5.2 million Americans currently on Extended Benefits and EUC (Tier 1-4). The net result is yet another hit to the US ledger, as soon 2 million Americans will no longer recycle $1,200 per month into the economy. In other words, beginning in July, there will be $2.4 billion less spent each month by America's jobless on such necessities as LCD TVs (that critical 4th one for the shoe closet), iPads and cool looking iPhones that have cool gizmos but refuse to hold a conversation the second the phone is touched the "wrong" way. As the number of jobless whose benefits expire grows, the full impact of lost money will progressively increase, and absent some last minute compromise, the monthly loss will promptly hit $5 billion per month. Annualized this is a hit of $60 billion to "consumption", and represents roughly 120 million iPads not purchased, and about half a percentage point of GDP (ignoring various downstream multiplier effects). Worst of all, as these people surge back into the labor force, the unemployment rate is about to spike by nearly 1%, up to 10.5%.

From the WSJ:

On Thursday, Senate Democrats failed to secure the 60 votes needed to break off a GOP-led filibuster. Sen. Ben Nelson (D., Neb.) voted with Republicans in a 57-41 roll call. Senate Majority Leader Harry Reid (D., Nev.) said this third vote on the matter would be the last, allowing the Senate to move on to modest legislation cutting taxes for small businesses.

The collapse of the wide-ranging legislation means that a total of 1.3 million unemployed Americans will have lost their assistance by the end of this week. It will also leave a number of states with large budget holes they had expected to fill with federal cash to help with Medicaid costs.

Up in the air are other provisions that were to be included in the legislation, including some $50 billion in new taxes designed to help offset its cost. They included an increase in levies paid by private investment groups, including hedge-fund firms and real-estate partnerships, a provision long sought by some Democrats that will likely return another day.

Under a program initially enacted last year—which expired June 2—jobless workers could receive up to 99 weeks of aid, including 26 weeks of basic assistance provided by states plus longer-term federal payments. The Labor Department estimates that the long-term unemployed, meaning those out of a job for at least six months, make up 46% of all jobless workers in the U.S.

And like every other stimulus program, there are those who focus on possible cons from the program end...

There are economic risks in ending benefits. Workers receiving them tend to funnel money back into the economy immediately, helping prop up demand and jobs.

In addition, said Harvard economist Lawrence Katz, if workers are unable to find work and no longer eligible for unemployment benefits, some will turn to other government programs, such as disability and Social Security. "If you're really concerned about the long-term deficit, you should be really concerned about the long-term unemployed," Mr. Katz said.

and pros...

Other economists argue that extended benefits have played a part in keeping people out of the labor force. "There's a very large body of research that says that more generous benefits and benefits that last longer…encourage people to stay out of work longer," said Bruce Meyer, an economist and public policy professor at the University of Chicago.

James Sherk, a labor economics analyst at the conservative Heritage Foundation think tank, said that while it could be argued that the benefits made available last year were too extensive, cutting off workers who expected to receive the full 99 weeks of benefits isn't ideal either. "You don't sort of pull the rug out from someone halfway through," he said.

In our view, what will happen is that the 1.3 million who had gotten used to receiving benefits (and for whom we certainly feel sorry, as once again expectations and reality under the current administration diverge in a dramatic fashion) and had no desire to look for work, will immediately flood back into the labor force to find some job, any job, that pays even remotely as well as what the government did. What this means is that the total labor force (which incidentally dropped by 322,000 From April to May) of 154.393 million, is about to grow by at least 1.3 million, and as much as 2 million, in July. And since census employment peaked, and the number of employed will stay flat (at best) at 139.420 million, the expansion in the total labor force, will increase the unemployment rate by almost 1% in just a month, growing from 9.7% in May to 10.5% in July. That number will be reported in late August. But by then the sequel to the Great Depression v2 movie will be playing in every theater across the land, and this number will be the least of our worries.

Appendix A: average monthly benefits check as per the Daily Treasury Statement and the DOL's weekly claims report.

Buy FAZ - banks have issues....

101 small banks have not paid their TARP dividend which is sign that’s there’s still a “great deal of instability in the banking system”.
Three thousand out of eight thousand banks have serious concentration in commercial real estate. 6 out of 19 stress tested banks have commercial real estate that exceeds tier 1 capital.
Does not look like a problem that’s going to get smaller over the next couple of quarters. It looks like a problem that is going to increase.

Is the end near?

Big Break to the downside....

As expected, support was breached. EURJPY has to follow to the downside for the move to be confirmed or ES will bounce right up as the gap is filled (yes, it is 3pm and decoupling is here).

George Soros - "the collapse of the financial system as we know it is real, and the crisis is far from over."

The Full Soros Speech on ‘Act II’ of the CrisisJune 10, 2010, 4:10 pm — Updated: 5:59 pm -->
In the week following the bankruptcy of Lehman Brothers on Sept. 15, 2008 — global financial markets actually broke down, and by the end of the week, they had to be put on artificial life support. The life support consisted of substituting sovereign credit for the credit of financial institutions, which ceased to be acceptable to counterparties.
As Mervyn King of the Bank of England brilliantly explained, the authorities had to do in the short term the exact opposite of what was needed in the long term: they had to pump in a lot of credit to make up for the credit that disappeared, and thereby reinforce the excess credit and leverage that had caused the crisis in the first place. Only in the longer term, when the crisis had subsided, could they drain the credit and re-establish macroeconomic balance.
This required a delicate two-phase maneuver just as when a car is skidding. First you have to turn the car into the direction of the skid and only when you have regained control can you correct course.
The first phase of the maneuver has been successfully accomplished — a collapse has been averted. In retrospect, the temporary breakdown of the financial system seems like a bad dream. There are people in the financial institutions that survived who would like nothing better than to forget it and carry on with business as usual. This was evident in their massive lobbying effort to protect their interests in the Financial Reform Act that just came out of Congress. But the collapse of the financial system as we know it is real, and the crisis is far from over.
Indeed, we have just entered Act II of the drama, when financial markets started losing confidence in the credibility of sovereign debt. Greece and the euro have taken center stage, but the effects are liable to be felt worldwide. Doubts about sovereign credit are forcing reductions in budget deficits at a time when the banks and the economy may not be strong enough to permit the pursuit of fiscal rectitude. We find ourselves in a situation eerily reminiscent of the 1930s. Keynes has taught us that budget deficits are essential for counter cyclical policies, yet many governments have to reduce them under pressure from financial markets. This is liable to push the global economy into a double dip.
It is important to realize that the crisis in which we find ourselves is not just a market failure but also a regulatory failure, and even more importantly, a failure of the prevailing dogma about financial markets. I have in mind the Efficient Market Hypothesis and Rational Expectation Theory. These economic theories guided, or more exactly misguided, both the regulators and the financial engineers who designed the derivatives and other synthetic financial instruments and quantitative risk management systems which have played such an important part in the collapse. To gain a proper understanding of the current situation and how we got to where we are, we need to go back to basics and re-examine the foundation of economic theory.
I have developed an alternative theory about financial markets which asserts that financial markets do not necessarily tend toward equilibrium; they can just as easily produce asset bubbles. Nor are markets capable of correcting their own excesses. Keeping asset bubbles within bounds have to be an objective of public policy. I propounded this theory in my first book, “The Alchemy of Finance,” in 1987. It was generally dismissed at the time, but the current financial crisis has proven, not necessarily its validity, but certainly its superiority to the prevailing dogma.
Let me briefly recapitulate my theory for those who are not familiar with it. It can be summed up in two propositions. First, financial markets, far from accurately reflecting all the available knowledge, always provide a distorted view of reality. This is the principle of fallibility. The degree of distortion may vary from time to time. Sometimes it’s quite insignificant, at other times it is quite pronounced. When there is a significant divergence between market prices and the underlying reality I speak of far from equilibrium conditions. That is where we are now.
Second, financial markets do not play a purely passive role; they can also affect the so-called fundamentals they are supposed to reflect. These two functions that financial markets perform work in opposite directions. In the passive or cognitive function, the fundamentals are supposed to determine market prices. In the active or manipulative function market, prices find ways of influencing the fundamentals. When both functions operate at the same time, they interfere with each other. The supposedly independent variable of one function is the dependent variable of the other, so that neither function has a truly independent variable. As a result, neither market prices nor the underlying reality is fully determined. Both suffer from an element of uncertainty that cannot be quantified. I call the interaction between the two functions reflexivity. Frank Knight recognized and explicated this element of unquantifiable uncertainty in a book published in 1921, but the Efficient Market Hypothesis and Rational Expectation Theory have deliberately ignored it. That is what made them so misleading.
Reflexivity sets up a feedback loop between market valuations and the so-called fundamentals which are being valued. The feedback can be either positive or negative. Negative feedback brings market prices and the underlying reality closer together. In other words, negative feedback is self-correcting. It can go on forever, and if the underlying reality remains unchanged, it may eventually lead to an equilibrium in which market prices accurately reflect the fundamentals. By contrast, a positive feedback is self-reinforcing. It cannot go on forever because eventually, market prices would become so far removed from reality that market participants would have to recognize them as unrealistic. When that tipping point is reached, the process becomes self-reinforcing in the opposite direction. That is how financial markets produce boom-bust phenomena or bubbles. Bubbles are not the only manifestations of reflexivity, but they are the most spectacular.
In my interpretation equilibrium, which is the central case in economic theory, turns out to be a limiting case where negative feedback is carried to its ultimate limit. Positive feedback has been largely assumed away by the prevailing dogma, and it deserves a lot more attention.
I have developed a rudimentary theory of bubbles along these lines. Every bubble has two components: an underlying trend that prevails in reality and a misconception relating to that trend. When a positive feedback develops between the trend and the misconception, a boom-bust process is set in motion. The process is liable to be tested by negative feedback along the way, and if it is strong enough to survive these tests, both the trend and the misconception will be reinforced. Eventually, market expectations become so far removed from reality that people are forced to recognize that a misconception is involved. A twilight period ensues during which doubts grow and more and more people lose faith, but the prevailing trend is sustained by inertia. As Chuck Prince, former head of Citigroup, said, “As long as the music is playing, you’ve got to get up and dance. We are still dancing.” Eventually a tipping point is reached when the trend is reversed; it then becomes self-reinforcing in the opposite direction.
Typically bubbles have an asymmetric shape. The boom is long and slow to start. It accelerates gradually until it flattens out again during the twilight period. The bust is short and steep because it involves the forced liquidation of unsound positions. Disillusionment turns into panic, reaching its climax in a financial crisis.
The simplest case of a purely financial bubble can be found in real estate. The trend that precipitates it is the availability of credit; the misconception that continues to recur in various forms is that the value of the collateral is independent of the availability of credit. As a matter of fact, the relationship is reflexive. When credit becomes cheaper, activity picks up and real estate values rise. There are fewer defaults, credit performance improves, and lending standards are relaxed. So at the height of the boom, the amount of credit outstanding is at its peak, and a reversal precipitates false liquidation, depressing real estate values.
The bubble that led to the current financial crisis is much more complicated. The collapse of the subprime bubble in 2007 set off a chain reaction, much as an ordinary bomb sets off a nuclear explosion. I call it a superbubble. It has developed over a longer period of time, and it is composed of a number of simpler bubbles. What makes the superbubble so interesting is the role that the smaller bubbles have played in its development.
The prevailing trend in the superbubble was the ever-increasing use of credit and leverage. The prevailing misconception was the belief that financial markets are self-correcting and should be left to their own devices. President Reagan called it the “magic of the marketplace,” and I call it market fundamentalism. It became the dominant creed in the 1980s. Since market fundamentalism was based on false premises, its adoption led to a series of financial crises. Each time, the authorities intervened, merged away, or otherwise took care of the failing financial institutions, and applied monetary and fiscal stimuli to protect the economy. These measures reinforced the prevailing trend of ever-increasing credit and leverage, and as long as they worked, they also reinforced the prevailing misconception that markets can be safely left to their own devices. The intervention of the authorities is generally recognized as creating amoral hazard; more accurately it served as a successful test of a false belief, thereby inflating the superbubble even further.
It should be emphasized that my theories of bubbles cannot predict whether a test will be successful or not. This holds for ordinary bubbles as well as the superbubble. For instance, I thought the emerging market crisis of 1997-98 would constitute the tipping point for the superbubble, but I was wrong. The authorities managed to save the system and the superbubble continued growing. That made the bust that eventually came in 2007-8 all the more devastating.
What are the implications of my theory for the regulation of the financial system?
First and foremost, since markets are bubble-prone, the financial authorities have to accept responsibility for preventing bubbles from growing too big. Alan Greenspan and other regulators have expressly refused to accept that responsibility. If markets can’t recognize bubbles, Greenspan argued, neither can regulators — and he was right. Nevertheless, the financial authorities have to accept the assignment, knowing full well that they will not be able to meet it without making mistakes. They will, however, have the benefit of receiving feedback from the markets, which will tell them whether they have done too much or too little. They can then correct their mistakes.
Second, in order to control asset bubbles it is not enough to control the money supply; you must also control the availability of credit. This cannot be done by using only monetary tools; you must also use credit controls. The best-known tools are margin requirements and minimum capital requirements. Currently, they are fixed irrespective of the market’s mood, because markets are not supposed to have moods. Yet they do, and the financial authorities need to vary margin and minimum capital requirements in order to control asset bubbles.
Regulators may also have to invent new tools or revive others that have fallen into disuse. For instance, in my early days in finance, many years ago, central banks used to instruct commercial banks to limit their lending to a particular sector of the economy, such as real estate or consumer loans, because they felt that the sector was overheating. Market fundamentalists consider that kind of intervention unacceptable, but they are wrong. When our central banks used to do it, we had no financial crises to speak of. The Chinese authorities do it today, and they have much better control over their banking system. The deposits that Chinese commercial banks have to maintain at the People’s Bank of China were increased 17 times during the boom, and when the authorities reversed course, the banks obeyed them with alacrity.
Third, since markets are potentially unstable, there are systemic risks in addition to the risks affecting individual market participants. Participants may ignore these systemic risks in the belief that they can always dispose of their positions, but regulators cannot ignore them because if too many participants are on the same side, positions cannot be liquidated without causing a discontinuity or a collapse. They have to monitor the positions of participants in order to detect potential imbalances. That means that the positions of all major market participants, including hedge funds and sovereign wealth funds, need to be monitored. The drafters of the Basel Accords made a mistake when they gave securities held by banks substantially lower risk ratings than regular loans: they ignored the systemic risks attached to concentrated positions in securities. This was an important factor aggravating the crisis. It has to be corrected by raising the risk ratings of securities held by banks. That will probably discourage loans, which is not such a bad thing.
Fourth, derivatives and synthetic financial instruments perform many useful functions, but they also carry hidden dangers. For instance, the securitization of mortgages was supposed to reduce risk through geographical diversification. In fact, it introduced a new risk by separating the interest of the agents from the interest of the owners. Regulators need to fully understand how these instruments work before they allow them to be used, and they ought to impose restrictions guard against those hidden dangers. For instance, agents packaging mortgages into securities ought to be obliged to retain sufficient ownership to guard against the agency problem.
Credit-default swaps (C.D.S.) are particularly dangerous. They allow people to buy insurance on the survival of a company or a country while handing them a license to kill. C.D.S. ought to be available to buyers only to the extent that they have a legitimate insurable interest. Generally speaking, derivatives ought to be registered with a regulatory agency just as regular securities have to be registered with the S.E.C. or its equivalent. Derivatives traded on exchanges would be registered as a class; those traded over-the-counter would have to be registered individually. This would provide a powerful inducement to use exchange traded derivatives whenever possible.
Finally, we must recognize that financial markets evolve in a one-directional, nonreversible manner. The financial authorities, in carrying out their duty of preventing the system from collapsing, have extended an implicit guarantee to all institutions that are “too big to fail.” Now they cannot credibly withdraw that guarantee. Therefore, they must impose regulations that will ensure that the guarantee will not be invoked. Too-big-to-fail banks must use less leverage and accept various restrictions on how they invest the depositors’ money. Deposits should not be used to finance proprietary trading. But regulators have to go even further. They must regulate the compensation packages of proprietary traders to ensure that risks and rewards are properly aligned. This may push proprietary traders out of banks, into hedge funds where they properly belong. Just as oil tankers are compartmentalized in order to keep them stable, there ought to be firewalls between different markets. It is probably impractical to separate investment banking from commercial banking as the Glass-Steagall Act of 1933 did. But there have to be internal compartments keeping proprietary trading in various markets separate from each other. Some banks that have come to occupy quasi-monopolistic positions may have to be broken up.
While I have a high degree of conviction on these five points, there are many questions to which my theory does not provide an unequivocal answer. For instance, is a high degree of liquidity always desirable? To what extent should securities be marked to market? Many answers that followed automatically from the Efficient Market Hypothesis need to be re-examined.
It is clear that the reforms currently under consideration do not fully satisfy the five points I have made, but I want to emphasize that these five points apply only in the long run. As Mervyn King explained, the authorities had to do in the short run the exact opposite of what was required in the long run. And as I said earlier, the financial crisis is far from over. We have just ended Act II. The euro has taken center stage, and Germany has become the lead actor. The European authorities face a daunting task: they must help the countries that have fallen far behind the Maastricht criteria to regain their equilibrium while they must also correct the deficiencies of the Maastricht Treaty which have allowed the imbalances to develop. The euro is in what I call a far-from-equilibrium situation. But I prefer to discuss this subject in Germany, which is the lead actor, and I plan to do so at the Humboldt University in Berlin on June 23. I hope you will forgive me if I avoid the subject until then.

GS - California is coming.......

Goldman Betting Against California

Monday, June 14, 2010 09:22 AM
By: Julie Crawshaw

Goldman Sachs made a $35 million bet in the credit derivatives market against California, the biggest issuer of U.S. state debt, the Financial Times reports.The trade was the biggest such bet placed in the past few years by Wall Street banks that underwrite the state’s bond sales, according to information that the banks provided to the state.This year, California began an inquiry into credit default swaps trading by its six major underwriters, who have earned $215 million of commissions on its bond sales since 2007.However, California state treasurer Bill Lockyer said the effect of CDS trading on California bond prices was not significant enough to cause concern “at this time” and that the banks themselves have not bet against California debt “to any meaningful extent.”The data provided by banks suggest proprietary trades were small. In 2008, Goldman’s proprietary trading desk entered into four CDS trades, three of which remain open, “as part of the management of its overall portfolio”, the bank said in a letter to Lockyer.Goldman says it stopped making proprietary bets on municipal bonds in 2009. Citigroup bought $5 million of CDS on California last year and then sold $5 million this year.Both banks say the CDS trades were small compared with their exposure to California debt.Goldman Sachs, which is facing a big Securities and Exchange Commission lawsuit, may be in hot water with California Public Employees' Retirement System, Reuters reports.The pension fund wants to know why Goldman said that, its "investment Banking Division is not known by the firm to be the target of a formal investigation" when in fact the firm had already been informed about the SEC suit.

Retail Sales Horrendous....

Retail Sales Show Surprise Slump as Consumers Struggle

Published: Friday, 11 Jun 2010 8:36 AM ET
Retail sales plunged in May by the largest amount in eight months as consumers slashed spending on everything from cars to clothing. The big drop raises new worries about the durability of the economic recovery.
UpperCut Images Getty Images
The Commerce Department says that spending fell 1.2 percent last month. Auto sales were down 1.7 percent but there was widespread weakness in a number of areas. Excluding autos, sales fell 1.1 percent.
The big decline cast new doubts about the strength of the economic recovery.
Consumer spending accounts for 70 percent of total economic activity. Economists are concerned that households will start trimming outlays as they continued to be battered by high unemployment.

Credit Markets -

AN INVERTED DEATH CROSS IN INVESTMENT GRADE CREDIT - Posted on Progmatic Capitalism
9 June 2010 by TPC 1 Comment
As we’ve previously described the primary differentiating factor between this sell-off and every sell-off since March 2009 has been the action in the credit markets. For the first time in over year we are seeing substantial deterioration across credit markets. This has been notable in IG credit. Spreads have started blowing out again as the sovereign debt fears raise memories of Lehman Brothers.
The action in yesterday’s market was notable due to the strong technical movement we saw in spreads. The 50 day moving average moving upward crossed the 200 day moving average moving downward. In a typical market this would be known as a “golden cross”, but as widening spreads are a negative indicator this is actually an inverse “death cross”. It sounds very phony as most technical analysis chart patterns do, but this is one that is worth noting. The crossing of the moving averages is a very rare event and generally indicates the beginning of a very strong directional trend. We have noted similar patterns in several markets over the last few years including the golden cross in the S&P 500 in June 2009 at S&P 900 and the death cross in Chinese equities just prior to their recent 20% decline.
From a purely simplistic technical perspective IG credit’s death cross is forecasting more difficult days ahead in the credit markets and that is certain to coincide with more difficulty in the equity markets. Investors would be wise to take note.

Thanks Pres.

Total US debt today was $13.06 trillion. Total debt on March 6, 2009 was $10.95 trillion. The government has spent $2.1 trillion dollars to create a bear market rally which has now fizzled, and to fund a fiscal stimulus that is now dancing its death rattle. GDP will now gradually roll over, the unemployment rate will once again start increasing, diffusion indices, manufacturing and all other economic output will begin declining, but not before the bill is in. It cost Americans $2.1 trillion in debt to generate a 14 months sugar high (for which all will promptly receive a much higher tax bill). Luckily, we will never pay this debt off, so perhaps "the joke is on them" after all.

Well - Guess IBD was wrong....

I had sold half my shorts going into yesterdays close ahead of todays big jobs report. At 10am after the market was already down 170, I bought additional FAZ options. Let's just say - I got lucky on a gut feeling. Let's hope Monday brings me more of the same.

Selling my shorts into todays close - IBD says so

Yesterday the Nasdaq followed through to the upside and this morning IBD, which I read every day, labeled this market back in a confirmed rally. Last time this happened was March 1st around 1120 and the S&P went to 1217. Each follow through does not lead to a new massive bull run, but no bull market has started without one. I think this new rally attempt takes us back to the 1120-1140 area by the end of the quarter, which is the end of this month. At that point we will re-evaluate to see if it’s the right shoulder of a bearish head and shoulders.

Head and Shoulders could spell bad news!

SPY - June1 2010

Alphatrends.net is a great website and very inoformative. It has taught me a lot over the past several years. I have pasted their update for this coming week.

The SPY is attempting to stabilize but so far it is unconvincing. A lot of discussion was made of the light volume of the last two sessions and while it is reason for heightened concern about the sustenance of this bounce, we have to remember that the volume was also light due to many participants leaving early for the long weekend. The key level of support this market will have to hold if we are going to see further gains is ~ 108.85, the low of the last two sessions and the approximate location of the rising 5 day moving average. A break below this level (if it holds for more than an hour or so) would likely lead to a test of at least 106.85.

This current rally attempt should be viewed as a bounce within a downtrend which means the emphasis continues to be on risk management through smaller share size and a willingness to bail on longs at the first signs of weakness. If we continue to see upside follow through this week the 112 is where there is likely to be some supply as that is the approximate location of the downtrend line and the level of the volume weighted average price since the market gapped down through the 118.50 support on May 4.

Watch the LIBOR closely this week...

LIBOR, other interest rate indexes
This week Month ago Year ago
Bond Buyer's 20 bond index 4.27 4.37 4.44
FNMA 30 yr Mtg Com del 60 days 4.49 4.89 4.64
1 Month LIBOR Rate 0.35 0.27 0.32
3 Month LIBOR Rate 0.54 0.33 0.66
6 Month LIBOR Rate 0.76 0.51 1.22
Call Money 2.00 2.00 2.00
1 Year LIBOR Rate 1.15 0.98 1.53

What my crystal ball says about the market - NYPOST.com John Crudele

What my crystal ball says about the market - NYPOST.com John Crudele
What my crystal ball says abot the market - will it go up or down?

The answer is: Yes.

Yes, it'll go up. And, yes, it will come down.

Now you probably will want to know what the predominant direction will be. And over what timeframe.

That's a little complicated. As you probably know intuitively from the knot in your gut, the stock market is down sharply since the beginning of May.

But before that it was 70 percent higher since March, 2009 mainly because -- well, there's really no explanation for that neo-bubble. However, before that it was down . . .

OK, I think you get my point. The stock market has been erratic, going up by big chunks and then coming down in sizeable pieces for more than a decade.

In the end, you probably didn't make out so well if you bought stocks in 1999 and held them until today.

On the other hand, you would have made a Warren Buffett-sized fortune if you had timed the market correctly -- in the same way you successfully pick lottery numbers every week -- over those same 10 years.

If I were forced to guess, the broader trend in the stock market will be down.

There are just too many intractable financial problems around the world, any one of which could sink even a titanic market.

Those problems would be made a little more bearable if economic growth suddenly took off around the globe -- lifting all boats, as the saying goes. But that doesn't seem to be happening.

Even before the European meltdown was understood to be a threat to US business conditions, American economic growth -- despite $780 billion in stimulus -- was slowing.

The Dow Jones industrial index has been in retreat all month.

And the index was down nearly 300 points early on Tuesday, before the Dow recovered.

But in the same way a big Dow loss was reversed on Tuesday, a triple-digit gain dissipated yesterday into a 69-point loss.

The stock market has a bias toward moving higher at this time in any month.

May has been terrible for people who manage money for other folks. Stocks and commodities are down about 9 percent, with oil prices doing the worst with a drop of 17 percent despite the fact that drilling may be curtailed because of the rig accident in the Gulf of Mexico.

Bill King, a market strategist at M. Ramsey King Securities in Burr Ridge, Ill. said, "Anytime you have a spring crisis, you tend to get a 'worst is over' rally in the summer. Then the big enchilada hits in the fall."

Bill and I have been working together for years and he's a very good market timer. King says this sort of pattern happened in 1907, 1929, 1931, 1987, 2000 and 2008.

People tend to come to the conclusion that the "worst is over" during summer for many reasons.

Trading activity slows down as people go on vacation. And unless there's an unscheduled emergency then all the bad stuff gets put off for the fall.

Think about all the crises we've had in the market over the years.

The other possibility, of course, is that traders may anticipate problems in the fall and move up their timetable for panicking.

So, you should probably start worrying while you and everyone else are still sunning yourselves on the beach in August.

But wait, there's also the inevitable summer rally that exists more in Wall Street lore than in fact.

When trading activity is light, the absence of any horrible outside news could allow traders to move stock prices higher.

So, that's why the answer is yes to both short-term higher stock prices and longer-term lower ones.

Let's focus on the problems that could break up any summer rally.

The usual issues probably aren't good enough anymore. After all, how many times can investors react to problems in Greece?

But a fresh set of concerns somewhere else in Europe -- Spain, Portugal, Italy and Ireland seem the odds-on favorites -- could be the catalyst for the next market shock.

But the biggest enchilada of all -- to use King's imagery -- could be the US economy.

There have been some good signs recently, but still too many bad ones. Consumer confidence has risen, the Labor Department has reported (suspect) job growth in recent months, and people seem to be having fewer problems making payments on things like car loans.

And while not booming, the housing market is no longer in critical condition thanks to government subsidies.

But once the government stops helping people purchase homes, the real estate in dustry could weaken.

And once consumers stop making warm- weather purchases and government stats turn negative, the economy will be given a true test.

And it might not pass. In fact, while the US economy isn't likely to go back to levels it sunk to in 2009, this year's growth should taper off. john.crudele@nypost.com

Read more: http://www.nypost.com/p/news/business/what_my_crystal_ball_says_about_B81Cm2ZXyQAyym9ElRJgxI#ixzz0p9lsAfTx

Point of Interest - David Rosenberg

“There have only been two other times when the stock market ran parabolically up from a low in barely over a year, as was the case this time around (+80% from March 2009 to April 2010): the 112% surge from June 1, 1932 to September 7, 1932; and the 116% runup from March 2, 1933 to July 18, 1933. In the first case, we had a 40% correction and in the second, the correction was 34%. So, we are talking here about the prospect of a pretty hefty reversal in the S&P 500 that could very easily take the index down to as low as 850, if the history of these types of givebacks is any indication

Commodities will be King

Housing Market - Getting Worse...

FHA Volume Sign of ‘Very Sick System’; Fannie, Freddie, FHA Account for 90% of Mortgage Market
The US mortgage market is extremely sick and getting sicker every month. For the first time ever, the FHA is issuing more mortgages than Fannie and Freddie. The reason is the FHA has lower down payments.Please consider FHA Home-Financing Volume Sign of ‘Very Sick System’.
FHA lending last quarter may have topped the combined volume of government-supported Fannie Mae and Freddie Mac in a home-lending market that’s still a “government-financed market,” David Stevens, the agency’s head, said today at a conference in New York, citing research by consultant Potomac Partners.“This is a market purely on life support, sustained by the federal government,” he said at the Mortgage Bankers Association conference. “Having FHA do this much volume is a sign of a very sick system.”The FHA, which backs loans with down payments as low as 3.5 percent, insured $52.5 billion of home-purchase mortgages in the first quarter, compared with $46 billion of purchases of the debt by Fannie Mae and Freddie Mac, according to data compiled by Washington-based Potomac Partners.The FHA and Fannie Mae and Freddie Mac, which regulators seized in 2008, have been financing more than 90 percent of U.S. home lending after a retreat by banks and the collapse of the market for mortgage bonds without government-backed guarantees.To sell houses the government needs to give $8,000 tax credits and the government also needs to grant the mortgage as well because the private marker won't.This is on top of the $trillion in mortgages on the Fed's balance sheet. Supposedly Bernanke will sell them at some point. Any bet the Fed buys more first?Can I ask a simple question: Who does not have a house that wants one and can afford one, and does not need money from the government to buy one, and is not in danger of losing their job?Supposedly there is a recovery underway. Recovery my ass.Mike "Mish" Shedlockhttp://globaleconomicanalysis.blogspot.com

NJ, CALIFORNIA.Illinois...are they the next Greece?

Visit msnbc.com for Breaking News, World News, and News about the Economy

Possible Head and Shoulders?

T3Live Chart

Barney Frank - absolute joke.

The Pragmatic Capitalism
AND WE WONDER WHY THE ECONOMY IS SUCH A MESS….
22 May 2010 by TPC

Nice work on Friday by CNBC who called out Barney Frank for being a liar and a fraud. As we’ve previously shown, Barney Frank (THE CHAIRMAN OF THE HOUSE FINANCIAL SERVICES COMMITTEE) is very confused about the actual workings of our monetary system. In addition to this, Frank has now been proven entirely wrong on his position in housing and has actually lied in public about his position on housing. And we wonder why the economy is so screwed up?

Here is Frank saying he didn’t push for housing just last week:


And here is Frank in 2005 saying there is no bubble in the housing market and that subsidizing home ownership is a good plan:


The nerve.

NYU's Roubini: U.S. Can't Run Massive Deficits Forever
Posted May 21st 2010 6:00PM by Joseph Lazzaro
Filed under: Forecasts, Financial Crisis

New York University Economics Professor Nouriel Roubini, who accurately predicted the subprime mortgage default-induced financial crisis more than a year before it hit, is now cautioning the U.S. to not assume that the next stage of the financial crisis cannot return to U.S. shores.

"Bond market vigilantes have already woken up in Greece, in Spain, in Portugal, in Ireland, in Iceland, and soon enough they could wake up in the U.K., in Japan, in the United States, if we keep on running very large fiscal deficits," Roubini told Blooomberg News. "The chances are, they are going to wake up in the United States in the next three years and say, 'this is unsustainable.' "

Roubini added that the record U.S. budget deficit might persist amid a stalemate in Washington in which Republicans block tax increases and Democrats prevent spending cuts.

Fiscal/Economic Analysis: No, the United States is not Greece or Spain, but to say that the debt servicing clock is not ticking for the U.S. would represent an act of supreme hubris and arrogance. Roubini is correct: Washington needs to wake up, and in a hurry. It must cut both social and defense spending -- we're spending more than $800 billion a year on defense -- and it must raise taxes. If Congress and the president don't act, they're going to make economist Roubini a brilliant forecaster for the second time in a decade.

Carter Worth

SUSIE GHARIB: Let's get another forecast on the markets from a technical analyst. Joining us right now, Carter Worth. He's chief market technician at Oppenheimer and Company. Hi Carter.

CARTER WORTH, CHIEF MARKET TECHNICIAN, OPPENHEIMER: Hi Susie.

GHARIB: Well, as you look at your indicators, do you think that what we're going through now is a normal market correction or the beginning of a bear market?

WORTH: Sure, there's a pretty time-tested rule that one can rely on for determining bear or bull -- a 200-year old rule and it is the character of slope of the (INAUDIBLE) mechanism, the 150-day moving average. So currency, commodity, index, stock, what have you, if the (INAUDIBLE) mechanism is rising, the instrument in question is bullish. If it's declining, the instrument in question is bearish. What's happened now for the first time in over a year, the smoothing mechanism on the S&P 500 is now no longer rising and just as of two sessions ago has turned down. And it's turned down in China, months ago. It's turned down in most of the European borses (ph) from Paris to Italy, to Spain months ago. So one of the last holdouts is the U.S. and the issue is not so much whether it's an opinion of bull or bear, it's the primary trend has now changed to no longer rising.

GHARIB: And how do you see the trend going through the rest of this year, for the Dow and for the S&P?

WORTH: Sure. We spend a lot of time trying to pay attention to symmetry and there are rules of symmetry if you will, borrow from some of the rules of physics. And in the S&P, what's happening so far, basically, we came in this morning, we were unchanged on the year. And there is a tendency where if you have a violent up year right after a big bear market, meaning you go down hard in a big bear and the first year that's up is up big, we had that in '09 -- the second year is often at the end a push, nothing's happened. And this happened after the 2000 NASDAQ bubble crashed when we dropped from 2000 to 2002, the first up year '03 was up big (INAUDIBLE).

GHARIB: So how do you see your -- specifically your prediction for the Dow and the S&P by the end of this year? Are they going to be unchanged or are they going to go higher or lower?

WORTH: (INAUDIBLE) unchanged and we're mirroring '04 almost exactly. Strong in the beginning of the year, January as we were in '04, weak now and we were weak in '04. And then we had strength at the end of the year in '04. We're looking for that same pattern to repeat. At the end --

GHARIB: What is the likelihood that the Dow could turn back statistically into the 11,000 territory or the S&P could get back up to the 1200 level?

WORTH: Right. We think that the highs are in for the year, so the late April highs of 12, 19 change on the S&P and 11,200 or thereabouts on the Dow, we think that marks the high. We think the lows are about 2 percent from here. And then we end up again on the year what you call (INAUDIBLE) plus or minus 2 percent.

GHARIB: You told me that despite this, you know, flat performance or downward performance of the S&P this year, there still are some stocks that are worth buying and you gave me a couple of names. And let's take a look at them. Heinz (HNZ), Campbell's Soup (CPB) and General Mills (GIS). They're all up so far in 2010. What does the technicals tell you and is it a good idea to buy these stocks now?

WORTH: Sure. Well they have one -- let's say two common characteristics. They are all defensive by nature, right -- ketchup, canned soup, corn flakes, General Mills. So the issue they're still in primary trends that are rising. And as you point out, they're up on the year. And it's of all the things that have ever been tested in all markets at the highest level of the biggest machines ever, computer, relative strength is the number one thing. How is something doing, a stock, compared to its asset class other stocks? These stocks are outperforming. They're exhibiting impressive relative strength.

GHARIB: Let's look at the opposite way because you said there are so many stocks that are not exhibiting any strength. You gave up three names -- Google (GOOG), Goldman Sachs (GS) and Freeport (FCX), all of them down double digits. What's your analysis there?

WORTH: And here it's really, it's the quota, yes, or quite the opposite. In each case and they're totally different businesses, a media company -- Google, a broker dealer, Goldman, a copper company, Freeport, but the patterns are identical. Each was very strong. Each has been faltering. And now the smoothing mechanism (INAUDIBLE) has turned down in each one.

GHARIB: What about market volatility, Carter? We hear a lot about this, the market volatility, the so-called Vix index has really spiked up in the past week even. Do you see between now and the end of the year a lot more volatility or not?

WORTH: I think the volatility -- elevated volatility will persist and that happens in transition periods, right. If you're in a steady down trend, volatility abates. If you're in a steady uptrend (INAUDIBLE). When you're in a transition period, there's a debate raging and that's what's (INAUDIBLE) and those who think the market is cheap and those who think it's got problems. The Vix or volatility typically spikes.

GHARIB: Very good information. Thank you so much for coming on the program.

WORTH: Thank you, much obliged.

GHARIB: My guest tonight, Carter Worth, chief market technician at Oppenheimer and Company.

ETF Investment Strategies

3x Bullish:
Large Cap Bull 3x – BGU – Russell 1000
Small Cap Bull 3x – TNA – Russell 2000
Energy Bull 3x – ERX – Russell 1000 Energy
Financial Bull 3x – FAS – Russell 1000 Financials

3x Bearish:
Large Cap Bear 3x – BGZ – Russell 1000
Small Cap Bear 3x – TZA – Russell 2000
Energy Bear 3x – ERY – Russell 1000 Energy
Financial Bear 3x – FAZ – Russell 1000 Financials

2x ETF's
NASDAQ 100 Long, ticker QLD, which is 2x the long
NASDAQ 100 Short, ticker QID, which is 2x the short

Dow 30 Long, ticker DDM, 2x long
Dow 30 Short, ticker DXD, 2x short

S&P 500 Long, ticker SSO, 2x long
S&P 500 Short, ticker SDS, 2x short