Friday, March 13, 2009

Polls: It's Still the Economy, But Confidence Slides in Government Policies

From the Wall Street Journal:

There is also a clear sense in the polling that taxes will increase for all Americans because of the stimulus, notwithstanding what the president has said about taxes going down for 95% of Americans. Close to three-quarters expect that government spending will grow under this administration.

Recent Gallup data echo these concerns. That polling shows that there are deep-seeded, underlying economic concerns. Eighty-three percent say they are worried that the steps Mr. Obama is taking to fix the economy may not work and the economy will get worse. Eighty-two percent say they are worried about the amount of money being added to the deficit. Seventy-eight percent are worried about inflation growing, and 69% say they are worried about the increasing role of the government in the U.S. economy.

When Gallup asked whether we should be spending more or less in the economic stimulus, by close to 3-to-1 margin voters said it is better to have spent less than to have spent more. When asked whether we are adding too much to the deficit or spending too little to improve the economy, by close to a 3-to-2 margin voters said that we are adding too much to the deficit.

Here is the full story.

Gold Keeps Rising

This recent gold strength over the past few days has surprised me. It has also pleased me. With stocks showing strength, I would have expected gold to weaken. Is it strong because of the overall strength of commodities? Or is there still an underlying sentiment of fear that is providing support for the precious metal? In the end, the reasons are irrelevant. I follow the charts. The charts don't lie or mislead. They are what they are.

GE, Berkshire Hathaway Debt Downgraded

China to U.S.: We're Worried You're Borrowing Too Much!

From AP:

China's premier expressed concern Friday about its massive holdings of Treasuries and other U.S. debt, appealing to Washington to safeguard their value, and said Beijing is ready to expand its stimulus if the economy worsens.

Premier Wen Jiabao noted that Beijing is the biggest foreign creditor to the United States and called on Washington to see that its response to the global slowdown does not damage the value of Chinese holdings.

"We have made a huge amount of loans to the United States. Of course we are concerned about the safety of our assets. To be honest, I'm a little bit worried," Wen said at a news conference following the closing of China's annual legislative session. "I would like to call on the United States to honor its words, stay a credible nation and ensure the safety of Chinese assets."

Here is the full story

Thursday, March 12, 2009

Currency Wars

From Financial Times:

The Swiss National Bank moved to weaken the Swiss franc on Thursday, the first time a big central bank has intervened in the foreign exchange markets since Japan sought to weaken the yen in 2004.

The bank’s move, which sparked fears that other countries could follow suit, comes as the value of the Swiss franc has soared as investors seek a haven from the recent market turmoil...

Analysts said the move was likely to increase talk that countries were set to engage in a bout of competitive devaluation.

“Let the currency wars begin,” said Chris Turner at ING Financial Markets.

Countries around the world faced with the constraint of zero interest rate levels might feel it was acceptable to intervene to weaken their currencies in order to ease monetary conditions, he said, adding that other export-dependent economies such as Japan would “probably be at the head of the queue”.

Read the entire story here.

I remember well the times when the Bank of Japan kept buying the Dollar to weaken the Yen. Often, once the BOJ stopped buying, we traders would make easy money by selling the USDJPY currency pair as soon as they finished. It was a waste of money for the Japanese taxpayers, and it merely put money into the pockets of traders like me.

Worse, however, in this day, is that it threatens to set off currency battles between countries that could deepen the recession. Protectionism deepened and worsened the Great Depression, and it has the potential to do the same during these difficult economic times.

Stocks Continue Gradual Rise

Now this is a rally to believe in!

Something to keep in mind:

"The biggest rallies come in bear markets. Think back over the last few months. All these spectacular rallies we have had and yet we continue to make new lows. We had the same phenomenon during the thirties. Bear market rallies are always more spectacular than bull market rallies." -- Peter Schiff, CEO, Euro Pacific Capital
I will keep in mind this during these rallies. However, this doesn't mean that I won't participate in these rallies, as I have again today.

Grains Rise Too

Commodities, Crude Oil Rise

Commodity prices are rising almost universally today with the stock market. If "the worst is over", then demand for commodities will surge along with global equity markets.

Treasuries Spike At Auction on Strong Demand

Treasuries rose rapidly today at 1:00 pm EST as the U.S. Treasury sold long bonds. Apparently, the demand was strong because his spike just minutes ago indicates that it was well bid. Rumor has it that the Fed may have been in the market to buy, but I haven't been able to confirm this. Either way, it doesn't really matter. The chart suggests that it was a successful auction.

Gold Continues to Rise

More Stock Market Strength

After yesterday's disappointing finish, perhaps we are now beginning to see some life as follow-up to the stock market rally on Tuesday. This rally has legs!

Wednesday, March 11, 2009

Stocks Close Dead Flat!

What a disappointment! Stocks closed almost unchanged for the day, with the Dow up only 3.91 points, essentially unchanged. Even a stout morning rally lost steam very quickly, with the Dow rising only a few dozen points before giving up its gains. A nice afternoon rally also lost steam and closed almost unchanged for the day. This isn't a good sign for stocks, but at least we didn't reverse and close down for the day. This created a doji candlestick, which is generally considered to be a wash and a continuation pattern for the existing trend. The long-term trend is certainly down, but yesterday's powerful rally suggests more upside in the immediate future. Today's doji is a symbol of that contradiction. A conflict in a market typically results in a consolidation pattern, and today's doji is one manifestation of that consolidation. Tomorrow, who knows what will happen?!

Stocks: It's Up, It's Down, It's Up, It's Down

Grains Get Drubbed

From Farm Futures Magazine and Arlan :

USDA Fails to Refocus Trader

Bearish outside markets over-shadow friendly corn and soybean adjustments. Arlan Suderman, Farm Futures market analyst

USDA's monthly crop report this morning contained a few surprises to refocus the trade. Those surprises were supportive for corn and soybeans and bearish for wheat. However, a general stagnation in the outside markets following a very energetic day yesterday overwhelmed those friendly adjustments to the balance sheets.

One of the noted adjustments in this morning's USDA report was a reduction in global demand for corn, soybeans and wheat, blamed on the global economic recession.

Here is the full commentary.

Treasuries: More Flight to Safety?

More evidence that investors are once again heading for the exits from stocks!

Go Gold!

Stocks Give Up the Ghost

Stocks are now flat or in the red for the day. This is not very good follow-through after yesterday's rally. But the day isn't done...

Grains Give Back Gains

Gold Begins to Rise Again

This is curious to me because if gold is rising, it is usually a sign of concern in the markets. The price has risen from $895 to $910/oz. With stocks sagging following yesterday's rally, I wonder if this is a sign that investors are fleeing to gold once again. Stocks should have been able to sustain a stronger rally today, and the fact that stocks are barely in the black doesn't auger well for extending the rally higher.

Dead Markets Today

Grains opened modestly higher, but not enough to consider it to be of value. Stock markets are dead, with the stock indexes waffling between meager gains and flat lining. Gold is holding its own around 900/oz. Even crude oil and natural gas are nearly flat for the day. There isn't much going on so far today! Where is volatility when you need it?

But It's Not Much of a Rally... So Far

This is somewhat disappointing. This isn't what solid, sustainable follow-ups to a rally are made of. The stock market is barely in the black for the day after nearly two hours of trading!

And Then the Buying Begins

After briefly going negative, stocks are now rallying. I would have been extremely surprised if stocks didn't rally for a second day. Still, I think everyone is keeping very tight stops, and will bolt from the long side at the first sign of trouble! Will this rally last 2 days, or two months?

Warren Buffett: Treasuries Are in a Bubble

Warren Buffett hardly has a monopoly on this opinion. Most investors feel the same. Ominous that so much of the world agrees. What will happen when we all start selling? Can the Fed fight off all of them? That will be some battle: The Fed against the World Markets! I've hunch we'll eventually find out.

Stocks Open Higher, Immediately Start to Sink

Tuesday, March 10, 2009

Michael Lewitt of HCM Market Letter

This seems amazingly timely from Michael Lewitt, who writes the HCM Market Letter. It is quoted this week in John Mauldin's "Outside the Box" newsletter. It seems to explain to some degree why the financial markets have responded so powerfully and negatively to President Obama's policy proposals.

The Obama Administration is facing a near-impossible task trying to bail the U.S. economy out of the muck of years of ill-begotten economic policies. The biggest challenge facing policymakers is not short-term recovery, however. Eventually, stimulus is likely to arrest the forces of economic collapse and stabilize matters – at least temporarily. But the real problem is sowing the seeds of long-term, sustainable, organic economic growth. This is really the crux of the policy challenge. The United States in the midst of the worst economic downturn in 80 years as the result of a panoply of extremely poor economic policy choices. Economist Roger W. Garrison draws an important distinction between "healthy economic growth, which is saving-induced (and hence sustainable), and artificial booms, which are policy-induced (and hence unsustainable)."2 In other words, monetary policy that kept interest rates low for an extended period of time, tax policy that favored debt over equity, regulatory policy that allowed financial institutions to operate opaquely, and social policy that pushed home ownership regardless of affordability, all combined to create artificial economic demand that could only be financed with debt because the savings (i.e. equity) to purchase them did not exist.

Moreover, as more and more debt was created through financial engineering and policy prescription, the prices of these were bid up higher and higher. This led these products to become grossly inflated in value compared to any inherent economic worth they might possess. Once the bubble burst, their value dropped precipitously. Unfortunately, the face amount of the debt used to purchase these assets did not adjust downward at the same time. Assets that were purchased at inflated prices are now worth a fraction of what they were purchased for, leaving behind a serious dilemma for the owners of these assets and their creditors.

Following conventional economic thinking, the government believes that the solution lies in policies designed to reflate the value of these assets. The problem with this approach is that it is based on the incurrence of trillions of dollars of additional debt to create the demand needed to purchase these assets. Debt begetting more debt is a poor prescription for sustainable long-term economic growth. At best the government may be able to provide a short-term boost to the economy, but what the economy really needs is a solid, organic foundation for growth. Debt-financed government demand can't be sustained indefinitely, which is why this policy is doomed to fail in the long run. The U.S. balance sheet is not a bottomless pit, although it is increasingly coming to resemble a Black Hole. At some point, the economy will have to generate sufficient tax revenue to pay for this government spending or the country will lose its AAA rating and ultimately become a troubled credit. Economic demand will ultimately have to become savings-driven or it will again collapse.

Read the entire newsletter here.

I found it interesting that, as I suggested earlier today, Hewitt recommended using any stock market rally as a way to cash out of the market with the expectation that stocks will crash again and move much lower still! If I weren't so humble (tongue-in-cheek), I would say, "Great minds think alike!"

Meredith Whitney: Credit Card Debt Is the Next Credit Crunch

Meredith Whitney is one of the most respected market analysts on Wall Street. She warned repeated of the impending credit crisis, and was prescient in warning of the shaky foundations of some of the largest banks and investment banks before they collapsed. When Meredith Whitney speaks, Wall Street listens!

From the Wall Street Journal:

Just six months ago, I estimated that at least $2 trillion of available credit-card lines would be expunged from the system by the end of 2010. However, today, that estimate now looks optimistic, as available lines were reduced by nearly $500 billion in the fourth quarter of 2008 alone. My revised estimates are that over $2 trillion of credit-card lines will be cut inside of 2009, and $2.7 trillion by the end of 2010.

Inevitably, credit lines will continue to be reduced across the system, but the velocity at which it is already occurring and will continue to occur will result in unintended consequences for consumer confidence, spending and the overall economy.
Here is the full article.

Gold Closes Day at Lower Trendline

Gold closed today almost exactly on the lower trend line from its most recent trading patterns, as shown by the green line in this chart. I will watch carefully what the price of gold does at this point, ready to place a trade when market direction becomes clear! Gold demand is usually weakest between March and August each year, and if this seasonal factor is combined with a stronger stock market, I wouldn't be surprised to see the price of gold ease for awhile.

Bullish Engulfing Pattern Forms on Stock Charts

The bullish engulfing pattern has formed today on stock futures. An engulfing pattern occurs when a series of bearish candles is followed and entirely encompassed (engulfed) by the body of a single bullish maribozu candle, as shown in this chart. The greater the number of prior candles that are encompassed by the bullish engulfing pattern, the more powerful the move is expected to be. Today's pattern engulfs the previous five days' downward momentum. We would therefore expect this to be a very powerful bullish pattern. Japanese candlestick patterns have tendency to be very short-term in nature, however, so I never trade based solely upon them alone.

There were several other bullish news events today. However, I haven't the time to write about them.

Stocks Turn In Worst Performance for New President

From the Seattle Times today:

The election of Barack Obama offered the promise of a new set of fixes for the financial crisis and the economy, a do-over that might help nurse the stock market back to health.

Since then, the market hasn't just gotten worse — it's turned in its worst performance ever for a new president.

The Dow Jones industrial average has fallen 21 percent during Obama's first seven weeks in office. Count back to Election Day and the results are even bleaker: That afternoon, the Dow closed at 9,625. Now it stands at 6,547, a loss of 32 percent.

Here is the full story.

Gold Swoons as Other Markets Rally

When gold failed to move higher, I exited with a small profit last week. However, the price of gold is still too close to the lower trend line for me to take a short position yet. If stocks continue their rally beyond today, gold will likely suffer for a time, as investors sell it and abandon the strength of gold's perceived safe haven status.

Stock Market Rallies on Citi News

The stock market has rallied today on reports from Citigroup that they had two months of profit in January and February. Who couldn't make a profit borrowing at 0% interest and lending out the same money at much higher rates? Nevertheless, this news is the type that provides a glimmer of hope that the worst is over, and could possibly lead the market to a sustained rally.

As I have mentioned for the past few days, I have felt that this market is oversold (temporarily). I have felt for the past few days that we were due for a bear market rally. Today's rally feels like a solid one to me. My gut tells me that this one has legs, but I've been wrong many times before. The financial markets have a tendency to humble everyone at one time of another. Even Phantom, in his book Phantom's Gift, acknowledges that he has been humbled more times that he can count. So have I.

I took profits on my longer-term short positions last Friday and I exited the rest of them this morning, and may take a long position tomorrow if this rally extends itself into the next day. However, I also believe that this is one of many "false dawns" in what will be a long and sustained market downturn, so I will maintain very tight stops and be prepared to exit in a hurry if conditions deteriorate. If another negative news shock hits the markets, I will be one of the first to head for the exits.

The smart money will make guarded bets into the markets, but I believe that much of the smart money will use this rally -- if it follows through -- as a way to make some quick profits or to cut their losses, before the next leg down. Unfortunately, many small investors will assume that the worst is over, and will either maintain their long positions or begin to enter the market once again with the long-term funds. This will be a costly mistake!

Grains and other commodities are also rallying, also as expected. I expect an even greater rally in crude oil, as the perception that the worst is behind us will multiply the perception that the demand for oil will increase.

Monday, March 9, 2009

Stocks Now Turn Negative

It appears that stocks traders are trying to form support at about Dow 6500.

Gold Relinquishes Recent Gains

Over the weekend, it occurred to me to check a prior post regarding the seasonality of gold. We are entering the slow period for gold. Peak demand period begins in August and extends in spurts through February.

Crude Oil Nears $49

Stocks Rally Soon After Open

Wow! Ten minutes after the open, we are seeing a solid rally. Anything can happen!

Natural Gas: Look Out Belooooooow!

Natural gas futures have parted ways with crude oil. Natural gas futures have plunged on news that new sources of natural gas over the next few years may create a glut of the commodity. (Would I love to see the same occur in crude oil futures!) This new reality is showing up in the price in the natural gas futures markets. Maybe T. Boone Pickens is right about using it to fuel our vehicles! Still, natural gas will cost more if the cap and trade tax passes Congress, even if the supply is abundant.

Fresh Stock Lows Upon Market Open

Stocks have hit new lows upon market open. The futures were higher until the European session, but crossed into negative territory thereafter. I am still anticipating a temporary rally at some point, but today's lower open doesn't give me much hope for one. If there is a ray of sunshine, perhaps it is that at least we didn't open down triple digits on the Dow.

Sunday, March 8, 2009

Who Will Pay the Cap and Trade Tax?

From the Wall Street Journal:

Cap and trade is the tax that dare not speak its name, and Democrats are hoping in particular that no one notices who would pay for their climate ambitions. With President Obama depending on vast new carbon revenues in his budget and Congress promising a bill by May, perhaps Americans would like to know the deeply unequal ways that climate costs would be distributed across regions and income groups.
Politicians love cap and trade because they can claim to be taxing "polluters," not workers. Hardly. Once the government creates a scarce new commodity -- in this case the right to emit carbon -- and then mandates that businesses buy it, the costs would inevitably be passed on to all consumers in the form of higher prices. Stating the obvious, Peter Orszag -- now Mr. Obama's budget director -- told Congress last year that "Those price increases are essential to the success of a cap-and-trade program."
Hit hardest would be the "95% of working families" Mr. Obama keeps mentioning, usually omitting that his no-new-taxes pledge comes with the caveat "unless you use energy." Putting a price on carbon is regressive by definition because poor and middle-income households spend more of their paychecks on things like gas to drive to work, groceries or home heating...
Cap and trade, in other words, is a scheme to redistribute income and wealth -- but in a very curious way. It takes from the working class and gives to the affluent...
Interesting article. Very interesting! Read the rest here.

Crude Oil Continues Its Climb Above $46

Crude oil is trading higher in Sunday evening trading, showing more strength than any other futures contract. Traders are suggesting that $50 crude is right around the corner, especially if OPEC cuts production again next weekend. OPEC oil production cuts of 13% over the past four months appear to have put a solid floor under the price of crude oil.

World Bank Forecasts Negative Global GDP for 2009

From the International Herald Tribune:

In a bleaker assessment than those of most private forecasters, the World Bank predicted Sunday that the global economy would shrink in 2009 for the first time since World War II.

The bank did not provide a specific estimate, but bank officials said its economists would be publishing one in the next several weeks.

Until now, even extremely pessimistic forecasters have predicted that the global economy would eke out a tiny expansion...

The World Bank also warned that global trade would contract for the first time since 1982, and that the decline would be the biggest since the 1930s.
Here is the entire story.