Steady Stream of Bad News Drops Dow Back to 8000 Level

Bad news this morning has pummelled stocks once again. The Dow is now in the tank to the tune of 200 points, and nearing the critical 8000 handle. I expect another bull/bear battle at this level. Here are a few headlines this morning:

• Shock: weekly unemployment claims rocket higher to 589,000
• New home starts drop more than forecast
• Large inventory builds send crude oil price lower
• Thain's future at Merrill in serious jeopardy
• Big bank CEO/insider stock purchases occurred one day before stocks tanked (yesterday)
• Microsoft revenue disappoints street, stock plunges
• Microsoft reports PC sales flat during Q4, indicating IT sales slumping
• Microsoft to ax 5000 jobs

Thain spent $1.22 million to redecorate his office after taking over Merrill, including a $35,000 commode! He was spending this money at the same time that he was cutting jobs at Merrill Lynch and imposing draconian cost cuts on his employees. What an unbelievable example of elitism!

After Yesterday's Rally, Stock Futures Drop Into Red

Even though stock index futures continued to rise following yesterday's close, the futures turned negative again during the night. Note in this chart the support at yesterday's closing price, shown as a white line in the 15 minute chart on the left. After a temporary bounce, prices once again began to fall, and broke through that same support on the second attempt.

Disappointing earnings reports appear to be the culprit once again. The futures are now in the red once again. As just one example, even Apple's solid Q4 showed some gaping holes in what was thought to be a solid foundation, especially in sales of Macs and iPods, the foundation of their profits.

New Perspective on Global Economy

Here are a few excerpts from the Quarterly Review of Hoisington Investment Management company. Hoisington manages about $4 billion in various funds, both public and private. Their website is:
http://www.hoisingtonmgt.com/

Presently, major sectors of the U.S. economy are experiencing a debt deflation that is causing a massive destruction of wealth, thereby curtailing jobs, income and spending. Irving Fisher who, according to Friedman, was the most brilliant of all U.S. economists has noted that when the economy enters a period of "debt and price disturbances", those forces will eventually engulf the economy... Once extreme over indebtedness occurs, fiscal and monetary policy become impotent in spurring economic growth because money velocity will decline -- something that is currently happening. Individuals and businesses struggle to repay debt with harder dollars, and saving begins to rise as caution prevails.
The debt level of the U.S. has reached unprecedented proportions. More important than the level, however, is the fact that for the last few years the debt was improperly loaned and financed... This type of lending activity implies there is little likelihood of repayment of principal and interest. Stock prices have plunged, and with home prices plummeting, and commercial and industrial properties losing value, a deflation of assets has clearly begun while the underlying debt remains constant.
Will this deflation overwhelm the best efforts of the Federal Reserve, invalidate Friedman's theory and prove Fisher correct? Most naturally feel and hope that the superiority of unbridled monetary and fiscal stimulus will overwhelm incipient price declines and stem the expanding cyclical downturn in economic growth. Our judgment is that the power of monetary policy revolves around the ability to initiate a new borrowing and lending cycle. This can only happen if lenders are willing to lend and borrowers are wanting and able to borrow. Presently, neither are so inclined. If price declines in assets continue, then Shakespeare's admonition of "neither a borrower nor a lender be" will become the economic mantra, meaning that a period of very low nominal growth will likely extend for a decade.
...The Fed has invented many new vehicles for injecting liquidity into the economy, but few outward signs suggest that these actions are engendering a recovery. Our analysis suggests that the Fed will not achieve the desired results...
Fiscal stimulus will not work well, and may even be counterproductive, and this applies to both spending programs and to certain tax programs as well...
The private sector has demonstrated the greater flexibility and creativity to expand the economic pie, increasing productivity and thereby improving living standards for all. The risk is that increased federal borrowing will stunt the private sector's ability to grow.

There are numerous other very interesting insights in this report, but they are too many to quote here. The authors studied debt bubbles and debt deflation periods in several countries over a period of 150 years, and concluded that the economy will show little or no growth for at least three years. In fact, they said it is more likely to persist for a decade of more! During the periods of debt deflation they studied, all of them resulted in periods of economic "further wealth drain" for 20 years! They concluded with the following:

While the historical record indicates that the ultimate low in Treasury yields lies years away, the path to the ultimate low will be anything but smooth or linear as significant volatility continues. As the experience from... history indicates, many "false dawns" will occur, with investors assuming that the long-delayed cyclical recovery in economic activity is at hand. During these pleasant but relatively short interludes, stock prices will probably rise dramatically and bond yields will increase. If history is a guide, however, these episodes will further drain wealth and will be thwarted by the persistent forces of the debt deflation.

The entire quarterly review can be read here. Very interesting read without political spin or agenda! Thanks to Hoisington for making the report public!

Stocks Rallied Stoutly Today

Thanks to news that President Obama and his economic team are preparing a new bank rescue package, timed with announcements of insider purchases of stocks by the CEOs of two major banks, stock prices rallied stoutly today. This was a very nice rally in the last two hours of the trading day.

Stocks Closed Yesterday Below Key Dow 8000 Support Level

Yesterday, stock futures closed the day below the key technical support level of Dow 8000 (the S&P 500 also violated the key 850 support level), raising new worries that a new round of technical-based selling may occur soon. Furthermore, we are only a few hundred points from the November 2008 low, and the nearness of this price support level raises to an even higher level the significance of these price levels. Overnight, the Dow has moved higher to about the Dow 8000 level, so anything can happen today.

Generally, if yesterday's close is confirmed by prices dropping below yesterday's low, more selling would probably be the natural consequence. A breakout of yesterday's low by an even lower price is my own personal method of indicating that prices are going to continue downward. I consider that a confirmation of yesterday's low, and thus, evidence that prices will continue still lower. I'm sure many others use the same confirmation method.

Client Memo Predicts Severe Consequences of Government Interventions, Including $2000 Gold

From a client memo being attributed to Citigroup Chief Technical Strategist:

"The damage caused by the financial excesses of the last 25 years is forcing the world's authorities to take steps that they have never tried before. This gamble is likely to end in one of two extreme ways: with either a resurgence of inflation, or a downward spiral into depression, civil disorder, and possibly wars. Both outcomes will cause a rush for gold."

"They are throwing the kitchen sink at this. The world is not going back to normal after the magnitude of what they have done. When the dust settles on this, the world will see that it will either work, and the money they have pushed into the system will feed through in inflation shock, or it will not work because too much damage has already been done and we will see continued financial deterioration, causing further economic deterioration, and the risk of a feedback loop. We don't think that this is the more likely outcome. But each week as it passes, and each month passes, there is a growing danger of a vicious circle as confidence erodes. This will lead to political instability.

"We are already seeing countries on the periphery of Europe under severe stress. Some leaders are now at record levels of unpopularity. There is a risk of domestic unrest, starting with strikes, because people are feeling disenfranchised...

"What happens if there is a meltdown in a country like Pakistan, which is a nucelar power? People react when they have their backs against the wall...

"We are already seeing doubts emerge about the sovereign debts of developed, AAA-rated countries /like the United States/, which is not something you can ignore...

"Gold traders are paying close attention to reports from Beijing that China is thinking of boosting its gold reserves from 600 tons to near 4,000 tons in order to diversify away from paper currencies...

"Britain had made a mistake selling off half its gold at the bottom of the market between 1999 and 2002...

"People have started to question the value of government debt...

"The blast-off /in gold prices/ is likely to incur within two years, and possibly as soon as 2009. Gold was trading yesterday at 812 oz. It is well off the all-time peak of 1030 in February, but it has held up much better than other commodities over the last few months, reverting to its historic role as a safe-haven store of value and a defacto currency. Gold has tripled over the last three years in value, vastly outperforming Wall Street and European bourses."

Stocks Turn in Worst Inaugural Performance In Dow History

Stock futures plunged even further following my last post, highlighting the magnitude of the challenge Pres. Obama faces. He will have to hit the ground running tomorrow. Today was the worst inauguration day performance since the Dow came into being in 1896.

Confidence in the U.S. banking sector is collapsing fast, as today's prices for major banking stocks indicated. It is now estimated that rescue of Bank of America, the bank that just four months ago was considered solvent, may require $80 billion or more. Citigroup is now considered to be beyond rescue and the market appeared to indicate that its nationalization will be necessary. JP Morgan and Wells Fargo stock prices are also plunging. Many banks stocks fell by 25% today alone! This seems to get worse by the day...

Could Pres. Obama's Policies Usher In/Prolong A Depression, as It Did With His Hero?

Let's hope that President Obama doesn't make the same mistakes that Herbert Hoover and Franklin Delano Roosevelt, both fellow "progressives", made during the Depression. (Hoover was, for a time, a literal member of the Progressive Party, but FDR implemented more forcefully the policies of progressives.) While the Depression in Western Europe lasted only a few years, it lasted nearly more 12 years after FDR took office. In Europe, it was just the "Depression". In the United States, FDR's policies made it the Great Depression, thanks largely to FDR's policies of progressivism. He played god with the U.S. economy, throwing the kitchen sink at it. He taxed small businesses into non-existence, leaving millions more Americans unemployed. His policies were the biggest reason the Depression lasted nearly 12 additional years instead of just a few short painful ones, as it did in Europe. Ironically, Pres. Obama has indicated that FDR is one of his heroes! If this recession lasts as long as the "Great" Depression did, we won't see a recovery until 2021! Ugh!

Stocks Drill New Depths Following Inauguration

Almost literally the moment our new President was sworn in, stock index futures dropped to new lows for the day, just a few hundred points from the lows last November reached shortly following his election.

Welcome and Good Will to President Barack Obama

Barack Obama was sworn in today as the 44th President of the United States of America. Like many millions of other Americans and people of good will all over the world, I wish our new President good will, great wisdom, and prayers of support.

Welcome, President Barack Obama!

Treasury Bears Can't Get Upper Hand -- Yet

This daily chart for treasury futures shows a consolidation pattern developing at the loftly price levels that we've seen recently. Many prominent investors have been suggesting that U.S. treasuries are in bubble territory, and I've included some of those opinions in this blog. I haven't shorted treasuries, except on a short-term basis.

There is a saying, "don't fight the Fed". As long as the Fed can continue to print money and and use those unlimited new funds to buy U.S. treasuries, it appears that shorting treasuries is a fight in futility. The Fed can always print more money and continue forcing interest rates lower by buying all the treasuries that the U.S. government wants to sell. It's going to be difficult for treasury bears to gain the upper hand as long as these conditions continue. However, I wouldn't be surprised if, at some point down the road, sentiment against U.S. government debt shifts strongly enough that the flight from treasuries is rapid, forceful, and devastating. One writer, whose name I don't recall now, a few weeks ago said that when this phenomena occurs, it will be "breathtaking". And that's an understatement!

Why Government Work Projects Don't Bolster Employment

From Bloomberg:

An hour’s drive through California’s Riverside County takes in neighborhoods of deserted homes, boarded-up businesses, busy unemployment offices -- and crews working on millions of dollars in new public projects.
Only four years ago, Riverside and nearby San Bernardino, often called the Inland Empire, were California’s economic powerhouse, accounting for more than a fifth of the state’s new jobs. Today, unemployment reigns in the sprawling region east of Los Angeles. The 9.5 percent jobless rate in the two counties matches Detroit’s as the highest of any major metropolitan area in the U.S.
Riverside... county illustrates both the promise and the limitations of the spending President-elect Barack Obama proposes to pull the U.S. economy out of a recession that may become the longest since the Great Depression.
“What infrastructure spending can do is bolster employment in a group of industries, like construction, with workers who are ready to go,” said Brad Kemp, director of regional research at Beacon Economics in Los Angeles. “What it can’t do is stop the unemployment rate from rising currently because there are a lot of forces coming at consumers, who are holding back on spending.”

Here is the full story.

Stock Futures Tumble (More) in Evening Trading

Dow 8000 is right around the corner. Expect a huge bull/bear battle over that handle.

Foreign stocks in Europe, Brazil, and Canada also dropped while the markets were closed in the United States.

$41.6 Billion RBS Write-Off Roils Stock Futures

Despite that the stock markets are closed today, the stock market futures tumbled from positive territory into the red when the Royal Bank of Scotland announced further write-offs of nearly $42 billion today, raising fresh doubts about the solvency of US and UK banking systems. The Dow last night had been higher by 75 points, but when the RBS news was announced at 8 a.m. EST, the futures tumbled to a low of -125 on the Dow, finally settling the trading day in the red at about -90.

It was also over the Martin Luther King Holiday one year ago that a rogue trader at Societe Generale also roiled the stock market futures when his unauthorized trades were suddenly liquidated. Dow futures dropped 570 points that day. The stock market recovered, moved higher again, and closed up about 200 points the following day.

The Magnitude of the Monster

From the editorial opinion page of the Wall Street Journal:

Thanks to a 6.6% decline in revenues due to recession, a spending increase of some $500 billion or 19%, and assorted federal bailouts, the U.S. deficit for fiscal 2009 (ending September 30) will nearly triple to $1.19 trillion. That's 8.3% of GDP, which CBO says "will most likely shatter the previous post-World War II record high of 6.0 percent posted in 1983."
The details aren't known, but Mr. Obama and Democrats have been talking about at least $800 billion, and probably $1 trillion, in new spending or various tax credits and reductions over two years. Toss that in and add more expected bailout cash, and if the economy stays slow the deficit could reach $1.8 trillion, or a gargantuan 12.5% of GDP...
Including the Obama stimulus spending and assuming the full $700 billion of bailout money for the banks, insurance companies, auto firms and so forth gets fully spent, federal outlays could approach $4 trillion in 2009...
Whether or not you think new spending will stimulate the economy, the one undeniable truth is that this money has to come from somewhere, which means that it is borrowed or taxed from the private economy. This spending blowout is all but guaranteeing huge future tax increases, and anyone who thinks only the rich will pay is living an illusion. Taxpayers need some new champions in Washington -- and fast.

Here is the full editorial.

By the way, $4 trillion spent in 2009 is ten times the deficit for 2008! And we thought the Bush deficits were irresponsible! Imagine adding the equivalent of eight years' of Bush Administration deficits in just one year -- this one!

I'm just curious. Has anyone asked the question: What if this doesn't work? If this turbo-charged Keynesianism fails to recharge the U.S. (and global) economy, the American people will still be obligated to pay the debt, but without any of the benefit. What then?

Anyone for Plan B?

More Job Losses Coming

Some of the weekend's finance-related headlines:

• UBS Plans to Cut 5,000 Jobs This Year
• Liquidation of Circuit City to Cost 30,000 Jobs
• Rio Tinto Slashes 600 Jobs
• GE Capital Plans to Cut 11,000 Jobs
• AMD Lays Off 1,100 Workers
• Hertz Axes 4,000 Jobs
• Pfizer Hands Out Pink Slips for 2,400 Sales Staff Positions

Gold Rockets Higher, But Why?

A weaker Dollar is being attributed for the rocketing price of gold today, but I fail to understand the reasoning. The US Dollar really wasn't that much weaker. The price of gold surged $30/oz!

Cotton Surges on Panic Buying

Demand for cotton has also increased over the past few days. From Dawn.com:

Cotton prices on Friday maintained their upward drive as spinners and mills continued to make panic buying in the backdrop of a sudden bullish change in the world cotton scene, analysts said.The both perceptions of a short crop and revival of new year demand from the leading cotton importing countries is said to be the chief factor behind the snap price flare-up.

Corn Surges on Drought Worries in South America

From the NASDAQ website:

Corn prices surged on U.S. trading and pared some of its recent losses. The grain climbed amid concerns a drought in South America could cause damage to supplies.
March corn futures rose to $3.91 per bushel, up 25.6 cents on the session. Despite the rally, corn lost almost 5% for the week. On a long-term basis, the grain has lost more than 50% of its record high of $7.9925 reached on June 27.
Soybeans for March delivery also surged...

Here is the entire story.

And Grains Explode Higher

Meanwhile Treasuries Sell Off

Stocks Battle Back to Black

Dumping the Dow

Stocks have now turned negative. Yesterday's upbeat mood and rally didn't last long, did it?

Treasuries Trump All Other Futures Today

Buying treasury futures was the right move today. If treasuries are moving solidly higher, it suggests to me that uncertainty or fear is draining cash from other securities. Gold has also rebounded very strongly today. This is another sign of market fear and uncertainty. When both gold and treasuries are rising strongly, we can take this as an omen that fear embraces the financial marketplace today. It is also possible that the Federal Reserve is buying treasuries to suppress interest rates, as they had signaled to the market that they would do in their FOMC minutes. As they do this, traders -- like me -- join the bandwagon, the prices moves higher at an even faster pace. As a short-term trader, I don't care that interest rates are artificially low, and heading lower. I'm only interested in the direction they are headed.

Treasuries are my favorite instrument to trade because the futures are extremely liquid and the futures move rather slowly. The slower movement makes executions easy and accurate with minimal slippage. What more favorable conditions could a trader want?

Grain and Stock Update

Both grains and stocks opened higher, but haven't been able to solidify or add to their gains. Perhaps these are the financial instruments that are losing ground at the expense of treasury purchasing. I don't know.

Grains have lost both their edge and their gains, and are showing some weakness. For a market to move higher requires active buyers, but for a market to move lower only requires a lack of buyers (not active sellers). Perhaps grains have lost ground because the Argentine government has announced that they will permit greater exports. Since Argentine grain products compete with those of the United States, this tends to weaken prices. Needless to say, the increased supply also has the influence of suppressing prices.

Stocks are maintaining a positive day, but are struggling to do so. At this moment, the Dow is barely positive after being more than 100 points higher in early trading. Trading conditions are atrocious! It is inconceivable to me that people would be buying stocks on a day when the entire banking system is showing signs of a catastrophic risk of collapse! But the market rules, not I!

Grains Gain Ground

The grains are moving higher again. Weather and fund buying appear to be driving prices at the open today. Stocks have rebounded too!

Stocks Struggle to Maintain Gains

Extreme and erratic trading is the buzz word today in early stock market trading. However, gains have been sliced in half over the past 45 minutes of trading. The Dow had been more than 100 points higher, but are less than half that at this moment. The prices are highly erratic and unpredictable. I'm trading treasuries today.

Bailout Du Jour: Viability of U.S. Banking at Risk

From Bloomberg today:

Renewed questions about U.S. banks’ viability are pushing regulators toward a new plan that would remove toxic assets from bank balance sheets, in what may become the biggest effort yet to unfreeze lending.
President-elect Barack Obama’s advisers see an increasingly grave banking crisis and are considering proposals far more sweeping than any steps that have been taken so far, according to people who’ve discussed the outlook with them.

Here is the entire Bloomberg story.

Despite this, stock futures, without any underlying fundamental data to support it, have risen yesterday and overnight, as despicted on this 4 hour chart. Perhaps this is an oversold rally following six consecutive days of declines. Stock market bulls successfully defended the Dow 8000 level yesterday and overnight, shrugging off the systemic risk of this news today. The elation may be temporary if the horror of recent news continues.

Bank of America Had Second Thoughts on Merrill Purchase, Government Promised More Money

Bank of America CEO Kenneth Lewis has revealed that the bank bought Merrill Lynch despite feelings of buyer's remorse and serious misgivings about their offer to purchase the trouble investment bank in December. Both analysts at B of A and at Merrill Lynch underestimated that magnitude of the losses to Merrill's portfolio of loans. (Does this portend something for the future, I wonder?)

The U.S. government promised to provide additional funding to B of A because they were worried about the systemic risk to banking system viability if the deal fell through. Bank of America is the largest U.S. bank by assets, so it is a bellweather for the industry. Bank of American has also slashed its dividend to a token $.01. From Bloomberg:

The government said earlier today it will invest $20 billion in Bank of America and guarantee $118 billion of assets to help the company absorb Merrill and prevent the financial crisis from deepening. The agreement is part of a commitment to “support financial-market stability,” the Treasury Department, Federal Reserve and Federal Deposit Insurance Corp. said in a joint statement shortly after midnight in Washington.

Here is the full story.

Grave Grain Weather Conflict

From Farm Futures:

South America’s weather problems are the number one concern for corn, soybean and wheat traders longer-term. USDA’s bearish crop report on Monday essentially meant that we could delay a battle for acres for a year, if South America would come through with a good crop. However, the current drought has already significantly cut corn production for our largest export competitor and it’s beginning to hurt soybean production. The duration and intensity of the current South American drought will shape the scope of the U.S. acreage battle as spring approaches.

Stock Rally #2 Sticks

Stalled Stock Rally

Going into the closing minutes of today's trading, the stock market rally has stalled and has once again turned negative. However, most of the loss has been erased. The closing minutes, as usual, are exciting!

Crude Finds New Low Below $34

What a stunning chart of the soon-to-expire front month crude oil contract! A picture is worth a thousand words!

Dow 8000 -- and $850 Billion -- Pump Bulls

Stock market bulls strongly defended the Dow 8000 level today, fueled by an announced $850 billion stimulus package by Congress. How long will this one last? It's anyone's guess!

Jobless Claims Continue to Rise

The moving average of jobless claims has spiked higher today.

Foreclosures Surprise Market, Spike Higher in December

"The /foreclosure/ numbers continue to go up frankly because none of the /prevention/ programs that have been adopted so far have had any material effect." Rick Sharga, VP Marketing, Realtytrac (Realtytrac specializes in providing data and services regarding foreclosures in the United States.)

From Realtytrac's website:

“State legislation that slowed down the onset of new foreclosure activity clearly had an effect on fourth quarter numbers overall, but that effect appears to have worn off by December,” said James J. Saccacio, chief executive officer of RealtyTrac. “The big jump in December foreclosure activity was somewhat surprising given the moratoria enacted by both Freddie Mac and Fannie Mae, along with programs from some of the major lenders and loan servicers aimed at delaying foreclosure actions against distressed homeowners.

“Clearly the foreclosure prevention programs implemented to-date have not had any real success in slowing down this foreclosure tsunami. And the recent California law, much like its predecessors in Massachusetts and Maryland, appears to have done little more than delay the inevitable foreclosure proceedings for thousands of homeowners.”

Realtytrac issued a report this morning that 2.3 million properties were subject to a foreclosure filing in 2008, a 81% increase from 2007. When considering that foreclosure filings had spiked higher in 2007 also, this is a gargantuan increase -- up 225% since 2006. Foreclosure filings were up 17% just in the month of December alone! It is a stark jolt back to reality, especially when during this same period, the government has been bending over backwards to modify mortgages and keep people in their homes that couldn't pay their mortgages. Realtytrac also reports that there are currently more than 1.5 million foreclosed properties in the system.

Nat Gas Price Drops Through the Floor on Weak Industrial Demand

While the arctic chill that has struck the eastern United States has created increased demand and prices for heating oil, collapsing industrial-sector demand has caused the floor to collapse under natural gas prices. This is an amazing development given that prices are now lower for natural gas than during all of 2007 and 2008. The price of natural gas has now fallen more than 70% since the highs last spring. I hope the various state utilities commissions will require that the gas supply companies provide either lower prices or a rebate to their customers!

Fresh Worries of Banking Crisis

Worries over the dismantling of Citigroup and the necessity of fresh capital injection into Bank of America by the U.S. authorities is creating worries of a system-wide banking crisis of confidence. Bank of American absorbed both Countrywide Mortage and Merrill Lynch in short order last year, and despite having 10% of the nation's savings deposits, has seen its share price steadily eroded as confidence in the banking system has failed to materialize. JP Morgan Chase has also been under pressure in recent days and weeks, after absorbing Washington Mutual late last year. The Dow has been lower throughout the evening and overnight session thus far.

Here is a related Bloomberg story.

Q4 GDP Revised Downward

JP Morgan today revised downward its estimate of the U.S. GDP for the 4th quarter of 2008. They changed it from -3% to -5%!

Stocks Freefall on 98% Down Day

Sellers today outnumber buyers today by nearly 50 to 1 volume. This is not a good day to be long stocks, because if you are, I'm taking money away from you. At the time of this writing, the Dow is down 300 points.

Retail Sales Slump Twice the Forecast Amount

Retails sales for November have been revised downward, and retail sales for December were also worse than anticipated, reflecting an even worse scenario than analysts had expected. Retail sales for December were down 2.7%. Chain store sales were down a staggering 9.8%, the largest drop on record. Does the bad news never end? Stock futures are reflecting the dour news. Folks, we may yet again test the lows from last November! Key support on the S&P 500 is around 850.

Here is a good summary by Marketwatch.

Madoff Ponzi Scheme Hits Pension Funds, and Now Tax-Payers - Hard!

This morning's news indicates that the Madoff Fund crisis may have been even more far-reaching effect than we thought even a few days ago. Why? This morning's news suggests that several pension funds ignored the tried-and-true principle of diversifying risk by spreading their investments across various asset classes and management companies. Several pension funds have now admitted that they invested their entire funds in a single management company -- Madoff's. Now, their pension dependents have lost their entire retirement, and the government's pension guarantee fund will be forced to foot the bill.

If there is any good news at all in this, it is that the pension funds involved have been relatively small. However, that is small consolation for pensioners whose life savings have been compromised, because the government guarantees will reduce their benefits substantially.

Conflict Between Weather and Crop Report

From Farm Futures magazine:

Monday's market was about surviving USDA's bombshell and /Tuesday's/ was about sorting the severely wounded from the slightly injured. Corn took a beating once again, while soybeans and wheat managed to bounce modestly on weather concerns. Yet, all suffered from bearish signals in the outside markets and ongoing index fund portfolio rebalancing.
Fund managers may still have every intent to own corn, soybeans and wheat for 2009, but bearish chart signals could tempt them to wait until a bottom is found to establish their long (bought) positions. Meanwhile, Wall Street is in the dumps once again, worried that the current economic crisis could struggle throughout much of 2009. That tends to add to bearish sentiment at a time when the market is already vulnerable.
The bright spot continues to be weather related, with adverse growing conditions providing support for both soybeans and wheat. Ironically, the rapidly rising new-crop soybean/corn price ratio may leave the U.S. desperately short of corn acres this year, with farmers reluctant to pay high input costs without a better promise from the market. That could lead to quite a wake up call for the market when USDA releases the results of its producer planting intentions survey on March 31 if things don't turn soon.

When conflict exists between bullish and bearish forces, consolidation and erratic trading can often be expected. The bearish USDA crop report two days ago conflicts with the bullish weather to create inherent volatility. However, since weather will put the larger-than-expected crop at risk, it would appear that the bullish weather forecasts will probably trump the larger crop expectations. Farm Futures particularly looks at longer-term weather patterns, with a La Nina pattern having developed in recent weeks. Until the weather looks more favorable, grains are likely to see price support. Thus, grains have rebounded higher overnight, and soybeans and wheat are showing particular strength.

Are These the Lies or the Statistics?

John Mauldin has more on the details and the real facts behind last Friday's awful jobs report from the U.S. Bureau of Labor Statistics. He says that these facts are in the BLS report and not not hidden, if someone just takes the time to look for them. He also states that the deceptiveness of the headline numbers are not due to conspiracy, but just the methodology that tends to understate the gravity of unemployment during times of economic trauma.

He has posted it under the heading, "Lies, Damned Lies, and Government Unemployment Numbers":

There are some who see a ray of hope in the recent jobless claims reports, which have dropped back to “only” 467,000 in initial unemployment claims, down from 491,000 for the last week, after being over 500,000 for several weeks. Those numbers are seasonally adjusted. That hope disappears if you look at the actual numbers. For the current reporting week ending January 3, 2009, the advance number of initial claims came in at 726,420. Last week’s advance number was 717,000. We have been above 600,000 new initial claims every week since the third week of November. Continuing claims jumped massively, by 744,000 to 5,316,124...

In December, the number of unemployed persons increased by a seasonally adjusted 632,000 to 11.1 million and the unemployment rate rose to 7.2%. Since the start of the recession in December 2007, the number of unemployed persons has grown by 3.6 million, and the unemployment rate has risen by 2.3% and is now at 7.2%.

I happened to be watching CNBC at the time of the release of the data, and several commentators remarked how much better the number was than they thought it would be. I wish they were right, but again, the actual numbers showed a loss of 954,000 jobs, over 50% more than the headline number reported in the press release. And that assumes that new businesses created 72,000 jobs from the birth/death model that I so frequently write about. It is possible that almost 1 million jobs were lost in December. I doubt the market would have liked that number.

I should note that the Bureau of Labor Statistics does not hide that number. You can find it if you dig for it. But most analysts seem to prefer just to take the press release and go with it. And most of the time that is fine. But in times like this, when trends are changing, you miss the bigger picture and get misleading data...

If you add people who have part-time jobs but would like a full-time job, and what are called marginally attached workers, the current rate is already 13.5%.

Even Mauldin's figures don't state the full total in a single figure. If we add the number of reported jobs losses and the assumed jobs created that weren't really created, the total jobs lost in December were:

1,026,000 jobs lost -- and that's one month!

Here is the entire newsletter.

Today's Grain Rally Feels Weak, Unconvincing

This chart shows the soybean futures intra-day just moments after today's close. After rallying more than 20 cents higher early in the session, soybeans closed only 7 cents higher. Needless to say, today's rally has largely fizzled. After this morning's rally at the open, soybean futures lost momentum fairly quickly, and had shown more and more weakness as the trading session progressed. After closing limit down 70 cents yesterday, closing only 7 cents higher today suggests continued weakness to my mind.

Corn gapped lower this morning, and continued to drop throughout the trading session. This is significant because corn and soybeans often tend to trade somewhat in lock step with each other, so when one or the other moves independently of the other, it is very noticeable. Wheat moved higher at the open, but like soybeans, slowly edged lower since. Wheat has now closed near the flatline for the day. This also suggests bearishness. I wouldn't be surprised if more selling/liquidations occur over the coming days, driving prices still lower. Of course, a weather event could change everything -- literally overnight! We will now be trading weather through mid-May 2009.
The daily chart (above) for soybeans shows how strong yesterday's limit down price thrusts were, but it also depicts visually how weak today's attempt at a rebound was. If, following a strong one-day move that crosses over the Exponential Moving Average (in this case, crossing below the EMA yesterday), prices attempt a rebound back toward the previous trend (in this case, soybeans had been on a solid uptrend throughout December and early January), but fails to cross back over (above) the Exponential Moving Average within the next few days, a confirmed new trend (in this case, a downtrend) is confirmed. The fact that the rebound did not cross back above the EMA into bullish territory, increases the probability of a confirmed downtrend. Once an EMA crossover occurs, I will only trade the direction of the new trend, in the hopes of entering the new trend at a fairly early stage to maximize my profit. Since today's rally appears to be faltering, by shorting grains today, I hope to take advantage of the early emergence of a new downtrend in grains, if it occurs. I will continue to place short-only trades as long as the closing price remains below the EMA, or until prices crawl back above the EMA and create a fresh uptrend.

A consolidation is obviously a possibility as well with these strong movements in price. It is possible that for several days, price may move erratically back and forth within a range. If a downtrend is not confirmed within a day or two, I will pull back and stop trading until a new trend asserts itself and is confirmed. If the Bollinger Squeeze indicator turns red (not shown), this is an indication of a consolidation pattern and tells me that I should stop trading that futures instrument and watch for a new trend to emerge.

Even though soybeans closed higher today, the daily chart clearly shows the weakness of today's higher close. Corn continued to drop significantly throughout the session, confirming a downtrend, and wheat, while rallying with soybeans early in the session, closed nearly flat, signifying potential further weakness ahead. Since corn futures have greater open interest than the other grains, its movements tend to carry more weight in my decisions. It's lower close today creates a bias in my mind for further downside potential.

Grains Struggle to Build Foundation Following Yesterday's Bloodbath

Grain prices, just as they did last week, have rebounded modestly following yesterday's limit down move. Corn remains week and has dropped modestly lower this morning, but soybeans (see chart) and wheat have not confirmed a downtrend, and have moved higher instead. Note, however, that in the daily chart for the grains (not shown here), the Klinger Volume indicator is showing a bearish divergence. When this occurs, I will tighten my stops and maintain tighter stops for the next few days until either 1) prices drop through my stop and liquidate my position, or 2) prices rebound solidly higher, suggesting that the bearish divergence wasn't valid. In either case, maintaining a tight stop beneath the recent lows will help me to both protect my profits and leave room to the upside for further price increases.

Dollar Moves Higher Like Fireworks as Trade Deficit Narrows

This morning's data that the U.S. trade deficit narrowed has provided rocket fuel for the U.S. Dollar. A smaller trade deficit is beneficial for the greenback. Go Dollar!

Crude Oil Sinks

Crude oil has also continued its decline, largely on anticipated weak demand due to poor economic conditions.

Grain Prices Collapse To Near Limit Down

Grain prices today collapsed to near limit down almost across the board. This chart for wheat shows the daily chart on the left and the 15 minute intra-day chart on the right. Note the huge downward spike on the daily chart that occurred right at market open today. The dotted line at the bottom of the upper panel of the 15 minute chart represents the exchange's maximum permitted downward move for today.

The large ETF DBA began an immediate sell-off when the stock market opened this morning, confirming the bearish market sentiment for grains one hour before the grain futures trading began trading at 9:30 am CST. I often look at this and other ETFs during off-market hours to gauge virtual market sentiment. This also works after the stock market closes because if ETF traders continue to sell the ETF after the grain market closes at 1:15 pm CST, it is likely that the futures will continue to sell off when trading resumes at 6:00 pm CST.

This chart is typical of grain prices throughout the entire spectrum. Corn and soybean prices also have either touched or are very close to limit down today. This is one reason why I always abide by Phantom's Rule #1 and keep extremely tight stop loss orders. If a trade isn't making money, I exit very quickly. I exited my soybean trade late last night that I initiated during the day session yesterday. When soybean prices collapsed about 1:30 am EST last night, my stop loss order was activated and I exited the trade with a modest profit. Corn and wheat prices were both soft during evening trading, which was a red light to me. Since then, grain prices have gone straight down! Crude oil prices also showed even greater weakness, putting additional pressure on the bio-fuel grains, corn and soybeans.

The USDA released a crop report this morning that was bearish for grains, with the USDA announcing greater than expected acreage plantings for spring 2009 for both corn and soybeans. Wheat was slightly bullish because the USDA estimated fewer acres planted in wheat (although they also increased the estimated end stocks due to lower feed demand) , but the price chart indicates the fervor of the sell-off today, with wheat plunging in sympathy to the other grains. Now, we will begin building a new base and I will look to find a bottom and reenter the market. If prices continue to drop this week, I will consider a short trade. I will trade weather conditions for the rest of the winter, as well as acreage updates for the next 3-4 months.

(Interest Rate) Eurodollar Futures Continue to Move Higher

This chart does not depict the Euro Forex futures, but the Eurodollar interest rate futures. Eurodollars are U.S. Dollars deposited in banks outside the United States. Like treasury futures, the price of Eurodollar futures moves inversely to interest rates, so this chart suggests that Eurodollar interest rates continue to drop.

Soybeans Continue March Higher

While corn has gone flat, the price of soybean futures continues to march higher overnight. Wheat is also marginally higher. On the left we see here the longer-term daily chart and the uptrend, and on the right, we see the tick chart showing the overnight price rise.

Soaring Soybeans

I believe that more investors are beginning to bet on future inflation by returning to the commodity markets. This is one reason why the price of gold has continued bouyant despite soft prices for other commodities. Soybeans are benefiting handsomely today. Other grains have also moved higher, but to a lesser degree.

The Myth That the Bad News Is "Priced In"

In John Mauldin's weekly newsletter last week, he invited Bennet Sedacca of Atlantic Advisors to write an opinion on the state of the U.S. economy. Here is a very brief excerpt from a very good opinion called "Setting the Bull Trap":

"Forcing money into risky assets is perhaps the most dangerous experiment ever done, and is so large in scale and so unprecedented that we have no idea how it will end. I expect it to end poorly and with hyper-inflation. The funneling of assets into risk is masking the deteriorating fundamentals and giving the appearance of a market that has bottomed. But this is sleight of hand, an illusion.
"The Fed has declared a war on savers, a war on prudence and provided the ultimate Moral Hazard Card-and with our money no less. They are also setting up the ULTIMATE BULL TRAP-a trap so large that when it is sprung, perhaps as early as the end of the first quarter/beginning of second quarter that there will only be sellers left.

• Unemployment on every front is rising. market that has bottomed.
• Tax receipts are down and State Governments are suffering.
• The debt market, except that artificially supported by the Government is closed.
• Earnings estimates for the S&P 500 are down 60% year-over-year.
• Stocks (using the Dow as a proxy) are at the same level they were 10 years ago.
• Industrial Production around the globe is imploding.

"Here is the magical question: "why is there is so much bad news, and is it fully discounted in prices?" If so, "why are the Fed, FDIC and Treasury Department so desperate to drive down interest rates to zero, buy troubled assets, ruin what used to be an efficient debt market in Mortgage Backed Securities, Corporate Bonds and Preferred Stock?"

Read the entire newsletter here.

Stocks Head South On Dismal Unemployment Data

Stock traders and investors must not have liked the internal data released by the Bureau of Labor Statistics, because now, the sell-off has begun. Note how solid the selling is over the past 30 minutes.

Grains Continue to Rebound Overnight

Grains have continued to rebound after Wednesday's losses, with soybeans (see chart) leading the way significantly higher.

Employment Falls 524,000 in December, Jobless Rate Climbs to 7.2%

The headline job losses in December were roughly as expected -- 524,000 jobs lost. However, traders were prepared for a much larger number, so the first reaction will likely be positive. The unemployment rate rose to 7.2% (highest since 1993).

The average hourly work week slid to 33.3 hours, and since this number is a leading indicator, it suggests even more job losses yet to come, since most employers cut hours worked before they cut the jobs themselves. This is the lowest average workweek figure in history since records were began in 1964. The implication of this is that job losses will continue to accelerate over the coming months! It is still getting worse!

The revisions for the previous six months (June - November 2008) have increased the job losses for each of those months. Most troubling to me was that service-sector job losses represented more than half the losses in December, since in previous months, this sector had remained fairly resilient and job losses were minimal. This suggests that job losses are spreading and broadening. This was the worst annual job loss in the United States since World War II!

From my experience, the initial reaction of the financial markets is usually short-lived. As economists begin to study the underlying internal numbers and react to those over the weekend, we may see a different reaction on Sunday evening or Monday morning.

From the U.S. Bureau of Labor Statistics website (pay particular attention to the household survey -- it is usually the most telling):

Nonfarm payroll employment declined sharply in December, and the unemployment rate rose from 6.8 to 7.2 percent, the Bureau of Labor Statistics of the U.S. Department of Labor reported today. Payroll employment fell by 524,000 over the month and by 1.9 million over the last 4 months of 2008. In December, job losses were large and widespread across most major industry sectors.
Unemployment (Household Survey Data)
In December, the number of unemployed persons increased by 632,000 to 11.1 million and the unemployment rate rose to 7.2 percent. Since the start of the recession in December 2007, the number of unemployed persons has grown by 3.6 million, and the unemployment rate has risen by 2.3 percentage points.

Grain Bulls Bounce Back

Despite the weakness in equity and crude oil markets today, grains have bounced back strongly. Analysts were expecting continued weakness in the grain markets, but grains have rebounded forcefully almost from the opening bell.

A Little Good News Today

Following the disappointment of Wal-Mart's earnings and sales announcements this morning, other news has helped to put a floor -- at least temporarily -- under the stock index futures. Target reported that their sales slumped only half of the expected amount.

Additionally, the U.S. government reported that new jobless claims were less than expected. However, this data is somewhat suspect, because yesterday, the government also reported that the telephone lines (for people to call in their new jobless claims) crashed because they were so overwhelmed from people calling in to place new unemployment claims. This can only be a very negative sign.

Wal-Mart Earnings Disappointment, Lower Earnings Forecast, Send Stocks Lower

The Wal-Mart earnings disappointment and revised lower earnings forecast has sent stock futures lower in early pre-market trading. As a Dow component, Wal-Mart shares are dropping in pre-market trading, sending both the Dow and S&P 500 index futures lower.

So How Bad Was December Retail?

This week, we are awaiting reports on how bad the retail Christmas figures were. The market is expecting bad news, but how bad is a question for debate. Here are a few headlines being released this week:

• Costco Sales Fall 4%
• Sears Drops 7.3%
• Williams-Sonoma Comparable Sales Drop
• Macy's to Close 10 Stores
• Abercrombie Posts 20% Decline
• Limited Sales Down 10%
• Wal-Mart Expected to Outperform
• Weaker Holiday Gift Card Sales
• Supervalue Sales Decline
• Wal-Mart Steers Profit Forecasts Lower
• Saks and Nordstrom Remain Laggards

Note: Despite the above headline, even Wal-Mart's December sales were up only 1.7%, disappointing analysts, who expected a 2.8% increase. Sam's Club sales, like its competitor Costco, were down!

Bursting the "First Five Days of January" Myth

Every year, I hear the pundits on the various business channels perpetuate the debate about whether the first five days of January will be a predictor for the rest of the year. Mark Hulbert, who has spent his journalism career studying such phenemenons as indicators and especially market-sentiment indicators, wrote this piece today:

"...You can make no rational bet about the market's direction in 2009 based on how the stock market performs in the first five days of January."

Here is his article.

Earnings (Disappointment) and Lay-Off Season

The Dow is down another 50 points at this writing, and both Eurozone and Asian stock markets are down almost across the board. (So are my beloved grain futures.)

David Calloway wrote this prescient editorial on Marketwatch:

"Everybody should have known the holidays would only delay it. The freight train of job cuts, plunging earnings and massive spending cutbacks set to hit the economy was, thankfully, pushed back a few weeks while stunned investors and workers across the globe caught their breath after the worst fourth quarter in decades.
"...Earnings season, the time for companies to 'fess up just how bad it's been for them in the last three months, is here."

Read his entire commentary here. He says now, "the great dying begins".

And now, the earnings disappointments begin. Yesterday, the stock market dipped when three Fortune 500 companies all issued earnings disappointments and reduced their earnings forecasts. Two also announced lay-offs. The three companies were from different industries, but seemed to bring a cold dose of reality to the optimistic sentiment of the past few weeks, especially since a few were from sectors that had previously thought to be resilient. Last night, Lenovo, a technology company, also issued dissapointing earnings news, throwing more cold water on the idea that technology stocks would escape the bloodshed and pain. They won't.

I have thought throughout this recession that eventually, investors would be disappointed, since in past recessions, technology purchases, representing discretionary spending for consumers, have always been hit hard. Tech stocks are not a safe haven from the dip in consumer spending.

And here is an article from Bloomberg today about the effect on stocks due to an expected onslought of earnings disappointments:

Stocks in Europe and Asia dropped, sending the MSCI World Index lower for a second day, on concern the deepening economic slump is wiping out earnings growth and demand for commodities. U.S. index futures declined.

Here is the entire story.

Have a Glass of Milk! It's Very Cheap!

Milk futures have been plunging since the beginning of December. Why haven't prices dropped at the grocery story then?

Grain Bull Ends!

The grain markets have signalled an end to the bull trend that lasted throughout the month of December. The collapse in equty markets today appears to have been the cause. If prices confirm by moving lower during the next trading session (this evening or tomorrow), then a complete liquidation of grain futures is warranted.

Note: Grain prices moved lower across the board during evening trading, confirming the sell signal. The grain bull is dead!

Bank of England: Lowest Interest Rate in Over 300 Years!

From Marketwatch tonight:

On Thursday, the Bank of England is widely expected to make a landmark statement of its own.
Facing what many economists expect to be the deepest recession since World War II, the nine-member Monetary Policy Committee is seen as virtually certain to drop the central bank's key lending rate to the lowest level since its founding in 1694.

Here is the full story.

The Magnitude of the Monster

Great editorial from the Wall Street Journal tonight:

Whether or not you think new spending will stimulate the economy, the one undeniable truth is that this money has to come from somewhere, which means that it is borrowed or taxed from the private economy. This spending blowout is all but guaranteeing huge future tax increases, and anyone who thinks only the rich will pay is living an illusion. Taxpayers need some new champions in Washington -- and fast.

Read the entire article here. Be prepared to be afraid. Very afraid!

CBO Projects Staggering $1.2 Trillion Deficit -- Before Counting the Obama Stimulus!

From Marketwatch today:

The U.S. government will run a $1.2 trillion budget deficit in fiscal 2009, the Congressional budget Office estimated Wednesday, offering a stark assessment of the red ink facing the country and the incoming administration of President-elect Barack Obama...
"The overall deficit number is a challenge to President-elect Obama, who is seeking to enact a major stimulus plan of close to $800 billion...
"Enactment of an economic stimulus plan would add to that deficit," the CBO warned Wednesday..."

Here is the rest of the story.

Do you get that? This article is suggesting that the total 2009 U.S. Government deficit is likely to reach $2 trillion this year, if the Obama economic stimulus package is enacted as expected! And that doesn't even include the debts and balance sheet obligations incurred by the Treasury and Federal Reserve!
Perhaps this is why treasuries are selling off today (see above chart).

Poor ADP, Earnings Sock Stocks

The ADP unemployment report this morning was worse than expected, manifesting additional weakness in the United States economy. This month, however, instead of job losses being centered in the construction, housing, and financial sectors, the majority of job losses occurred in the services sectors of the economy for the first time. The ADP jobs report includes only private-sector jobs losses, and occurs as a precursor to the BLS (government) jobs report on Friday. However, since ADP reported that the private sector job losses alone were 693,000 during December, it raises questions about how bad the BLS version will be on Friday. ADP reported that they have adjusted their methodology so that it more closely reflects the BLS figures due out on Friday. If this is true, in future months the ADP figures may take on greater significance to investors.

Transferring the Risk -- To the Taxpayers

From Bloomberg today:

Chairman Ben S. Bernanke sees the thawing of frozen credit markets as critical to a recovery, and is determined to try to prevent a second wave of credit distress as the U.S. weathers bad economic news over the next two quarters. The Fed is now looking at ways to revive lending by using its balance sheet to hold loans and bonds that investors don’t want.

Here is the complete story.

It is my belief that as long that the United States Congress continues to spend without limit, the Federal Reserve Bank continues to print without limit, and the United States Treasury continues to borrow without limit, the future will eventually reflect a very ugly scenario!

The New Commodity Bull

Just when the central banks of the world are deluding themselves with the idea that inflation is under control, commodity prices are surging much higher once again.

Soybeans (other grains have similar charts) - up 30% over the past month

Crude Oil - up 40% in 7 trading sessions. Crude has touched $50/barrel today.