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Another Treasury Reversal

Wow! What a day! Volatility in the treasury futures!

Keeping Pace With Momentum

Until recently, I had software installed on my computer that would ring with a siren every few minutes. It uses a literal siren sound like a fire engine. The purpose of this timer was to remind me to check all my charts so that I could stay on top of changing market conditions as they evolve throughout the day. One way that I ensure consistent earnings is by constantly scanning for emerging signs of new momentum. This is, after all, a profession, not a hobby!

As a trader, existing positions can often become a distraction from other emerging trade opportunities elsewhere. It seems that as traders, we often miss good opportunities because we are so absorbed with a different one. This alarm helps me to be mentally alert and to quickly locate new opportunities as they emerge. I have written elsewhere on this blog of the danger of opportunity cost/loss.

Recently, Tradestation updated its software and added some timer alarms, so I no longer need the separate software. I have a timer set in Tradstation that activates an alarm at regular intervals to remind me to quickly scan all my charts. I follow about 20 futures instruments, so even if I have a position in one instrument, I frequently scan all of them so that when a breakout occurs, I can quickly find and assess each one. It is mentally exhausting, but is necessary to keep skin in the game. Who ever said this business was easy?

Surprise Sharp Reversal in Treasuries

One of the reasons that I prefer trading treasuries above all other futures contracts is that sharp reversals aren't the norm. Obviously, that is not always the case, as this chart shows. This chart pattern has manifested itself just minutes following my last one.

One person I know who works on the floor of the Chicago bond pits reported to me that many of the hedge funds and large bond mutual funds are liquidating long positions in bonds, and have been since the peak a few weeks ago. Thus, in a downtrend, we should expect that strong heaves of buying may be met with even stronger spasms of selling as those dry heaves run out of steam. Still, I am very aware of the power of the Fed to move markets, so their threat to intervene and buy long-term treasuries is always something I try to keep in mind. One of the rules I live by, as a trader, is this one: "Don't fight the Fed."

ADP Unemployment: -522,000 in January

I'm sure glad they consider this to be a lagging indicator! We should keep in mind that the ADP figure includes only private sector employment. Fortunately, January is typically the worst month for job cuts, too, so perhaps the worst may be over. Many companies are reluctant to lay off workers during the Holidays, so they delay job cuts until January. The risk, however, is that one round of lay-offs lead to lower consumption in the macroeconomic perspective, and new rounds of lay-offs in future months in a downward spiral.

Momentum With Treasuries Today

Treasury futures have shown the only significant momentum this morning, reversing some of yesterday's price decline. I see no other futures instrument that shows and significant momentum overnight.

Grains Rebound Strongly in Early Evening Trading

Prices have rebounded strongly in evening trading on stronger economic prospects bouyed by higher stock markets. One interesting aspect of the financial markets is that the grain futures market closes at 1:15 pm CST, but the stock markets don't close until nearly two hours later at 3:00 pm CST. In a case like today, in which the stock market rallies strongly after the close of grain trading, it tends to set up the grain markets for a rally when it reopens later, on the hopes that an economic revival will result in increased demand for grain products. This phenomenon also exists at times to some degree in the mornings, because the grain market is closed from 6:00 am to 9:30 am CST, while stock index futures continue to trade throughout this period, including the stock market open at 8:30 am CST. Strong momentum in stocks often bleeds into the grain markets when they open again at 9:30 am.

From Reuters this evening (the reference here to "Wednesday" is written to be released in Asia, where it is already Wednesday morning):

U.S. soybean, corn and wheat futures rose on Wednesday, as stronger U.S. home sales data buoyed stock markets and firmed crude oil prices.

Stocks Rally Into Close

Stock futures were able to break out of the doldrums and move higher. We remain in a very tight range, once again bouncing higher off support near the November lows.

Grains Turn Bearish

Grain futures have dropped more today than any day in nearly two months. This intraday chart for corn is typical for all the grain futures today.

Stocks Struggle to Stay Positive

The Russell 2000 has now dropped into the red. The S&P 500 is straddling the flat line, and the Dow is barely positive. With such erratic conditions, its not worth trying to trade stocks today.

Russell 2000 -- the leading indicator for stocks, both upside and downside (yesterday's close is the purple line)
S&P 500 -- flat, but about to go negative?
Dow -- still positive

Gold Loses Some of Its Luster

Gold has dropped nearly $35/oz. in the past few days. The bull market continues, however. I will be looking to buy again when the market appears to find a bottom.

Despite this, I noticed that gold failed to reach the upper trend line on the daily chart (not shown) before reversing downward. This suggests to me that the yellow metal is possibly losing its momentum. If stocks and the Dollar rally together, gold will probably be a victim. (Surprisingly, the Dollar is down today, which usually causes gold to rally. There are always surprises in the futures markets.) Perhaps the news today that the U.S. Senate may reach a more balanced accord on economic stimulus between Republicans and Democrats is humbling gold's recent bullish character. Is gold losing its luster?

Trading Soybeans With Smaller Margins, Limited Risk

A few traders have indicated to me that since soybeans are the most volatile of the grains, the potential risks and losses are too much for their risk profile. However, I've noticed that soybean oil and soybean meal can also be traded with a smaller margin and more limited risk. Both futures have margin requirements that are about half that of the soybean contract. The down side is that both also tend to have less liquidity than the intact bean.

I've also noticed another interesting phenomenon. I've noticed that when I intend to sell, it is most profitable to sell soybean oil. When I wish to buy, on the other hand, it is best to buy soybean meal. Meal tends to move higher, faster than the oil. Oil tends to move lower at a faster pace than the meal. Shown here are the daily charts for both. Also, the chart for soybean meal tends to more closely match that of the chart for the soybean contract.

Soybean Meal -- Moves Higher at a Faster Pace

Soybean Oil -- Moves Lower at a Faster Pace

Stocks Swing to Black on Positive Housing Data, Pharma Profits

Good News on the housing front! Pending home sales rose 6.3% during January. Howing the number of existing homes that have been vacated due to foreclosure also rose to a record 19 million. Still, the surprise to the upside in pending home sales was enough to move stocks weakly into positive territory! Positive earnings from drug makers has also helped to fuel some optimism this morning.

Treasuries Tumble

The picture says it all today! More of a challenge by the bond vigilantes to the fortitude of the Fed! The size of the supply is apparently the greatest factor influencing the rising interest rates, as investors are demanding a higher interest rate to compensate for the increased risk. If America is going to borrow their way to prosperity, they're going to pay through the gills!

Dow Chemical, Motorola Earnings Rock Stocks

Bad earnings reports are pressuring stocks once again overnight, but only modestly. The S&P Index Services is now expected to report the first negative earnings report in its history. Losses at Motorola and Dow Chemical both rocked the market overnight. Perhaps the weakness of the dip is suggestive of a rally when the market opens.

Stocks Move Back to Black

The S&P 500 and Russell 2000 have erased all losses for the day and moved back into positive territory once again. At this rate, the Dow may also end higher for the day.

Trading Perspective From John Mauldin

An excerpt from John Mauldin's most recent newsletter:

Seriously, buy and hold in a secular bear market like we are in is a losing strategy. On an inflation-adjusted basis, you are down if your holding period has been 30 years! Most of us would think that 30 years is the long run! On a nominal basis, you are about where you were ten years ago, if you are in a broad index.

Even if you are a value investor, you have gotten creamed in this market. (Some great value investors are down 60%. Their experience of buying and holding solid companies, which had worked so well for so long, needs to be married with some risk discipline.) You need a sell discipline. Barry's system, or others like it, can at least get you thinking about selling rather than riding a stock all the way to the bottom and hoping it comes back. Hope is not a viable investment strategy...

The best traders and managers have risk controls and sell disciplines and they stick to them. Period. They don't fall in love with a stock or a commodity position.

Here is John's full newsletter.

In his latest newsletter, John mentions and discusses software that combines both fundamental and technical analysis in a single software platform. This is rare in his newsletter. I am not familiar with the sytem, so I neither endorse nor discourage it. However, when John mentions "Barry's system" in the above quote, this trading software/system is what he is referring to. I mention this only as an explanation of the above quote, not as an endorsement. In his complete newsletter, Mauldin has a more complete explanation of how the system works, a special introductory rate for his subscribers, and a link to take advantage of the offer.

"Not the Time for Profits" - Pres. Obama

Pres. Barack Obama today mentioned that these are not times for businesses on Wall Street to make profits. What a stunning statement! Was this a freudian slip or a reflection of his true attitude toward business? I hope it was a slip of the tongue, but one certainly must wonder if it was a freudian slip that is based upon his deep-seated attitudes. Wow!

Stocks Rebound, Collapse on New Job Cut Announcements

Stocks put in a bottom, rebounded to positive territory, and have now collapsed again on new large job cut announcements from Macy's and Morgan Stanley. Macy's also announced that it would cut its dividends and make a tender offer to retire some of its debt load, an action that is interpreted as bearish. Morgan Stanley is cutting 3-4% of its staff.

Stock Index Futures Slide Lower

Stock futures during overnight trading in Asia and Europe have continued to slide lower. This surprises me, since I expected the stock market bulls to successfully defend the Dow 8000 support level. However, the data is so negative, and there is so little news that can provide upward momentum, that the Dow futures, trading more than 100 points lower than Friday's close, are suggestive of further weakness ahead during the day session. We are close to testing the November lows for the Dow. Another terrible and disappointing jobs report this Friday would be a tipping point one direction or the other.

Fed Fights Back Against Bond Vigilantes

I haven't seen the data, but in an environment in while investors have been selling U.S. treasuries, it appears that the Fed's verbal intervention last Tuesday may be having an impact. Interest rates overnight have been moving lower, even on long-term treasury futures, including both the 10-year and 30-year. The charts show increasing treasury purchases and higher prices, despite a "debacle" in treasury purchases according to a fellow blogger who is a bond specialist. He suggested that last week's treasury auctions were a debacle because of weak demand. How, then, are they so strongly higher overnight?

Opinions Mixed in Davos on "Bad Bank"

From Bloomberg:

Nobel laureate Joseph Stiglitz said any decision by President Barack Obama to establish a so-called bad bank to rid financial companies of toxic assets risks swelling the national debt.
Obama’s administration is moving closer to buying the illiquid assets currently clogging bank’s balance sheets and preventing them from boosting lending, people familiar with the matter said this week...
Whether a bad bank would accelerate an end to the financial crisis split delegates attending the Davos talks. JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon said such an operation would help if “executed well.” Billionaire investor George Soros said in an interview that “it’s not the measure that would turn the situation around and enable banks to lend.”

Here is the full story.

It should be noted that Dimon's bank would benefit from being able to rid itself of toxic assets by disposing them through the bad bank. I suppose, then, that so would Dimon.

Nouriel Roubini: Prescient Prophet of Economics

Two years ago, when Nouriel Roubini spoke at the Davos World Economic Forum, many considered his dire assessment of the global economy as excessive and he was considered to be the latest Dr. Doom. Not any more! Now, because his forecasts have been so accurate, he is now vindicated. He has tremendous credibility because he has been so accurate. Here are excerpts from Bloomberg regarding his acceptance this week in Davos:

Even as he wins plaudits for his prescience, Roubini, 50, says worse lies ahead. Banks face bigger credit losses than they realize, more financial companies will require state takeovers and the world economy will keep shrinking throughout 2009, he says.

“The consensus is catching up with me, but it’s still behind,” Roubini said in an interview in Davos. “I don’t know what some people are smoking.”

“I was intellectually vindicated,” Roubini says. “But I was vindicated by having an economic disaster which has political and social consequences.”

While the U.S. government is resisting nationalizing its biggest banks, Roubini says it will have no choice because they are now “effectively insolvent.” And the outcome may be even worse than even he anticipates if governments fail to take aggressive steps to recapitalize banks and revive their economies, he says: “The risk of a near-depression shouldn’t be underestimated.”

Here is the entire article.

Treasury Funding May Force Interest Rates Higher

Bloomberg suggest that treasuries rose yesterday, but this chart shows them flat for the day. The article is still very interesting:

Treasuries fell for a second week after the U.S. sold $78 billion of notes, the start of what’s forecast to be a record amount of debt this year to pay for a burgeoning budget deficit and fiscal stimulus programs...
“In the long term, you’re going to see Treasury yields rise as we deal with the mother of all supply challenges,” said Kevin Flanagan, a Purchase, New York-based fixed-income strategist for Morgan Stanley’s individual-investor clients...
The U.S. will probably borrow $2.5 trillion this fiscal year ending Sept. 30, almost triple the $892 billion in notes and bonds sold the prior 12 months, according to Goldman Sachs Group Inc., one of the 17 primary dealers required to bid at Treasury auctions.

Here is the full article.

The Challenges of "Good Bank", "Bad Bank"

This is a fascinating article from Bloomberg this weekend. I suggest skipping to the section entitled, "Pricing Rotten Assets" through the end. There were many interesting points raised concerning the trade-offs regarding the pricing of all these bad loans.

Here is an excerpt:

“Creative pricing of toxic assets will only postpone the pain, extend the duration of the crisis, and present a bigger bill,” Northern Trust Securities Inc. economist Asha Bangalore said in a Jan. 23 research note.
If the government purchases the security at $85, the future losses and bill to the public purse would be less. The problem is, this price could cause banks to recognize as permanent their losses on other securities. Right now, they claim those losses are temporary.
Such a move would cripple banks’ regulatory capital ratios. Plenty of banks could still fail. In that case, banks and taxpayers both get hit.
Buying the security at the market price of $65 means banks and the financial system immediately face a day of reckoning. While bank balance sheets would get unclogged, many wouldn’t be able to, or willing to, face the losses.

Here is the entire article.

Worst January in History for Dow, S&P 500, Russell 2000

Gold Has Further to Go

This long-term chart shows the trend for the price of gold, with the upper and lower trend lines shown in green. The next long-term trend line on the up side is around $950/oz.

Gold Leaps Still Higher

Gold continues to leap even higher on concerns about inflation that will come down the road, and that all this spending will lead to an eventual collapse of the Dollar. Safety is number one for investors, and this is why gold continues to climb higher despite recent Dollar strength. Gold is up $110/oz. in 11 trading sessions -- $10 each day!

Government Can't Create Wealth, Just Redistribute It

Also from Minanville:

The reality is that printing money, which is precisely what is going to take place under this $888 billion "economic stimulus" package, cannot create real savings or wealth, it can only redistribute it.

Here is the link to the Minanville article containing both the last two posts.

Investment in Banks: For Better? or For Worse?

Here is some perspective from Minanville:

According to Time Magazine (via Barry Ritholtz), since October, the government has deposited $165 billion into the accounts of the nation's eight largest banks, which are now worth $418 billion less than they were four months ago. Also, the Congressional Budget Office estimates that the government's preferred shares are showing a $20 billion loss, the magazine reports.
"All told, the government's annualized rate of return on its investment in the nation's largest banks is -1,096%."

Why am I not surprised that the investment our government has made into these banks -- by borrowing more money and creating monstrous new debt -- is worth substantially less than what we put into them? Since when has the government ever been known for making good investments?

Perhaps when President Obama uses his latest poll-induced buzzword, "investment", with the American People to make his spending plan appear palatable, we should be very skeptical. In fact, we should run, not walk, for the exits! The fact is that the so-called stimulus plan is nothing of the kind. It is spending. It is nothing more... than more pork! It's more of the same we've come to see from Washington for decades and generations of Americans! It's no change at all!

At -3.8%, GDP is Better Than Expected, But...

Most people would consider an headline GDP figure of -3.8% right now to be better than what was expected. What was expected was a figure of -5.5%! So why are stocks down, then? Because the better-than-disastrous 3.8% was only better because companies were building up their inventories, and that suggests that an even worse Q1 and Q2 in 2009 are likely. It also suggests that even more job losses are coming. If companies have larger-than-expected inventories, then they need fewer employees to keep their inventories at level to sustain sales. And that means that even more job cuts are coming! That's why the stock market is down on this news, and continuing to move still lower.

Rice Futures Limit Down

Isn't this the same commodity that, a year ago, its scarcity was causing riots all over the world? Today it was limit down (see intraday chart, above). The daily chart is shown below. The price of rice has been plunging for months without much fanfare!

Lumber Futures Long Collapse With Housing

Lumber futures continue to plunge, as the have since early December, as shown on this daily chart.

Bond Vigilantes Take On the Fed

The bond vigilantes challenged the Fed to a dual today, selling off 10-year and 30-year bond futures in defiance of the FOMC's statement yesterday suggesting that they would buy long-term treasuries. This was a great trade!

The FOMC attempted to use a verbal intervention to force interest rates lower, but it didn't work! The bond vigilantes would have none of it, and they didn't take the challenge lying down. They sold treasuries forcefully today in an open challenge to the Fed to do so. The 5-year note auction showed weaker-than-expected bids, and the sale was on in earnest.

With the U.S. government borrowing money in unprecedented quantities, bond holders world-wide are beginning to demand higher interest rates in order to hold debt that is more and more likely to be labeled with down-graded debt ratings and a higher probability of default. They want to be compensated for the increased risk!

On the blog of another financial blogger who is a bond specialist, he said that, "Investors are punishing profligate taxpayers for prodigious spending." Well said. His blog is located here:

Across the Curve

Stocks: Falling Further!

Stocks: Gains Gone, Thanks to Congress!

Today's stock market has now completely eliminated yesterday's gains, as the collapse of the stock market has accelerated today within the past few minutes. Looking at this chart, I wonder if, following the announcement of Congress' heavy-handed regulation 30 minutes ago, has created this plunge in stocks. The collapse was almost instantaneous! This is what happens when a misguided Congress creates havoc with their well-intentioned, but grossly misguided attempts to manipulate the financial markets. It panics the markets!

Wasn't it a similar onerous attitude when Congress passed the Community Reinvestment Act, compelling banks and other mortgage lenders to make liar loans to people who were incapable of repaying them, that created the financial meltdown in the first place? Why is it that they can't ever learn from the crises they create and the mistakes they have made?!

Congress Drafts Legislation to Restrict CDS Futures

Congress has drafted legislation today to begin to restrict credit default swap futures only to those who plan to take delivery. If this goes very far, it could panic the market. This is only the first shot from the Democrat-controlled Congress. Will they do the same in the grain, crude oil, and other futures markets as well? They've threatened to! This will dry up liquidity and drive capital to overseas markets. It will literally amplify the very conditions that Congress hopes to prevent.

By restricting the capital markets in this way, Congress risks the following:

1. Capital will flow out of the United States to futures exchanges in other countries. This, in turn will drive the Dollar lower, and commodities prices will move higher. Money and commodities flow to places where they are welcome. If Congress creates an unwelcome environment in the United States, both the capital and the commodities will go elsewhere. Can the U.S. afford to create long lines at gas pumps by creating a fuel shortage here? Can the U.S. afford to see capital flight to other countries, collapsing the Dollar and run the risk of the Dollar being dumped as the world's primary reserve currency?
   
2. Liquidity will dry up, giving greater power to large market participants to control prices and manipulate the markets. George Soros is a master at manipulating small, illiquid financial markets. Remember the Hunt Brothers and their manipulation of the silver market? As prices rose, more and more participants entered the market, until the Hunt Brothers lost control and they could no longer manipulate the small silver market. Liquidity brought an end to their manipulations. Strong liquidity in any futures market is critical to prevent any market participant from exercising too much control.
   
   One reason for the current crisis is that derivatives products were created for which there was no market. A market without liquidity exacerbates the wild price swings when a single market participant need to change positions or exit the market and can't find a willing buyer or seller. Liquidity prevents this. This is precisely what has caused the current crisis. The absence of a liquid market eventually caused the government to step in and buy toxic assets for which no liquid market existed.
   
3. It will make price discovery more difficult and constrained. One of the reasons that this financial crisis occurred is because so many derivatives products were created without price transparency. This action will reduce transparency, and amplify the very problem that created the crisis in the first place.

If they were wise, Congress would, instead, take action that would encourage greater transparency and liquidity. This will have a negative and destructive effect on the futures markets. It won't improve conditions. It will amplify the very conditions that created this imbroglio in the first place.

We are now beginning to see signs of over-regulation that harms financial markets. We are seeing signs of a brewing trade war and trade sanctions. These are precisely the conditions that multiplied and deepened the Great Depression. Congress must have the wisdom to resist the temptation to engage in populist actions that will make matters worse. If they don't, everyone will pay the price for their stupidity!

Stocks Begin to Fall Further, Faster on Housing, Durable Goods Data

Data showing surprising deterioration in the housing sector and in durable goods orders has pummeled stocks today, reversing most of yesterday's rally in a grinding fashion that is somewhat difficult to trade.

Bloomberg said this:

Prospects for an economic recovery this year dimmed after reports today showed new-home sales collapsed, durable-goods orders slumped and a record number of Americans collected unemployment benefits.

“There really isn’t any hiding place in this economy,” said Nigel Gault, chief U.S. economist at IHS Global Insight in Lexington, Massachusetts.

Here is the full story.

Jobless Claims Hit All-Time Record, and Wall Street Shrugs!

Stock market futures traders are responding with a shrug following continued expansion of the jobless rolls in America. I was surprised to see losses from two major drug manufacturers in overnight earnings reports, a sign that economic contraction is affecting all sectors of the global economy. By the way, the "unadjusted" new claims for the week were 617,289 new jobless claims -- just for last week!

Futures are slightly higher as a result (see far right on chart). With stock futures moving moderately lower in overnight trading, I wouldn't be surprised if we see profit-taking today as a result. I may well be among them if stocks don't move higher at the open. I should also note that stock traders have successfully defended the Dow 8000 level over the past few days, and prevented the index from breaking through last November's lows.

From Marketwatch:

U.S. unemployment lines stretched to the longest on record, the Labor Department reported Thursday, a sign that the U.S. labor market continues to worsen.
Continuing jobless claims rose by 159,000 in the week ending Jan. 17 to a seasonally adjusted 4.78 million, the most since the government's records begin in 1967. That is the same week the government surveyed hundreds of thousands of workplaces and households to gather information for the January employment report.

Here is the full story.

I would call attention in the above quote to the words "seasonally adjusted". These figures are changed by the government with the intent to smooth out the peaks and valleys. The real numbers are far worse! The "unadjusted" unemployment rate, according to BLS figures, is 13.5%!

Fed Declares War on Bond Vigilantes!

The Federal Reserve today declared war on the bond vigilantes who have been pushing long-term interest rates higher in fear of the potential for inflation and the possibility of the U.S. government defaulting on its debt. These two following quotes are verbatim from the Fed's FOMC statement released today:

"The Committee also is prepared to purchase longer-term Treasury securities if evolving circumstances indicate that such transactions would be particularly effective in improving conditions in private credit markets."

The Fed also indicated that it is going to begin to "facilitate" loans to households and businesses. Why do I doubt this?

"The Federal Reserve will be implementing the Term Asset-Backed Securities Loan Facility to facilitate the extension of credit to households and small businesses."

Corn Drops, Other Grains Flat

Corn drops -- Daily chart in consolidation

Wheat and Soybeans are flat, liquidity is poor -- daily also consolidating

Stock Roller Coaster Continues Overnight

Most Prescient Economist Raises Cost of Bailouts

From Nouriel Roubini:

The US banking system is borderline insolvent in the aggregate and it will take a huge amount of public financial resources and complex and time-consuming work-out of insolvent institutions to restore its financial health and allow it to lend again in ways that support sustained economic growth.

Roubini predicts that the total cost of the debt crisis will be $3.6 trillion. He says it could be as high as $5 trillion.

Is Protectionism Coming?

Twice during the Geithner confirmation hearings, Mr. Geithner replied exactly the same way with regards to questions from Senators regarding China and its currency. This was his written, prepared answer:

"President Obama -- backed by the conclusions of a broad range of economists -- believes that China is manipulating its currency. President Obama has pledged as President to use aggressively all the diplomatic avenues open to him to seek change in China's currency practices."

This was his written, prepared answer. He was clearly answering on behalf of President Obama.

China's Commerce Ministry issued the following statement in response:

"/China/ has never used so-called currency manipulation to gain benefits in its international trade. Directing unsubstantiated criticism at China on the exchange-rate issue will only help US protectionism and will not help towards a real solution to the issue."

Why is this significant?

• China owns more U.S. treasuries than any other country in the world. If China should begin to dump them suddenly, in a spirit of retaliation, it would almost certainly force interest rates in the United States to rise significantly and rapidly. It may also cause the Dollar to plunge, sending prices of nearly everything sky-high, as commodities respond to a Dollar collapse. As the world's largest debtor nation, the United States can not afford to see a sell-off of its debt.
• If the United States declares China as a currency manipulator, and retaliates with sanctions of any kind, China would almost certainly respond in kind by limiting or restricting U.S. goods and services. This would make the United States economy worse. Quite frankly, the United States has more to lose.
• One of the lessons that nearly all economists and students of economic history agree is that one of the factors that powerfully amplified the gravity of the Great Depression were policies that ignited a trade war. If a trade war begins between the world's two largest economic powers, the consequences could be catastrophic.

This will be something that we will want to monitor very carefully! While most economic advisers see a trade war as extremely harmful to U.S. interests, as political instability mounts, Congress may respond to such instability with retaliation regardless of the harmful long-term consequences!

Another See Saw Day

We are still seeing a battle for the Dow 8000 level. If the bulls lose this one, the bottom could be a long way down.

Job Cut Parade Continues

Job cuts announced this morning:

• Phillips cutting 6,000 jobs
• Sprint cutting 8,000 jobs
• Caterpillar cutting 20,000 jobs
• ING cutting 7,000 jobs
• Home Depot cutting 7,000 jobs

Bloomberg is announcing an additional 72,000 job cuts today. That's one day!

Crude Oil Reversal Sends Prices Higher

Friday, I received a reversal signal for crude oil, and today confirms that signal with prices moving higher. The intraday chart, above, shows prices surging today. The daily chart (below) showed a reversal late last week. I am keeping a very tight stop, however. As long as the economy remains weak, the potential upside for crude oil requires close, tight risk management!

A Glimmer of Good News Turns Stocks Positive

Despite horrible earnings reports from Caterpillar, including 20,000 job cuts, there is some good news also. McDonalds beat analyst earnings expectations, existing home sales rose unexpectedly in December, and the leading economic indicators were better than expected. Stocks have responded by moving higher. We have had this much good news in several weeks!

Civilization Seduced by the Chains of Debt

It is now clear to me that, despite temporary rallies in the stock market, we are now facing long-term economic weakness and, with each day that passes, an increasing probability of a depression and wholesale economic collapse. Gold, the ultimate currency and barometer of fear, has risen solidly above $900/oz. overnight (see above chart).

I believe that the primary cause for this, among many, is that we have built our entire civilization here in the United States upon a house of cards called debt. The people in government and the media keep referring to "the credit markets", but they are playing a perennial game of semantics. The reality is that we have built our economy upon the sandy foundation of debt.

They're Not Credit Cards. They're Debt Cards! They're Not Freedom! They're Chains!

Excessive cheap "credit" -- debt -- causes bubbles as prices are artificially inflated by easy money without sufficient respect for risk. The more money that the Fed creates and Congress spends, and the lower the Fed artificially forces interest rates, the more it builds the bubble of debt, the more they inflate prices and create bubbles. Easy money and easy credit are inflationary! Why is it that our government and the media always refer to it as "credit"? Why don't they call it what it really represents -- debt? It is no coincidence that we call them "credit" cards. Imagine if we started to call them what they really are -- "debt" cards! That's what they are! Does the easy-money verbiage of "credit" sound better than the less responsible-sounding word of "debt"? Could that be why they avoid the latter word? The word "credit" implies just another entitlement, but the word "debt" implies an obligation. One seems to imply a right and freedom, while the other suggests chains. They are the same thing, but it is time that we begin to look at things the way our grandparents did. Debt represents crippling chains, not financial freedom.

What happened to the time-proven idea of "save for a rainy day"? What happened to saving for something, and then buying it? What happened to "Use it up, wear it out; make do, or do without?" What happened to cash? What happened to paying for something? It is time to save, not time to borrow!

It is now my firm belief that those who survive this financial crisis, and prosper over the coming years of hardship will be those who have "deleveraged", paid off their debts, put away some cash, and saved! That is not only true for individuals. It will also be true for nations!

Despite my opinion here described, I will strive to ignore it when trading. Now that I have acknowledged my bias for the financial markets, I will try to ignore it when taking trades and making a living. I need to leave my emotional biases behind when trading.

Mauldin: Here Comes TARP 3 and 4 -- and It Still Won't Begin to Fix the Problem!

This quote doesn't do justice but here it is:

It is going to take a lot more TARP and private money to capitalize the banks. A whole lot more. And that is before any of the other stimulus. And all that next $1 trillion does is get the banks back to where they were two years ago. Further, it does not give them the capital they need to make up for the loss of the Shadow Banking System. It is going to take some time to build what I call the new private credit system.

Read the whole kit and kaboodle here.

This mess just gets uglier by the day! Mauldin explains in his latest newsletter why, even if the banks lend like there's no tomorrow, the credit markets won't be any better this year, or the next one, or the year after that (2011).

In case you don't believe there will be a TARP 3 and 4, here is a headline on Marketwatch tonight:

Pelosi Says More Money May Be Needed for Banks

Here's a quote: "More money may be needed for the Treasury's Trouble Asset Relief Program, beyond the $700 billion already approved..."

USA's Bank Bets -- What Next?

From the New York Post:

"The capital injections haven't worked," said Edward Yardeni, an independent market analyst...

With a little over $350 billion already infused into the banking industry through TARP and countless billions through the Fed, many see the cash having little benefit for the economy. Plus, some Wall Street firms have estimated that it will take $3 trillion to right the banks.

"The size of the problem is growing faster than the banks' ability to handle it," said Joe Battipaglia, market strategist at Stifel Nicolaus.

"We're halfway through the bailout money, and the banks are in worse shape than they were six months ago."

Here is the full story.

Jobless Rolls to Grow

From Bloomberg:

What’s shaping up to be the longest and deepest U.S. recession in at least a quarter century may swell the number of Americans collecting jobless benefits by half this year.

As the economic slump approaches the depths of the contraction in the early 1980s, the 4.6 million workers currently receiving unemployment insurance checks may increase to as many as 7 million by the end of 2009, economists said.

Here is the entire story.

The Bond Vigilantes are Back

From Barrons today, suggesting that interest rates are starting to rise. The article indicates that nations' debt ratings are increasingly threatened by unbridled borrowing:

The incoming Obama administration got a rude reception from the debt markets.

Ed Yardeni, who coined the term "bond vigilantes" back in the early 'Eighties, sees them being roused again. Then, the vigilantes' main target was inflation; now it's burgeoning budget deficits around the globe.

The eponymous head of Yardeni Research notes that the Congressional Budget Office is projecting a fiscal 2009 budget deficit of $1.2 trillion -- 8% of U.S. gross domestic product. And that's before President Obama's $800 billion stimulus plan.

Reading the entire news story requires a paid subscription to Barrons. This story seems to confirm my post from Thursday incidating that long-term interest rates -- which are less subject to Fed manipulation -- are rising, like it or not.

Don't Trust Your Gut -- You'll Likely Be Wrong

I thought this was interesting from the Wall Street Journal:

Barron's asked a dozen experts to forecast the level of the Standard & Poor's 500-stock index at the end of 2009. Not one called for the market to go down; they all predicted gains between 5% and 38%, with a median of 13%.
Given how wide off the mark their predictions usually land, you may already be skeptical of the forecasts of Wall Street's finest Pollyannas. But their inaccuracy doesn't make your own forecasts more likely to hit the target. You should be as skeptical of your predictions as of theirs.

Here is the full story.

This story underscores research the indicates that when we trade our biases, we're generally wrong. Perhaps we can extend this lesson to acting on our interpretations of news events also. Successful fellow traders have told me that they trade more successfully when they ignore CNBC and the news, and trade only their signals instead. I've found this to be wise counsel.

Stocks -- Defending the Bottom Teaches Important Principles

Stock traders over the past few days have successfully defended the prior lows for the major indexes. In this chart, the left chart shows today's 15 minute chart, showing a steady rise following this morning's open. The right chart shows the daily chart, with the November stock market lows near the left edge of the daily chart. Today's chart isn't complete yet, but today's candle shows what may be either a hammer bottom or a dragonfly doji forming. Until the day is done, the candle could certainly change, but it is worth watching and paying close attention to.

Some Lessons to Be Learned

On the one hand, the more often we test the previous November lows, the more likely we are to see a breakout to the downside. We are, after all, close to the lows, and with good reason for being there. On the other hand, the more often we test those lows and hold them, the more likely we are to see a rally, as investors decide that "the worst is over" and want to buy at what they perceive to be "cheap" prices. This line of thinking exposes an investor/trader to a serious flaw in thinking. I call this flaw the "falling knife" syndrome. Just because a financial instrument has fallen precipitously, doesn't mean that it can't fall even more! And when traders are caught in the trap of thinking, "It has fallen so far, it just has to go higher now," they are likely to lose money. This is flawed thinking. In fact, from a purely statistical standpoint, when a breakout occurs, it is far more likely to continue in the original direction, rather than reverse direction. What has gone down, can go down more! Trying to catch the proverbial falling knife only results in bloodied finances!

Lows Are There For a Reason that is Neither Bullish Nor Bearish
These battleground levels are neither bullish, nor bearish. That's why they are battlegrounds! Prices consolidate at these levels because there is conflicting data, both bullish and bearish, at these price levels. It is a standoff! A breakout can occur in either direction at any time. I'll wait to take a position until I know who won that battle! I have found no consistent pattern that gives me confidence in either buying or selling at these consolidation/battleground levels for a longer-term trade. (To me, a long-term trade lasts days or a few weeks, not months or years.) If I am already in a profitable trade, as in this case (I hold some bearish ETFs right now), I will tighten my stops, often each day, so that if a breakout occurs against me, I will exit with as much profit as possible.

Money is Only Happy When Put to Work!
My money must be working for me all the time -- every day! I only trade, and I only hold a trade, as long as it is doing what I bought (or sold) it to do -- go up (or in the case of a sell, go down)! If it goes sideways or the wrong direction, I exit the trade "rapido"! Time is money, and wasted time is wasted money!

Emotional Peace Counts for Something

This strategy of holding a position only when profitable doesn't just save me money. It also permits me to sleep better at night. I saves me emotional angst! Peace of mind is worth its weight in gold!

Opportunity Cost -- Wrong Trade at the Wrong Time -- The One that Got Away
Lastly, and this is almost universally ignored among investors, it also prevents me from experiencing "opportunity loss". The cost of a lost opportunity because my money was tied up in a bad trade or unprofitable trade is a true cost, but it is a hidden cost. More accurately, it is an ignored cost. I'm not just in this business to make money! I'm in it to make money as quickly as possible. If I miss an opportunity while I'm waiting with white knuckles and praying for a trade to make money, or (heaven forbid) to turn from a loss to a gain, then I'm leaving money on the table. I lose the money I could have had if I had used my money on a different trade! That is a costly error -- literally!

Don't Give Control to the Market

I'm also giving control of my profitability and my money to the market. The market is not here to make money for me. Only I should be in control of that. Holding onto a bad or unprofitable trade transfers power and control of my money to market forces. Bad idea! This concept is taught powerfully by Phantom of the Pits in his book, "Phantom's Gift".

Laws and Principles
All of these principles are important. When I violate these principles, I lose money. Here is another way of stating the importance of abiding by principles:

"And unto every kingdom is given a law; and unto every law there are certain bounds also and conditions." D&C 88:38

In the "kingdom" of the world of finance and trading, my job is to learn and abide by those laws, bounds, and conditions. When I fail to do that, I pay a dear price. When I learn and live by those laws, I prosper!

Gold Goes Ballistic, Up $40 Today

It appears that investors are buying gold, having now made the decision that they have lost confidence in the financial system, at least for the moment. This confidence tends to ebb and flow from day to day. Is this a reflection of the confidence level in President Obama's capacity to fix the problems that are overwhelming our economy? Perhaps investors are realizing that such expectations are unrealistic for one person, even if he is the most powerful man in the free world. Or perhaps there is a realization that these problems can't be fixed by government, no matter how often or forceful the interventions are. In any case, when confidence drops and fear reigns, people buy gold, and we are seeing the phenomena manifested today. Gold has closed higher the past five trading sessions.

Just a few days ago, I posted here excerpts from a Citigroup memo that recommended buying gold, predicting that it would reach $2,000/oz., perhaps as early as this year. They also predicted that the current crisis would result in either 1) resurgent high inflation, or 2) severe political instability and perhaps even war.

Grains Follow Financial Markets Lower

Grains are showing more and more signs of a consolidation pattern on the daily charts (not shown). This intra-day chart shows weakness during overnight trading. The light blue dotted line is yesterday's close.

More Stock Market Blood in the Offing?

Stock index futures have continued to decline overnight, and the Dow futures are down well in excess of 100 points once again. We are trading below the Dow 8000 again this morning, but certainly near enough that anything could happen.

Long Term Interest Rates Starting to Rise

As shown in this chart of the 30 year U.S. bond futures, we are seeing prices fall as the interest rates begin to rise. This is significant, because unlike the short-term interest rates, the Fed is much less capable of manipulating long-term interest rates. The added cost to finance U.S. government deficits is beginning to have an effect, and the interest cost to the American tax-payer is beginning to rise.

The Multiplier Effect of Public Spending

There was a fascinating editorial in the Wall Street Journal today by Robert Barro, economics professor at Harvard University. Here is an excerpt:

I have estimated that World War II raised U.S. defense expenditures by $540 billion (1996 dollars) per year at the peak in 1943-44, amounting to 44% of real GDP. I also estimated that the war raised real GDP by $430 billion per year in 1943-44. Thus, the multiplier was 0.8 (430/540). The other way to put this is that the war lowered components of GDP aside from military purchases. The main declines were in private investment, nonmilitary parts of government purchases, and net exports -- personal consumer expenditure changed little. Wartime production siphoned off resources from other economic uses -- there was a dampener, rather than a multiplier.
There are reasons to believe that the war-based multiplier of 0.8 substantially overstates the multiplier that applies to peacetime government purchases... When I attempted to estimate directly the multiplier associated with peacetime government purchases, I got a number insignificantly different from zero. /my note: In other words, there was no benefit -- it was virtually zero!/
Much more focus should be on incentives for people and businesses to invest, produce and work. On the tax side, we should avoid programs that throw money at people and emphasize instead reductions in marginal income-tax rates -- especially where these rates are already high and fall on capital income. Eliminating the federal corporate income tax would be brilliant. On the spending side, the main point is that we should not be considering massive public-works programs that do not pass muster from the perspective of cost-benefit analysis. Just as in the 1980s, when extreme supply-side views on tax cuts were unjustified, it is wrong now to think that added government spending is free.

Here is the entire article.

Another Roller Coaster Day for Stocks

After President Obama's spokesperson had a press conference, the stock market erased nearly all of its 270 point loss for the day, within about 20 minutes. The Dow had been down only about 35 points. I thought we might even move into the black. Now, however, stocks have reversed again, and the Dow is headed downward again, dipping to -175 at the moment of this posting. This is why I don't take longer-term futures trades in stocks (I do, however, in my ETF trading, where I am still short stocks). As a trader, I always keep in mind two principles regarding stock trading:

1. For stocks to rise, there must be active buyers in the market. All it takes for stocks to fall is for there to be few buyers in the market. No short sellers -- or sellers of any kind -- are necessary for the market to fall.
2. There is almost a perennial bias in stock trading for prices to rise. Personally, I take this phenomenon as evidence that we have not yet seen any signs of a capitulation. When this phenomena reverses, it will be a sign to me that a genuine reversal has occurred.

Thain is History at Merrill Lynch

Perhaps this news will cause B of A's stock to rebound? I'll keep watching!

BIg Inventory Build Causes Crude Oil Plunge

Today's inventory report, showing a large and unexpected build in crude oil inventory in Cushing Oklahoma, has caused a fresh sell-off in crude today. This is despite surprisingly solid compliance with production cuts from OPEC members. The expired contract fell to fresh lows earlier this week; will this lead the new lead contract to do the same? Look at the plunge at the moment the inventory report was released!

With so much oil being hoarded globally, and inventory builds occurring in the United States, the largest crude oil market, I don't see that crude oil can rebound in the near future.

Grains Stagger At Open on Demand and Stock Market Concerns

The weakness in stocks today has rippled through to the grain markets, causing grains across the board to sell off upon open. Over the past week, grains have shown signs of consolidation. Over the past few months, commodity prices have shown considerable and unusual correlation with stocks, with weakness in each reflecting demand concerns for products and the commodities that compose them.