Private Investment Plummets Due to Price Controls

When governments attempt to manipulate capital markets and control prices, terrible things result. Hugo Chavez' Venezuela is only the latest example. Inflation reached more than 32% during June, and the worse things get, the more Chavez tries to manipulate. If the price of crude oil continues to fall, and remain lower for a sustained period, I predict that Hugo Chavez' days as president of Venezuela are numbered. Good riddance!

Here is an excerpt from Bloomberg:

"Annual inflation quickened to 32.2 percent in June, a five- year record and the fastest increase in prices among the 79 economies tracked by Bloomberg...

"Foreign direct investment has dropped 90 percent since 1997, the year before Chavez was elected...

"That puts Venezuela... on par with Guatemala, a nation without any oil and an economy less than a quarter the size."

Read the entire Bloomberg article:

Chavez Pleads for Investment as Falling Output Fuels Inflation

Congress, the Fed's Bernanke, the SEC, and Treasury Secretary Paulson should all take caution, because the more they attempt to manipulate and interfere with the financial markets, the more unintended consequences there will be. The more frequently they engage in such machinations, the more likely those unintended consequences are to amplify in negative ways and with catastrophic effects. Why is it that these people never seem to learn this lesson? I'd like to introduce them all to George Santayana, who famously said that, "those who fail to learn the lessons of history, are doomed to repeat them." May they learn from the catastrophe that Hugo Chavez is making of Venezuela!

Iran: Thumbs DOWN On Negotiations to Limit Nuclear Enrichment

Watch early oil trading Sunday evening, because Iran once again refused to even negotiate the future of its nuclear uranium enrichment program. Some of the erosion of crude oil prices in the past few days was due to the rumor that Iran was showing a willingness to negotiate and end to their nuclear ambitions. Those hopes have now been dashed. Watch crude oil trading early next week. It may reflect the disappointment of this news.

To be honest, this news doesn't surprise me. Iran has a poor economy, with high unemployment, costly social services, and high inflation. Crude oil revenues are the primary shield of protection from the Iranian regime's collapse (the same is also true of Hugo Chavez). The leaders of Iran have learned that the best way to add a few billion Dollars to their treasury over the next few weeks is to talk of war, mayhem, terrorism, and bloodshed. It is a cheap price to pay. They exchange a few bellicose words, and the world compensates them with billions of Dollars in higher crude oil revenues within days. Where's the motive to consider any change?

Some Perspective On the Grain Markets

I read this wrap-up this evening by Arlan Suderman, market analyst for Farm Futures:

"The current break in the corn market would seem unprecedented to the casual observer, suggesting that the commodity bubble had finally been broken...

"A scenario can be constructed that would suggest that the multi-year highs are behind us, but such a scenario is still not the likely one, based on overall global dynamics.

"The more important take-home message is that you can’t judge the long-term direction of the markets based on short-term rhetoric. Last year’s “collapse” was accompanied by equally bearish talk and followed by the strongest bull-run in history. Prices more than doubled over the next nine months. In fact, the nearby corn contract doubled in value in the subsequent rally in each of the past two years. A doubling in value is not expected this year, but we should see prices stabilize and strengthen again to reflect overall global dynamics that are still pretty solid."

Arlan's complete daily commentary can be found here:

Farm Futures

I also found it interesting that corn prices dropped by about the same amount two years ago, while electronic trading of grains was still in its infancy, before trading volumes reached high levels, and prior to the current commodity boom. This also puts a fresh perspective on the idea of a commodity bubble and also on the idea of speculators driving the commodity markets. Arlan's perspective casts serious doubt on both, and suggests that both the bubble and the influence of speculators are both myths.
In our modern society, we would hardly like to admit it, but sometimes we behave in ways that are almost as superstitious and irrational as if we lived in the dark ages. With our elitist attitudes, we tend ot think that in this day we are more enlightened. I suggest that we are probably only more proud.

Credit Default Swap Futures Continue to Rise

This daily chart for credit default swaps futures suggests that concern continues to rise that defaults on debt will occur with greater frequency and intensity in the future. CDS's are used as a way to hedge against the possible default on debt. The higher cost of insuring debt against default continues to rise, which appears to suggest that investors are still worried, despite this week's latest government bail-out of Indymac, Freddie, and Fannie. For me, I pay more attention to these financial vehicles rather than to the lip service of government officials, because they represent the collective wisdom of many companies and individuals in the marketplace, all actively taking independent but collective actions in their own best interests. A word to the wise is sufficient.

Stocks Continue to Straddle the Flatline

Crude oil has moved lower again today. Talk of an agreement between the U.S. and Iran will continue to provide downward momentum, and the bearish impact should not be underestimated. That's great news for suffering motorists, like myself.

Unfortunately, stock index futures haven't benefited much from the good news., either from lower oil prices or on the geopolitical front. Stock futures have continued thus far in the session to straddle the flat line. Because of the disappointments in the tech sector earnings reports (IBM, Microsoft, Google, and AMD), the NASDAQ futures are still trading substantially lower. Flat conditions for the Dow and S&P makes it very difficult to trade them profitably.

Soybeans Joining the Grain Downtrend?

Today's soybean rout may have pushed the oilseed into a downtrend today. Two consecutive days of substantially lower prices seem to have pushed this commodity into a bearish bias also.

Many Commodities Now In A Downtrend
I have begun to wonder if the emergence of large funds that actively short the commodity markets over the past three months has begun to play an important role in counter-balancing the funds that had previously existed only to buy them. Many of these "short commodity" ETNs are discussed on my other blog (see the link at the right side of this page). These shorting ETFs and ETNs have grown very rapidly to monstrous size and volume, a testament to the demand for such alternatives. This will benefit the markets, if the U.S. Congress doesn't interfere, because while it will simultaneously add tremendous liquidity to the markets, it will also provide a needed counterweight to the long-only ETFs that we had before. This is proof that the market takes care of itself by correcting for overbought conditions, if permitted to do so unimpeded by overzealous politicians with overinflated egos.

Soybean Intra-day charts

Soybean Daily chart

Corn and Wheat Downtrends Continue

Corn and wheat continue in a downtrend, with favorable weather dominating the news cycles. Even soybean prices are showing some softness. It seems odd that we hear nothing in the news media about this.

Look how far the price of corn has fallen (below) over the past 2-3 weeks. This chart is a very good example of the "Australia" pattern from Philippe Cahen's book. (I have no idea why he chose that name, since he doesn't explain it in his book, and it certainly isn't obvious from looking at it.) The Australia pattern involves a reversal. Apparently, it involves a transition from a volatile trend in one direction, to a volatile trend in the opposite direction, but without the intervening period of low volatility in between. One could certainly make the case in this example that there was a period of minimal volatility in between, but since prices reached a new high and then immediately reversed to the downside, the typical flat Bollinger Bands never occurred in this example. Hence, the Australia pattern.
Note, however, that corn is very close to reaching the price support level where it consolidated previously at just above the $6.00/bushel level. Corn has declined about 25% from its recent highs, yet this decline has hardly made the newspapers, much less garnered any headlines. Have "speculators" been given the credit for this decline? No. The news media and Congress are too busy painting them as villains!

Wheat (below), while also in a downtrend, appears to be firming up for a bottom. This is to be expected, since the price of wheat declined 45% from its highs during the Spring, and had only risen somewhat more modestly, compared with the other grains, since the first of June.

Nuclear Deal Between the U.S. and Iran?

Yesterday, in his "Outside the Box" newsletter, John Mauldin sent out a quarterly update from Stratfor, which is an analysis of the world's geopolitics for the next quarter. It analyzes each region of the world, with its current challenges, possible outcomes, and consequences for investors.

In the latest issue, Stratfor said that the United States and Iran have been secretly negotiating a deal to end the stand-off over Iran's nuclear program.

Now, this morning, some news reports are suggesting that such a deal may be coming fairly soon, perhaps before the end of the year. Wow! I couldn't help but think that this must be bearish for the price of oil.

Largely Listless

Despite a few good trades in treasuries, which appear to have consolidated into a trading range, stock index futures today are trading somewhat listlessly, without strong conviction one way of another. Last night's after-hour reports were slightly offset this morning with an acceptable one from Citigroup. I don't see much energy for the moment in stock index futures.

Grains are expected to open mostly flat also. Not much news there to move the market.

Crude oil is trading modestly higher for the first time in days.

Citigroup Loses Less

In an investment banking world where losses are expected to continue to mount, a loss that is less than expected is reason to rejoice. Such is the case for Citigroup, whose quarterly earnings have surprised in that they were less than expected. Stock index futures have rebounded, erasing most of the losses from the poor earnings reports last night. Is this a short-covering rally, or genuine buyers stepping into the market?

Stock Futures Tumble After Hours

Stock index futures have tumbled following earnings reports that were released after hours, largely due to poor earnings reports from Merrill Lynch, Google, Microsoft, and IBM. Moody's even downgraded Merrill's credit rating after the news. Microsoft beat street expectations, but showed disappointing conversion of unexpectedly-high revenues into profits. The Dow is down 80 points from its closing high just minutes before, which closed nearly at the sessions highs.

Google, after having passed from quarter to quarter with strong profits ever since its IPO, is now suddenly showing vulnerability, with a stinging and disappointing earnings report. Within moments of its news release, Google was trading lower by almost 10%, giving up almost $50/share. Google had seemed like an impenetrable fortress of profits, but now, this disappointment seems to create the specter that perhaps technology stocks aren't the tower of strength during tough times that was once thought. Tech titan IBM's earnings only made matters worse for the eroding perception of the tech sector. AMD's earnings also reinforced the same erosion idea. Even technology is now showing some signs of stress.

Crude Sells Off Again, and Stocks Rejoice

Two charts speak louder than words:

Crude Oil -- Sell, Sell, Sell!
Stocks - Buy, Buy, Buy!
The only fly in the ointment, as I see it, is that as the economy shows signs of life, crude oil and other commodity prices will rebound strongly, fueling more inflation! At some point, the two will reach an equilibrium of sorts!

Indecision in Stock and Crude Oil Futures

This chart shows the tug and pull between the bullish and bearish forces in both stock and crude oil futures today. I'm staying out of this tug-of-war. It is sad that this rally ended up as a squandered opportunity! Treasuries are equally ugly!

Soybeans Fall Off Cliff

Wow, can you believe it? Soybean prices have fallen of a cliff today, possibly because of events in Argentina. Throughout the political crisis in Argentina, soybean exports have ground nearly to a halt. Now that the tax of President Fernandez is defeated, Argentine soybean exports are likely to resume soon. United States export levels are likely to drop, and prices will also.

Speaking of Socialism...

The following article should be required reading, I believe, of every American citizen. It is about what is at stake in the fall elections by JB Williams, who is a small businessman and entrepreneur. Perhaps we should listen to him:

The Obamessiah of Pickpocket Politics

Here are a couple of brief excerpts:

"Every national election is about the same thing really. Half of Americans use every national election cycle as nothing more than an opportunity to pick the pockets of the other half. The other half is running for cover.

"I should be more specific… There is no such thing as a free public feeding trough. Every penny in that trough came from the pockets of fellow Americans who earned them and politicians, who pick those pockets as an expedient means of gaining personal political power, are nothing more than thieves for hire.

"From now on, I’m referring to the practice as “pickpocket politics” and clearly, Barack Obama is angling to become the new Pied Piper of the practice...

"Of course, if voters themselves picked their neighbors pockets, it would be a crime and they would go to prison if caught. But when they elect politicians to do it on their behalf, it’s not a crime, its some insane form of economic justice, which for some odd reason, they feel entitled to."

Founding Fathers Weigh In

I also began to read the wisdom of the Founding Fathers of the American Republic and others of their era, where I learned the following scenario.

Let's suppose that I have one horse, my neighbor has one horse, and another neighbor on our street has no horses. Still a third neighbor on our street has 5 horses. I think, "It sure would be nice if my wealthy neighbor with 5 horses would share with our poor friend and give him just one of his horses. He would still be rich with four horses." So I decide to do something about it. I go to the home of my neighbor with five horses. I take one, and I give it to my neighbor that has no horse at all. My purposes are noble. My actions are criminal.

Six months later, I'm in prison. I find out the hard way that that activity is called stealing.

However, instead of stealing the horse, I'm smarter than that. I gather all my neighbors together, and I say, "Hey friends, our neighbor has no horses. If all of you will elect me to office, then we'll use the power of government to take the horse of our wealthy neighbor, and we'll give it to our neighbor who is poor." All my neighbors -- except the wealthy one -- think this is a great idea, so they vote for me. Once in office, I use that office to use the power of the state to accomplish the same act that would have otherwise landed me in prison. Now, suddenly, I'm everyone's hero. They pat me on the back. They name buildings and freeways after me. I'm popular, and I keep getting reelected. Boy, I'm good!

Wrong! I'm still a thief! I just did it legally! I used mob rule to steal! My actions are just as dishonest, but I have now done it by hiding behind the collective desire of my fellow citizens to steal! The nobility of the cause -- to take care of my poor neighbor -- is irrelevant! Stealing is still stealing, regardless of the nobility of my intentions!

In the United States, government derives its power (at least its supposed to) from the consent of the governed. However, I can not give to government a power or right that I don't possess. I can not give to the government the power to steal, because I don't have that right or power inherent within my Constitutional protections or rights. Stealing isn't a right, and therefore I can't empower to government to do it!

(In contrast, since I do have the right to protect myself and my property, I can empower government to do that through police actions and the military. The police protect me and my property, and the military protects our society and country.)

This is one reason why the Founders created a Constitutional Republic, not a democracy. In a Republic, the rights of minorities -- even unpopular ones like the wealthy -- are protected. In a democracy, everything is subject to "majority rule", including the property of our neighbors. I learned that a pure democracy is nothing more than legalized mob rule! This concept of democracy is sweeping across much of Latin America, and now, even the United States of America. It will be equally destructive in both places!

One day, I ran across the following quote by John Adams, one of the Founding Fathers of the American Republic:

"The moment the idea is admitted into society that property is not as sacred as the laws of God, and that there is not a force of law and public justice to protect it, anarchy and tyranny commence. If `Thou shalt not covet' and `Thou shalt not steal' were not commandments of Heaven, they must be made inviolable precepts in every society before it can be civilized or made free." -- John Adams (A Defense of the American Constitutions, 1787)

I am convinced that those who use their votes to steal by hiding behind their vote and a shameless politician, will one day be held accountable to their Maker for that act, just as much as those who use their hands to steal.

John Adams correctly realized that such an act is a violation of two of the Ten Commandments -- not to covet, and not to steal. Is it not coveting the property of another to see their prosperity and have the desire to take it away through taxation? It is especially coveting if we seek to use our vote on the condition that only they are exposed to confiscatory taxes, and not us! They are wealthy, after all, and can spare the change. This is coveting, a violation of one of the Ten Commandments! This is precisely the reason why God forbade coveting, because it leads to dishonest actions.

Our Duty To Care For Each Other

I also believe that we have a moral duty to share with those who are less fortunate than ourselves and in need. That obligation, however, is a moral duty, not a legal one. That duty is to God, not Government! "Render unto God that which is God's, and render unto Ceasar that which is Ceasar's!" And I'm convinced that we will also be held accountable to our Maker for this moral duty as well. If someone wants to be selfish and refuse to share the prosperity God gave them, then that is their right. They will be held accountable for such poor stewardship by their Maker in the end. But they should never be coerced.

Jesse Jackson's New Term for Socialism

A few years ago, I heard Jesse Jackson in an interview on television with Neil Cavuto. At some point during the interview, Reverend Jackson said that the United States must begin to employ "democracy of capital". I thought, "What does he mean by that term, 'democracy of capital'?" As I pondered upon it, I then suddenly realized that Jesse Jackson was speaking of socialism, in which part of society feels they have the right to take away the property -- capital -- of other members of society, and redistribute it to those who haven't earned that property, if necessary, by popular vote. I guess that now, the term "democracy of capital" is the new buzz word that sounds benign (to the average voter) for taking the property of hard-working, productive Americans for the misguided social ends of others. People like Jesse Jackson have realized that they can shamelessly steal from a minority of the wealthy if they can garner enough votes to do it by government. He should be ashamed of himself, especially for a man that claims to be a religious leader.

For the record, I don't like John McCain either, and won't vote for him this fall!

Crude Claws Its Way Higher, Stocks Lose Gains

The usual scenario is emerging today, as energy prices hold support and begin to move higher. Stocks, despite good earnings, have given up much of their gains for the day.

Blow to Socialism in Argentina

Soybean prices may take a hit this morning as the Argentine Senate rejected the tax imposed by Cristina Fernandez de Kirchner. The vote was so close that the Vice President broke the tie, siding with the farmers and casting his vote against the President. What a surprise that the Vice President would vote against the President! The farmers were elated, as shown in this pciture! More power to you, guys!

This is expected to be bearish for soybeans prices on the American futures exchanges, as it will prevent the farmers from starting another strike and increase soybeans exports in Argentina. Argentina is one of the world's leading exporters of soybean products.

Lower Crude, Rock Solid Earnings Fuel Stock Rally

Lower crude oil prices following yesterday's EIA inventory report, coupled with good earnings from JP Morgan Chase, United Technologies, Black Rock, and Coca-Cola have helped to fuel a rapid rise in the stock market index futures this morning. Good economic news!

Crude oil at $132 is a key support level, and I am watching it closely. Following yesterday's surprise build in inventory, if crude oil supplies continue to build on the back of demand destruction, sending crude oil prices even lower, stocks show good reason to rally even higher.

Stout Stock Rally Into Close

Wow! What a great rally for stocks today, closing near the session highs. The Dow was up 276 points. This rally was so stout, it gave me a reversal signal to go bullish, on the daily charts, if the rally continues tomorrow. I even held onto a few contracts to see what will happen. If this is a firm reversal, I may hold onto these contracts for the next bull trend in the stock indexes.

Tomorrow, earnings season continues with some very important companies reporting, including Google, Microsoft, IBM, and Merrill Lynch. Stay tuned, this is getting good!

Prices Continue Still Higher

I am only able to write about these trades because my trades are profitable and I am now managing them for maximum profit. If I were required to constantly monitor each tick, as I would if my trades were new and barely profitable, then I couldn't take the time to write about them.

In this chart, prices once again pushed firmly through the Bollinger Bands on the tick chart at right. Prices have continued to climb the moving average in a ladder-like fashion on the 3-minute chart (middle), and prices are approaching the Upper Bollinger Band on the 15-minute chart (left). I expect resistance at the Upper Bollinger Band, so I anticipate a pull-back soon. In fact, since prices are closing farther and farther below the Upper Bollinger Band on the 15-minute chart, and since the Klinger Volume indicator on the 15-minute chart is showing collapsing momentum, I wouldn't be surprised to see prices stagnate or perhaps even reverse. The Dow is currently up about 160 points for the day, and after such a sustained triple-digit rally, I don't expect a reversal -- at least not right away. Prices would be more likely to consolidate for a period of time before they would reverse and begin a new downward trend.

Consolidation and Holding

Frequently, prices will temporarily flatten out, as shown at the far right of this chart. This chart immediately follows the one in my last post. Anything can happen at this point. Prices could continue to climb still higher, or a reversal could ensue. After a sustained rally such as today, a sudden reversal is unlikely, unless some news event has just broken that reverses sentiment. The more sustained the rally, the more attention I will pay to higher time frames.

At this point, I will begin to look at the higher time frames for guidance, especially the Klinger Volume indicator, which is the best leading indicator I've seen. The 3-minute chart below shows waning volume and momentum.

The 15-minute chart below shows that we have reached resistance, but that resistance is weak. The 15-minute Klinger Volume indicator continues to show continued upward volume. However, the 15-minute Bollinger Bands show that momentum is also beginning to wane. I also consider on the higher time frames where prices are in relationship to the Bollinger Bands. If prices are close to the upper Bollinger Band, I anticipate that there will be a "rubber band" pull-back, since from a statistical standpoint, prices are temporarily overbought.

I will continue to hold, but if prices don't push higher through my Bollinger Bands on the tick chart, I will probably liquidate my trades fairly soon.

Waves of Buying

Today's stock market indexes provide an excellent case study in observing waves of buying activity. These tiny waves are referred to as "bubbles" by Cahen in his book. Each time prices close below my moving average (in this case, the dotted white line is a Weighted Moving Average), then I will buy at the top of the next green candle that passes back above the moving average. I will then sell the odd-numbered contract as close to the apex of this wave as I can best estimate. I use the Bollinger Bands to assist me in this. My sole objective on the even-numbered contracts is to not lose money, since I'm holding them throught the downturn of the wave. Of course, when these waves of activity occur as in this example, I make just as much from the even-numbered contracts as I do from the odd-numbered ones. In this way, I am using the patterns that Cahen describes in this book, combined with Rules 1 & 2 described in Phantom's Gift, to accelerate my earnings. On a higher time frame, these waves create a pattern that Philippe Cahen refers to as a pattern of "parallels". This chart shows a photo-perfect example of this phenomenon of . Wow!

Solid Earnings Provide Welcome Tail Wind for Stocks

Solid earnings for Intel and Wells Fargo have provided a nice tail wind for stock index futures today. The Dow has rallied more than 100 points so far. It is particularly good news to hear from Wells Fargo, since most of the worst news over the past few weeks has come out of the financial sector. Wells Fargo seems to have bucked the trend this past quarter.

While these intra-day charts don't demonstrate a very powerful rally, with erratic movements interspersed throughout, the bulls will take any form of encouragement they can find. In an environment like this, I will typically trade in even-numbered contracts (2, 4, 6, etc.). When the momentum wanes, as shown at various points on this 3-minute chart, I will liquidate an odd number of contracts (1, 3, 5, etc.). I will allow the other contract to remain. I do this for two reasons:

1. The liquidated contract at a profit gives me some cushion against the possibility that the other contract might go negative, and
2. The remaining contract allows me to hold onto the possibility that prices will continue indefinitely into the future. This permits me to maximize returns in a trending environment.
   

The one negative in the scenario is that since I still maintain some contracts during counter-trend moves, I can't trade those counter-trend moves.

Inflation: CPI Soars 1.1% -- In ONE Month!

The Consumer Price Index surprised everyone this morning, with the reported number being nearly twice the expected inflation rate and the highest monthly rise in 26 years. While 1.1% percent for a single month may not seem particularly high, by multiplying it out for an entire year, eyebrows should rise quickly. The inflation rate this month nearly doubled from the previous month! If inflation is accelerating, then it should get almost anyone's attention!

Treasuries Sell Off, Show Signs of Consolidation

As I anticipated within the past few days, treasuries have sold off significantly today, further signaling consolidation (or perhaps even reversal, at some point) in the treasury and bond markets. The TIC data released by the U.S. government this morning shows signs that foreign governments are beginning to curtail purchases of U.S. government debt. Coupled with CPI data that shows inflation picking up steam, this is likely to force interest rates higher, as less demand for the notes and greater concern for inflation, will ultimately drive prices down, and interest rates up.

Intra-Day Charts
Daily Chart

Venezuela, Ecuador Ink Refinery Deal. So What?

Yesterday, news from Latin America included headlines that Venezuela and Ecuador have reached an agreement to jointly build crude oil refineries. This is significant for two reasons:

1. Ecuador and Venezuela are the only two members of OPEC in the Western Hemisphere. They both export crude oil, and their largest customer is the United States.
   
2. Ecuador and Venezuela both have presidents that, although freely elected, are among the most radically socialist in all of Latin America. (This is a trend that is sweeping Latin America in the past few years. Nearly every country in South America now has a socialist government except Colombia, where the decades-long battle against narco-marxist guerillas has somewhat hardened the Colombian people against the poison of marxism.)
   Hugo Chavez and Rafael Correa, the two presidents of Venezuela and Ecuador respectively, in their statement, explicitly stated that their purpose in building the refineries was to stop sending crude oil to "the empire", as Hugo Chavez said, referring to the United States. Chavez indicated that they plan to help effectuate a collapse of "the empire".
   

This headline is significant for the United States because it means that within a few years, available supplies of crude oil from foreign sources will be reduced even further. What will be the implications for the price of crude oil here when that happens? The answer is obvious! They will have to move higher!

Between radical marxist philosophies rapidly expanding throughout Latin America, and the radical philosophy of global warming expanding in North America that seeks to limit fuel sources domestically, it appears that the future of crude oil in the United States may be coming to a close -- by coersion! Americans might also begin to prepare for a radical alteration in the quality of their lifestyles as well!

Unemployment Was Much Worse Than Headline

From John Mauldin's latest newsletter, here is an excerpt:

The unemployment number from the BLS last week showed a loss of 62,000 jobs. Private sector jobs were off by 91,000, with the government showing growth of 29,000.

But once again, the birth/death ratio of estimated new jobs was 177,000. As The Liscio Report noted: "... without the b/d's contribution, private employment would have been down by something like 268,000. It added 29,000 [new jobs] to construction, 22,000 to professional and business services, and 86,000 to leisure and hospitality. Given the weakness of the economy and the crunchiness of credit, we doubt that there are enough startups around to match these imputations."

Because the BLS makes adjustments to the figures each month, during economic downturns, the official figures historically underestimate the true losses in jobs. Using the BLS' own numbers, the U.S. economy in June really lost more than 1/4 million jobs for the month! Ouch!

It get's worse, too. From the same newsletter:

" 'We are facing an avalanche of bad assets. We have big doubts as to whether financial institutions will be able to obtain enough new capital to cover their losses. The credit crisis is going to get worse,' said the group in a confidential report, leaked to the Swiss newspaper Sonntags Zeitung.

"Bank losses on this scale would have far-reaching effects. Lenders would have to curtail loans by roughly 10-to-one to preserve their capital ratios. This would imply a further contraction of credit by up to $12,000bn [$12 trillion] worldwide unless banks could raise fresh capital."

Last quote:

The bottom line is that they estimate there is at least another $1.1 trillion of losses that will have to be written off by institutions all over the developed world, including very large potential write-offs from insurance companies.

Banks and investment institutions worldwide may need another $400 billion in capital infusions. But where they are going to get it is the problem.

Read the entire newsletter here:

$1.6 Trillion in Losses and Counting

Stocks Lose Ground and So Does Oil

This is a very bad sign. If crude oil tumbles, but stock prices do to, that's a very powerful sign of weakness. Just pray for no hurricanes!

Out of Treasuries, Into Stocks

The stock markets appear now to have taken the jawboning of Treasury Secretary Paulson and Fed Chairman Bernanke as reasons to be reassured, since they have now turned higher for the day. The flight out of treasuries is occurring simultaneously, so it appears that the two are linked. Note here that these two charts are nearly mirror images of each other.

Dow
Treasuries

Crude Oil Falls Off a Cliff

The price of crude oil seems to be building a trading range of between $135 and $147 per barrel in recent days. It seems to me unlikely that crude oil could move much lower than $135, especially during the hurricane season, which should last until November. The first storm in the Eastern Atlantic that shows a high probability of entering the Gulf of Mexico will almost certainly send the price of crude oil to fresh record highs. We nearly reached one today. It surprised me today, however, that this plunge in the price of crude oil hasn't lead to a stock market rally.
CNBC attributes this price drop to the need for banks and hedge funds to raise cash for capital and margin requirements. If this is true, this tumbling price will be short-lived, because both hedgers and other speculators will perceive an opportunity to buy crude oil at bargain prices. This phenomenon even now appears to have put a floor under the price of crude oil, which is already moving higher again, having already risen $3 from its lows.

Inflation: PPI 9.2%

Year over year wholesale inflation continues to gather steam and head higher. At 9.2%, inflation is far from defeated. While the Fed may choose to ignore the effects of its monetary policy, wholesale buyers can't! As manufacturers begin to increase their prices, consumers will begin to see even higher inflation this fall and winter. Inflation is rearing its ugly head, and its getting more and more bold with each peek out from behind its hiding place!

Fedwatch: Chairman Bernanke's Humphrey Hawkins Testimony WILL Move Markets

The news is not wanting today, but despite various news events that typically would move the markets (like PPI inflation and retail data), the news that everyone will be watching today will be the testimony of Fed Chairman Ben Bernanke before Congress this morning. Congress will be looking for blood today, so I expect firey tempers and blood pressures to boil over today. It is almost guaranteed to move the markets.

Keep in mind, also, that the last time Chairman Bernanke testified, Congress create the impression that they were a bunch of ignorant buffoons. They really came across as fools! It will be interesting to see if Congress reinforces their poor image, as they did last time, or if they have wised up at all since the last Humphrey Hawkins dog and pony show. After the last time, it was no surprise to me that Congress' approval ratings have dropped to an all-time low of single digits. Congress, wake up!

I'm glad I'm not Mr. Bernanke. He will frankly have my sympathy today. Just about anything he says today has the potential to move the financial markets by triple digits on the Dow. His comments can even affect the price of commodities, if it impacts the Dollar significantly. Confidence in the banking system will be center stage as he seeks to reassure the financial markets and to stop the loss of blood. Don't miss today's show!

Morose Mood?

From the blog of a fellow trader who is a bond specialist:

I have been writing this morning recap here for a little over 6 months and for many years as a market participant before that and I do not recall ever having recorded as much negative new[s] as I have recorded here this morning.

That about sums it up! When I recently wrote my own thoughts on the domino effect a few days ago, the mood in the financial markets felt similarly to me.

His website/blog is:

Across the Curve

Painful Price of Crude Oil

Does this crude oil chart look like the price is close to topping out? I don't think so!

Currencies: EURUSD Cross Hits New All-Time High

The EURUSD currency cross has today hit a new all-time high. The US Dollar Index futures have also set a new all-time low at 71.555, breaking the old record set in March at 71.620. This is to be expected, since the Euro composes the largest share of the US Dollar Index. This, of course, also has the potential to send the price of crude oil and other commodities to attain new all-time highs. Crude oil is less than 75 cents from a new all-time high. Grains are higher across the board too, even though corn and wheat have been in a downtrend recently. Records are being set everywhere. Does the bad news never end?

EURUSD - New All-Time High

US Dollar Index - New All-Time Low

Stocks Blast Through Support

So much for the Dow holding support yesterday above the 11,000 level. The Dow futures are currently trading a morose 127 points below yesterday's close. The futures overnight have handily blasted through the support level that had held firmly over the past few weeks. It will be interesting to see if prices continue to remain below that level during the day session, especially since now that the 11,000 level has broken, it becomes resistance instead of support.

The daily chart (below), after showing some signs over the past two weeks of consolidating, have now reinforced the downtrend today. Look at the Klinger Volume indicator in the second panel, which, after several days of suggesting an upturn, has now turned lower again. Volume suggests that stock index futures are going to continue to slide lower still.

Stock Index Futures Close Modestly Lower

There is good news and bad news for stock index futures traders today. The bad news is that the futures indexes traded modestly lower. The good news is that the futures indexes traded modestly lower! The Dow managed to maintain support at the 11,000 level, despite repeated attempts by the bears to break through. We should recall that the same thing happened at the 12,000 level. Of course, that was before prices broke through that 12,000 level. Needless to say, the charts suggest that throughout most of the trading session, the stock indexes traded sideways. Tomorrow will be another day, and another opportunity!

Win/Loss Ratios Are Irrelevant! Only Profits Matter!

I recently read Phantom of the Pits suggest that if we knew his win/loss ratio, he would lose credibility. However, he is a phenomenally-successful trader. He also tells the story of a trader with an 80% win/loss ratio on his trades, but who loses money consistently. How can that be possible? He says that this trader with a high win/loss ratio -- and a small trading account -- keeps all his trades open indefinitely until they eventually become profitable. The problem is that his losing trades remain open so long that they keep racking up larger and larger losses that decrease his equity more and more. Thus, he continues to lose money because the few large losses vastly outweigh his many small wins!

This is why cutting losses quickly is one key to successful trading. Every time I place a trade, I know what that trade must do to become profitable. If I take a long position, the market must go up, right? Well, what should I do, then, if it doesn't go up? I get out! Every time I place a trade, I have a mental vision of what that trade must do to be profitable. If the chart doesn't match that mental image quickly, I get out and move on! If I stick to a flat trade that doesn't meet my expectations, then I am missing the opportunity to make a profitable trade while I sit there and bite my nails! Ahhhh, the cost of opportunities lost!

So someone says, "well, but what if I get out, and then the market goes up?" Chances are, the market will move downward before it goes up. If the bulls had been in charge, the price activity would have moved higher immediately. Thus, a temporary (or permanent) downward movement is more likely if prices don't move higher immediately. Therefore, wouldn't it be wiser to exit with a tiny loss, wait through the downward movement, however limited it may be, and then re-enter the long position when the market shows signs of moving up again? By doing this, there is a very good chance that a trader can get a better (lower) price, so that when that trader enters the new long position later, he or she will make more profits than might have possible by holding a losing position.

My Own First Experience Trading Forex
When I first started trading Forex, I began with a company that claimed that traders could have a consistent 100% trading record. The two guys that trained me, I later learned, had never traded a single contract! In order to become certified to train other new trainees, they required that a trader submit to them a trading record of 50 successful trades -- all on paper. No live money! They would then use those fictitious paper trades to entice other inductees into their program, without telling the newbies that they were fictitious trades. It was a literal hoax! However, a few weeks later, when I went to an event to obtain more training, I was chatting with a fellow new trader, and he said to me, "You know, it's very easy to get those 50 winning trades! You just leave the trade open for as long as it takes to turn profitable!" I told him that's what I had done, too!

Just like with the example that Phantom used above, anyone who trades that way with real money is guaranteed to lose money! This same company sends their trainers all over the country with documented proof that someone can trade 50 consecutive times without a loss. What they don't tell people, however, is that those trades are with simulated, fictitious accounts. They are only paper trades. They also don't reveal to their inductees that those trades don't include all the losing ones that they made that weren't included. I know, because I played their game and did it also. But frankly, their method is utterly dishonest because they don't teach traders proper money management, and they deceive people by using those paper trades as documentation of their success. It is intentionally deceitful. They even tout the Christian beliefs of the owners to disarm people of their skepticism. They even seem like very nice people.

Years after I had left this organization, I met the employee of one of the largest Forex brokers in the world. When I mentioned the name of the head of this Forex trading group, this employee started to laugh. He then explained to me that the head of this Forex training group had once traded Forex with his employer's company. He told me that the man continually lost money, and insisted that the broker reimburse him for his losses. (I was then using this same Forex broker, and was very pleased with both the service and the minimal slippage I incurred on my trades. I had no complaints with this broker.)

When the broker refused to refund the losses of this Forex training company's leader, he switched to another Forex broker. Then, by recruiting thousands of unsuspecting traders to use this new broker, he could threaten the new broker with the loss of many accounts if that broker didn't refund many of the losing trades of his inductees.

Ironically, I had also used this same new broker previously, and the slippage I experienced was so excessive that I left. I didn't want to be dependent on someone else for good brokerage treatment. I feel that if I have to depend upon the training company for getting fair treatment from the broker, then I have the wrong broker.

This Forex group trading company not only intimidates the broker into making refunds on bad trades, but they also make their inductees dependent upon them for restoring their lost funds. They apparently make far more money from the referral fees from the broker, than they do from trading Forex. This same Forex group charges astronomical monthly fees to traders for charts, alerting and signaling services, etc. They even planned to start their own Forex brokerage, although I have no idea if they ever did. To this day, they tacitly boast on their website about all the money they donate to charity. This same Forex group still exists today, and they continue to imply at the top of their website that traders can trade 50 or even 200 trades without a loss. They also have an asterisk by this implied promise that has no explanation -- the fine print is obviously buried somewhere to avoid notice and scrutiny (and lawsuits). Apparently, they have successfully fended off the class action lawsuits, because they are still making these claims. However, I wonder what percentage of their students have known any lasting success. Wouldn't that be a much more honest measure of their achievement than to claim that one or two people have traded 50 times without a loss?

The guy who recruited me into their training system eventually dropped out, telling me that he just kept losing more and more money. And this guy made thousands of Dollars from recruiting numerous people into this organization! And yet he lost money!

That sounds like a scam, not Christianity. One should always be skeptical of anyone who tries to lure others into an investment by baiting them with their religiosity rather than their investment or trading success! A very tiny minority of the trained traders have long-term success with this company. I wonder how many tens of thousands of people have passed through their system to find a handful that have made money. How many tens of millions of Dollars have been lost for every one person who makes a few bucks with them?

The point of telling my own personal story, of course, is to make the point that this kind of training may lead people to have a high win/loss ratio, but a terrible trading account balance. They can make lofty claims, but have few successful students.

People Making Money From Traders, Not Trading!

I have learned that there are many people who make money from traders, not trading! It was the same thing during the Klondike gold rush. The people who became rich were not the miners. Those who became rich were those who sold supplies to the miners. Most of the miners went broke looking for that lucky strike. It is the same in trading. That's one reason why I don't sell trading services, and I'm skeptical of those who do. Those who can, DO, and those who can't, TEACH! I have learned that most of those that do sell such services can't make money from trading -- so they sell trading services instead!

The only exception to this is that I have found that there are very good trading books. Instead of spending $5000 on trading coaches -- and doing it again and again -- I would rather spend a few hundred Dollars on some good books. It is a much better, and a much smaller, investment! Many of the book writers have had real trading success, although there are exceptions to this as well.

Obviously, Unconvinced!

Apparently, stock market traders are unconvinced at the Fed's latest rescue for Fannie Mae and Freddie Mac, since stocks sold off and have only moved southward since the open of the stock market. Look at the sell-off in the last 30 minutes (far right)! The Indymac failure over the weekend only added fuel to the fire! I'm even concerned that if these financial catastrophes continue, the Fed itself may not have enough reserves to make the rescues stick at some point. The more they try to prop up a weak financial system, the more doubts are raised in the minds of investors, because the thoughts come more and more frequently to mind, "Wow! What's the next shoe to fall?". Even so, despite the negative sentiment, the Dow 11000 level has continued to provide support and is being successfully defended!

Meanwhile the downtrend on the daily chart continues:

Proof That Anything Can Happen

One of the 5 fundamental truths (Mark Douglas) of trading the futures markets is that "anything can happen". Today's trading in the treasury futures is a poignant example of this principle. With the Fed's rescue of Fannie Mae and Freddie Mac, the treasury futures reversed between last Friday's close and today's trading. In fact, last night, the treasury futures continued to sell off, confirming the downtrend signaled last Friday. However, when the Fed intervenes into the financial markets, prices can reverse on a dime, as shown in this daily chart for the 10 year treasuries. Anyone who tries to tell me that they can trade without ever experiencing a loss or a reversal against their position, undoubtedly has a personal agenda, and knows that they are usually hedging the whole truth Surprises happen, and as a trader, I need to always be prepared for that possibility. Anything can happen!

One more thing: from my experience, when a large counter-trend event occurs like last Friday (that long red candle), even if the original trend reasserts itself, that new trend is typically shorter-lived than the original. Such a strong, albeit temporary, reversal usually is a sign that the counter-trend forces are gathering strength. Often, the volume trend indicators will show a marked reversal at that point, as shown in the lower panel on the Klinger Volume indicator in this chart. That green reversal candle today is more likely to be indicative of a consolidation than a reinforcement of the previous trend. Then again, anything can happen!

I always get a kick out of pundits and traders who talk like they can predict the future price activity of a stock or futures instrument. I don't try to predict or forecast. I just strive to respond to market indicators and price action, reacting to the daily and hourly price activity. I intentionally try to restrain myself from predicting or forecasting. Sorry, but I have no crystal ball, and don't believe those who claim to have one! In fact, as soon as I hear someone saying, "The stock market is going to do such-and-such between now and the end of the year", that person immediately loses credibility with me. Are such people ever truly kept accountable for such predictions? NO!

Have you ever wondered why psychics only try to tell people about things that can't be explicitly verified? They predict nebulous things like, "I see a man close to you with the letter "P" in his name", or "someone close to you died tragically"? Hey, we all know someone with the letter "p" in their name, and someone who died tragically! The last I checked, we all die, and many -- perhaps most -- of those deaths are somewhat sad -- ie., tragic! Why are people so gullible to believe that stuff. Why don't those psychics ever become billionaires by accurately predicting financial market moves? Answer: because they can't! They don't have any crystal balls, either!

I just do what the charts tell me to do! That's my edge! By keeping tight stops, I can exit quickly when I make a bad trade, and that's how I keep my head -- and money -- in the game long-term. Exiting quickly on a bad trade also keeps me from becoming emotionally attached to a losing trade. It's amazing how quickly my thinking and my emotions clear when I jump swiftly out of a bad trade. Emotions are the enemy of traders, and getting out of a bad trade with a small loss is the best therapy for them. Predicting the future, I have found, doesn't pay very well, and it leads me to make lots of very expensive mistakes.

It's NOT How Much You Win...

The key to profits is not how much you win...

the key to profits is now much you don't lose.

"...traders are usually unaware that trading is a loser's game. He who loses best will win in the end!"

"... assume your position is wrong until the market proves what your position is correct. Keep your losses quick and small. Don't ever let the market tell you you're wrong. Always let the market tell you when your position is correct."

Phantom of the Pits

The trader that loses least, wins best!

Wheat Turns Down Also

A downtrend for wheat is somewhat easier to imagine, since wheat has already experienced a downtrend retracement of more than 40% previously this year.

Corn Confirms the Downtrend

Corn prices have confirmed a downtrend. I wouldn't have believed it was possible if I hadn't seen the charts. The price of corn has moved lower steadily since last week's gap downward on 7-7 to 7-8. This downtrend appears somewhat weak to me, but often, when prices tumble, they start out weak and gain momentum as prices begin to accelerate. After a strong uptrend, I am more likely to maintain very tight stops in the early phases of a new trend. However, such fluctuations in both directions are one of the characteristics that commodity futures are famous (infamous?) for.

Stocks Ride Fannie-Freddie Roller Coaster

After the stock market futures rode the Fed's Fannie-Freddie roller coaster up 130 points overnight and during pre-market trading:
Now the stock market indexes have given up all their gains and are now down during the day session:
These roller coaster rides are made for swing traders. Keep your seat belt buckled for the ride. This is only the beginning, and I should expect more swings today. It's a roller coaster, after all!

We're ALL on the Fanny-Freddie Roller Coaster

Throughout the day last Friday, the financial futures were on a roller coaster as rumors of the Fed opening the Fed's discount window to Fannie Mae and Freddie Mac were then exchanged for denials by all three. Friday afternoon and evening, one government official after another appeared with statements to reassure the markets. Just two days ago, we were being told the Fannie Mae and Freddie Mac were sound, and that they had no need for a rescue.

Much has changed in 48 hours! Over the weekend, the Fed has now confirmed that indeed, the discount window has been extended to Fannie and Freddie -- just two days after the Fed told us it wasn't necessary. The stock index futures have reacted positively, with the Dow futures moving 80 points higher within minutes. However, the burden of increased debt load by the Federal government has caused Treasuries to sell off, with interest rates moving higher. Bond investors are showing slight skittishness at the increasingly monstrous burden of more and more U.S. government debt, sending interest rates higher.

These higher interest rates are beginning to reflect the increasing concern of the remote possibility of a U.S. government debt default. Unthinkable, you say? U.S. government debt had always been considered the most riskless investment in the world. Credit default swaps for U.S. government debt have shown a significantly increased cost in recent days and weeks. Credit default swaps are like insurance against the possibility, however remote, of default by a borrower. CDS' rose to 16 points on Friday for U.S. government debt. German government debt CDS's only cost 9 points! The U.S. government is becoming increasingly overextended, and the credit default swaps are beginning to reflect that growing risk.

In addition, the failure of Indymac Bank Friday night sends chills up my spine. Apparently, I'm not the only one. From the Wall Street Journal's website tonight:

The federal government's seizure of IndyMac Bank is deepening worries among executives, regulators and consumers about the U.S. banking industry, which is in a tightening bind following a long run of prosperity.

And in a separate Wall Street Journal article tonight:

One reason the stock market has had trouble rebounding: Investors are beginning to think the U.S. Federal Reserve is running out of the ammunition it has used to support the stock market in past months. Despite repeated intervention by the Fed and central banks and regulators world-wide, no one seems to be able to prevent further damage to banks and other financial institutions.

Each of these events (Fannie, Freddie, Indymac) are significant events in themselves. However, with all three occurring at the same time, it seems to highlight the fragility and vulnerability of the financial system, and how stressed it really is. The more bail-outs are needed, the more uneasy I feel. Three dominoes falling in such rapid order within a couple of days begins to make me wonder what's next, and to what extreme the Fed will reach with the next domino to fall. When, I wonder, will the falling dominoes accelerate, and when might they fall so rapidly that there is no stopping them? When a domino falls here and there, once in awhile, faith in the health of the financial system is easy to find. But when the dominoes start to fall several at a time, then the faith starts to falter.

Why else would the Fed Chairman, the Treasury Secretary, and the Senate Banking Committee Chairman all make repeated frequent statements over the weekend to attempt to reassure the financial markets, if they didn't see the potential for growing, significant risk? Why else would interest rates on treasuries rise so high, so quickly (see my post from Friday)? Why else would the cost of credit default swaps rise so much in a short period of time?

It sure feels like the financial markets are on a roller coaster of ups and downs -- and the downs are feeling progressively steeper with each new domino that drops!