More Mauldin: Update on The Continuing Credit Crisis

This one is also very good. It provides great perspective on where we're at and how far we still have to go before the economy will recover. For one thing, Mauldin runs the numbers on the current foreclosure and credit crisis. One of every 16 homes in the United States is now in serious delinquency status! And its going to get worse! With Fannie Mae and Freddie Mac both leveraged about 50 to 1, even a 2% default rate will have unimaginable ripple effects worldwide, and especially in the banking system.

Thoughts on the Continuing Credit Crisis

One more note. Keep your eyes on the financial news, especially over the weekend. In addition to new bank closures by the FDIC each weekend, there is a strong sense that an immense bailout of Fannie Mae and Freddie Mac is imminent. Added to the union strike declared last night against Boeing, things will be volatile and interesting over the next few days!

Kremlin KGB Kings

Here is a great write-up sent out by John Mauldin in his weekly newsletter. Mauldin was ranked as the second best investment adviser (only Warren Buffet was higher). He forwards an article written by Stratfor, the world's private intelligence company. Stratfor is an adviser to most multinational corporations around the world regarding security and terrorism.

As investors, having timely and accurate data about dangerous places and nationalistic policies of governments around the world can prevent potentially catastrophic losses. Often, we think of an investment in terms of preventing small losses. However, I have learned by sad experience that in some countries, one can lose the entire investment, sometimes literally overnight, if that country doesn't respect private property. One of those places is Russia. Vladimir Putin and Dmitry Medvedev, the joint KGB Kings of the Kremlin, have transformed Russia over the the past 8 years from a fledgling democracy into a oligarchical fascist dictatorship where there is no free press, freedom of assembly, freedom of speech, private property rights, or due process protections.

As an investor that invests internationally, I recommend this newsletter highly. It is written by an expert on the Russian Federation and has great insights into what is really going on and how it will change the world.

The Real World Order

Stocks Back to Flatline

Stock index futures, after seeing triple-digit losses early on, have rallied back to flat today. Currently, we are printing a doji on the daily chart, which is unconvincing. If the day closes near its current levels, we are likely to see more volatility ahead.

Rough Rice -- A Lonely Bull

While most commodity prices have been softening over the past few months, rough rice has been one of the few commodities that are in a bullish trend of late. After the rice panic last Spring, the price of rice plunged, dropping about 30% over the past few months. Now, rice is rising again! There aren't many commodity bulls right now, but rice is one of them.

Grains Hold Support -- Barely!

Corn, soybean, and wheat prices have held support so far overnight. However, as all three grains remain just a hair's breadth from critical technical support levels, the likelihood of a downside breakout remains relatively high. The following key support levels are currently being held, but are at risk:

Corn $7.50
Soybeans $12.00
Wheat $7.50

If these three support level hold over the next few days and weeks, then as the harvest season ends, a rebound is a good probability. However, if the US Dollar continues to rise, there is a greater likelihood that a downside price breakout may occur. The grains are at key inflection points right now.

Gold Drops Below $800

Gold has dropped below $800/oz. for the first time in a month. With the continued and growing strength of the Dollar, gold weakness should be expected. The gold bugs must be in a tizzy!

Cramer and Gross Call for 1/2 Trillion Dollar Bailout!

Bill Gross and Jim Cramer, in a joint interview on CNBC today, have called on Hank Paulson, the U.S. Treasury Secretary, for a bailout of Fannie Mae and Freddie Mac that would amount to $500 billion. That's unbelievable! No way! Bill Gross is asking for the Federal Government to shore up his bad bets and bad debt! He acknowledged that he purchased much of this debt prematurely, and now, he wants the government to protect him from the consequences of his bad timing.

In a single bailout of the mortgage industry, they are asking for the Federal authorities to engage in a bailout that would double the nation's deficit for the entire year -- in a single day! This would be the first time that the nation has increased its debt by $1 trillion in a single year! This would be unprecedented not only in size, but scope and rapidity.

Bill Gross said that he will no longer keep buying the mortgage debt. He says it's now time for the Feds to step in and bail out the industry. He is saying that he is no longer going to buy this toxic debt. Good! Perhaps then risk will once again be priced into the price of debt, instead of throwing endless and limitless amounts of money at debt that was created to simply give money away!

Why do these Wall Street heavyweights constantly call for the government to bail out Wall Street? Why should the tax payers on Main Street be forced to accept the debt burden of bailing out the garbage created by Wall Street wunderkind who know the price of everything, but the value of nothing? Why should a coal miner in Pennsylvania, or a farmer in Iowa, or a steelworker in Washington, or a nurse in Montana, be the buyer of last resort to bail out billionaire financiers on Wall Street? When does the parabolic escalation of national debt end? When our debt becomes worthless and no one will lend to us any more?

We're no long talking about debt that will hamstring our children or grandchildren. We're talking about debt so crippling that we could become the Weimar Republic in this generation, even in the next few years!

It is time to stop the madness on Wall Street! It is time to say "NO"!

The Bear Market Is Back

Stocks today have slid back into bear market territory, with the Dow now down 20% from its highs last year. The Dow is now down more than 300 points today! With only positive news today in the economic data front, including a further slide in the price of crude oil and other commodities, this is a significant development. Many are viewing the slide in crude oil to be a bearish indicator because crude oil would only slide if the economy were in dire straights.

The daily chart above shows a Bollinger Band breakout of the lower band, after nearly two months of trading dead flat. If the index closes below the band today, and tomorrow continues to move even lower than today's low, a new downtrend is confirmed. However, I also expect to see an attempt to rally back to approximately the 8-period Exponential Moving Average before another sell-off. Some shorts will get shaken out of the market when this happens. I will probably use it as an opportunity to improve my position to improve my price before the selling.

If, on the other hand, the jobs report is better than expected, we may expect a rally that could last for days. Typically, if a Bollinger Band breakout occurs, and prices then rebound back within the bands, prices will often rally back toward the opposite Bollinger Band, often touching the opposing band. This would represent about a 500-point rally for the Dow, although it would not likely occur on a single day. Personally, I don't see this as a high probability scenario.

I also wonder if some of today's sell-off is a way for many traders to lighten up their positions for a possible bad number from tomorrow's payroll report. Obviously, the risk is to the downside tomorrow. Everyone is expecting a slide in unemployment of approximately 75,000. If the number is more than 75,000, perhaps even more than 100,000, then the market will be hit with a shock and could sell off even more. Many traders, who are otherwise bullish and have seen a possible bottom, might possibly be removing their bullish positions in anticipation of the possibility of a bearish jobs report tomorrow. We'll see when the monthly jobs report is released tomorrow morning by the Bureau of Labor Statistics. It will undoubtedly be an exciting day.

Stocks in Steep Decline Today

After just over one hour of trading, stocks are steeping their decline. Even better-than-expected ISM non-manufacturing data haven't helped, with the Dow down by more than 200 points now. This is not a very good sentiment for stocks. Today, I am trading only to the downside, taking profits on bullish corrections, until I see signs of a significant upside correction.

Off to An Ugly Start

Stocks are flat or down every day this week so far! Today is no exception, and the Dow was down over 100 points right from the starting gate! Even the daily chart, which has shown flat trading for the stock indexes for two months, is beginning to show weakness. Is the next leg down right around the corner?

Great Article on Obama's Economic Plan

The Wall Street Journal this morning has a great op ed on why Obama can't seem to close the deal with the American people. The bottom line is that Americans know that when a candidate attempts to buy the votes of people who already don't pay any taxes with promises of more free money, that money will inevitably come from the pockets of those who do pay taxes, and at the worst possible time for working American's pockets and the U.S. economy! Here is the link:

Why Obama Can't Close the Sale

Mr. Obama, you can fool some of the people all of the time, but you can't fool all of the people all of the time!

Content of Email I Sent To a Friend Today

I get the sense from the broader futures markets that commodities are continuing to weaken because a weaker business climate is bringing a drop in demand for everything. If this is prescient, it may get even uglier! Commodity prices usually only weaken like this when poor business brings soft demand.

Tomorrow morning we will get the monthly jobs report! If it comes out worse than expected (about 75k job loss), stocks could get clobbered. There is a sense in the financial markets this week that even with lower oil prices, the economy is not going to recover. Treasuries continue to rise (interest rates lower) despite the inflation risk because treasuries are seen as the only place for money to be safe.When interest rates drop lower than inflation, people must be really scared! There is a feeling that we may be on the precipice of a new move down if we get some bad news in the next few days.

It looks like Boeing's union is going on strike this weekend. Very bad news! That will probably clobber stocks on Monday if it happens. What stupid union leaders! The unions turned down an 11% pay increase by a vote of 87% against! When I was a union employee, we would have been grateful for such a pay increase! And the timing couldn't be worse for the economy! It will drive down the Dow (Boeing is a big component), hit durable goods orders nationally, and hurt one of America's few thriving businesses at a terrible time for the economy. How many other American jobs depend on strong orders from Boeing that will be hit by this impending strike! This has the potential to plunge the American economy into a spiral of deepening unemployment at a time when the economy can scarcely afford it!

I thought this was interesting: On CNBC this morning, Art Cashin mentioned a statistic that following the two party conventions, whoever is ahead in the polls at that point wins 90% of the time!

Grains Under Selling Pressure Despite Bullish Weather

From Bruce Knorr of Farm Futures Magazine in an email to me this morning:

Look for another day of selling on the open this morning, with the futures market torn between conflicting weather news and outside markets that are again under selling pressure.

Here's more:

Dry, hot weather is impacting condition of the corn crop. According to USDA meteorologist Brad Rippey 45% of this year's crop has been dented as of Aug. 31, which is well behind the five-year average of 65%.

"That is something to watch as we head deeper into September and worry about the threat of an early freeze," Rippey says. "We do only have 14% having reached the dent stage in North Dakota; the five-year average is 47%. Only 24% dented in Minnesota; the five-year average 59%."

The dry weather pattern is also affecting soybean conditions, particularly in the northern states.

"We do see in Michigan and Wisconsin now 29% of the soybeans rated very poor to poor," Rippey says. "We've seen some increases in other states as well including Indiana at 18% and Ohio at 23% very poor to poor."

Although the dry weather is causing concern for the corn and soybean crop, it has allowed for nearly all spring wheat across the Northern Plains to be harvested.

The point of this is that while grains are being sold heavily, the grain crop itself is under severe stress. One reason for this is that the cold, wet Spring of '08 delayed planting for weeks in May and June, so now, the crop is well behind normal in its development. An early Fall and cool weather could significantly reduce the grain harvest. This is an increasingly likely scenario as September progresses, unless the crop develops to harvestable condition very quickly. We are in a race against time! Will the crop finish its development and be harvested before cold weather sets in?

While wheat, soybean, and corn prices are all near limit down today, the crop is showing signs of damage and crop yields are increasingly likely to be negatively affected. This will likely eventually prove very bullish for prices, especially if early freezes occur in the Midwest grain-growing regions. An Indian summer would help to relieve this stress. However, some regions of the upper Midwest have already seen night-time temperatures in the 30's.

Because of the crop stress, analysts keep predicting higher prices, but prices keep dropping instead, probably due to fund-related selling of commodities across the board. Why don't the news media ever accuse speculators of driving prices too low? When the weather fundamentals regain ground and their influence over the grain markets, grain prices may rise in a parabolic pattern. I will be watching this development very closely over the next few weeks during the harvest period of the growing cycle, because this could be setting up a tremendous opportunity to buy grain futures sometime this Fall. If cold weather begins to damage the crop, we could see a new bull run in grains that would overpower even the strong Dollar fundamentals! The next few weeks should prove very exciting and interesting!

British Pound Continues to be Weighed Down

Following comments over the weekend by Chancellor Alistair Darling that the British economy is the worst in 60 years, sterling sunk even lower today.

Stock Market Rally Turns to Stock Market Rout

Thus ends the first trading day of September. Perhaps today is a sign of things to come, since September is historically the worst month of the year for stocks.

Soybean Rout Turns to Soybean Rally

This is very bullish to me. Today's grain sell-off turned into a rally. Soybeans recovered 45 cents from its lows, forming a dragonfly dogi on the daily chart after touching limit down. Corn and wheat rallied well off limit down lows also. This appears to me to be a very bullish omen, unless the Dollar strengthens even more.

200 Point Rally Eliminated

Wow! There must be a whole lot of worry, such that on a day when crude oil declined to a fresh new low, the stock market gave up all its gains and is now down for the day. The Dow had gained over 200 points, and is now in negative territory today, despite that crude oil is still lower by more than $5. Now that's heavy-duty worry, if a $5 crude oil plunge can't move stocks to a sustainable rally! What would have happened if crude oil hadn't collapsed?

I am still anticipating much more tough sledding in the stock markets before the business climate improves. I like to see rallies of "irrational exuberance", because the higher the stock market rallies the more money I'll make as it plummets when the next shoe falls. All these traders who convince themselves that the bottom is "in" will be the people whose money I take when I short the market at some point in the future when the bottom falls out again.

The Dollar has been rising not because of any endemic strength but because there is a perception in the global markets that the U.S. has bottomed, or is close to it, and will be the first to emerge from economic malaise. I think this sentiment is erroneous, and eventually, the stock market indexes will plunge again when reality sets in. This is likely to occur sometime this fall when unemployment jumps unexpectedly or if GDP gets revised significantly lower. That is my bias. However, I will continue to give the market what it wants, even if it is "irrational exuberance"!

I have traded treasuries (long only) and stocks (both long and short) today. Grains were so close to limit down that I was unwilling to take additional trades. I'm convinced that unless the Dollar continues to strengthen significantly more, grain prices are very close to their lows for the year. However, for the short term, I expect the Dollar to continue to rise until another shock hits the market like the ones I've mentioned above.

I also traded the Euro futures a few times.

Good day! Nice volatility! It's nice to be back to normal volume levels after a long summer. Very nice day to be a trader!

Trading Volumes Finally Back to Normal

This chart for the 10-year Treasury futures shows very good activity today, after a week of low volume last week. It sure is nice to see the financial markets finally back to normal after the dog days of summer. August is often the most difficult month of the year to trade. Now, we can finally get back down to business!

Don't Forget Tropical Storm Josephine!

Lest we overlook her, Tropical Storm Josephine is also forming rapidly in the Eastern Atlantic. They are coming like dominoes!

China, Russia Economies Slow Down Too

Economic data out of both China and Russia overnight also indicate dramatic economic slowdowns also. This may also be a reason why crude oil has fallen so far, so fast today.

And Hurricane Ike Comes Into the Picture, Too!

And now Hurricane Ike prepares to follow Hurricane Hanna toward the Atlantic coast of the United States. Ike has already become a category 2 hurricane stronger than Hanna, even while still far out in the Atlantic. Fortunately, neither Hanna nor Ike show any signs of endangering oil platforms in the Gulf of Mexico. The Atlantic seaboard may not be so fortunate, however. Will the East Coast be able to evacuate and prepare as effectively as the Gulf Coast states did? I hope so! Click on the graphic to see the latest storm path at accuweather.com.

Crude Oil Fuels Stock Market Rally

Stock markets have also rallied overnight on crude oil weakness. The Dow is up nearly 100 points today. Exciting market movements overnight!

Crude Oil Falls Through the Floor

Crude Oil fell all the way to $105.44, but has also recovered back to the $108.50 level. Wild markets overnight! Demand destruction is being at least partly attributed to the downside breakout.

Personally, I hope that despite the price collapse in the energy commodity sector, Americans will keep up the pressure on their elected officials to become energy independent, or the United States will soon be back in the same energy pinch that we have seen in the first half of this year!

Corn, Soybeans Near Limit Down Overnight!

Both corn and soybeans are very close to limit down overnight, following the lead of crumbling crude oil prices and the strength of the US Dollar. It appears that more and more, these two commodities (corn and soybeans) have become surrogates for crude oil, following it in lockstep. It seems striking that these three commodities (crude oil, corn, soybeans) in particular appear to be closely linked to the US Dollar also. Gold is also significantly lower!

And Here Comes Hurricane Hanna!

As if Hurricane Gustav wasn't bad enough, the National Weather Service has just upgraded Tropical Storm Hanna to a hurricane. The good news is that Hanna doesn't appear to be a threat to the same people and facilities in the Gulf region. The bad news is that Hanna seems intent on targeting the eastern seaboard of the United States. Click on the picture to see the latest update on the hurricane from accuweather.com.

Crude Oil, Natural Gas Sell Off to New Lows

Following relief among market participants that perhaps oil platforms in the Gulf of Mexico may not be as severely damaged as earlier thought, both crude oil and natural gas futures have sold off, reaching new lows today. Natural gas reached price lows today that were lower than those reached one year ago. This is an amazing downtrend considering that the price of natural gas has declined more than 40% since it's high of about $13.75 on July 4th!

This could easily lead to additional fresh selling and a renewed downtrend. Additionally, unlike crude oil, new supplies of natural gas have been developed and are being brought online. This could also contribute to a bearish sentiment for the gas.

"Russia Is No Longer a Free Country"

"This year Russia has become a different country. It is no longer a democratic country. It is no longer a free country". Andrey Illarionov

This is a significant quote because Illarionov was the senior economic adviser to Vladimir Putin. It was he who persuaded Putin to begin a flat tax in Russia that caused its economic boom. He also played a key role in eliminating Russia's foreign debt and in creating the fund that used oil revenues to boost foreign reserves and create a soverign wealth fund. He also obtained admittance for Russia into the G8 and was Putin's personal representative to that organization. The above quote was stated at the time of his resignation. He now lives in the West and works for the Cato Institute.

Here is an excellent article in which many Russian citizens who are striving for basic human rights in their country condemn Russia's invasion of Georgia. It is a factual, unbiased recitation of events thus far:

Human Right Defenders Condemn Russia's Operation in Georgia

Reasons Are Irrelevant!

Reasons are irrelevant. All that matters is that the market responds in the way that it does! Today, despite a Category 3 hurricane in the Gulf of Mexico, oil plunged more than $5/barrel. Does the correct answer to the "why" really matter? Nope!

We all tend to look for reasons that things happen so we can justify our responses. There is something in our psyche that looks for a reason. However, reasons are always given post-event anyway, so by the time we know what caused an event, those reasons are no longer relevant to future market movements anyway. Tomorrow's event will have a different -- and equally irrelevant -- cause!

When we were children, we would always ask our parents, "Why?" "Why this, Mom?" "Why that, Dad?" "Why, why, why?" Eventually, Mom and Dad would tire of our relentless asking and just reply "because". "Because" became the ultimate answer to perennial "why's".

Apparently, there is something in our human psyche that seeks to know the "why" despite the fact that the response to yesterday's "why" doesn't really matter when applied to future events. The reason for tomorrow's market event will be different than the response to today's "why". This is true both individually and collectively (collectively meaning the entire market). The answer is simply, "because". It just IS! The ultimate market answer, just like Mom and Dad's replies, is a vague, but true: "BECAUSE"! That's just the way the market responded! What else matters?!

Who cares whether the Dow drops 1000 points because Aunt Bodie had a hangover or because Goldman Sachs had a bad quarter? The result is the same -- a 1000 point drop on the Dow.

Do we really need a reason to trade? No! We just use it to justify what we did. "See, the market agrees with me!" But having that justification really doesn't make our trade any better -- or worse. It just helps us to justify taking it! But really, who cares what caused the market to go up or down? The fact is that it just went up or down! And that is all that truly matters!

Who cares WHY it happens? Maybe it happens just because most market participants EXPECT it to happen! That may seem like a dumb reason, but it's the BEST reason. It's the only REAL reason, and the only accurate one. "Because" that's the market sentiment! That's reason enough! More cause or reason beyond that -- is irrelevant!