Treasuries Plunge On Fannie, Freddie Takeover

Investors shouldn't underestimate the significance of the U.S. Treasury takeover of Fannie and Freddie. Now that the U.S. taxpayer has been forced to accept repayment obligations for the two mortgage giants, U.S. government debt has exploded (as if it hadn't already). Nevertheless, U.S. government debt is expanding at an even faster rate. As a result, interest rates have risen and U.S. government debt has sold off. Oddly enough, it is causing interest rates for mortgages to rise, too!

Are you skeptical of the impact? Just look at the daily chart for the 10-year note (above). That last red candle is just the impact on overnight trading!

Since the takeover has effectively equalized U.S. treasury debt and Fannie/Freddie debt, instead of interest rates on Fannie/Freddie debt going down, U.S. treasury debt interest rates have moved higher. There is an increase in perceived risk, and investors are demanding higher interest rates for that risk. This increased risk is real. Fannie and Freddie have derivatives instrument with leverage of about 50 to one (50:1). Even most hedge funds, which are now dropping like flies, only had leverage of about 20 to one (20:1). Now that the taxpayers have been forced to accept that kind of debt obligation, the surging debt of the U.S. government causes increased risk of default for investors. Thus, interest rates must rise.

This increases exponentially the counter-party risk that the U.S. taxpayers incur on all of these derivatives instruments. If, as was announced last Friday, mortgage foreclosure rates continue to rise, the cost of that risk rises exponentially, not incrementally. For more on this subject, read the links to John Mauldin's newsletters that I posted over the weekend. Mauldin's warnings were well-timed!

Also as an odd twist: the increased interest rates that the world requires will force the U.S. government to pay out higher rates, and thus increase the deficit even more!

It's a Traders Market

The stock market futures have been in a such a tight trading range for so long now (2+ months) that it appears that we may continue in that pattern for the foreseeable future. The takeover by the U.S. government of Fanny Mae and Freddie Mac over the weekend is being seen as a positive by some stock market bulls. The Dow futures rallied instantly by more than 200 points in Sunday evening trading! However, many traders are so accustomed to buying the dips and selling the rallies that the overnight trading rally may be nothing more than that. Who knows! The reasons are irrelevant!

From my experience, these dramatic moves by Federal authorities create huge supp0rtive rallies for stocks, but they don't tend to last too long - days, not weeks! Once more negative economic data comes forth, the mood gradually shifts, and negative sentiment returns. I buy these rallies, too, until the morose mood returns. Why miss out on the profits? I'm neither a bull nor a bear, but why swim upstream? I give the market what it wants!

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!

No Suprise! Russia Annexes South Ossetia

Russia announced today that it will annex part of the territory of Georgia into its own borders. The monster reveals its nefarious motives more every day! Worse yet, Russia also announced that it will build a permanent military base within the conquered territories. It also indicated that it would soon do the same with other Georgian areas.

"The disclosure will expose Russia to accusations that it is annexing land regarded internationally as part of Georgia. Until now, the Kremlin has insisted that its troops intervened solely to protect South Ossetia and Abkhazia from Georgian “aggression”.

Needless to say, Russia's KGB Kings have repeatedly lied over the past month to the international community. This is only the latest revelation of Russia's dark heart that has emerged over the past few years. Tyranny has come once again to Russia, and now, it has begun to bludgeon its neighbors once again also. 1968 is here again. Here is the entire article:

Kremlin Announces that South Ossetia Will Join 'One United Russian State'

Russian Opposition Party Decries Recognition of Georgian Breakaway Regions

Now, human rights organizations are going into the region to catalog atrocities, and they are finding that despite widespread reports of such atrocities by the Georgians, there are no eyewitnesses. They are rumors, and nothing more, apparently planted to turn the hearts of the locals against their Georgian countrymen. One report by a human rights worker explains that while the rockets came from the direction of Georgia, what remains of the rockets themselves are Russian Grad rockets. This same reporter said the following:

For instance, all of a sudden, that maybe it was Russia that bombed everything to spite Georgia.

First a bombardment took place, then, after a massive shelling, the armored vehicles moved in.

And after the armor, the infantry forces walked in.

On the level of the shelling, and the armor, genuinely, the rights of the civilian population were violated.

Weapons were used which in no case can be used.

There were direct tank attacks on residential buildings, and on the building’s basements.

But from the point of view of the atrocities that, supposedly, were committed by individual Georgian soldiers, the infantry, we did not find any information from first-person sources.

It is possible that they were fed fables that the peaceful people had long since left.

This same human rights organization indicated that Russia has grossly overstated the number of civilian casualties in the area. Instead of the thousands that Russia claimed, the human rights workers were only able to document "tens of victims", not hundreds or thousands.

On the other hand, the same human rights worker said that there were decaying corpses of Georgian soldiers widespread throughout the area. These are a grave concern because they raise the likelihood of disease.

More Russian lies?

No Trading 'Til Next Week

Volume has been unusually low this week. I have decided not to trade until after the Holiday.

September is typically a very volatile month for the markets, and especially the stock markets. September and October are historically the worst months of the year for stocks.

Grain Analysts Surprised

Despite higher prices for crude oil, grain analysts have been surprised today to see the price of corn and soybeans plunge instead.

Russia's Medvedev: Itching for New Cold War!

While the West tries to downplay and ignore the idea that a new Cold War has begun between Russia and the West, Russia has embraced the idea. In fact, if Russia's President Medvedev has anything to say in the matter, Russia is eager for it. Russia's once fledgling democracy has now fully evolved into a elitist capitalist dictatorship controlled by a few militant oligarchs. “We are not afraid of anything, including the prospect of a Cold War," he boasted today. Russia troops continue to occupy tiny Georgia, including the port city of Poti, nearly two weeks after Russian leaders agreed to pull out of Russia. In fact, Medvedev said today that Russian forces are continuing to build, not withdraw.

This is important because as I continue to take the pulse of business leaders throughout the United States, we are only now beginning to price into the market the consequences and costs of this new Cold War (using Medvedev's terminology). Finally, we are beginning to wake up, sit up, and take notice that the past is still prologue in our relationship with Russia.

There is one significant difference this time, however. This time, Russia has a wealthy, capitalist economy awash with petrodollars and the confidence and willingness to pick a fight. They have no intention of backing down with the West.

Interestingly, the Founding Fathers of the United States, in their studies of human history, said that democracies have a tendency to do precisely that, evolving into tyrannical dictatorships controlled by a few wealthy elitists. They feared that such would also eventually be the fate of the United States, resulting in tyranny. That's why, when a woman asked what kind of government has been chosen following the Constitutional Convention, Ben Franklin replied, "a republic, if you can keep it". He knew that historically, democracies tend to degrade and destroy themselves, partly because where a majority rules, minorities rights are destroyed. Perhaps this is why Jesse Jackson pines for a day of "democracy of capital", in which the majority will take the property of a wealthy minority by force, if necessary.

On the other hand, a republic operates on the concept of the "rule of law", protecting minority rights and holding the tyranny of the majority at bay. This was also one of the reasons why they provided for United States Senators to be chosen by the states rather than by vote. This was changed, and the United States took a giant step toward democracy (and away from the republic they had given us), with passage of the Seventeenth Amendment. This amendment fundamentally changed the form of government in the United States away from that envisioned by the Founding Fathers.

We are now seeing this devolution of democracy occur in Russia, but also in the United States to a lesser degree. Lest anyone bristle at the suggestion that the United States is descending toward the tyranny of democracy, I would suggest that class warfare is one example of this. The idea that the majority can take the property of a wealthy minority by voting it away, is a form of tyranny that the Founders dreaded. A small, unpopular minority of wealthy people are preyed upon by the majority. Here is a link to a good explanation of the difference between a republic and a democracy:

'A republic, if you can keep it' ...or remember what it means

Gustav Takes Aim at Gulf Oil

Oil prices are jumping higher today as Hurricane Gustav takes aim at the prime Gulf of Mexico oil producing regions. Some computer models predict that Gustav will be a Category 4 or 5 storm by the time it hits the Texas-Louisiana coast. Click on the graphic to go to the latest update at accuweather.com.

Very Little Trading Today Due to Illness

I hope to be back tomorrow.

Grains Topple From Recent Highs

The Pro Farmer crop tour over the weekend suggested that crop yield expectations of the USDA are about 1% too high. The lower yield estimates were expected to buoy higher prices. However, prices have fallen significantly all morning so far. What gives? Good question! This is one more example why I follow the charts, regardless of what the fundamentals suggest. Falling yield should almost certainly provide ample impetus for higher prices, but we are seeing lower prices instead. Perhaps today's US Dollar strength is a large factor. A stronger Dollar increases the cost to foreign countries to purchase much-needed U.S. grain products. This might cause demand decay, but this is food they are buying, after all.

Bad News Bears In Charge Today

It never ceases to amaze me that on one day, we can see euphoric triple-digit stock market rallies, and the next day, the mood is so melancholy that prices plunge by the same amount. That's why I call these days of stocks "manic markets". Today is no exception. Compare today's charts (above) to those of last Friday. While Friday, it took the entire trading day for the Dow to climb 200 points, today, the plunge of more than 220 points have taken only half the day. It is also interesting to me today that each subsequent plunge today has been large than the prior one!

This Inflation Fudge Don't Taste So Good!

When the news media report US economic data, they typically only report the headlines. When was the last time we heard any of them spend more than a few cursory seconds (and usually no time at all) discussing how the government has fudged those statistics over the years? I have known for years that the government doctors the statistics, misleading the American people. I'm not suggesting that it is intentional, because I really don't know if it is. But whether it is intentional or not is really quite irrelevant. The fact is that it happens. As I have said several time in other posts: reasons are irrelevant. So are intentions.

I even knew how they do it, using hedonics, weightings, and substitutions. However, until now, I didn't know how much. I hadn't seen precise quantification of how much the government fudges the statistics. I ran across an interesting article that discusses the "how much". Here is an excerpt:

"...from 2007 to 2008, CPI showed a 4.1% rise in the price of food. But according to the Farm Bureau, that tracks the same basket (without using substitution, weighting or hedonics), food prices actually rose 11.3%!"

What this short quote is telling us is that while the official inflation statistics released by the Bureau of Labor Statistics reports inflation of only 4.1% (which is still twice the amount the Fed is comfortable with), the true, undoctored statistics, as collected by the Farm Bureau, using historical methods, is much higher -- 11.3%! Ouch!

Perhaps this is why universally around the globe, from the Arabian Peninsula to China, all the countries that have pegged their currencies to the US Dollar, are finding that inflation is out of control. Only the U.S. continues to claim that inflation is "contained" or soon to come down.

Here is the rest of the article:

Government Statistics: Perfecting the Art of Mass Deception

Obama -- Candidate of "Big Corn"

The title of "Big Corn" seems kind of silly, doesn't it? "Big Corn"! But it underscores how we have been brainwashed into thinking of only one industry as the big, evil boogeyman. Big Oil! Oooooh, scary! There is no "Big Software"! There is no "Big Computer Chip"! There is no "Big Healthcare" or "Big Pharma"! Just "Big Oil"! Brainwash complete!

We frequently hear Senator Barack Obama attack the oil companies, as if profitability is evil. Apparently, to him it is! What we never hear, however, is how frequently Senator Obama accepts donations and free airplane rides on the corporate jets of companies that make billions in taxpayer-funded corn subsidies. Companies like Archer Daniels Midland, a huge agriculture multinational that competes on the same level and size with the largest oil companies! And with better profit margins! So why no talk of Big Corn or Big Ag? Brainwash complete!

CFTC Disputes Washington Post Inaccuracies

"Contrary to what has been reported in The Washington Post, it is factually inaccurate, and the CFTC has never reported, that financial firms speculating for their clients or for themselves account for about 81 percent of the oil contracts traded on NYMEX," the CFTC said.

The commission argued that instead, noncommercial traders make up about 50% of both the long and short side open interest in West Texas Intermediate crude oil futures and options.

"The Post's 81% figure seems to assume that all swaps dealers are engaged in speculative trading," the CFTC said, noting that swap dealer activity often involves serving as a counterparty to commercial entities hedging price risk exposure.

It sure makes you wonder what the Washington Post's private agenda is, doesn't it. When one considers that the Posts doesn't have the data (only the CFTC and exchanges do), whey would the publish data to make a point based upon erroneous data? Here is the full article:

CFTC Disputes Washington Post

CME Locks Up Nymex

CME completed its acquisition of the Nymex over the weekend. It will be interesting to see how this impacts the futures markets. We should perhaps ask them to eliminate so many redundant fees. A single fee for users would be more appropriate in a competitive marketplace.

Is Coal King?

"...the U.S. Air Force, some months ago successfully tested coal-derived jet fuel in an in-flight B-52 bomber without altering the engines in any way. And diesel fuel so derived is actually cleaner than conventional petroleum-sourced feedstock."

--Dick Phelps

Grain Prices Fizzle on Profit-Taking Before Weekend

As if typical prior to the weekend, many funds are liquidating their trades and taking profits, leading to mild price weakness. While grains are down somewhat, there has been no full-scale sell-off. This suggests to me that prices will remain fairly well-supported going into next week. Weather has been a bit too dry for good crop yields this week, which has also supported prices. We will all be watching the weather over the weekend for clues to trading next week!

And the Rally Continues

Stock indexes have once again rallied higher off the support level I pointed to in my previous post. Note also that stocks rallied at that same level earlier today (notice on left chart). This is a nice rally -- more and better than I expected!

S&P Finds Support at 1 Hr EMA

I had been watching the 1 hour EMA for possible support. It is depicted on this 15-minute chart as the green line supporting prices on the left chart. Prices have begun to find support and push higher. I expect a short-term rebound at this point. If we see only a consolidation, then it will be very short-lived. However, the over-riding economic concerns are likely to eventually lead to lower stock market prices, either today or early next week.

Well, Maybe We're Not THAT Convinced!

Following a very nice rally, stocks have sold off somewhat, although we're still well in bull market territory for the day. This is a very typical reaction to Chairman Bernanke's remarks. As the impact of the Fed Chairman's remarks fade, markets often reverse in the opposite direction. As the new week brings a fading memory to the markets next week, don't be surprised if worry begins once again to wear down the bullish sentiment. I also wouldn't be surprised if, over the weekend, we see more developments in the attempt to backstop Freddie Mac and Fannie Mae, which may give the market more impetus next week. And don't be surprised also, if we see more bank failures over the weekend. The FDIC tends to announce them after market close on Friday to prevent overnight panics.

...But Warren Buffett Disagrees, Sees More Inflation Ahead!

This morning, CNBC viewers were treated with a three-hour visit by Warren Buffett and many nuggets of his monetary wisdom. While I am personally not a fan of Buffett's atheism (he's not willing to pay the price to know what the rest of us have paid the price to know), I admire his brilliant financial mind and his great wit and humor. His wisdom, common sense, and gift for humor are a joy to listen to. I can't help but like the guy, as long as I keep my admiration to only those subjects for which he has proven himself worthy of respect. Politics is not one of those areas!

He said that the surge earlier this year of commodity prices is only beginning to be reflected in retail prices that must eventually be passed onto the end consumer. He gave examples from the businesses in his empire, and said that their margins have been squeezed so tightly that they have been forced to increase prices repeatedly to their retail dealers. He said that they have been forced to increase prices again and again, sometimes in rapid succession. He also said that the price increases have only just begun, and that much more -- and many more -- substantial price increases are coming. Inflation is not dead! It is not under control! Take it from a man who should know -- Warren Buffett!

Wall Street Concerns Eased By Bernanke's Remarks

Fed Chairman Bernanke's remarks at the Jackson Hole summit this morning have eased Wall Street concerns about a possible resurgent inflation. The Dollar has recovered some of yesterday's losses, and renewed commodity price strength has also eased.

We must remember that this same Fed is the one that told us that there was no credit crisis, that inflation was contained, and that there would be no contagion from the credit markets into the rest of the economy. This is also the same Fed that didn't see any of this coming last year! That's pretty cruddy credibility! Today's remarks sound more like spin than credible economics!

Commodities Back Off Across the Board

Commodities prices have backed off across the board today, with crude oil leading the way. Grains, softs, and gold have followed suit. The U.S. Dollar is stronger, also. There has been no follow-through buying strength with additional buying of commodities. This is suggestive of a consolidation that could last a very long time.

However, it is also common for commodity buyers to liquidate their positions on Fridays to avoid the potential risk of events over the weekend. These buyers will then reestablish their positions Sunday evening or Monday morning.

The grains, although lower overnight and selling off at market open, have showed surprising resiliency and some renewed buying vigor today.

(There Is No) Freedom of Speech or Press in Russia

One economist critical of the Kremlin, Mikhail Delyagin, was apparently given an appearance by mistake on a popular talk show. Before “The People Want to Know” program aired, Delyagin was digitally removed from the tape.

The show’s host, Kira Proshutinskaya, said she was embarrassed over this and other incidents, and admitted that networks are constantly intimidated by the Kremlin.

“I would be lying if I said that it is easy to work these days,” she told the Times. “The leadership of the channels, because of their great fear of losing their jobs — they are very lucrative positions — they overdo everything.”

I recall how the Soviets used to doctor photos to remove people from them. This looks a lot like the old Soviet mentality has returned to Russia. The above is a quote from the following news story about the absence of press freedom in Russia:

Press Freedom Absent in Russia

The Following is a news story about persecution of critical voices in Russia. This person was prosecuted for publishing an opinion to a BLOG!

Criminal Case Launched Against Russian Opposition Blogger

In Russia, Vladimir Putin has passed a law, article 282 of the Russian Criminal Code, that allows the government censors to classify anyone's speech as "extreme". It can therefore be censored and the person prosecuted. Imagine the number of KGB agents necessary to monitor millions of blog posts all over the internet each day! They're serious about censorship and silencing those with a different perspective! The sentence is two years in prison! His crime? Criticizing the Federal Security Service!

Here is another article about the office of Russia's largest radio media conglomerate being raided. Check out the photo of the hooded soldiers that conducted the raid in the article below. Often, Russian authorities won't shut down media source entirely. Instead, they will harass them and accuse them of various activities, including tax evasion. If that doesn't work, they prosecute them and send them to prison. The intent, of course, is intimidation!

Russian Media Group Offices Searched, News Program Cut

Crude Oil -- $122

Crude just keeps rising. It is now up more than $10 from the low earlier this week, and more than $7.00 so far today!

Natural Gas Bottoms on Report

The price of natural gas rose today despite the fact that supplies rose in the latest government survey. When supplies increase, but prices rise, that's a pretty good sign of oversold conditions. With crude oil substantially higher today, natural gas appears to have been destined to follow! I've been watching for this!

Grains Limit Up Move

Commodities, including grains, are surging across the board. Grains touched limit up within 30 minutes of market open today. The bull is back with a vengeance!

Today -- Tumult and Turmoil!

With the amount of worry and turmoil in the market today, I expect that we will soon see another rescue or bail-out very soon. Here is a quick summary:

Dollar is Down, and if it remains this low, it will be in bear market again at day's end

Gold is Up $50/oz. in a few days

Oil is Up partly due to geopolitical supply fears, partly due to Dollar weakness

Treasuries are Down due to fear that the Feds will have to bail out Fannie, Freddie

Commodities Up almost across the board due to Dollar weakness

Turmoil in Treasuries

Wow! Check out this chart this morning. Treasuries have been selling this morning with vigor, causing interest rates to rise the most in days! Much of this is no doubt due to the slow-motion collapse of the capitalization of Fannie Mae and Freddie Mac. Expectations are for an almost certain take-over of the two institutions by the Federal Government.

"Me Too" Gold!

Gold has also now moved back into bull market territory! This is the daily chart. Up by $50/oz. this week!

Stocks Take a Tumble

Prior to market open this morning, the sentiment is absolutely morose. With oil more than $3 higher due to Russia's threats against Poland, and expectations that Fannie and Freddie are on their last legs, stock market index futures are nearly down by triple digits and sinking moment by moment, and the market isn't even open yet.

Bubble? What Bubble?!

Today, we are beginning to see the reemergence of a commodity price bull trend. These charts show the daily charts for corn and soybeans. Prices for both have moved significantly higher overnight. Notice also that prices have reversed and are moving higher over the past few days. The price of corn is higher seven of the past eight days! The bulls are back! How long it will last is anyone's guess!

Corn
Soybeans

Crude Oil Reaches Highest Prices in Weeks

Crude oil has reached $118.50 per barrel today. This is the highest price in weeks. Perhaps the risk premium of geopolitical events is once again pushing the price of oil into the stratosphere! Could this be one of Putin's purposes for invading Georgia? One certainly wonders if it might be at least one of the fringe benefits, from his perspective!

Note the daily chart below is now back in bull market territory! Personally, I would be surprised if we see prices go back to record territory anytime soon, but anything can happen!

"Everyone Lost"

Political opposition voices in Russia recently released a statement saying that in the war upon Georgia has no victors. “No one won from the war,” the opposition leaders write. “More precisely, everyone lost.”

Here is the full statement (see link below). They were incredibly courageous to issue it, considering how many members of the press and Putin political opponents have been murdered. It is estimated that among the press alone, more than 150 reporters have been murdered in Russia over the past 5 years just for criticizing the KGB King. That's about one every two weeks! Russia is the most dangerous place in the world to be a reporter. It's deadly to speak the truth about Vladimir Putin!

Russian Democratic Forces On the Georgia Conflict

Crude Oil Inventory-Related Selling Followed By Rebound

This is an interesting chart because the U.S. government inventory data this morning showed an unexpected rise in crude oil inventory. The price of crude sold off powerfully. However, the selling only lasted an hour, and crude oil prices have been rising steadily since, as shown on the 15 minute chart on the left. Unless some geopolitical or other event occurs to drive demand lower, it appears that the price of crude oil has bottomed. Prices have been trading within a fairly tight trading range for nearly two weeks!

Once a firm bottom has formed in any commodity, I change my focus from selling on rallies, to a strategy of buying on dips. This changing of the guard between a selling focus to a buying focus is the market psychology that causes consolidation trading such as we're seeing now on the daily chart for crude oil (see below). Note that the Klinger Volume indicator (green, bottom panel) is showing stronger and stronger buying, even though prices are relatively flat!

Mmmm! Those Golden Grains!

Finally the grains have broken out of their flatline status and have broken out higher. After forming such a firm bottom, I would have been surprised if prices had broken lower. This may well be the early stages of a new bull trend for grains. Grain prices have closed above the Exponential Moving Average five of the last six days. For wheat, it was nine of the past ten days! Sounds like an uptrend to me!

When prices are flat, that is no time to take one's eye off the ball. The longer prices remain flat, the more powerful the move will be when the breakout occurs. When the market is quiet is the most important time to stay focused and wait like a patient panther to pounce.

Interest Rates on a Downtrend

It never ceases to amaze me that anyone is willing to accept such paltry interest rates as the prices of treasuries continue to rise (interest rates and bond prices move inversely to each other), but such is the case. Don't they realize that they are losing money to inflation by buying these things? There is no end in sight to lower rates according to this trend. Perhaps one reason for this is that treasury futures purchases are also a barometer of fear. When people buy treasuries, they are often doing it for fear of losing their money by investing it anywhere else.

It's Ugly Today in the Grain Pits

This is absolutely untradable. Don't even try or you'll lose money!

Putin Sends in the Chechen Goons!

Russia Lost the Georgian War

As long as Putin's Russia continues it brutal invasion of Georgia, I will continue to post short updates on the status.

The Kremlin KGB Kings have sent Muslim Chechen gangsters into Georgia to brutalize and terrorize the Georgian people, despite the fact that they signed an agreement to withdraw one week ago. These mercenaries are so brutal in their conquests that even the Chechen puppet President begged Moscow to disband them. Putin refused. We also know that they are on the ground in Georgia because photos from the Kremlin of these thugs showed them on Russian armored personnel carriers with their battalion ID painted on the equipment.

We also now know that when Putin left Beijing suddenly, he was headed directly for the front lines of Russia's invasion of Georgia. He is personally directing the brutality and humiliation. Photos and video from Russia's state media showed Putin personally directing the invasion at the front. Since when is that in the job description of a Prime Minister, Mr. Putin? That has all the appearances of a dictator, not a diplomat!

Additionally, press photos yesterday also showed Georgian troops taken hostage by the Russians and hauled away blindfolded into Russia as political prisoners! Photos also showed the Russians stealing American Humvees owned by the Georgian military, and taking them into Russia also. They are now adding plunder and pillage to their war crimes!

We in the West had better wake up to realize that the bloodlust for power of the Kremlin KGB King will not long be contained within Russia's borders. Putin and his puppet-dog Medvedev will become more and more brazen and aggressive until they are checked. Europe is so worried about the oil and gas pipelines that they are being blinded by their need. If they don't establish their independence quickly, they will eventually wake up licking the feet of Putin, and being grateful for the privilege.

Vladimir Putin has the West's number. He knows how to manipulate the UN to block all diplomatic efforts to check his military conquests. He has repeatedly blocked all UN efforts to bring a halt to Iran's nuclear efforts. And he understands the weaknesses of Europe's desire for diplomacy better than Europe understands him. He humiliated President Sarkozy of France, agreeing to a ceasefire and withdrawal, and ignoring them as soon as the ink was dry.