Gold Has Further to Go

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

Gold Leaps Still Higher

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

Government Can't Create Wealth, Just Redistribute It

Also from Minanville:

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

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

Investment in Banks: For Better? or For Worse?

Here is some perspective from Minanville:

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

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

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

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

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

Rice Futures Limit Down

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

Lumber Futures Long Collapse With Housing

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

Bond Vigilantes Take On the Fed

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

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

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

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

Across the Curve

Stocks: Falling Further!

Stocks: Gains Gone, Thanks to Congress!

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

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

Congress Drafts Legislation to Restrict CDS Futures

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

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

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

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

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

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

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

Bloomberg said this:

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

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

Here is the full story.

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

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

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

From Marketwatch:

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

Here is the full story.

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

Fed Declares War on Bond Vigilantes!

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

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

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

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

Corn Drops, Other Grains Flat

Corn drops -- Daily chart in consolidation

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

Stock Roller Coaster Continues Overnight

Most Prescient Economist Raises Cost of Bailouts

From Nouriel Roubini:

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

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

Is Protectionism Coming?

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

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

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

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

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

Why is this significant?

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

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

Another See Saw Day

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

Job Cut Parade Continues

Job cuts announced this morning:

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

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

Crude Oil Reversal Sends Prices Higher

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

A Glimmer of Good News Turns Stocks Positive

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

Civilization Seduced by the Chains of Debt

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

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

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

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

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

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

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

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

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

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

Read the whole kit and kaboodle here.

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

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

Pelosi Says More Money May Be Needed for Banks

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

USA's Bank Bets -- What Next?

From the New York Post:

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

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

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

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

Here is the full story.

Jobless Rolls to Grow

From Bloomberg:

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

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

Here is the entire story.

The Bond Vigilantes are Back

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

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

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

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

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

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

I thought this was interesting from the Wall Street Journal:

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

Here is the full story.

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

Stocks -- Defending the Bottom Teaches Important Principles

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

Some Lessons to Be Learned

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

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

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

Emotional Peace Counts for Something

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

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

Don't Give Control to the Market

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

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

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

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

Gold Goes Ballistic, Up $40 Today

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

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

Grains Follow Financial Markets Lower

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

More Stock Market Blood in the Offing?

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

Long Term Interest Rates Starting to Rise

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

The Multiplier Effect of Public Spending

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

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

Here is the entire article.

Another Roller Coaster Day for Stocks

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

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

Thain is History at Merrill Lynch

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

BIg Inventory Build Causes Crude Oil Plunge

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

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

Grains Stagger At Open on Demand and Stock Market Concerns

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

Steady Stream of Bad News Drops Dow Back to 8000 Level

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

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

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

After Yesterday's Rally, Stock Futures Drop Into Red

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

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

New Perspective on Global Economy

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

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

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

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

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

Stocks Rallied Stoutly Today

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

Stocks Closed Yesterday Below Key Dow 8000 Support Level

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

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

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

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

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

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

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

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

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

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

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

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

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

Stocks Turn in Worst Inaugural Performance In Dow History

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

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

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

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

Stocks Drill New Depths Following Inauguration

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

Welcome and Good Will to President Barack Obama

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

Welcome, President Barack Obama!

Treasury Bears Can't Get Upper Hand -- Yet

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

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

Why Government Work Projects Don't Bolster Employment

From Bloomberg:

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

Here is the full story.

Stock Futures Tumble (More) in Evening Trading

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

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

$41.6 Billion RBS Write-Off Roils Stock Futures

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

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

The Magnitude of the Monster

From the editorial opinion page of the Wall Street Journal:

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

Here is the full editorial.

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

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

Anyone for Plan B?

More Job Losses Coming

Some of the weekend's finance-related headlines:

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

Gold Rockets Higher, But Why?

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

Cotton Surges on Panic Buying

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

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

Corn Surges on Drought Worries in South America

From the NASDAQ website:

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

Here is the entire story.

And Grains Explode Higher

Meanwhile Treasuries Sell Off

Stocks Battle Back to Black

Dumping the Dow

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

Treasuries Trump All Other Futures Today

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

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

Grain and Stock Update

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

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

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

Grains Gain Ground

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

Stocks Struggle to Maintain Gains

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

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

From Bloomberg today:

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

Here is the entire Bloomberg story.

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

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

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

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

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

Here is the full story.

Grave Grain Weather Conflict

From Farm Futures:

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