Another Rush for the Exits, Another Flight to Safety

Today, fresh doubts about whether the new stimulus/spending bill will work coupled with stronger doubts about Treasury Secretary Geithner's capability to resolve the crisis is causing another flight from stocks and into gold and treasuries. The treasury auction at 1:00 pm EST was well bid, but only at a higher interest rate, which temporarily drove prices downward. The bottom in the treasury chart below reflected this dip at the time of the auction, shown as a hammer bottom candlestick pattern. However, renewed fear and uncertainty over the value of the spending bill quickly reversed the higher interest rates and fresh buying ensued. Scary times we live in!

Stocks -- investors fled for the exits. The bulls are running out of hope!
Gold -- breached $950/oz. today
Treasuries -- brief dip as investors demanded more interest, followed by fear-based buying

House and Senate Find Agreement, but Stocks Fall Off a Cliff

Thanks Congress! Thanks, President Obama. This is what the financial markets think of your "stimulus" spending bill! This just goes to prove once again the adage that "You can't fool all the people all the time!" The Dow's November lows are now only a few hundred points away.

From MyWay.com:

World stock markets fell Thursday amid pessimism about the Obama administration's plans to fix the U.S. banking system and restore the overall health of the world's largest economy. European stocks were also undermined by a raft of disappointing earnings...

Sentiment in Europe, already depressed by further losses in Asia earlier, was hit by the news that a number of companies across the continent reported worse than expected earnings and predicted further difficulties for the months ahead.

Here is the full story.

Compare this chart above with the one I posted less than an hour ago.

New Unemployment Claims As Expected

New unemployment claims last week were slightly better than expected, but that didn't help the mood either. Wow! What gives?

Retail Sales Not As Bad As Expected

Despite that January retail sales in the United States were not as bad as expected, traders doubt the accuracy and completeness of the data. Stocks are selling off instead. I expected a rally given that good news is so rare, but when the data is in doubt, this only adds to the uncertainty.

European Banks -- Worse Than I Said

Yesterday, I posted a link to a story indicating the European banks have bad loans on the books amounting to more than $16 trillion. It is much worse than that. It is now estimated that the amount is well in excess of $20 trillion. That's more than the entire GDP of the European Union in 2008.

"There Isn't Enough Money in Government to Solve This"

"There isn't enough money in government to solve this." -- Orin Kramer, Chairman, New Jersey State Investment Council, speaking on CNBC this morning.

Finally, someone in government admits what the rest of us seem to know intuitively!

Hang In There, China!

From the Financial Times:

China will continue to buy US Treasury bonds even though it knows the dollar will depreciate because such investments remain its “only option” in a perilous world, a senior Chinese banking regulator said on Wednesday.

China has used the dollars it accumulates selling manufactured goods to US consumers to accumulate the world’s largest holding of Treasuries.

Here is the full article.

Despite that the Chinese feel trapped into buying more treasuries, they aren't happy about it. They used very strong and stern language to describe their disgust: "We know the dollar is going to depreciate, so we hate you guys but there is nothing much we can do.”

There's Good News... and Bad News

The good news is that the U.S. trade gap has declined to a six-year low. The bad news is that it declined because the economy is in the doldrums, and imports have dropped. Still, stocks today are taking it as sufficient reason to rally modestly!

PIMCO Exec Predicts "2nd Wave" in Crisis

From Bloomberg:

Pacific Investment Management Co., which runs the world’s biggest bond fund, said the global economy faces a “second wave” of turmoil unless governments adopt larger spending plans.

“The economic setback is still in its early stages,” Koyo Ozeki, head of Asia-Pacific credit research at Pimco’s Tokyo office, wrote in a report published today on the company’s web site. “Any further decline in housing prices could accelerate the downturn, intensifying the pernicious feedback loop and possibly leading to a second wave in the financial crisis in the next six to 12 months.”

The entire story is here.

$16.3 Trillion Needed to Bail Out European Banks

From the Daily Telegraph (U.K.):

A secret 17-page paper discussed by finance ministers, including the Chancellor Alistair Darling on Tuesday, also warned that government attempts to buy up or underwrite such assets could plunge the European Union into a deeper crisis.

National leaders and EU officials share fears that a second bank bail-out in Europe will raise government borrowing at a time when investors - particularly those who lend money to European governments - have growing doubts over the ability of countries such as Spain, Greece, Portugal, Ireland, Italy and Britain to pay it back.

“Estimates of total expected asset write-downs suggest that the budgetary costs – actual and contingent - of asset relief could be very large both in absolute terms and relative to GDP in member states,” the EC document, seen by The Daily Telegraph, cautioned. “

"It is essential that government support through asset relief should not be on a scale that raises concern about over-indebtedness or financing problems.”

To put this into perspective, the amount needed to bail out these banks, according the the article, is equivalent to 44% of the entire balance sheet value of the banks in Europe. Put another way, this amount ($16.3 trillion) is more than the entire GDP of the United States last year. If this is true, we are rapidly beginning to see an environment in which banks that were "too big to fail", when seen in aggregate, are quickly becoming "too big to rescue" -- even by governments!

I didn't post the information here (my internet connection has been poor), but earlier this week, a trade association of Russia's banks approached Europe's banks to demand renegotiation of repayment terms for $400 billion in loans that they couldn't repay. This, on top of all the toxic assets that European banks have created in non-performing loans to emerging market countries, is rapidly becoming a crisis of such gargantuan proportions that finding a solution may prove intractable, and perhaps impossible.

Read the entire article here.

One Safe Place -- GOLD!

With the Fed artificially driving interest rates lower by talking down long term bonds, and stocks in the tank, investors are fleeing to the one safe place they know today -- gold!

Dow -350: Stocks Begin Another Leg Down

What's Also Buried in the Spending Bill -- Seeds of Nationalized Healthcare!

From Bloomberg today:

"...No one from either party is objecting to the health provisions slipped in without discussion...

Senators should read these provisions and vote against them because they are dangerous to your health. (Page numbers refer to H.R. 1 EH, pdf version).

The bill’s health rules will affect “every individual in the United States” (445, 454, 479).
One new bureaucracy, the National Coordinator of Health Information Technology, will monitor treatments to make sure your doctor is doing what the federal government deems appropriate and cost effective. The goal is to reduce costs and “guide” your doctor’s decisions (442, 446). These provisions in the stimulus bill are virtually identical to what Daschle prescribed in his 2008 book... According to Daschle, doctors have to give up autonomy and “learn to operate less like solo practitioners.”

Keeping doctors informed of the newest medical findings is important, but enforcing uniformity goes too far.

Hospitals and doctors that are not “meaningful users” of the new system will face penalties. “Meaningful user” isn’t defined in the bill. That will be left to the HHS secretary, who will be empowered to impose “more stringent measures of meaningful use over time” (511, 518, 540-541)

Daschle says health-care reform “will not be pain free.” Seniors should be more accepting of the conditions that come with age instead of treating them. That means the elderly will bear the brunt.

The Federal Council is modeled after a U.K. board discussed in Daschle’s book. This board approves or rejects treatments using a formula that divides the cost of the treatment by the number of years the patient is likely to benefit. Treatments for younger patients are more often approved than treatments for diseases that affect the elderly, such as osteoporosis.

This article is a must read. It is all good, and nothing should be missed. Click this link to read it.

Is This Thumbs Down on Geithner's Rescue Plan?

Up to $2 trillion more in bailouts announced! The chart says it all. At the moment that Treasury Secretary Geithner began his press conference to unveil his new financial system repair plan, stock markets plunged and treasuries rocketed higher. This appears to offer an early assessment of what the financial markets think of this new plan. It's thumbs down!

Stock Markets

Treasuries -- buying is a sign of more fear!

Geithner + Bernanke + Treasury Funding = Volatility

Today should a great day for trading. Treasury Secretary Geithner will be unveiling his plan for financial system rescues, Ben Bernanke will be testifying before Congress, and the U.S. government will have a treasury auction at 1:00 pm EST. It should be a very exciting trading day!

Gold Explodes, Treasuries Surge

Gold and treasury futures have both surged powerfully higher this morning. This is usually a sign of fear and uncertainty, when both move higher together.

Gold

Treasuries

Keynesian Economics' Destructive Dirty Little Secret

Many people know Dick Armey as the former Congressman who was the Republican Leader in the U.S. House of Representatives from Texas. However, very few people know that Dr. Armey is an economist by profession, with a Phd. from the University of Oklahoma, and was a professor of economics at North Texas State University before serving in Congress.

Dr. Armey recently wrote a superb editorial in the Wall Street Journal that any business person should read and understand. He clearly elucidates the fatal flaws of Keynesian economic philosophy and why it is ultimately so incredibly destructive, undermining stable and lasting prosperity. Here are a few excerpts (bold type, italics, and bold headlines were added by me for emphasis):

President Barack Obama and congressional Democrats... have dug up the dead economist's convenient justification for deficit spending in defense of their bloated stimulus legislation. But none ask the most important question: Was Keynes right?

According to Nobel economist Friedrich Hayek, a contemporary of Keynes and perhaps his greatest critic, Keynes "was guided by one central idea . . . that general employment was always positively correlated with the aggregate demand for consumer goods." Keynes argued that government should intervene in the economy to maintain aggregate demand and full employment, with the goal of smoothing out business cycles. During recessions, he asserted, government should borrow money and spend it.

Classical economists up to that time had emphasized a balanced budget and government restraint as the primary goals of fiscal policy. The simplistic notion that "aggregate demand" drove investment and employment threw all of that out the window, but it had one particular convenience for policy makers...

A father of public choice economics, Nobel laureate James Buchanan, argues that the great flaw in Keynesianism is that it ignores the obvious, self-interested incentives of government actors implementing fiscal policy and creates intellectual cover for what would otherwise be viewed as self-serving and irresponsible behavior by politicians. It is also very difficult to turn off the spigot in better economic times, and Keynes blithely ignored the long-term effects of financing an expanded deficit.

It's clear why Keynes's popularity endures in Congress. Intellectual cover for a spending spree will always be appreciated there. But it's harder to see any justification for the perverse form of fiscal child abuse that heaps massive debts on future generations.

Three Ways to Pay -- All Destructive! (headline added by me)

What everyone should agree on is that the money has to come from somewhere, either through higher taxes, borrowing or printing.

If the government borrows the money for the stimulus, then it will either have to print money later or raise taxes to pay it back. If the government raises taxes to pay for the stimulus, it will, in effect, be robbing Peter to pay Paul. If the government prints the money, it will increase inflation, which will decrease the value of the dollar. That would, in effect, rob Paul to pay Paul back with devalued currency.

Taking money out of the private economy -- either through taxes or inflation -- and spending it in a way that doesn't offset the loss of money with real economic gains is worse than doing nothing... The idea... is that at some point the burden of government spending exceeds the private economy's ability to carry it.

Hayek, who famously debated Keynes in a series of articles after the release of "General Theory," gave what I believe to be the most devastating critique of government action to stimulate "aggregate demand." Hayek viewed the boom and bust of the business cycle as primarily a monetary phenomenon created by governments' artificial inflation of money and credit.

Free Markets are Free People Acting on Their Own Interests (again, mine)

Sound money policy, conversely, allowed the disparate knowledge of millions of economic actors to be conveyed through the price system, rationally allocating capital and labor through relative prices. The problem with government attempts to manipulate the economy through fiscal policy -- spending that takes resources away from those who are productive and redistributes it to politically favored interests -- is that it is audacious. It assumes that government knows better how to spend and invest than individuals acting in their families' best interest...

The charade of the current stimulus package, chockablock with earmarks to favored pet constituencies and virtually devoid of national policy considerations, is the logical consequence of Keynesianism in action. It is about politics and power, not sound economics, and I believe that the American people will reject it.

The bottom line is that Keynesian theory is not just bad economics. It's destructive too!

Please read Dr. Armey's entire editorial here.

"Buy The Rumor, Sell the News"

Stocks have sold off this evening, now that the U.S. Senate has passed a stimulus/spending bill. Now, the Senate and House must find a compromise in conference, which could be a difficult and arduous process. Passage is still not an absolute certainty.

The Dow is down approximately 100 points. Tomorrow, I am looking forward to the announcement of the latest iteration of the TARP and/or financial system rescue plan, as well as the treasury auction.

RBC Analyst Predicts 1,000 Bank Failures From Commercial Mortgage Losses

As many as 1,000 U.S. banks may fail in the next few years, almost double the one-year tally at the height of the savings-and-loan debacle, as losses climb on commercial real-estate loans, the RBC Capital Markets analyst said.

Most of the failures are likely to occur at smaller banks with less than $2 billion in assets as their commercial customers default, said Gerard Cassidy, an analyst at RBC, today. Somehow, I wonder if only small banks will fail. Is this because the big ones are "too big to fail"?

IMF Running Out of Cash for Bailouts

From the Washington Times:

/IMF head/ Dominique Strauss-Kahn said the Fund needed an urgent cash infusion if it was to continue bailing out troubled economies in the future. Mr Strauss-Kahn also indicated that the world's advanced economies were now tipping from recession into full-blown depression, cementing fears about the scale of the economic slump in rich nations.

The IMF head made the comments in Kuala Lumpur in Malaysia over the weekend...

Here is the full story.

Dow in the Doldrums

Stocks are barely holding above yesterday's close today. The new job claims were better than expected, but are highly suspect. It's ugly out there! Trading is awful!

More Like Tidal Waves... Than Ripples!

I am closely watching the treasury markets this week, beginning with the sales auctions tomorrow (Tuesday). The amount of U.S. debt borrowing is growing faster than a baby blue whale! If treasury sales aren't well bid, the ripple effect will be colossal! Congress and the officials at Treasury, the Fed, and the FDIC, are making huge assumptions that the demand will permanently remain strong for U.S government debt. If demand falters, it won't be a ripple -- it will be a tidal wave! Treasuries should see strong volatility this week, regardless of what happens!

Unbelievable! Fed, FDIC Pledge 2/3 of Last Year's GDP to Unknown Recipients -- With NO Oversight!

Fascinating and mind-boggling story in Bloomberg today. Here are small excerpts:

The stimulus package the U.S. Congress is completing would raise the government’s commitment to solving the financial crisis to $9.7 trillion, enough to pay off more than 90 percent of the nation’s home mortgages...

Only the stimulus package to be approved this week, the $700 billion Troubled Asset Relief Program passed four months ago and $168 billion in tax cuts and rebates approved in 2008 have been voted on by lawmakers. The remaining $8 trillion in commitments are lending programs and guarantees, almost all under the authority of the Fed and the FDIC. The recipients’ names have not been disclosed.

“We’ve seen money go out the back door of this government unlike any time in the history of our country,” Senator Byron Dorgan, a North Dakota Democrat, said on the Senate floor Feb. 3. “Nobody knows what went out of the Federal Reserve Board, to whom and for what purpose. How much from the FDIC? How much from TARP? When? Why?”

The pledges, amounting to almost two-thirds of the value of everything produced in the U.S. last year, are intended to rescue the financial system after the credit markets seized up about 18 months ago. The promises are composed of about $1 trillion in stimulus packages, around $3 trillion in lending and spending and $5.7 trillion in agreements to provide aid.

The $9.7 trillion in pledges would be enough to send a $1,430 check to every man, woman and child alive in the world. It’s 13 times what the U.S. has spent so far on wars in Iraq and Afghanistan, according to Congressional Budget Office data, and is almost enough to pay off every home mortgage loan in the U.S., calculated at $10.5 trillion by the Federal Reserve.

Here is the full story.

Stocks Back to Flat in a Waiting Game

Stock futures have rallied somewhat, moving back to hover around the flat line, in anticipation of a Senate vote and more news from Treasury Secretary Geithner regarding the latest rescue package for the financial system.

Is Pres. Obama Becoming Dr. Doom?

From the Washington Times:

From crisis to catastrophe. Off a cliff. Dark, darker, darkest. Mortal danger of absolute collapse. Armageddon.
President Obama and top Democrats on Capitol Hill are deploying these and other stark predictions of doom and gloom to push through their economic-stimulus package. In terms not heard in Washington since the late 1970s under President Jimmy Carter's watch, the new president has sought to terrify Americans into supporting the $800 billion-plus bailout bill...
"Mr. Hope has to be careful not to become Dr. Doom," said Frank Luntz, a political consultant and author of the book "Words That Work: It's Not What You Say, It's What People Hear."

Here is the full story.

Is all this doom and gloom going to become a self-fulfilling prophecy?

Delays, Delays in Treasury Plan

Treasury Secretary Geithner has delayed plans to announce his new bank bailout. The financial markets aren't happy about it, according to the futures. I wonder if this is revealing an internal conflict in the Obama administration, since the article presents various unresolved questions regarding important items that will be in the plan. "Where do we go from here?"

From Bloomberg:

Some aspects of the plan, to be announced by Geithner tomorrow in Washington, have been settled. They include a new round of injections of taxpayer funds into banks, targeted at firms identified by regulators as most in need of new capital, people briefed on the matter said. A Federal Reserve program designed to spur consumer and small-business loans will be expanded, possibly to include real-estate assets, they said.
Still outstanding is the issue Geithner’s predecessor failed to address: the illiquid assets that have caused the credit freeze. Officials continue to consider a so-called bad bank to buy them, perhaps in cooperation with private investors, such as hedge funds and private equity. It’s unclear how big a role there’ll be for federal guarantees of securities that remain on banks’ balance sheets.

Here is the full story.

Bloomberg Unveils Internal Fed Conflict

From Bloomberg Sunday evening:

Federal Reserve officials have failed to resolve an internal debate over whether to purchase long-term Treasuries, even as rising yields on the securities threaten to undermine the central bank’s objective of cutting borrowing costs for consumers and businesses.
Policy makers are instead focusing on a program to purchase $200 billion in consumer and small-business loans and on a plan to buy $600 billion in home-finance debt, according to people familiar with the deliberations.

Find the complete story here.

Stock Futures Give Up 1/2 Friday's Gains in Sunday Evening Trading

Dow futures have lost about 1/2 of their Friday gains in Sunday evening trading.

IMF: Advanced Economies Now in Depression

Bloomberg is reporting this weekend that the IMF has indicated that the world's most advanced economies are now in a depression. Now that's ugly!

Here is the story.

S&P Earnings Just Keep Falling, and It's Going to Get Worse in Q1 and Q2!

In his latest newsletter released last night, John Mauldin takes a look forward into 2009 and beyond. He also looks at his previous forecasts for the past two years. What stood out to me was his interview with Howard Silverblat from Standard and Poors, whose responsibility it is to compile the data on earnings for the S&P 500 companies. No one should know these companies and their earnings better! Mauldin says the following of his interview with Silverblat:

I have been writing about analyst earnings forecasts for some time. Earnings forecasts just keep dropping...
I commented on how bad earnings were last quarter. The web site shows earnings were a negative $3.14 a share, the first time they have ever been negative for a quarter. Ever! That was with 65% of companies reporting. He commented that it was worse than that. They don't have it up yet, but with 78% of companies reporting, losses are now a staggering -$8.56 a share. And it could get worse. The write-offs this quarter are just huge.

So, how does that affect total earnings for 2008? The table above shows analyst projections from March of 2007 through today. Notice how they kept falling over time. They are now down 70% from what was expected two years ago. Earnings for 2008 are a paltry $29.57 and dropping. The S&P 500 closed at 868.60. That makes the P/E (price to earnings) ratio 29.4. (I use a decimal to show I have a sense of humor.)
So, what are they projecting for 2009? Let's take a look. Notice that they too have been falling over time.

If the S&P 500 were to close where it is today, and using the estimates for the first two quarters of 2009, the P/E ratio would be 36.4 on July 1.

But what if earnings merely fall to where they were in the last recession, or about 55-60% of where the projections are today? That would drop the 12-month trailing earnings for the four quarters ending June 30 to $15.90 and result in a nose-bleed P/E of 54.7 by the middle of the year.

If earnings don't come in dramatically better for the first quarter as opposed to last quarter, we could be setting up for a nasty summer bear market. Even in the bear market of 2001-2, the P/E did not get above 47. Which, by the way, at a 47 multiple would correspond to a range for the S&P of either 1111 if the earnings come in as projected or 731 if they come in at the lower range.

I see nothing on the horizon which suggests the economy is going to get manifestly stronger in the next two quarters. The real risk is that earnings come in weak for both quarters and investors simply despair this summer, throwing in the towel and bringing about a vicious bear market. I would seriously consider hedging any long positions you have before earnings season this next April. If they come in stronger, then we will see.

The above is only an excerpt of the entire newsletter. Italics were added by me to emphasize important points. It is all fascinating, and worth reading once each week.

Click here for an online copy of this edition of the newsletter.

John Mauldin, Best-Selling author and recognized financial expert, is also editor of the free Thoughts From the Frontline that goes to over 1 million readers each week. For more information on John or his FREE weekly economic letter go to: http://www.frontlinethoughts.com/learnmore

To subscribe to John Mauldin's E-Letter please click here:
http://www.frontlinethoughts.com/subscribe.asp

I highly recommend John's newsletter. It is free!

Friday's Rally Was a Short-Covering Rally

Fellow traders and the news media have unitedly confirmed that Friday's rally was a short-covering rally, not a rally supported by strong buying activity. Financials, retail, and housing stocks led the way. Many investors were unwilling to carry short positions over the weekend in anticipation that the U.S. Senate might pass a spending bill and of the plan to be proposed on Monday by Treasury Secretary Geithner.

Treasuries Drop Over Demand Concerns

From Bloomberg:

Treasuries fell for a third straight week after the government’s announcement of a record $67 billion in note and bond sales overshadowed the biggest monthly decline in payrolls since 1974. Yields on the benchmark 10-year note touched the highest in more than two months as the government set the auctions for next week and concern mounted that debt sales will damp demand.

Here is the full story.

One of the concerns that I have about this is that possibility that the immense supply of treasury debt may cannibalize the corporate and muni bond debt markets, sopping up money that would have gone to those bonds instead. If this happens, interest rates will rise for companies, states, and local governments, making matters even worse for them.

Out of Treasuries, and Back Into Stocks

Just at the moment that stock futures rallied this morning at 10:00 am EST, treasuries plunged. Many traders toggle back and forth between them. Often, if I want more feedback on the status of a particular trade in treasuries, I will quickly glance at what stocks are doing. If stocks show signs of reversal, then I know that shift in market sentiment will also affect my treasury trade.

Stock Futures Continue to Ride Higher in Anticipation of Spending Bill Passage

Senate Majority Leader Harry Reid has indicated that the U.S. Senate will vote on a spending package today intended to stimulate the U.S. economy and which also rewards special interests. If the bill is passed "as is", it will likely be one passed largely on party line votes. Stocks are responding with a solid rally! The Dow had been down more than 100 points, but are now 100 points higher as a result.

However, two influential floor traders have suggested that stock index futures are rising in anticipation of the bill's passage, but that once it does, the "buy the rumor, sell the fact" phenomenon will eventually occur. In other words, once the bill passes, another sell-off is likely. I don't know how immediate this will be, but in the past when other bailout bills passed Congress, it occurred fairly soon thereafter. I am hoping for at least a temporary rally of a few days or even weeks, but I will be wary of this possibility.

The bill, if passed "as is", it not likely to provide sufficient stimulus or correct the imbalances that exist in the economy right now. No credible business person nor economist that I know of genuinely believes this will work. However, I would still follow any momentum higher as long as it lasts. Eventually, however, this bill, as it exists at this time, will not correct the problems in the U.S. economy, will significantly multiply the national debt, and will falter. It is mostly just more pork barrel spending! The higher stock markets rise in the meantime, the further they will have to plunge when the next drop occurs. Larger drops later mean greater profits when we short the market. The bear market has much further to go!

Stocks Erase Losses, Rebound Higher

Currency momentum of a rising USDJPY has caused stocks to rebound, erasing all losses and moving into positive territory (see the S&P 500 chart above). I have no idea why this would help stocks. It is good news that we have managed to once again bounce off the lows we struck in November. Perhaps there is also some hope that a stimlus package is likely to be passed by Congress soon.

USDJPY Currency Cross

Jobless Claims Leap to 626,000

Ouch! The moving average jumped higher also. This is probably going to kill stocks because it is so unexpected. But there is also a glimmer of good news. Productivity remains high. On the other hand, hours worked in non-farm activity continues to fall. It is also troubling to realize that job losses are no longer centered in housing, construction, and financial sectors. We are seeing more and more job losses in all other sectors of the economy, including even technology and pharmaceutical industries.

Walmart Announcement Socks Stock Futures

Despite better-than-expected January sales figures, another announcement this morning from Walmart sent stock index futures south. Walmart announced that it will no longer provide monthly sales forecast guidance, spooking traders in pre-market activity. This is worrisome, given that Walmart apparently sees trouble ahead. As the world's retail discounting goliath, when Walmart sees trouble, it gets the market's attention. Personally, I think this announcement will have only temporary, short-term impact.

In related news, however, other retail sales reports from other retailers, including both Macy's and Target, have been generally better than expected. Sales results for January have been better than the terrible expectations, almost across the board.

S&P 500 Nearing the Half Way Point

I was stunned to learn that the S&P 500 index has declined nearly 50% since its high in 2007. As we approach that ominous benchmark, it seems that the world has been transformed since that time. We face a very different world now. What an amazing change we have seen since those heady days during the past 18 months or so!

Most Markets Quiet, But Gold Shows Renewed Vigor

While stock index, grain, and treasury futures have been fairly quite in overnight trading, gold has once again shown some strength, after retracing somewhat over the previous few days. Currencies have also demonstrated some modest volatility. Is this the beginning of the next rise for gold?

10-Year Treasuries Rise on Employment Concerns

Bloomberg is reporting the following today:

Ten-year Treasuries rose, snapping a two-day decline, on speculation a government report today will show U.S. job losses are mounting.

The bonds climbed in advance of a report that’s expected to show half a million Americans lost their jobs in January, pushing the number of jobless claims to the highest since records began in 1967.

The report “is going to be ugly, so clearly the market is positioning for that, giving us a firmer Treasury market than in the last day or so,” said Olando Green, a fixed-income strategist in London at Calyon, the investment-banking unit of Credit Agricole SA. “Once you get the payrolls out of the way the market will restart focusing on supply, which is a major issue.”

Here is the full Bloomberg story.

10-year treasury futures overnight have been relatively subdued, but the 30-year futures have shown some modest activity.

Sober Assessment of Housing Market by Banker With Good Track Record

Bloomberg has an article this morning about a very sober assessment by John Talbott, a former investment banker for Goldman Sachs.
Here are some excerpts:

Talbott is an oracle with a track record: His previous books predicted the collapse of both the housing bubble and the tech-stock binge before it.
Talbott’s latest predictions are sobering. The U.S. is only halfway through the total potential decline in housing prices, he says. Home values will continue to deteriorate for four to five years, he forecasts.

Here is the full story.

Buy Canadian!

Buy the loonie! Today at least! This was one of the opportunities I uncovered by using my timer alarm to scan frequently for opportunities.

Good Grief! Fast Trigger Finger Required!

Trade now. Write later!

Another Treasury Reversal

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

Keeping Pace With Momentum

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

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

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

Surprise Sharp Reversal in Treasuries

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

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

ADP Unemployment: -522,000 in January

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

Momentum With Treasuries Today

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

Grains Rebound Strongly in Early Evening Trading

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

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

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

Stocks Rally Into Close

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

Grains Turn Bearish

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

Stocks Struggle to Stay Positive

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

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

Gold Loses Some of Its Luster

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

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

Trading Soybeans With Smaller Margins, Limited Risk

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

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

Soybean Meal -- Moves Higher at a Faster Pace

Soybean Oil -- Moves Lower at a Faster Pace

Stocks Swing to Black on Positive Housing Data, Pharma Profits

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

Treasuries Tumble

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

Dow Chemical, Motorola Earnings Rock Stocks

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

Stocks Move Back to Black

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

Trading Perspective From John Mauldin

An excerpt from John Mauldin's most recent newsletter:

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

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

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

Here is John's full newsletter.

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

"Not the Time for Profits" - Pres. Obama

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

Stocks Rebound, Collapse on New Job Cut Announcements

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

Stock Index Futures Slide Lower

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

Fed Fights Back Against Bond Vigilantes

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

Opinions Mixed in Davos on "Bad Bank"

From Bloomberg:

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

Here is the full story.

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

Nouriel Roubini: Prescient Prophet of Economics

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

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

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

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

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

Here is the entire article.

Treasury Funding May Force Interest Rates Higher

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

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

Here is the full article.

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

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

Here is an excerpt:

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

Here is the entire article.

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