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.