Market Climb Continues

SPY continued it's upward climb this week despite a much stronger than expected Non Farm Payroll report that showed upwards of 270,000 jobs added to the labor force last month.  SPY closed at 210.04, up 2.11 (1%) on the week. 

Precious Metals collapsed nearly 5% on the news while TLT, a proxy for the long term bond, fell more than 3%.

SPY weekly price continues to ride the four week moving average higher, so it's hard to see a case for any downside correction at the moment. 

Over the past several weeks, we've been watching the weekly line chart and noticed that it was facing resistance at the head and shoulders neckline.  This neckline was breeched this week and now we are at a slightly higher resistance level, the line connecting weekly high closes.  As market patterns generally mirror up and down moves, it's not inconceivable to believe that should price break through this resistance line, it could rally to the 230 level.

At the moment though, I don't see this breakout as likely.

As mentioned previously, volatility, while still at high levels, has reversed and continues to weaken. 

Also, the weekly rate of change moving average chart continues to hold at the 0 line showing that the moving average has stopped advancing.

This shows me that on the weekly data, the market, while continuing to eke out small weekly gains, is losing steam. 

For me, the biggest kicker is the view of the monthly chart.

I always like to look for the three period test pattern.  September's monthly close was at 191.61.  We advanced in October and should we maintain current levels throughout November, it will be a perfect setup for a December test of the 191.61 low.  That would coincide well with a possible Federal Reserve Rate Hike, which is now becoming more widely expected.

My best guess is that a rate hike would be crushing for the markets, even a token hike. 

Currently, I have no positions in the market but will be looking for an opportunity to position myself for next month's potential three month test of the low. 

Gold-backed Chinese Renminbi Gaining Favor

 

I haven’t paid too much attention as of late to agreements between China and other nations intended to expand the use of the yuan (renminbi) internationally, because the near-term implications always seem to be exaggerated by many market commentators. That said, this deal between the People’s Bank of China (PBOC) and Germany’s Bundesbank seems quite significant given the importance of Germany within the global economy generally and the E.U. specifically.

From Bloomberg via BusinessWeek:

Germany’s Bundesbank and the ?People’s Bank of China agreed to cooperate in the clearing and settling of payments in renminbi, paving the way for Frankfurt to corner a share of the offshore market.

 

The central banks signed a memorandum of understanding in Berlin today, when Chinese President Xi Jinping met German Chancellor Angela Merkel, the Frankfurt-based Bundesbank said in an e-mailed statement.

 

Germany’s financial capital prevailed over Paris and Luxembourg in a euro-area race to win trade in renminbi, which overtook the euro to become the second-most used currency in global trade finance in October, according to the Society for Worldwide Interbank Financial Telecommunication. The U.K. Treasury said on March 26 that the Bank of England would sign an initial agreement with the PBOC on March 31 to clear and settle yuan transactions in London.

 

“Frankfurt is one of Europe’s foremost financial centers and home to two central banks, making it a particularly suitable location,” said Joachim Nagel, a member of the Bundesbank’s executive board. “Renminbi clearing will strengthen the close economic and financial ties between Germany and the People’s Republic of China.”

 

China was Germany’s third-biggest foreign trade partner last year, with 140 billion euros in turnover passing between the two countries, according to the Federal Statistics Office in Wiesbaden. China ranks fifth among importers of German goods and is the second-biggest exporter to Germany.

 

German companies including Siemens AG, the country’s biggest engineering company, and Volkswagen AG are embracing the renminbi internally as a third currency for cross-border trade settlements.

 

“The potential is vast,” said Stefan Harfich, the Siemens Financial Services manager, who steered the introduction of the yuan at the Munich-based company in October. “The introduction of the renminbi as an official company currency will therefore have a big impact on Siemens’s business in the coming years.”

 

Daimler AG, the Mercedes manufacturer that sold 235,644 autos in China last year, issued 500 million yuan of one-year notes in Asia’s largest economy on March 14, in the first so-called panda bond by an overseas non-financial company.

With all that in mind, let’s not forget that Obama is currently in Saudi Arabia trying to restore ties with the Medieival Kingdom, i.e., he is trying to figure out a way to arm al-Qaeda in Syria without the American public finding out about it.

From the Wall Street Journal:

RIYADH—Barack Obama’s visit to Saudi Arabia on Friday marks a bid to warm relations that the Saudis hope will result in commitments by the U.S. president to boost the supply of sophisticated weapons to Syrian insurgents.

 

Mr. Obama’s stopover at the end of a European tour will mark his first visit to the kingdom since U.S.-Saudi ties were severely strained last year following the renewal of high-level U.S. contacts with Iran and the cancellation of planned airstrikes against the regime of Syrian President Bashar al-Assad.

 

Saudi officials also are hoping he will bring word of a breakthrough in U.S. and Jordanian opposition to supplying Syrian rebels with more advanced weapons, including shoulder-launched missiles, known as manpads, capable of bringing down Syrian aircraft, according to Saudis, a Western diplomat and regional security analysts familiar with the situation.

 

Saudi officials also are hoping he will bring word of a breakthrough in U.S. and Jordanian opposition to supplying Syrian rebels with more advanced weapons, including shoulder-launched missiles, known as manpads, capable of bringing down Syrian aircraft, according to Saudis, a Western diplomat and regional security analysts familiar with the situation.

 

Jordan also has blocked delivery of the additional weapons through its territory to rebels in Syria, for fear of getting pulled deeper into the Syrian conflict. The diplomat and two Syrian opposition officials said Amman is waiting for the U.S. to approve the deployment of Saudi-bought manpads currently sitting in Jordanian warehouses.

 

Saudi royals have muted their angry rhetoric since last autumn’s rift. Prince Turki Al Faisal, whose criticism of the Obama administration’s policies on Iran and Syria made front-page news in December, made virtually no mention of the U.S. during a U.S. speech about Iran this month. A Saudi ambassador who wrote of Saudi Arabia breaking with the U.S. in the New York Times in December has been publicly silent since.

It appears that becoming entrenched in a Syrian civil war is still very much on the table…

Lots of moves appear to be afoot on the macro front at the moment. The months ahead should be very interesting to say the least.

 

Submitted by Mike Krieger of Liberty Blitzkrieg blog,

 

Also see Reuters article  http://www.reuters.com/article/2014/03/29/germany-china-idUSL5N0MQ0MP20140329

 

Higher Interest Rates Coming Soon?

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I've been talking about the US Dollar as a "flight to quality" move as the debt of Greece and other European nations have recently been downgraded by debt rating agencies. And it seemed that the dollar would have to stage some kind of upside move as everyone has been bearish on the dollar. The huge run on gold has shown that there is very little faith in the dollar as the printing presses in Washington have been operating at maximum capacity. But maybe, just maybe, the dollar move is foreshadowing a real move in the dollar, not caused by a global crisis, but instead, higher interest rates?

The dollar has been subdued not only by dilution coming from the printing of more money, but also by the extremely low interest rates kept in place by the Fed. What would happen though, if interest rates were to break out of these low levels and move to say 6% on the 10-year note? I'd bet that there would be a strong demand for the dollar. Is this possible?

It sure does look like it. The chart above clearly appears to be reflecting a reverse head and shoulders pattern. And with a low on the rates at 2% and the neckline at 4%, should 10 year rates break out above the 4% level, there is a strong chance, based on technicals, that the rates will move to 6%.

It appears that for now, rates may fall a bit further, especially if there is a "flight to safety" move going on. Or perhaps it is just trying to gather enough steam to push it through the strong 4% resistance that is sure to come.

No matter what, it appears that the dollar should be moving higher. Those of you who have married their gold position, be careful. You may be in for some great pain.

Dollar Gains Highlight Week's Trading

Stocks continued trading sideways for the fifth straight week. Strength in the dollar was the main attraction but gold managed to hold it's own.

Is This The End??

Dollar gains limited asset gains today as the SP fails against strong resistance. Declines in foreign currencies and gold were supported by continued global economic weakness. This again sent the pack running for the safety of the dollar and Treasuries, which rallied today.

The SP weekly chart above shows pretty heavy resistance at current levels. We looked at this last week and compared the SP with interest rates, noting the correlations. If the charts mean anything, this could be the time when equities and rates begin to fall precipitously. Despite the claims by the government that we are now on an uptick, the truth is that much of the gains, especially in the financial sector, has been engineered by the government. Federal Reserve Chairman Bernanke commented yesterday that interest rates will remain at current low levels indefinitely. This totally snuffed out any breakout efforts for interest rates.

As I mentioned many times, the government cannot, will not allow interest rates to rise if they can help it. A sudden surge in interest rates, although inevitable, will most likely doom the US economy. They are totally out of tools here.

I can only laugh as President Obama today stated that we must spend our way to prosperity. OMG! Can he mean it? I had always had a somewhat open-minded point of view and many have even called me liberal. But I never totally believed that Democrats were totally "TAX AND SPEND." Well, my best experience was Bill Clinton under whose tenure I had the most prosperity in my life. I even worked at the government during his tenure and was happy to see the ranks of government workers and federal deficits melt away. But now I know what "TAX AND SPEND" really means. I never, in my wildest dreams, ever expected that this is what the Democrats were all about. Spend spend spend.

I am finding it difficult to hire workers. When I contacted my Congressman about what I can do when people prefer to take unemployment rather than accept a job, I have gotten no response, despite several attempts to contact him. Ummmmm, surely I digress.

Well, it's beyond me how a socialist state can see a 30% stock market gain. What do the experts see that I don't? I've been a bit fearful of the markets since 2005 and my attitude is no different. 0% interest rates going on indefinitely can only have one end effect, another market meltdown. I see that things never happen in the time frame that you expect. I am so thankful for the invention of 2x and 3x short ETFs. It's impossible to be short, difficult to buy puts and certainly, the futures are too short termed to play this concept out for the long term. Despite some of the hard knocks the ultra short ETFs have recently received, I continue to add on. Eventually, everthing is going to collapse. My only concern is that when it does, will the dollars that I win be worth anything.

WHAT IF??? The Safety Trade Doesn't Work???

"What can they be thinking?' I keep asking myself as the Federal Reserve and US Treasury Department vow that they have a strong dollar policy. Even as the US Dollar continues to collapse, no doubt due to current monetary policies, our money leaders assure us that they are supportive of the strong dollar. Even as Japan and other countries shiver as the dollar reaches new lows and they vow to begin buying dollars, our leaders tell us one thing but enact policies that clearly show that they are shooting for different results.

This is not the time or place to discuss political issues so in defense of our leaders, I can only surmise that they truly understand the global financial situation AND KNOW, the in the event of a financial meltdown, the world will flock to the US Dollar in search of safety. Such is what happened this morning as news of a possible Dubai meltdown spread through the markets. Gold was down some $40 early, the Euro dropped significantly and the dollar rallied above the 75 level. As the dollar rallied, markets collapsed but then the attitude changed. Still enjoying my holiday, I paid scant attention to the talking heads commenting how a Dubai meltdown might actually be good for the US economy. Well, again, I sure didn't catch the jist of this comment but in the end, the dollar again began drifing down and markets recovered.

And now I ask, what happens if the dollar isn't the safe haven that it once was. What happens if foreign government and institutional investors refuse to buy into negative interest rates? Will the US really ever pay back all of the debt they are accumulating? What happens to the US Dollar and the economy if we have yet another banking system meltdown (a sure thing in my mind) and yet the dollar remains weak? Arggghhh! The US will have to devalue, default on debt payments much like our neighbors in the Gulf, interest rates will soar, fiat currencies will become worthless.

WHERE CAN YOU PUT YOUR MONEY????

I tend to agree that we are in the down part of the K-Wave or long term cycle and that all forms of assets will devalue. With this in mind, the concensus is that the safety of the dollar is the place to be. But look at the hourly chart of the dollar today. In the end, the dollar gave up the rally and headed back down.

REMEMBER LONG TERM CAPITAL???

This hedge fund, featuring Nobel Prize winning economists as model developers amassed billions in investments. The assumptions that they built in appeared to be flawless UNTIL!!!! In the end, economic assumptions are just that. Assumptions that will change over time and sometimes in a heartbeat, without warning. Yet the Federal Reserve and Treasury continue to act apparently with total confidence that their assumptions will hold true into the future. We can print as much money as we wish and borrow as much as we wish and the world will continue to beat a path to our doorsteps. The Government and Federal Reserve has made investments that no rational person would undertake. Has it been a blatant give-a-way? Are politicians and theoretical people so niave?

THE BEST BET, BE LIKE THE GOVERNMENT

In my mind, the best bet for individuals is to act just like the government. They know that all of the debt they amass now will eventually be worthless. Either they have no intention of ever paying it back or if they do, it will be in dramatically deflated dollars. Consult with your adviser to see if such a strategy makes sense for you. If you have nothing to lose these days, take it to the limits. As deflation pervades the economy, all of your assets will deflate in value. If all you have is debt, then that will also deflate. What do you think? Not the conventional line of thinking...but what is the government thinking? Shouldn't our leaders be setting the example??? Perhaps they are.

Market Shoots for the Stars as Dollar Deteriorates

Stock prices surged as comments from a Federal Reserve official suggested that the Federal Reserve should continue aggressively purchasing mortgage-backed securities to keep interest rates low. The market received additional support from a 10% surge in existing home sales last month over the previous month.

As short-term interest rates remain at virtually 0% and continued economic life-support measures provided by the US Government and Federal Reserve, it doesn't appear that the markets will ever back down. Unfortunately though, this success may come at a great expense, the demise of the US Dollar. While Fed officials assure us that they have the talents to reduce the amount of dollars in circulation to hold off future inflation, each time they have held interest rates low, it has resulted in severe market crashes and economic downturns.

How can they possibly believe that they will be smart enough to pull the plug this time at the right moment? They have missed it EVERY TIME!

The markets now are truly reflecting the BIGGER FOOL THEORY. Again, asset prices are built like a house of cards, depending totally on immense world-wide injections of liquity and pretty much free money to the banks. I know so many people are happy to be getting back what they had lost but be careful. A much greater crash looms on the horizon.

Markets Sell Off as Rates Rise

Markets reversed sharply this morning as interest rates rose. The US Dollar strengthened in response to rising rates. There has been a very strong correlation in the falling dollar and rising asset prices. As the dollar fell, stocks, bonds, gold and other hard assets rose in value. Rising rates have the potential to cause the "PERFECT STORM" in your investment portfolio as most asset classes may fall. Naturally, bonds fall as rates rise, but as higer rates invite investors to again move into the dollar, the stock market, oil and gold may fall as well. Those who are not using all of the risk management tools available may find themselves just as they were last year, bailing out of the stock market, trying to preserve whatever is left after a number of recent market crashes.

Roubini Predicts Doom

It's not only me that has concerns about the current situation. Dr. Roubini, in an interview today with business channel CNBC commented that the dollar won't continue to fall forever and when it does start to strengthen, there will be a collapse in asset prices across the globe.

I'm sure that you've seen stories about how some people made BILLIONS of dollars profiting from the recent market collapse. Don't be a hostage to the whims of the market. You can control your profits in any kind of market through proper risk management techniques. To learn more about how you can protect yourself from disaster and position yourself for profits in the future, feel free to e mail me.

Dissention at the FED?

Federal Reserve Board Governor, Kevin Warsh, indicated in a Wall Street journal Op-Ed piece that interest rates will have to be raised sooner than expected.

The Fed Governor's comments confirmed on-going thoughts that the Fed's stimulous policy will lead to massive inflation in the future. Dropping interest rates to low level for extended periods of time have resulted in the previous bubbles we have been living through, first the high tech bubble and most recently, the real estate bubble. Easy money is the cause for asset run ups of the past and today looks no different. Stocks, bonds and hard assets have been soaring despite questionable fundamentals.

The Fed is fearful that raising interest rates and taking cash out of the system too soon could lead to a double-dip recession. Despite all of the hype that the economy is recovering, there is still doubt about removing it from life support.

BAD DEBTS AT RECORD HIGHS

Record High Bad Bank Debt is still an issue. Despite soaring bank prices, there are big problems still on the horizon. Many expect another wave of mortgage defaults in 2010. China has already warned the US several times about reckless spending. Seems senseless to me to invest in US Treasuries at 4% or less when the dollar continues to devalue without end.

WHAT HAPPENS IF???

In fact, banks do experience the wave of mortgage defaults, large loans default, Ginny and Fannie Mae default, the FDIC defaults and China stops buying our debt? Am I paranoid? Is this totally out of the question? When are we going to face up to the fact that banks are still in lots of trouble and the US Government is ALL IN in guaranteeing that they don't fail. When the banks fail, well, the US Government will also fail. Who is going to bail us out?

YOUR COMMENTS ARE REQUESTED

If you have any thoughts on this issue, pro or con, please comment. I'd like to know what readers think. Thanks

Markets Continue to Dazzle Doubters

Markets turned in another stunning performance this past week with REITs leading the way. Every industry sector gained with the exception of Healthcare, based on sample ETF data. Bonds and gold, traditional safe havens, also lagged.

Even the Dollar took a pause from it's massive drop this past week.

I WOULD JUMP IN EXCEPT FOR...

Yup, you guessed it. SIZE. Size continues to fall. Since this is a statistical indicator, I cannot doubt it. It is not some data point that might be interpretted this way or that. It is a clear sign that momentum, even though it appears to be so strong in the market movement, is really losing steam. Perhaps it will ramp up next week if we have some kind of huge move. But I'm not going to bite except for play positions. I've earned my target returns for the year in both stocks and futures. I've learned that the old axiom is true. Bulls make money, Bears make money but Pigs get slaughtered.

If the market movement is getting you excited and you are funneling in more money, it's quite possible that there is still some more upside left. But is it worth the risk?

On the other hand, I'm tempted to throw in a couple hundred thousand, take my probable 5% return next week, and quit my day job for the rest of the year.

(NOT!!!!)

Notes, Bonds Surge to Continue?

Interest rates surged this week reportedly on investor nervousness regarding the potential credit downgrade as well as the mounting debt that the US Treasury is issuing. Neither story is new. If you have been following the Asset Design Center blogs all year, you will have noticed that we have been positioned for such market turmoil from the very beginning. Just like the laws of nature, economic and finance laws are universal and are bound to eventually catch up with the marketplace.

The above chart is a weekly chart of the ProShares Ultra Short 20+ Year Treasury Bond (TBT). It is the instrument that we have been using in our stock portfolios as a core holding. While the chart is weekly, notice how powerful the three-period idea can be. After making lows in December, TBT came back down in March establishing a three-month test of the low.

SPX Making a Different Pattern

The stock market also tried to test the lows in March but failed. While the market has rallied since then, it has not risen above previous lows and my feeling is, an untested market is an unsafe market. Our stock portfolios have been 35% in cash and many investments have been in equities that are sensitive to the decline in the dollar such as gold, oil and the Pro Shares Bearish Dollar Fund (UDN). Other stock positions have been established as buy/writes at the beginning of the year. Volatility was so high at that point that almost all of our stocks would be able to weather a 35% decline in the stock price without our position losing money.

I've got to admit, reviewing stocks this weekend in preparation for possible actions at the end of this new week, I was surprised that so many stocks are still on a run.

Potash (POT) is one example of a stock that is powering ahead. Notice how this stock also made the important three-month test of the low. The stock has nearly doubled from the testing point. It demonstrates the validity of the basing process that I have been discussing over and over again. You don't need to pick the absolute bottom to make a ton of money. I can sleep much easier when I see such a test of the lows be successful. And when I have doubts, I sell a long-term call option against the position. Most of the buy-writes that we put on at the beginning of the year stand to make a 50% profit should the stock price rise or do nothing. Those kind of returns are pretty good. And the option sale gave us extra income to hedge ourselves on the downside should the market go against us.

Potash was one of such holdings. We purchased POT at 73.22 and sold the January 09 call at 22.70. At this point, our net profit on the position is greater than 30% for a five-month holding period. With only 3 points of premium remaining on the position, we may close the position out and build up some cash in the event that the market will decline. There are many, many stocks that appear ready to fall apart and I would like to have cash on hand and be ready to pounce when the opportunity is right

Don't Need To Be Greedy

Asset Design Center clients know that our format is to build portfolios that provide you with the required rate of return with minimal volatility. It is not our goal to make 100% on your money each year but to achieve your financial objectives through consistent year-to-year steady growth with minimum volatility. If you have extra money available that isn't in your goal saving plan, you can use it to "rock and roll." Our relatively conservative options on futures accounts are up nearly 30% this year. There is always room to "rock and roll" after all of your important objectives are met. Even though we like to think that our futures ideas are conservative, just as the realities of higher levels of debt are sure to cause a lower debt rating and higher interest rates, earnling 5% to 10% each month is also beyond the realm of normal expectations. There is always that once or twice events in a year that can destroy your gains if you are not experienced enough to know how to work our way out of it. .

TIME TO PARTY

While the wonder as to what North Korea's nuclear gamesmanship will have on the world markets tomorrow, the day will be set aside for enjoying the day. As a Viet Nam era veteran, and a disabled one as well, I choose to spend the day with other vets and friends before returning to the real battle when electronic trading begins tonight! Have a great day and enjoy.

Markets Pause For Holiday Fun

While many will think that the stock market endured a rather dull week, in truth, it was a very important week. As I have been reporting since last week when the market finally broke it's winning streak, it's time to start watching for a topping formation. One of my favorite topping formations is the three-period test of the high. As stock markets settled in to close virtually unchanged this week, we can see that we continue along a perfect setup for the test of the high. Should the S&P not close above the 929.23 level next week, or 8,575 on the Dow, the market will provide what I believe is one of the most reliable reversal signals.

Many have been saying that if the S&P falls beneath the 889 mark, the market will fall, perhaps to new lows. While I am, nor have I been, bullish throughout this entire move, I think that it's premature to predict a return to the markets' March lows just yet. One must not lose sight of the fact that the Fed is continuing to flood the market with dollars. These dollars have to find a home. If you are holding dollars, then you are certainly going to lose. Yesterday, I heard on the stock market tv channel that even Warren Buffet does not have any cash. Rather than interpretting this as a bullish sign, I thought that it just makes sense. Whoever says that cash is king is not looking at the continual devaluation of the dollar that is taking place.

Dollar Losing Big!

When the Treasury Secretary claims that the US has a strong dollar policy, the following chart illustrates that either the secretary is telling a big fib or that he just sucks at his job.

At the risk of being called a "wacko," I believe that the Secretary, being the former head of the most-important New York Federal Reserve bank, is using his government position to enhance the wealth of the Federal Reserve, to which he will most likely return once he finishes looting the taxpayers.

There has been lots of talk about how big of a lender China is to us but are we really beholden to the bankers? With the Federal Reserve buying another $300 billion of Treasuries, I would guess that in the end, the bankers who own the Federal Reserve will probably be our biggest creditor. The Federal Reserve's and Treasury's actions are only to serve in creating still another asset bubble. The trick is to identify the bubble, get as much profit as you can, hedge your newfound wealth and be sure not to be the last fool in the game!

Bubble Bursting on Bonds

Above is the daily closing price of the June 10-year Treasury note future as traded on the CBOT. Note prices have been in a major decline since the Fed's announcement in March that they would be buying $300 billion of long-end Treasury Securities. Price declines picked up momentum on Thursday when the Fed's purchases of long-end treasuries fell short of what the market was hoping for. Many are now predicting that the Fed will step in to moderate the decline. But is this really in their best interest? The Fed merely represents the banking cartel. Higher interest rates result in a higher debt payment that the US and everyone else will have to make. Banks like to get higher interest payments. Unfortunately, I'm too old to believe any of the babble that comes out of the mouths of bankers or politicians. They say one thing but act in a totally different manner.

Size is Still the Key

Those who have been reading my materials know that Size is the Key. When Size is increasing, you cannot, MUST NOT go against the trend. The chart above shows the weekly size of the 10 year rate. It has just gotten to "average" but because it is rising, you must not begin to think that the decline in bond prices is over. It is just starting! Don't expect the Fed to step in to moderate prices. If they are truly acting as a fiduciary for the bank owners, they will buy Treasuries at the best prices, when yields are significantly higher than they are now. You've got to remember that the Fed is not a government organization. It is a private banking organization. We have already seen that there is no limit to the amount of greed in the banking system. Even former-Federal Reserve Chairman, Alan Greenspan, lamented that he couldn't believe that the banks would not act in the shareholders' best interests!. Of course he was right. Banks did act in their best interests. Who the real owners are though, that is the question. Just look at the billions of free money the banks have been getting. Just look at all of the future gains they will receive. Certainly, the banks, at least the favored banks that are on the "too big to fail" list will win big. It is our job to make sure that we also buy into these banks, but at the right price!

Other Effects of Falling Dollar

The above chart is the daily action of the CRB Index. At one time, this chart used to be closely watched as a sign of inflation. Be careful. The Federal Reserve and Treasury tells us that there is no inflation. Our biggest concern is DEFLATION! But again, don't listen to the talk unless you like talking about it at cocktail parties. Last year when the oil prices skyrocketed, we didn't have inflation, we had "pricing pressures." Call it what you want. Prices are going up, we have to pay more. In the end, I hate what the Fed and our government is doing to our purchasing power. Even China now is trying to break it's habit of taking dollars. It is going to be a hard habit to break, but the sooner we can move to making transactions in gold or some other medium, the better off we will be. Unfortunately, the dollar continues to retain value because there is really no other fiat currency that is any better. In the end, fiat currency is only worth the value of the paper it is printed on.

Oil, Oil, Oil

I like oil. Each day I hear that there is no reason for oil to be so highly priced. There is no demand. I remember last year that supply/demand had no relevance in the huge runup in oil prices either. It was the dreaded "speculators" who caused prices to run up. If my money needs to be someplace, I think that oil is a great place. Like gold, it is traded in dollars so it will help preserve value. Unlike gold, it is consumed, every day, in greater and greater quantities as less developed countries develop.

As some people say that they have been buying gold continually to preserve their wealth, I have been doing the same with oil I have been using the Exchange Traded Fund OIL.

Oil has a long way to go on the upside. It doesn't matter whether the cause is increased demand or dollar devaluation. I like oil the best. While I do have a position in gold, I remember the day when it was illegal to own gold. Do you? Yes, it's true. Not too long ago, it was illegal to own gold. If the government was able to do it back then? Why can't they do it again? What if the dollar totally collapses and the government decides that it must go back to the gold standard. Do you think that they will let you hold on to your gold?

I hope I'm wrong but I think that it's prudent to think through every possible idea. Remember what they say, those who don't remember the past live to repeat it.

Have a great holiday and be sure to subscribe to the Trendsetter newsletter.

Rates Surge

Rates surged yesterday to overbought levels. The move began as a result of the Federal Reserve's less than expected purchase of long-term securities. Further exacerbating the move was Standard and Poor's outlook that UK debt will lose it's AAA or highest quality status. Many expect that this will also happen with the US' debt.

When the financial crisis hit at the end of last year, the UK's debt to GDP level was at 44%. The US' debt to GDP level was 63%. S&P lowers it's credit rating when debt to GDP levels reach 100%. Major organizations such as the IMF expect the US' level of debt to exceed 100% of GDP before the UK.

Dollar Losses Continue

The US dollar has also suffered as a result of this "New" worry. Well, it's not really a new concern. It has been real and ongoing. The US cannot continue to borrow $100 billion each month and continue to bail out and absorb losing businesses. It cannot continue to print trillions of dollars without expecting that its currency will devalue. It's simple economics that anyone should be able to understand.

We have been short the dollar, the stock market and US bonds from the beginning of the year and long on oil, gold, and agriculture commodities. We feel that we are positioned well for the coming economic disaster that is sure to take place. While the stock market has been surging, it's no different than any other commodity. With trillions of new dollars being put into play, these dollars need to find a home. It's not new wealth being created, it's inflation. There is no real new value being created. If you disagree, please comment and tell me where I should be looking.

There could be one last gasp to the upside in stocks next week and then a new down trend may begin. This weekend, I am putting together a special report to Trendsetter subscribers identifying which stocks might present good trading opportunities. If you are not a subscriber, send me an e mail and I will put you on the free subscription list.

This could be a very important time not only in the market, but in the history of mankind. You owe it to yourself to get all of the information that you can so that you don't possibly lose all of your wealth. We saw how ugly it got during the last decline. Can you imagine the fear that will pervade the world if we break through to new lows? Can you understand that the government is already preparing for mass panic?

The market rally we have seen has all been engineered by the government. It's not a real thing. It's just perhaps giving them time to prepare for the meltdown that might occur.

Market Awaits CPI Data

Rates on 10 year Treasuries remained neutral this morning, resting at the 3.08 level, right on the moving average, as the market braces for CPI data to be released in a little over an hour. Yesterday's PPI data came in stronger than expected at 0.3% for April with food cost increases leading the way.

While the Federal Reserve continues to focus on deflation, paying little attention to inflation, as the daily chart of Soybean futures indicates, some prices are rising sharply. We need to be positioning ourselves for strong moves in the agricultural markets. We have discussed this issue and how to position yourself in recent Trendsetter issues.

How the market reacts to today's data release is uncertain but it's important to note the rising trend in interest rates as well as strong price increases in commodities.

US Credit Rating to Fall?

The US Dollar fell to it's lowest level in months against major world currencies. A news article on the Bloomberg website, Dollar Falls, Ratings Threatened, details how a strengthening Chinese economy has eased fears of a global economic crisis. As a result, those who flocked to the US Dollar as a safety trade are now exiting. Some analysts noted that increased US investment in foreign markets has also added pressure to the dollar.

David Walker warns of Dollar Rating Reduction

Walker reports that Moodys Rating Service warned that increasing Social Security and Medicare costs could engulf the US government in debt for decades. A report today on the health of Social Security said that the system might be insolvent earlier than previously expected.

Expected by whom? Don't think that many of us believe that Social Security will be here for us. It's just been another tax

Dollar, 10 Year Futures, Remain Under Pressure

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After an ovesold rebound yesterday (accompanied by a Wall Street selloff), 10 year notes appear to be resuming their current downtrend. The 20-day average appears to be providing current resistance. The dollar continues under pressure as well.

More and more analysts are starting to state that the stock market is overvalued already while others claim that we are in a new Bull Market!

KUDOS TO REPRESENTATIVE GRAYSON

Seeking Alpha article with Rep Grayson YouTube.

Take a quick look at Rep Grayson's You Tube video about Federal Reserve oversight. Truly scary. I took the time to look at other Rep Grayson's YouTube offerings and was pleased to see one of our elected officials who realizes that we are being robbed! If you get a chance, look at his video where he questions Citi boss Pandit over the US taking 90% of the risk of Citi's bad debt. Pandit says that he bought "insurance" from the government. Despite the mess Citi got itself into, I believe that Pandit still made $100 million last year. Well, he got the US government to take 90% of his losses, I guess that's worth something.

"There Will Come a Time"

"There will come a time where the lack of Chinese participation may have a significant impact," said Illinois Congressman, Mark Kirk recently after touring the Bureau of Public Debt. In a recent AFT article
China Cancels US Credit Card, Kirk, a co-chair of a group of lawmakers promoting relations with China, said that China was discretely shifting investments away from US denominated Treasury Securities. Kirk further said that China's concerns were legitimate.

We have noted in early reports how China has been less than discrete at times concerning excessive US debt levels as well as the expanding US money supply. China has been diversifying away from US investments, investing heavily in other Western Hemisphere countries. While they have continued to participate in treasury securities purchases, they have focused more on short termed maturity paper, moving away from longer-termed debt issues.

This week, the US markets, received quite a wakeup call even while stock prices were rallying. Both long term bonds and the US Dollar fell sharply. Our mantra for the year has been to be short the dollar and bonds and long oil, gold and commodities. We are going to review our positions this weekend now that momentum might be starting to develop. Until now, the dollar has been considerably strong as have long term bonds, despite the heavy monthly supply of debt amounting to more than $100 billion per month!.

For those, especially outside of the US, with heavy US dollar exposure, it could be time to review your risk parameters and consider applying hedging techniques to protect your wealth.

Market Rally? A Matter of Perspective

We are just minutes away from the stock market attaining it's 9th week in a row with a gain! Markets have not had so much momentum since perhaps the bull runs of the late 1990s. But while US investors may be smiling as their 401(k)s expand close to previous levels, those outside of the US may not be seeing such gains.

US market gains abroad are definitely beginning to be muted by declines in the US Dollar. Today's downward move in the dollar is the second day in a row that markets received a wake-up call as to the US Government's fiscal policies. Yesterday, bond yields rose sharply as investors demanded higher yields on long term treasury debt. Higher yields normally result in a stronger dollar. Not so today.

While President Obama's economic stimulus package my ultimately benefit the country, it will not be without substantial costs. Inflated money supplies and record debt levels may cause a run on US securities resulting in lower prices for US products across the board. Don't leave yourself unprotected. Be sure your positions are hedged appropriately.

Bull Run Falls Short

Bull Run Falls Short

End of Month Report - Part 1

Major Stock markets staged a remarkable comeback in March with the Dow Jones Industrial Average rising to 7,608, up 545 points or 7.7%. The S&P 500 rallied 8.5% to 797.87. While the gains were impressive, the S&P’s failure to close above 800 and the Dow’s inability to break above a major resistance level of 7,676 leaves doubt that the downtrend has come to an end.

I mentioned in previous writings this month that Volatility Levels are starting to drop. This is generally my first signal to anticipate a potential stock turnaround. The second step would be to look for a basing pattern in the charts.

With the Dow at least rallying this month, I will look for one of the following two scenarios to play out in April. Either the market will drift, potentially setting up for the three month test of the February lows, or the market will bounce down from the 4-month moving average and make new lows.

The following graph illustrates Scenario #1 …




SCENARIO 1: The three-month test of the low scenario might be the best possible outcome. Should the average remain stable, closing next month little changed, the price could rest right on the four month moving average. Then in May, we would be closely watching to see if the Dow could hold the February closing low of 7.062. Should we hold the 7,062 low, look for a long-term rally to begin.

Again, with the volatility indicator reversing, it’s very possible that price will drift sideways. While the above scenario could be the best scenario a variation of this is that the market will continue to drift sideways until it meets the ten month moving average (the red line). It could take another six months of sideways action to meet the 10-month moving average.








SCENARIO 2 is not as friendly and more probable considering the uncertainty that surrounds the banking system, auto industry and other sectors of the economy. As I have mentioned several times in the past month, markets almost always try to come back and test key areas of support and resistance. By not being able to maintain above the 7,600+ support level, chances are that the market will sell off in April, making new lows.


The battle for supremacy was fast and furious as expected. Like a battle between two prize fighters, the Bears were getting beat badly as the Bulls pushed the Dow towards 8,000 last week. The Bears though were not giving up and staged an attack starting on Friday, pushing the Dow down into the 7,400 area! The Bulls came back today, pushing the Dow up 200 points, above the support level.






In the end, the Bears again took charge, driving it index down below 7,600 at the market and end of the month close. Only last minute settlements brought the Dow above 7,600. There truly was a monumental battle here between the Bulls and the Bears. The Bulls could not hold their ground in the end. I'm sure that we will quickly learn whether the Bears will remain in control. As I write around 8:50 pm, already Dow Stock Index Futures are trading down to the 7,500 level.

GROWING CONCERNS

Believe me, I would love to be a fundamental analyst. But accounting data seems to be so manipulated, numbers massaged, footnotes everwhere. Who can tell what is going on? And if you wish to analyze various segments of most corporations, that data does not exist in public information. I fear that fundamental analysis will take another hit with the proposed Mark-to-Market (MTM) changes. What is MTM all about?

MTM is commonly used in the futures and other derivatives markets. At the end of each trading day, gains and losses are settled up. If you have a position that gained in the day, money from the loser would flow to your account. If you were the loser for the day, money would flow out of your account. If you don’t have the money, then you will get worried calls from your broker asking you to please, at your earliest convenience (by the end of the day) to add funds to your account or the position will be closed out.

The big reason that MTM is causing so much concern now is because many of the mortgage based instruments cannot be valued because the housing market is so volatile. If you can’t value the assets on your books then how can you determine what the bank is worth and how much cash they need to protect themselves and their depositors. What the banks are proposing is that changes be made in the accounting standards to allow them to value these “value-less” assets at face value instead of the current market value (which is very low). This would allow banks with very risky positions to look great on paper. Another blow to those who really want to understand the fundamentals. Without real transparency, is it worth it to buy bank stocks in the future?


THE US DOLLAR AND MTM

The government could be supporting the MTM accounting changes for other reasons as well. Recently, the Federal Reserve Bank announced that they would be aggressively buying long-term treasury notes and bonds in an effort to lower interest rates, helping to bring mortgage and other credit rates lower. The problem with this action is that the Fed is buying Treasury securities at very high prices and reporting them on their balance sheet to support the integrity of the US dollar. What would happen though if interest rates do advance sharply? Bond prices move inversely to interest rates so if rates advance, bond prices would fall. And the longer the maturies are, the more volatile the price movement would be.

It’s not inconceivable that bond prices could fall 25%! Imagine what impact that could have on the dollar from an integrity standpoint. If the assets backing the greenback decline in value (or become worthless as could be the case for some “toxic assets” they are holding), foreign investors could exit their positions in the dollar en masse! BUT WAIT! No no no! We don’t use the mark-to-market any longer. Our devalued investments can still be valued at face value since someday, we expect that they will reach maturity and we will get all of our money back. Will investors continue to be deceived? Or perhaps there is just no place else to go with money.