Market Discussion

la-onda · March 09, 2008, 10:55:30 PM

Dollar-Gold: A Perfect Storm
by Jim Willie, CB. Editor, Hat Trick Letter | March 7, 2008

The title should really be "Psychology of 1000-20-100" to give respect to the major signpost price targets. The $1000 gold target is within reach. The $20 silver target has been breached. The $100 crude oil price has been breached. Before long, all three price levels will serve as support. When a gold target of $1000 was proposed three to four years ago, most people dominated (or bound) by conventional thinking dismissed such talk as silly, irresponsible, even ludicrous. Not any more! The same goes for silver and crude oil with their respective distant price targets, each attained. Profound market psychology is in the process of changing. Many new wrong analyses will come to the table, like so many casseroles containing rancid meat and rotten vegetables as ingredients. They will maintain that now these three goals have been met, the great selloff can begin. They will be dead wrong. The great commodity bull market is entering into its second crucial phase, marked by a failing US financial system, a USDollar in freefall, an insolvent US banking system, a perfect storm in US housing, the beginning of an endless USEconomic recession, inept banking leadership, and equally bankrupt economic stewardship. As the futility of policy measures becomes recognized, as rescue packages have almost no effect, as various markets refuse to stabilize, the gold price will rise further. In time the steps will be massive, like $100 in a single day. My guess is the year 2009 will see such days. Already, in the last two weeks we have been treated to two different days with at least a $1 range in the silver price. Volatility is here, to the upside, crushing shorts, lifting spirits for bulls.

PERFECT STORM DEVELOPS

Numerous vicious cycles have begun to strike at the core of the US system, both the economy and the banking system. They are each powerful. They will not relent. They will inflict horrendous damage. They will rip apart the ramparts of the USEconomy, then the fabric of American life. My colleague Roger Wiegand has been vocal in his dire warnings, one of few who see the upcoming carnage, disruption, and chaos. When people ask whether the USDollar has hit bottom, a simple question goes out as my reply. HAS ANYTHING BEEN FIXED? HAVE ALL DESPERATE MEASURES BEEN INVOKED? The answer to the first question is NO WAY! and to the second question NOT EVEN CLOSE! So the declines will continue, as US economic, banking, and political leaders squirm in reaction to utter futility in their policies to date, and continued futility in their upcoming policies. Their errors are many, in prescribing solutions which are more of the same inflationary wallpaper, which demonstrate no conceivable depth of understanding for the corner they have painted the United States into. YOU CANNOT FIX INFLATION PROBLEMS WITH MORE INFLATION, any more than you can treat an alcoholic with a morning whisky chaser! This 2008 year the system breaks, and it is breaking on almost all fronts. Feedback loops are kicking into gear, and they are incredibly powerful, vicious, and difficult to interrupt.

During my 20 years in Boston, on at least four or five occasions, residents were treated to Nor'Easters, nasty storms off the Atlantic Coast that resembles an egg beater. Storms would lift moisture from the ocean, circulate air in the upper lofts, as warm air current would come north from New York, cold air would come south from Montreal, and heavy water-filled air would come east from the ocean itself. Storms would sometimes last for days on end, dumping wave after wave of snow. The most beautiful aspect of the storms in my view was the bluish hue of the snow itself, having taken and deposited blue algae from the ocean water. In certain sunlight afterward, the awesome display of nature was something to behold. The Nor'Easter storm was a vicious circle. People would ask if the storm would ever end. Eventually, one of the three directions of wind strength would prevail, usually the south along the eastern seaboard. My imagination marvels at the power of nature embedded in rare weather systems. In the last few years, other vicious cycles have captured my attention. The Halloween Nor'Easter off the east coast in November 1991 was devastating (shown below). Its story was told in a movie called The Perfect Storm in 2000. This killer storm was an unusual Nor'easter that escaped the tropical zone, absorbed one hurricane, and ultimately evolved into a small hurricane late in its life cycle. Damage totaled $208 million while the death toll climbed to 12 people. The hurricane was the second costliest storm of the season, behind only Hurricane Bob.

VICIOUS CYCLES ENGAGE

The HOUSING vicious cycle will ensure steady decline in home prices. Numerous factors are at work to keep the damaging process caught in cycle after cycle. Questions continue on whether the worst is over for housing. The answer is NO.

The BANK vicious cycle will ensure steady losses in bonds and portfolios. Numerous factors are at work to keep the damaging process caught in cycle after cycle. Questions continue on whether the worst is over for banking. The answer is NO.

The RECESSION vicious cycle will ensure steady decline in USDollar value, since it is the stock of the Untied States. Numerous factors are at work to keep the damaging process caught in cycle after cycle. Questions continue on whether the worst is over for the USEconomy. The answer is NO.

DEVASTATING EFFECT

The end result of these vicious cycles is round after round of harmful blows to the USDollar. A perfect storm has fully developed. After forming, it is gathering power. The psychology behind the storm becomes intense when the feedback loops become clear. Remarkably, parallel vicious cycles work to render horrible damage on both the tangible economy, with the housing market as foundation, and the financial sector, with the banking industry as foundation. Reaction by the financial markets to the US housing market decline, the US bank system meltdown, and the USEconomic recession, whose collective report card will increasingly be perceived through the USDollar lens, might resemble what is seen in the movie by actors heart-throb George Clooney and bad boy Mark Wahlberg. Giant waves overtake their tiny fishing vessel, much like similar images of FOREX waves of US$ exchange rate declines overwhelming the USEconomy. Never does prosperity come amidst a powerful currency decline. Instead of slower economic growth bringing down prices, the opposite will occur. The falling USDollar will force commodity and energy prices higher, the ugly consequence of decades of import dependence. Most economic policy directed by US banking and political leaders has fostered that dependence. Case in point is rising gasoline prices, amidst falling volume demand!!! Bernanke has it wrong. Next comes picking the rancid fruit from the withered industrial vines.

The final arbiter will be the gold price, along with its sibling the silver price. Great difficulty comes in fighting US giant corporations. The big US banks freely sell fraudulent bonds on a global scale with impunity, protected by the USGovt and US Congress. The big US corporations enjoy advantages with capitalization from a brisk bond and stock market, from size, and from the ability to subsidize losses. Mostly honest firms, they are hard to compete against. However, Microsoft does stand out, with a recent $1.35 billion fine imposed by the European Commission for chronic foul play of some monopoly shade. Microsoft treats the string of similar rulings with contempt, regarding such levies as mere cost of doing business. The big US Military cannot be opposed on its terms, but can suffer from being bogged down in guerrilla wars, not to mention the devastating ignored effects of sand damage. That leaves the USDollar as the remaining vulnerable to wave after wave of selling, from foreign disgust, utter shock over the seemingly unstoppable deterioration, and basic good judgment to sell the stock in "USA Inc" which is the USDollar itself. The reality is that the Untied States are gradually morphing into a Thrid World nation, complete with a puppet leadership.

A bearish triangle was much more prominent within what mistakenly was identified as a double bottom reversal pattern. The primary trend exerted itself in strong terms. The breakdown was sudden. The 20-week moving average proved formidable as resistance. USFed Chairman Bernanke and the minion knights of his Knothead Table gave a full green light for continued interest rate cuts, acknowledging the USEconomic distress, fully aware of the bank insolvency. They recklessly opened the door to heavy volume USDollar sales. The world noticed, did not blink, and hit the SELL button. Buttressed by continued monetary ease, unleashed waves of monetary inflation, complete with attendant rabid price inflation, factors behind the gold bull are increasing in number. Gold will surpass the $1000 mark within weeks. Continue to watch silver, whose ratio with gold will surely improve. In other words, silver gains will outpace those of gold. The desperate central banks have no silver to dump on the market.

By the way, the announcement of Intl Monetary Fund gold sales is huge bullish. The Swiss announcement of heavy gold sales last summer was also bullish. These are desperate signals, as they are running out of gold bullion to dump. IN BASIC TERMS, THEY ARE DESPERATE. The Euro Central Bank will be the last to cut official interest rates. The gold bull will return to European shores sooner than Trichet might expect. That event will usher in the gold price vaulting past the millennium mark.

http://www.financialsense.com/fsu/editorials/willie/2008/0307.html

cheers
O.

la-onda · March 09, 2008, 11:02:00 PM

Shadowtrader update:
http://www.shadowtrader.net/videos/sunday030908st.html

la-onda · March 09, 2008, 11:08:10 PM

Old Fool Notes – 03/09/08

The bears have been having themselves a fine ol time for the past couple of weeks. The surprising thing I have noticed is that there is little resistance from the bulls even though the volume has been relatively normal. In other words, we have a buyers strike. The talking heads on TV are lamenting the fact that there is "no fear" and are begging for a capitulation volume day (say 3.5-4 billion). We will see. It may be that the reason there is "no fear" is that many traders are hedged or sitting in cash. I shuffled through a dozen or so mutual fund quarterly reports this weekend and half of them were holding 8-25% cash. This is very unusual for large funds.

The volume on Friday was up slightly at 2.4 billion with a ratio of 1.7 to 1 in favor of the bears. This is very good efficiency. It also shows that there was buying, just none during the middle of the day. Next week should be interesting. Unfortunately, I have to be at a conference in Canada Mon-Wed. Will check in when I can.

The daily chart is looking very ugly. If the bears succeed in holding below 2200, we are likely headed to 2100.

The hourly charts look slightly better but the bulls need to get it back above 2225 to show any strength.

The ratio chart shows a slight blip up and that's encouraging. Also note that the 21-day EMA is approaching the turn line. This chart has not been working very well lately so we will just have to wait and see what happens.

The weekly chart is also very ugly but the downtrend appears to be getting stale. Note the MACD reading.

The Wilshire chart does not look good but it is not as bad as the NAZ. The money flow also causes me to pause – why is it holding up?

The P&F shows that we have broken out of our trading range. The target is 2180. Frankly, if we get to 2180, I expect us to continue down. I just do not see any support between here and 2100.

I had one trade on Friday. I dropped in 25% long QID as a hedge at 2232. I'll drop in some more if we come back down below 2200. I'll lift the hedge if we make it above 2225. Friday was a perfect example of how difficult this market is to trade when the buyers are on strike. They bought early and then just walked away. The volume went to zip. Pull up a 3-minute chart on MSFT, QQQQ or INTC – you can see the volume effect perfectly. I don't have an opinion on which way we are headed but I am concerned enough to have put the hedges back in. Follow the ball.

Charts link below.

http://stockcharts.com/def/servlet/Favorites.CServlet?obj=ID2071209

Houlahan · March 09, 2008, 11:24:21 PM

As always! applaud la-onda.
Asia already looking sold off in early trading.
I am short LEH but a little nervous.

kslifka · March 09, 2008, 11:46:48 PM

The market will probably "puke" Monday morning...even dropping below the January lows. I bet it recovers in the afternoon, however. Then we should have a short-term bear rally for a few days, unless really bad news.

I still believe that the ultimate bottom of the S&P will be around 1220 and the Nasdaq around 2020-2030. So still about 180 points to the downside on the Nasdaq and around 70 points to the downside on the S&P. Bottoms in this type of market are difficult since we've breached so many technical signals...it may take some time to get down there. After that we'll see what happens.

BigSully1 · March 10, 2008, 12:00:58 AM

Asian markets all down tonight.

Last Trade Change Related Info
^AORD All Ordinaries 5,257.00 11:57PM ET 111.90 (2.08%)
^SSEC Shanghai Composite 4,193.15 11:27PM ET 107.37 (2.50%)
^HSI Hang Seng 22,117.70 11:43PM ET 383.63 (1.70%)
^BSESN BSE 30 15,975.52 Mar 7 0.00 (0.00%)
^JKSE Jakarta Composite 2,535.67 11:58PM ET 120.79 (4.55%)
^KLSE KLSE Composite 1,296.33 Mar 7 3.36 (0.26%)
^N225 Nikkei 225 12,576.07 11:38PM ET 206.73 (1.62%)
^NZ50 NZSE 50 3,541.31 11:38PM ET 16.95 (0.48%)
^STI Straits Times 2,811.32 11:58PM ET 54.96 (1.92%)
^KS11 Seoul Composite 1,632.59 11:58PM ET 31.38 (1.89%)
^TWII Taiwan Weighted 8,303.27 11:58PM ET 228.11 (2.67%)

la-onda · March 10, 2008, 01:59:30 AM

BigSully1 · March 10, 2008, 10:06:52 AM

I think half of wall street forget to set their clocks forward.

buddjas1 · March 10, 2008, 02:42:36 PM

Why do I feel like all stocks are going to be penny stocks soon? This is getting ridiculous.

BigSully1 · March 10, 2008, 03:49:18 PM

2:38PM Nymex Energy Closing Prices (COMDX) : After hitting a new all-time high at $108.21pbl, crude closed the session up $2.70 to $107.85pbl. Nat gas ended higher by 26.2 cents to $10.031mbtu, heating oil settled up 2.94 cents to $2.9764/gal and RBOB finished higher by 2.38 cents to $2.7181/gal.

pinoleropuro · March 10, 2008, 05:12:20 PM

I may just have to take my money out and buy me a harley because I sure don't want to pay $5/gallon of gas for my pickup truck. its too expensive.

Garoh · March 11, 2008, 01:33:51 AM

Quote from: buddjas1 on March 10, 2008, 02:42:36 PM
Why do I feel like all stocks are going to be penny stocks soon? This is getting ridiculous.

Yes buddjas1 , people dumping their stocks like crazy

It's a bear market as I mentioned before ..

BigSully1 · March 11, 2008, 09:17:42 AM

08:35 am : S&P futures vs fair value: +20.0. Nasdaq futures vs fair value: +15.8. Futures get a boost to their best levels of the session on news that the Fed announced a new lending tool. The Fed plans to lend up to $200 billion in hopes to improve liquidity. Separately, the January trade balance deficit was $58.2 billion, compared to the prior reading of that saw a deficit of $57.9 billion. Economists expected a deficit of $59.5 billion.

buddjas1 · March 11, 2008, 09:49:51 AM

So the Fed goes from printer of money to bona fide lender? That will end well, I am sure.

I prefer just letting some banks fail; akin to this Bloomberg editorial.

http://www.bloomberg.com/apps/news?pid=newsarchive&sid=avFnuh9oWHVo

BigSully1 · March 11, 2008, 12:56:19 PM

FED: Sleight of Hand?
Submitted by moneysage on Tue, 03/11/2008 - 16:18.
This morning's dramatic presentation of the opening by the FED of a new "front" against the war on credit market "panic" is interesting more for what it demonstrates about the LIMITS of the FED's power than its ostensible display of FED power.

As we understand it -- and it is as yet an imperfect understanding -- the FED will be loaning Treasuries to banks -- both commercial and investment -- and primary bond dealers in exchange for mortgage-backed securities. These loans will amount to a substantial number -- some $200 billion, according to this morning's news reports. The FED reportedly is hoping to restore the willingness of banks to lend, and thereby contain the intensifying credit contraction. According to news account the FED is also seeking to restore confidence to the mortgage-backed markets, where the buying freeze, initially limited to non-Agency mortgage-backeds, has in recent days shown signs of spreading to the ultra-important Fannie and Freddie mortgage-backed bonds.

Now, what are we to make of all this? In the first place, the imperative of containing the credit market panic before it infects the Fannie/Freddie market is crystal clear. If Fannie and Freddie cannot securitize and sell their mortgages, they cannot make any more loans. This will raise the lending freeze to the level of calamity. In the second place, the reality is that no matter how many mortgage-backeds -- Fannie/Freddie and/or non-agency, the FED accepts as collateral, and no matter what percentage of the market value, or presumed market value, of the mortgage-backeds it accepts in exchange for Treasuries, even a "market value" which is entirely fictive -- the balance sheet of the banks is NOT IMPROVED ONE IOTA. After all, the banks still own the mortgage-backeds, not the Treasuries they have "borrowed" from the FED. And the value of the mortgage-backeds MUST continue to decrease as the income stream of mortgage payments upon which the market value of the bonds rests DIMINISHES in consequence of rising defaults and foreclosures. Moreover, any RISE in market rates for long-date, high quality bonds (Treasuries, for example) in consequence of growing inflation hysteria, fed by rising oil prices ($109/bbl. and counting) and other commodity prices -- and fed as well by endless central bank references to, and hence legitimation of, inflationary fears -- translates to a DECLINE IN THE MARKET VALUE OF ALL LONG-DATED BONDS REGARDLESS OF, AND SEPARATE FROM, THEIR DEGREE OF CREDIT RISK.

There is a profound difference between REMOVING the deteriorating mortgage-backed bonds from bank balance sheets and TEMPORARILY SHIFTING THIS JUNK TO THE FED. We have been calling, since August, for a full bore bailout to be accomplished by the government buying, at par, all mortgage-backeds banks wish to sell. (This, we estimate, would be approximately 100% of same). This is A BAILOUT, PLAIN AND SIMPLE. The FED is HOPING to achieve the beneficial results of a bailout without actually conducting same. THIS IS PRECISELY THE TYPE OF WISHFUL THINKING THAT HAS BROUGHT US TO OUR PRESENT PASS. We are skeptical that you can procure a lunch without paying for same.

We would add one further observation. The market, as indicated by the fed funds futures, has been expecting a 75 basis point (bps) cut in the Funds rate, with a growing minority looking for a 100 bps cut. There have also been rumors of an emergency inter-meeting cut, as in January. We would not be surprised if the FED did NOT cut 75bps, but produced only 50 bps. Reason: the bond market, the currency market, and the oil market are WARNING THE FED, and the FED, brave talk to the contrary notwithstanding, takes the point. Consequently, the FED may well have determined that much as a 75 or 100 bp. cut is needed, they are unable to deliver. To soften the negative impact of a rate cut which falls short of market expectations, they are hoping against hope that today's dramatic announcement of new monetary "tools" and programs will take the sting out.

We are doubtful -- although we continue to hope -- that the ominous signs of a forthcoming deflationary avalanche can be confuted. Certainly, without a full bore bailout, requiring full presidential and congressional action, the FED's chances of single-handedly preventing said hypothesized avalanche from occurring are not sufficient to bet the ranch on.

While we say: bravo Bernanke, we must regretfully note that had the FED's Johnny-come-lately efforts been undertaken preemptively some months ago, rather than post-facto, they would have had a vastly higher prospect for success. This is the problem with too little, too late: it requires an ever-more rapid and ever-more drastic ramping up of concessions to accomplish -- or ATTEMPT to accomplish -- that which could have been done more effectively with much less effort earlier on. This is the ultimate price we pay for a Federal Reserve which, under Bernanke's chairmanship, has based policy upon DATA (ie., statistics reporting on PAST economic behavior) rather than basing policy on the forward-looking leading indicators. As one regional bank president noted at the inception of the sub-prime crisis, he never looks at the incoming data because it is useless in forecasting the future: he looks at the leading indicators, and properly so. Unfortunately, Dr. Bernanke chose to accept the premise that it was necessary to base FED policy upon necessarily LAGGING DATA. Thus, the Bernanke FED began with 2 dangerous rate hikes, on top of the 15 which had preceded it, even as the leading indicators -- the yield curve and the bond market -- were sending unmistakable warning signals. Now we reap the harvest of this misguided monetary policymaking.

3SOF

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