Bad News Is Good News.

Headline news from AP; “Dow up for a fourth day, turns positive for 2011”. But what changed from the beginning of August? Have we solved all the structural problems or have the sovereign debt crisis in Europe been solved? Or for that matter, have the capital adequacy requirements of the European banks been met? Nothing of that sort has happened and yet we have a mini bull run.

This Bull Run is based on few things:

•             Month end window dressing.

•             Hope that QE3 is coming.

•             Hope that Obama Administration will socialize the mortgage and housing mess and thus the insolvent banks will be saved.

•             Hope that some sort of stimulus package will be worked out.

•             The economic indicators and news are so bad that actually it is good news for the Banksters because it means more free money.

Any one of these hopes can materialize and the market can continue to go up to new heights but the timing does not seem right. If the market continues to go up, then the Fed will not inject liquidity. For that to happen, TPTB (The Powers That Be) have to create panic. So my wild guess is that we will see renewed volatility again and most likely the lows of August will be revisited or broken. Without that panic, they are not going to get more free money.

Hope is not a good investment strategy. Tomorrow being the 1st of the month, there will be lots of new fund allocation and possibly the last day of the prices going up till October. The sentiments have become overtly bullish and the put call ratio has reached a new high which is flashing red light. The COTS report is indicating that it is time to get back in cash. And possibly Gold will make a run for new high before the correction.

Overbought Markets, confusing signals and Keynesian stupidity

First the Keynesian Stupidity.

Is there any provision to take back the Nobel prize?
The governments of the world thought that they can stop all recessions just by pumping in more money, printed out of thin air. Bubbles replace bubbles and pop ups are messier.

The stock markets continue to go up and Gold jumped more than $ 30 just by the whisper of QE3 in the minutes of the Fed meeting. The markets are overbought and corrections, even if limited, is due any time. May be tomorrow.  There is no clear trend, just HFT confusion.

In that confusion, NASI gave a buy signal.

How much to act on this signal is big question. In the past, this signal has been quite good. So again, no clear trend. I am expecting Euro to continue moving up, after a brief spell of weakness. If that happens, we might see the general stock market also move up.

But move up or down, it is a market for day traders. Investors better stay away.

P.S.: A very nice short clip from BBC; http://www.bbc.co.uk/news/business-14678859

Pavlov Rang the Bell

Excerpt from Stock World Weekly

Last week we wrote in To QE3 or Not to QE3, “The biggest hope for the markets may be another round of quantitative easing. Investors and traders have been carefully listening to the words of Fed officials, looking for clues of an impending announcement for QE3. Such a move might be bullish for the markets, at least in the short term.” On Friday, Ben Bernanke gave his much anticipated speech in Jackson Hole, Wyoming. He expressed mild optimism for the U.S. economy and did not explicitly announce a third round of quantitative easing. 

Bernanke acknowledged that while the housing market is bad, and the current rate of unemployment is unacceptably bad, the economy is not in terrible shape and can grow normally again. However, the U.S. government and European governments are going to need to get actively involved. For as Bernanke put it, “most of the economic policies that support robust economic growth in the long run are outside the province of the central bank.” 

Taking Congress to task for the game of chicken they played with the debt ceiling, Bernanke declared, “The country would be well served by a better process for making fiscal decisions. The negotiations that took place over the summer disrupted financial markets and probably the economy as well, and similar events in the future could, over time, seriously jeopardize the willingness of investors around the world to hold U.S. financial assets or to make direct investments in job-creating U.S. businesses.” Paul Dales, senior U.S. economist at Capital Economics commented, “[Bernanke] appears to be saying that the Fed has largely played its part and that the politicians need to step up their game.”

The market initially sold off, but soon recovered as people realized that more easing is likely on the way.

While Bernanke didn’t promise to announce QE3 at the September Fed policy meeting, he dropped enough hints to make the markets respond as if he had done so. The response of the market makes sense from the perspective of Pavlovian conditioning. First you ring the bell, then you give the food. After some repetition, all you have to do is ring the bell to make the subject salivate in anticipation of the food. While Bernanke may not have served the QE3 food to the hungry markets, he did “ring the bell” by dropping broad hints about how the Fed is “prepared to employ its tools as appropriate to promote a stronger economic recovery in a context of price stability.”

So Bernanke laid the groundwork for justifying more easing at the Fed’s September policy meeting. That meeting had originally been scheduled for one day, but was expanded to two days so members could enjoy a “fuller discussion” of their options. St. Louis Fed President James Bullard pointed out that adding a second day to the September meeting would allow more time to review easing options. “If the economy is weaker and the inflation picture moderates, we could consider more action. The call is much more difficult this year than last year. We have a much different inflation situation than last year.” 

Bernanke was probably telegraphing to the market that some form of QE3 would be announced in September. As Bruce Krasting surmised, “This is a heads up to the insiders that more monetary gas is in the works. The stock market’s first reaction to today’s nonevent was to sell off hard. But after the word got around that this was just a delay (and a short one at that) stocks caught a bid. Basically, the plan by Bernanke to leak his intentions worked..." (My read on the speech) 

Commenting on the media’s response to Bernanke’s speech, Phil wrote, “What more can the guy say – they WILL do what they can – we DO have problems that the Fed is able to address. They think inflation is under control, but unemployment is too high and liquidity needs to be improved. How can someone read this and not conclude QE3 is coming?...CNBC has stopped saying no QE3 and is now saying that Bernanke has ‘kicked the stimulus can into September.’ I guess enough people finally pointed out to them how ridiculous they sounded saying that there was no QE3 in that speech.” 

Bruce Krasting made the point he felt obligated to repeat - and we agree:  "I flat out hate that this Fed is conducting monetary policy through leaks, a wink and a nod and innuendo.

“It feels like we should just put up a tent, because a three-ring circus is what we are getting nonstop. And Bernanke is the strong man in the middle ring.” (My read on the speech) 

As reported by Zero Hedge, Jeff Snider of Atlantic Capital Management wrote, “His statement spoke volumes without saying anything. Yes, he disappointed the hardcore debasement enthusiasts called stock investors, but only at first. In between the lines of what he did say, it was crystal clear: Chairman Bernanke wants to do more QE. ‘Want’ is not really the right word because it doesn’t really go far enough into Bernanke’s canon. I think it is abundantly clear he believes the Fed needs to do it as soon as operationally possible... 

“He said QE 3.0, without really saying it.  The markets, seeing the enlarged schedule for the September meeting and interpreting the likelihood of heavy discussions, have gotten the message. Stocks threw off the daily mortal struggle that is life as Bank of America and bid for the QE future that is now September (good riddance to August apparently). Gold prices followed on those expectations of a resumption to the willful and wanton dollar destruction that QE purely represents.

“If the Chairman can influence a major market rally without ever having to face the growing dissent within the FOMC ranks, then his speech has proven to be a stroke of genius.  That is the essence of rational expectations, making others believe you have magical powers so that they do your bidding without any actual work or direct engagement on your part.”  (Bernanke In A Box)

Not everyone expects QE3 to be delivered at the September meeting. According to Diane Swonk, chief economist at Mesirow Financial Inc. in Chicago, “The move to a two-day meeting means [Bernanke] will work to build consensus. They will end up with QE3, but probably not in September. They will edge closer to it in the September statement.” (Bernanke May Seek Consensus on Easing)

Regardless of what eventually happens in September, expectations for more easing have now been established. The markets may now rise in Pavlovian anticipation of more free money from the Fed (or fall less than it may have otherwise). 

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The Next Twelve Months.

As the days of summer draw to a close, we are filled again with uncertainty about the future. The scares of 2008 have not been erased from the minds of the investors and we are constantly looking over our shoulder to watch out for the double dip recession. But 2011 is not 2008. The central bankers have learned their lesson or so you would think. Perhaps they are better prepared in terms of addressing the crisis, but they still do not understand how to solve the crisis on a permanent basis. Much of the crises of 2011 are actually fiscal crisis and credit crisis. To solve a fiscal crisis with a monetary tool is not only ineffective, but a complete waste.

The threats facing the world economy today are ironically the things which were responsible for the progress for much of last 40 years. The globalization of trade and interdependent nature of the economies. The Keynesian theory of growth followed by the world governments, which depend on debt to deliver prosperity. The desire of the politicians to hang on to power by providing or promising to provide everything to everyone. And of course, the growing power and greed of the “Bankers” to manipulate the political class and engage in excessive speculation.

In the USA, from the period of dot com bust, till date, the political class and their henchmen in the Fed, have created bubble after bubble by borrowing and injecting liquidity in the system. There was no job growth, no real income growth, only an illusion of prosperity, created by simply inflating asset prices. Stock markets went up and up, house prices went higher forever, fooling the mass that they are far wealthier and they need not save or produce anything. Only one country in the western world has bucked this trend. That country is Germany. But there also they were fooled by megalomaniac politicians, notable among them Mr. Helmut Kohl. Helmut Kohl, a post world war 2 politician, who grew up in the guilt of wars, wanted to become a world statesman and thus pushed for the creation of a unified Europe and Euro. While Euro has helped German export machinery to a great extent, it has also tied Germany to other profligate countries in Europe and its periphery that do not have the fiscal or work ethics of Germany.

So in 2011, we are faced with two headwinds not one. The economic powerhouse of the USA is slowly turning to recession again and Sovereign defaults in Europe is a real possibility and banking crisis in those “soon to default” countries is going to explode sooner than expected.

For all the news of BIRC countries who will take us to economic salvation, these countries cannot even save themselves, let alone the world. China and India are just other developing countries, who will soon turn to emergency market from emerging market, when the markets in the USA and Europe dries up and protective barriers start to come up. Make no mistake, politicians will install protectionism to appease their vote bank and the globalization that we know will be a thing of the past. When the unemployment rate hits past 10%, who do you think the politicians will blame for the loss of jobs? They won’t take any blame themselves. They will sure find scapegoats and the easy ones that too.

Anyway, let’s just look at the real GDP figures of USA.

The 1^st revision of the 2^nd Quarter GDP figure stands at barely 1%. So year on year we are below 1.5% and the 3^rd quarter is not going to be pretty either.  Normally, consumers get the feel of economy better and earlier than the sale-side economists in the big banks. So the following chart says.

The GDP and Consumer sentiment have mostly walked together. So what can we expect here? GDP following the sentiment or sentiment climbing up?

And then we have glorious politics. The presidential election of the USA in 2012. With the bitter partisan divide that we have seen so far, the slash and burn method employed by the Republicans, and their pledge to make Obama one term president, we can be sure that they will do anything to turn the voters away from the incumbent president. What better way than to sabotage the economy.  Historically, the 3^rd year of the presidential cycle is the best in terms of stock market returns and the 4^th year is the worst.  You can read it here; http://alphaim.net/research/Pres_Cycle/index.html

When we combine all these three, we can be almost certain that a recession is in the cards by 2012. Stocks typically go down 40% or more in a recession, but this one is going to be a depression, not just our garden variety recession. In addition to the negative economic growth in the USA, we are going to have sovereign default in Europe and possibly a banking collapse there as well.(More on that,later)  All these toxic combinations will lead to massive balance sheet contraction and we are looking at an uncharted territory 12 months down the line. In short-term, I think we might still re-test the lows of August or might even go below it, before the Fed is forced to tip its hand with more liquidity. If that happens, it will consistent with the script of 3^rd year cycle and also the fact that when January of a 3^rd year of a presidential cycle has been positive, 90% of the time, the stock markets in that year have ended in positive territory as well.  

That is another reason, I am not expecting the bottom to fall off yet, but we are not far from the cliff either.

If you like this macro economic analysis, invite your friends to read it and follow me on twitter. bbfinanceblog

Au Revoir Mr. Jobs.

Today’s headline stories are:

·         Steve Jobs Steps down and

·         Gold and silver starts correction.

For the first news, I do not have many comments except wishing Steve Jobs good luck and good health. He has singlehandedly turned around Apple and made the company what it is today. Many things can be said about Apple but no one can deny the fact that it is the most valuable company in USA just by market capitalization alone.  We need to wait and see how it will affect the stock price tomorrow. But nothing or nobody goes on forever. So “ Au Revoir” Mr. Jobs. Well done Sir.

The second news was about the sharp decline in Gold and other precious metals.  

From ETF Digest; the sharp decline in the price of gold was “the result of the Shanghai Gold Exchange raising margin’s the second time this month Tuesday late, the impending options expiration on the COMEX Thursday which generally leads to chaos, a much overbought market and, let’s face it, Bernanke doesn’t want continually rising gold prices to embarrass him Friday. (BREAKING NEWS: After the close the CME raised gold margins by 27%! This must have been leaked to other exchange members. Options traders at the COMEX will feast on this and this is another reason markets are broken and corrupt.)”

I am borrowing another chart from the master chartist Chris Kimble regarding gold;

Please continue reading here:

http://bbfinance.org/1/post/2011/08/au-revior-mr-jobs.html

Have Markets Reached Bottom?

Nothing happens in small measures in stock markets anymore these days. Either DOW goes down 400 points or it goes up 400 points. The question that is in everyone’s mind; “ do we have a tradable bottom”? Let us read on to find out.

Given the fact that HFTs and ALGOs rule the market, in short term the markets are ruled by irrationality not economic fundamentals. I would like to draw your attention again to the Russle chart I showed few days ago. Does it look similar? If it does look similar, that is because we are in a similar situation.

Please continue reading here;

http://bbfinance.org/1/post/2011/08/have-markets-reached-bottom.html

Goldman and BRIC Theory Bull*hit.

Among many jitters in the stock market, today it was hammered hard by the news from GS that the vampire squid has hired a high profile Washington based lawyer to defend its chairman from the possible perjury charges for lying to Congress. I am not sure if we should laugh or cry. After all, it may be all noise without any meaningful action. But we can be assured that lots of backroom posturing is going on and there will be more market volatility. The stock markets today are a giant casino run by the Banksters.  They always win.

Market’s hope is being built on coming QE3 expectation but I think the market will have huge 

disappointments there. I do not think the Fed is going to come out with any additional bond buying program now. But if we step back a while from the five minute chart and daily churning and look at the big picture, we can be sure that central banks of the world have almost run out of bullets to inflate the bubble.

Please continue reading here:

http://bbfinance.org/1/post/2011/08/goldman-and-bric-theory-bullhit.html

Recession or Depression?

It is now almost given that we are going to have economic downturn. Except the Fed and Obama Administration, everyone is pretty much sure that we are going to get a double dip. For people on the main st. we never left recession in 2008 in the 1st place.

Question is, are we going to be in recession or in a worldwide depression?

From Wikipedia; “In economics, a recession is a business cycle contraction, a general slowdown in economic activity. During recessions, many macroeconomic indicators vary in a similar way. Production, as measured by gross domestic product (GDP), employment, investment spending, capacity utilization, household incomes, business profits, and inflation all fall, while bankruptcies and the unemployment rate rise.

Recessions generally occur when there is a widespread drop in spending, often following an adverse supply shock or the bursting of an economic bubble. Governments usually respond to recessions by adopting expansionary macroeconomic policies, such as increasing money supply, increasing government spending and decreasing taxation.”

So what we have here?  We all know that GDP growth is below 2% in USA and almost 0 in most parts of Europe. In Japan it is negative. Only growth we still see is in the fantasy land of China and in some developing countries like India and Brazil. But we should be fools to believe anything coming out of China at face value. Before we go any further, let us understand what is GDP. It is C+I+G+Net Export. C is the consumer spending. I is investment by industries. G is spending by government and Net export is difference between export and import.  We also know that there has been no growth in real wages for the last 10 years. Consumers have been spending by borrowing, using home equity or some other form of bubbles created by the Fed. That ATM has now been turned off. Industries are sitting on piles of cash and not investing because they do not see any increase in sales in future.  Net export is negative in USA and in most European countries. We are helping the Chinese to come out of the swamp by purchasing all the junk from them and creating jobs there. In return they are now able to give lectures to America how it should live within its means.

Please continue reading here; 
http://bbfinance.org/1/post/2011/08/recession-or-depression.html

No Help For Small Business

Let me indulge in some shameless self-promotion. Our new look business web site is now ready. So henceforth all market blogs will be written and posted in the blog of our company website; http://bbfinance.org/

We are basically small business consultants and one of our major operations is offering off-site accounting and bookkeeping function to small businesses. We offer to save up to 50% of the current cost in accounting and bookkeeping function. Just think, even if a small business owner saves $ 10,000 in cost, s/he would have to generate sales of over $ 100,000 to generate that much profit otherwise. It is the small business which makes America tick. People are surprised to know that US Economy is by no means dominated by big business. Yet the big business gets most of the tax cuts and favorable policies, simply because they have the money to lobby to the politicians.

These small business account for almost 60% of the workforce and yet the government makes the life of the small businessmen/women difficult with innumerable rules, requirements and bureaucratic hoops. The financing to small business is always a problem and there are times when we have seen small business owners pawn their personal assets to make the payroll. If these people survive, America will survive. 

Continue reading here;

http://bbfinance.org/blog.html

Market Analysis and Outlook, August 17th.

Yesterday was an extremely busy day for me. We are giving a new look to our official web site and it took all my time.

Coming back to the market, it does not look good at all. The market opened strong but closed weak.

There is huge resistance around 1200 level in SPX. May be people are selling the rally. I think it is time to get back in cash by Friday, which is the OPEX. Historically August expiration has been bullish lately, DOW up seven times in a row. But I think the upward momentum is losing steam and the lows will be retested.

The Franco-German joint statement was possibly the 1^st indication that France will save its skin when push comes to shove. Their joint statement made some demands regarding fiscal stability and sovereign policy, which only few in Europe can match. There is no mention of Euro-Bonds. The irony is that Germany fought two world wars to win over what is Europe. Now they effectively control the rest of Europe and they did not have to fire a single bullet.

My favourite chartist  Chris Kimble has this chart to share.

The similarities between 2008 and 2011 are eerily similar. But the market has to churn in that grey rectangle area few times, before it can roll over. I do not see any chance of the indexes going up without any further stimulus from the FED. That seems highly unlikely today, unless the market tanks a good bit and all the highly popular (13%, no less) leaders in Washington lose half the value of their portfolio. Then there will be a bipartisan call for action and we shall see happy days again, even if for a short while.

Market Analysis, 15th August.

The price action of the market makes news. This was evident today. The economic data was bad and normally when the Empire manufacturing index is negative for three consecutive months it signifies recession.

But bad news is good news for the super computers that control the markets. Markets are up three days in a row on decreasing volume. That is quite understandable. After the panic, retail investors do not have the stomach yet to go long. If anything they are selling into the rally. That is the whole idea of the panic. Buy cheap and then sell high. Very soon, 200 DMA will be overcome and once again greed will overtake fear. Wash, rinse and repeat.

If 2008 was memorable for bank failures and credit crisis, 2011 / 2012 will be remembered for sovereign debt crisis and of course bank failures. This time the bank failure will come from Europe. French banks are particularly vulnerable. It seems banks like Society Generale has a leverage of 50:1. How long before it blows up? The trouble was evident last week but France banned short sale of bank shares for 15 days. So the problem has been hushed up for now.

So the market rally today because TPTB (The Power That Be) wanted it to go up. Today was a major accumulation day. So we can expect a red day tomorrow or a very small green. But the rebound is not over yet. I expect the SPX to rebound between 1250 -1300. 61.8 % of Fibo. Retracement is 1270 and 200 DMA is 1280.

If you believe Elliot wave mumbo jumbo, then we are in wave 4 up and it should be followed by wave 5 , testing the lows. Most likely reason, Banksters will create panic for QE3.  

I think we shall see more disturbances by the end of the month or even before and markets will retest lows.  

The Coming Hard Landing of China.

China is a success story told many times over. It’s economic miracle has been the stuff of folklore. There are investors out there who think that China will keep growing forever. The commodity speculators love China. Be it oil price or copper, any spike in price in any commodity is attributed to the insatiable demand from China. But behind the obvious, there is another story. For those who are willing to question the fairy tale story, it is time to short China.

Let us start by looking at the socio-economic model of China. The communist party of China has ruled the country with iron hand for over from 1949. The political elite of China want to avoid any social unrest and upheaval at any cost. They have an unenviable task.  They have to provide enough work, food and shelter to the millions of ordinary Chinese. Being a command economy means there is no free market. The local purchasing power is insignificant compared to the western world. In order to create work and alleviate poverty, the leadership decided to take the route of growth by export.

Today China is the manufacturing powerhouse of the world and the single biggest factor in the growth has been low labour cost. Companies from all over the world shifted their production base to China to take advantage of the cheap labour. With the result, western civilization lost jobs. But most of the wages that a Chinese worker gets is at a level that is just sufficient for survival. Millions of rural poor migrate to bigger coastal cities in search of work and live in deplorable conditions. The worst part of the deal is that the companies that produce goods for the world do so at a very low level of margin, average 4% to remain competitive. And now every country is trying to grow out of poverty through export. Irony is, not every country can be net exporter, and someone has to be net importer as well. And consumers in western civilization do not have the capacity anymore.

China imports all the raw materials from other countries, iron ore from Australia, energy from Middle East, and machinery from Germany and produce goods to export. When the world demand for the cheap Chinese goods plummet, as it will with the slowdown of the global economy, what will happen to the export oriented growth model?

After 2008, China decided to kick start its economy through construction. And they found it is the easiest way to keep people employed while projecting a growth of GDP. But creating assets which does not give income does not actually create sustainable growth. When, not if, the world economy slows down in the coming months and years, the available capital to continue such useless construction projects will come to a halt. Already millions of homes and cities are lying vacant across China. As if the sub-prime housing crisis is being played all over again in China, but in a much greater scale.

Over the last 40 years, there has been a growing middle class in China who are well educated and are demanding. Since the currency is pegged to US dollar, the QE in the USA is exporting inflation to China in the form of higher food cost. And unlike in America, food cost constitutes over 40% of the average household expenditure in China. So inflation is rising in China and China is now battling hard to control the price rise. This is causing huge social unrest and the Communist Party is uneasy about it. As a result, we are seeing a slow rise in the value of Chinese Yuan vis-à-vis US$. But this cuts both ways. While a rising Yuan will help reduce the cost of imported foods, it will reduce the profit margin of the exports and make them uncompetitive. More so in today’s weak demand situation where the exporters do not have the leverage of negotiating higher prices.

There are talks about the huge Chinese holding of US debt and the threat they possess to US Economy. Actually it is the other way round. China has no option but to invest in US treasury and if they don’t, they would not be able to keep their currency down and be totally uncompetitive. If they want to sell the massive holding of the US Treasury bonds, they would push the prices down and lose money.  So again, China is caught in a no win situation there. With the money fleeing Europe, there is no shortage of demand of US Treasury, at least for now. So US do not need China, as much as China needs US.

The demographics are another factor to be worried about China. With one child policy strictly followed by the party for so long, the average age of the population is growing and the country is graying. Moreover, because Chinese parents prefer boys to girls, there have been systemic abortions of girl featus on a large scale for a very long period of time. With the result, the ratio of man and woman has been totally skewed. In some places there is one woman for every two men and poor migrant workers cannot get wife for the love of their life.

Central command always fails. The asset allocation in central command economy is not based on efficient use but what the party leaders think best. And few people cannot decide what is best for millions. Corruption is rampant and so are the red gift bags. Even the death penalty does not deter the local authorities much. The end result is something other than desired.

The bubble is about to burst along with the global debt deleveraging and the popping  sound will be heard loud, far and wide for many years to come.

Volatile Markets.

Continuing on my theme of yesterday, the basic question we should ask is; who is/are controlling the stock markets?  For answer just look at the price movement of DOW this week;

Monday, August 8, 2011 = -635

Tuesday, August 9, 2011 = +430

Wednesday, August 10, 2011 = -520

Thursday, August 11, 2011 = +423

Friday, August 12, 2011 = + 125

Net effect                       = -177

Never before we have seen such wild swings and it can only be attributed to HFT and Algo trading by the big black box traders. The same too big to fail banks which now control the Wall St.

The same old “too big to fail banks” who are in bad shape again. GS, down from $ 175 to $ 116. City, down from $ 51 to $ 29, Bank of America, down from $ 15 to $ 7, JPM, down from $ 48 to $ 36. The situation is same with the European banks.  The 2008 crisis was started by these big banks and it is only after 2 trillion dollar liquidity injection, they survived and got back their swagger.  Bonuses and six figure salaries continued based on speculation. But underneath, the assets in the books continue to lose value. Mortgage loses and legal claims from fraudulent COD and MBS keep mounting. Income from trading operations continues to shrink because retail investors flee the market. Traditional loans to Main St. are not growing and so the traditional banking incomes are not growing either. Only thing that is still keeping them alive are the free money from the Fed and the speculation that they do with the free money.

Now that Fed has stopped the flow of free money, these too big to fail banks are feeling the pain. So they are creating the volatility and panic. I think they will force another round of QE and they do not want the retail investors to be around when the QE 3 comes.

Only fly in the ointment of that plan is that money is fleeing Europe. That is where the fire has started already. All these money fleeing Europe has to find a parking place and so far they have gone to the bonds, pushing the 10 year rate to historic low. But in the next two weeks, some of that money will flow through to equity as well, pushing the stock market higher.

The boyz know that public memory is short and in two weeks we will forget this panic and talk about new highs. I think that is when they will strike again. They will not stop unless the Fed comes out with QE3 and when that happens, they don’t want Main St to be there.

 Have a wonderful weekend folks.
PS. Now MSM has picked up the theme. Here is one from CNN.
http://money.cnn.com/2011/08/12/markets/high_frequency_trading/index.htm?source=cnn_bin&hpt=hp_bn3

Bipolar, Manic Depressive Stock Markets.

Last night before heading off to sleep, I checked the futures and it was up 2%. In morning before trading started futures were down 1%. At the end, the stock markets closed the day about 5% high. What changed from yesterday or day before? What is this manic depressive stock market doing? How the retail investors are supposed to trade in this market. And the headlines that follow each rally or sell-off are adding to confusion. Just read note that said "risk appetite gained because... US Jobless Claims came in 5k below forecasts." Anyone really believe that?   And only people who are in control are HFTs and Algos.

Yesterday I wrote about an interesting statistics. “In the 3^rd year of presidential cycle, when the 1^st week of January and the whole month of January is positive, history shows that probabilities are 90% that the year will end in positive territory. “ So there is a chance (9 out of 10 times) that the year will end in a new high. But that can happen only when there is more liquidity pumping from the Fed. Even after this 15% sell-off, the Fed, in its last meeting did not come out with any new QE3. May be it was too early after the just concluded QE2. So what is next? I think the Banksters may rally the market for a while, and then we see another round of massive sell-off which will force the Fed with another round of free money. Makes kinda sense.

The market cannot survive on its own. The structural problems which led to the financial crisis in 2008 are all there, only they are worse. The assets values in the books of the banks are less than they were in 2008.There is no job growth, no income growth, consumers are stretched thin. Only thing that has grown is debt. It has grown not only in USA but all over the western world and the law of diminishing return has set in. It cannot sustain any further.  If you notice, each round of monetary injection is giving less and less result. We have already gone back to the level of pre QE2. The interest rate cannot go down any further. And Bond market is saying that depression is here. There are no “Growth” folks. At one end of the spectrum we have power hungry greedy manipulative Banksters and uber rich who want more and more. On the other side we have welfare addicted free loaders who could not care less about job and prosperity so long their daily quota gets filled by government dole. The subprime mortgage problem started with Bankers knowingly giving loan to people who could never pay back and people taking the loan knowing well that they would never pay back.  Who is to be blamed for the mess we find ourselves in? The society as a whole is sick with speculation and getting rich quickly. And what we see today in the stock market is just a manifestation of this sick society. Stock market do not reflect economy nor it is an instrument of growth of capital.

Where does all these ranting and raving lead us anyway? It all boils down to the matter of debt. The world governments have over $ 40 trillion in recorded debt and 10 times that much in unrecorded debt. Just ask Goldman how governments of the world hide their debt. Do the governments of the world have enough money to save all the broken banks and keep them on life support for ever? At least Japan has done it for over 3 decades. But at what price? Today the Japan’s debt is 200% of its GDP and the Nikkei 225 now stands at less than 9000, far from its lofty high of 38000. And Japan is in depression for last 3 decades. Magnify this to USA and Europe and only thing that you can expect is deep decade long depression and DOW somewhere between 2000-4000.

Short term, I expect to see some tradable bottom and Indexes may well attempt 50DMA or above by end of the month. May be the stock markets will end the year at a higher high but it does not matter unless you are a day trader or speculator. For average retail investors, it is time to be careful. 

   

SPX 400 Anyone?

The Fed did not come up with more free money, yet. So where do we go from here?

I strongly believe that what we are seeing is the beginning of the end of debt super- cycle. All the prosperity and growth of the last 40 years are largely based on massive debt which resulted in speculation and hubris.

The question going forward is whether we will have inflation or deflation.  My thinking is more towards deflation. But Governments of the world are trying their best to pump in more money. And it is a losing battle all the way.  Oil has already in 80s and other commodities are on the way down. All the money printing has only resulted in increase in the price of foods all over the world. People in developing world are finding it more difficult to put food on the table and that is causing a great social unrest.

Closer to home, London is burning. One of the reasons of the riot is social disconnect by a large part of the unemployed youth. The unemployment rate among the youth of colour is over 25%. How long before that social unrest reaches our shore?

Will the emerging markets save the world? I doubt it. China and its economy is a mirage and I will be writing a detailed report on the coming hard landing of China. India and Brazil would be happy to survive and keep its own population fed. India, at least is not an export dependent country and so the effect of the coming world crisis will be less on India, as we saw in 2008. The emerging markets will soon become emergency market.

The gyration of the stock market from May onward is a process of forming a top. I was hoping that we will see a new high before we plunge, but I was wrong. Now I think we should be lucky even if we get back to 1300-1350 level in SPX. Unless we have a definitive QE3, there is no way the share markets are going to hold up.

One piece of interesting statistics. In the 3^rd year of presidential cycle, when the 1^st week of January and the whole month of January is positive, history shows that probabilities are 90% that the year will end in positive territory.  The only way I see that happening is if we sell of hard between September and October and Fed ultimately comes out with QE3 to inflate the asset prices.

Price actions of the last 3 days show that the market is taking a breather. The force of selling has reduced somewhat. It can either break down from here and go to 1000 or shoot up. Rest of August is going to be interesting.  But 2012 will definitely be the worst to come. Stock market historian and CLSA consultant Russell Napier says that S&P will go to 400. Watch the video. Sobering thoughts indeed.

http://video.ft.com/v/946244201001/Long-View-Historian-sees-S-P-fall-to-400

Time To Down-Grade S&P?

The downgrade of USA by S&P was more of a political statement and the timing could not have been worse.

Here is a rating agency, which along with other rating agencies has caused the financial crisis in the 1^st place by giving triple A rating to all the CODs and MBS during 2002-2007 and then come out and downgrade a sovereign nation even when there has been no actual default. What were they smoking?

In fact rating agencies have no business of rating countries. Market does a better job of that. How long it took the rating agencies to downgrade Greece in the 1^st place?

It is given that the debt situation in USA is grave and only way America can pay its debt is by printing more dollars. But in a deflationary environment, where values of assets are and will get destroyed, printing more money is not yet a cause for alarm. Inflation is still not a major issue in USA. 

ECB has already started making noise about stripping the power of the rating agencies.  The bond market actually did opposite of what S&P said. And now US Senate is contemplating to start an investigation in the conduct of S&P.

I think S&P can expect a serious and powerful backlash from the world Governments in the coming days and months. They can expect multiple cases filed against them on various charges.  Politicians on both sides are gunning for them.

Coming back to the market, it was a grand show of circus aimed to scare the hell out of investors. But 2011 is not 2008 and the world Governments will react more quickly and with more liquidity every time there is a sell-off. Can they continue to prop up the markets forever?  We are back to the point where we were before the start of QE 2. The next sell off will be far more severe and deep.

Let us now see how far the rally goes and if it fails to make a new high, then we can be sure that a new bear market has indeed started.  We need to watch the market action for the next few days to get a feel of the direction. 

Till then, be safe out there.

Sink or Swim Tuesday.

Nothing much to say today. After the bloodbath, the market is taking a pause.
I would still quote from my weekend's post:
 "Over here, [Federal Reserve Chairman] Ben Bernanke stopped QE2 and has convinced people that he has their back. Now, they've got a gun to his head and the markets are saying 'give us more QE3 or we'll melt the markets down by Wednesday. The markets are going to force the politicians to deal with these problems... we have to admit these things and solve these things." From Dylan Ratigan of MSNBC.


So all eyes are on Ben today. 
How the Governments of the world come up with their plan to save the capital market remains to be seen.
If Fed comes with weak lip service, more selling ahead. If they come out swinging, we shall see a rally and the inevitable is postponed for some more time.

The Circus Starts Next Week.

Who are our real masters?

I think there are 1200-1300 of them all over the world and their names can be found here. ( http://www.forbes.com/wealth/billionaires  )

They and the businesses they control are the true masters of the universe. Every politician in every country is at their service. Why do you think the members of Congress are exempt from the insider trading laws? Is it because of the special relationship the politicians have with these masters? If we could follow the portfolio of the US Congressmen/women we would retire rich.

Given the above, how do you think the politicians will react to the current crisis? Bear in mind, this crisis is just the continuation of the crisis of 2008 which never went away. Here, we have a president who came to power on the promise of change and changed nothing. He has a war chest of $80 million for the coming election and most of this money came from Wall St. On the other side we have Tea Partiers who have been brainwashed to protect the interest of the rich by refusing to tax them and we also have union freeloaders who suck the system dry.

In a normal world, economy should drive the stock market. But 30 years of bull market have changed the character of the country. Now it is the stock market which drives the economy and the economic policies. Remember during the debt debate, both the Democratic president and Republican speaker would invoke the stock market for speedy resolution.  All the actions for solving the crisis of 2008 have been centered on saving the stock market, Wall St. and “Too Big to Fail Banks”. That is where the masters of the universe keep their wealth. Uncle Ben created QE1, QE light and QE2 just to restore the wealth of the masters which eroded during the 2008 banking crisis. And you thought he wanted to create employment! Silly you.

So now we see that the politicians and central bankers of the world are holding emergency meeting over the week-end to solve the looming crisis. And they will do the only thing they know. Pump in more liquidity in the system.  They mistake this credit crisis as liquidity crisis. But when one continue with the same mistake for three years, it is not a mistake any more.  It is a way of life for them.

Do whatever they may; the response to these emergency measures is getting smaller and weaker. Like in Japan, where debt is 200% of its GDP, the debts of America and Europe have socialized the losses and created Zombie banks. And at some point all the kings’ men won’t be able to put “humpty dumpty”  back together again.

As I said on 4^th of August, the politicians will not give up without a fight. So we see the fight started. Between Fed and ECB they will introduce some sort of liquidity measures, which will keep the money flowing in the stock market. Short term, we might see a vicious rally. Let me again show you the  SPX weekly chart. 

Like in 2008, SPX made the first touch of the 80DMA on the weekly chart. So the next move should be upward and possibly a new high. Sounds ridiculous today, but it is a possibility.  I do not think a bear market will start on such high negative sentiments. There has to be euphoria before the plunge.  A speculative market top is formed when everyone who can be sucked in has been sucked in. And it is a stock market driven by speculation not by fundamentals.

The debt deleveraging has started and it is going to be a long process.  Rest assured that the bear market is also going to be long and vicious. I do not think it will be one straight line down. It will be more of Chinese torture, 30% down followed by a 20% rally, untill such time all the excess has been cleansed out of the system. The central bankers will fight back hard and when everything fails the politicians will create war to divert attention from their failure. That has been the history of mankind and there is no reason to think that it will be otherwise now. The military industrial complex is there for a reason.

The next three weeks are going to be interesting to say the least. Last week’s sell-off was a complete insider job in a completely rigged market because they knew about the coming downgrade. If my thinking is correct and a deal between FED and ECB and world politicians are done over the weekend, we will see dollar weakening and stocks rallying. Gold will reach new heights. That will be an opportunity to go short 200 %.

How Rigged Is the System.

We know that the stock market is rigged. We know that only thing that drives the stock market is greed. And now that S&P has downgraded the credit rating, explains why the market has been selling off for the whole week.

After the debt deal was done, it was natural to have a relief rally. But they knew that a possible downgrade is coming. And by mid-week they were 100% sure. And that is why the market sold off even in the absence of a trigger. People have been scratching their head and wondering why the sell-off when there is no actual bank or sovereign failure. And now we know.

Even today, after the NFP numbers, the market opened higher and within 5 minutes the market was in negative territory.  Then something happened and the market reversed course.

So what is the deal now? Have they been promised QE 3? We do not know and we are wondering if recession is upon us and that is why the market is selling off.

From Politico:" Rumors of a downgrade filtered through a volatile stock market, causing the Dow Jones Industrial average to swing by 416 points as it teetered between losses and gains to close the day up slightly by 0.54 percent."

And here we are trying to beat them and make money in the stock market? How naïve we are!

This Week's Market Tantrum.

Today's market action can be summed up as; WTAF

The best quote of the week; "Over here, [Federal Reserve Chairman] Ben Bernanke stopped QE2 and has convinced people that he has their back. Now, they've got a gun to his head and the markets are saying 'give us more QE3 or we'll melt the markets down by Wednesday. The markets are going to force the politicians to deal with these problems... we have to admit these things and solve these things." From Dylan Ratigan of MSNBC.

Yesterday I said;” The plunge protection team in FED and all Governments in all countries would not give up so easily after spending trillions.”. And sure enough we had calls from all the world governments for action.

“ China and Japan called for coordinated action to avert a new worldwide crisis sourced to Europe and the United States, as did European Economic and Monetary Affairs Commissioner Olli Rehn.” Bunga bunga Berlusconi had a tele-conference with Angela Merkel and our great Timmy. … Late in the day, the White House said President Barack Obama had spoken separately with Merkel and French president Nicolas Sarkozy about the eurozone crisis but offered no details of their discussions.(Reuters)

By the way, The Economist ran a special report on BB Berlusconi in their 11^th June issue.

ECB agreed to buy the bonds of Spain and Italy and the markets in USA rallied.

So we can be sure that the whole world will go on feeding the addicts. Is it possible to ride a tiger without getting killed? The politicians of the world are going to find out soon if they can tame the Banksters. I doubt it.

Next week is going to be interesting. On 9^th we have the FOMC and if uncle Ben does not give the addicts their daily dope, there will be tantrum again.

From Businessinsider; “With markets tanking, and the economy weakening, buzz about the Fed doing QE3 has really heated up.

The FOMC meets next week, and the Jackson Hole conference (where QE2 was announce) happens soon thereafter.

But arguably, the next round of general easing has begun.

Yesterday at 3:00 AM the Swiss lowered interest rates to stem the rise of the Franc, and last night Japan intervened to make its currency weaker.

And then today, the ECB confirmed more bond buying, so however you slice it, the central banks are back into easing mode.

On Twitter, Nouriel Roubini declares that the latest currency interventions from Switzerland and Japan represent the start of QE3, ultimately ending in more Fed easing.”

All the tax breaks are for the super rich and more free money for the Banksters will surely help maintain the wealth effect. When they don’t get the free money, they create panic. Remember Hank Paulson? This is a great country or what.

However much they try there is a limit to keep the Ponzi scheme going. And the bubble is going to burst sooner than expected. This week’s action was just a prelude.

So dear readers, can you predict next week’s market action? You do not need TA. Really. Send your thoughts based on your understanding of the market action.

MTFBWY

PS. Now the reason behind the sea-saw of the market for the whole day is clear. The market surged at the open but nose-dived by noon. Because the big boyz knew about the down grade by S&P. 
From politico;" Rumors of a downgrade filtered through a volatile stock market, causing the Dow Jones Industrial average to swing by 416 points as it teetered between losses and gains to close the day up slightly by 0.54 percent.

The possibility of a downgrade overwhelmed the initial surge caused by a government report showing the economy had added 117,000 jobs in July, beating analyst expectations"

 The question now, what caused the market to go up and DOW end in green.