Investor Sentiment Remains Little Changed on the Week

Little changed over the last week as the AAII’s percentage of bullish investors ticked higher just slightly to a reading of 43.

As the economy recovers from its extreme lows and GDP growth turns positive I am seeing more and more similarities with debt burdened Japan. The credit crunch in small business, lending and consumer balance sheets continues unabated, but investors have grown quite confident regarding the longer-term outlook mainly due to the extraordinary government measures that have helped prop up national growth. As we transition from the panic phase of the credit crunch into the malaise phase of the credit crunch you just have to begin to wonder if we aren’t going to experience the same repercussions Japan suffered from throughout their battle with deflation – relatively strong GDP growth accompanied by a deleveraging consumer and a nearly non-existent lending market. All of which leads to a spectacular churn in the markets which essentially takes us nowhere.

$2 Trillion of Negative Real Estate Equity for U.S. Households by 2010

This Wall Street Journal article (http://online.wsj.com/article/SB126040517376983621.html)
gives us insight into the real estate market.

Many home-owners can no longer afford or want to afford their homes. Some are leaving behind their homes and mortgages right away, while others are simply halting payments until the bank kicks them out. That's freeing up cash to use in other ways.


Analysts at Deutsche Bank Securities expect 21 million U.S. households to end up owing more on their mortgages than their homes are worth by the end of 2010. If one in five of those households defaults, the losses to banks and investors could exceed $400 billion. As a proportion of the economy, that's roughly equivalent to the losses suffered in the savings-and-loan debacle of the late 1980s and early 1990s.

Anybody can make money in a bull market. The test of a good investor is ..

Anybody can make money in a bull market. The test of a good investor is how you perform during a correction and a bear market. It is not what you make but what you keep that is important !

It has been pretty easy to make money in the stock market over the past 7 or 8 months if you had the guts to entered a buy order this past spring. That is assuming you still had cash and were not getting ready to jump off a tall building. After witnessing the ugliest 7 or 8 months in the stock market previous to this spring, it took lost of 'guts' to hit the 'buy' switch.
You could have been the most savy investor in 2008 and you would have still lost alot of money in the subprime meltdown and market crash that followed. Everyone was selling and running for cover. Cash was the one asset that saved investors. There where a number of 'head fakes' to get investors to put the cash to work in 2008 but at the end it was a blood bath and not many investors made off with profits (except the hedge fund guys that shorted the subprime and stock market).
2009 has been a different story, basically straight up since late March (up 20% YTD after being down 30% Jan to Mar, a 50% swing). That is after a 43% peak to tough drop in 2008.  The DJIA looks like a "V".
Now the $1,000,000 question ... what is the market going to do now ???  Do you sell and go to cash or stay invested because the market is climbing the wall of worry.

trading volume

There are many questions out there about what is really driving the seven-month gain and how sustainable it really is. One of the big ones that keeps popping up is trading volume. Where is it?


The recent ups and downs have generally been defined by low volume on the up and higher volume on the down.



Gains have been exaggerated by light volume, Gluskin Sheff + Associates’ strategic guru David Rosenberg comments in his note Tuesday morning.



“Barely over a billion shares on the Big Board? Are you kidding? After a 16.6% plunge on Friday, volume in yesterday’s session was still far below normal and the second lowest in the past two weeks,” he says. “This is a sign that conviction over the current rally remains unusually light.”



It’s a good question and the bulls haven’t offered a convincing answer. Trading was light Tuesday morning, with U.S. markets giving back early gains and the Toronto Stock Exchange down 86 points to 11400, led by the energy sector.

S&P 500, a pause

The weak dollar was cited as reason for yesterday's rally, but there is more to it than that simple explanation. Slack  economic activity has prompted the Fed to keep short term rates low, and the money supply ample in hopes of causing increased economic activity. The cheap rates also provide funding for the carry trade. With the carry trade, speculators and entrepreneurs alike have funding to invest in the assets they choose. Recovery will take a very long time if we tax and regulate the job creating entrepreneurs.




So far today the stock market has paused. In the US the IBD/TIPP Economic Optimism report came in at less than expectations, 47.9 versus 53.1, and 52.5 in the previous period.

Head And Shoulders Pattern ????

What Does Head And Shoulders Pattern Mean?

A technical analysis term used to describe a chart formation in which a stock's price:



1. Rises to a peak and subsequently declines.

2. Then, the price rises above the former peak and again declines.

3. And finally, rises again, but not to the second peak, and declines once more.



The first and third peaks are shoulders, and the second peak forms the head.

S&P 500, breakdown from the ascending wedge pattern

Technically speaking, we do not yet have a down trend -- we need a lower high and a lower low.

Going against one of Gartman's Rules and I am averaging down.

One of Gartman's Rules is to never average down.
BUT I am averaging down. To be successful you must believe in your analysis and have conviction. There is no 'hold', a position is either a buy or a sell. I also do not believe the saying "Portfolio returns are based on time in the market not market timing". I believe it is good analyis, market timing and a lot of luck. I rather be lucky than smart with regards to the market.

Buying another unit of SKF‎ - ProShares UltraShort Financials (previous purchase $40.47 and today's purchase $26.75 = $30.61 Average)

Buying 1 unit of DXD‎ - ProShares UltraShort Dow30 to average my short Dow 30 (note DXD is 2 time levered and DOG is just the inverse of the Dow's daily move)

Short term warning signs. General comments

Bulls should be spooked by the fact that a blow-out GDP report, showing an economy with a HUGE turnaround and the President crowing on TV about how great things are going, could ONLY erase 1/2 the losses we suffered since last week.

Short term warning signs. S&P 500 weekly, noon Fri index is 1055 down 11

Wednesday's comments:
S&P Emini 500 Futures opened with a 2.50 point gap down this morning. The gap filled with a pierce through that level during the 9:50 a.m. 5 minute candlestick, but that proved to be the high for the day at 1060.25. From there, prices plunged on above average volume. There were a couple of brief retracement periods during the day, but for the most part, price action was steadily lower. Prices closed at the low end of today's trading at 1039.75. Volume was heavy at 2.8 million contracts traded. The day's range was over 20 points deep, the average true range is 18.38 points. This marks the fourth day of lower highs and lower lows on greater than average volume. A down trend line on the daily charts has formed, and it shows a break through the 50 day moving average. Tomorrow may see a bullish bounce after the 4 consecutive down days, but a close above the 1060 level on good volume would be a clue that support has been found. Meanwhile, we trade what we see, and we see a down trend. Today's action erased one more open gap. The October 7th close at 1053.25 filled during the morning, leaving two more unfilled gaps underneath at 972.25, and 902.00. The lowest of the two open gaps currently falls just below the 200 ma, and not far from supported price levels at 875.00 from this summer. It's possible that level might be a reasonable correction expectation.

========
Are we taking out the 1053 Oct 7 close ? Market is now 1055 down 11

Leaving " two more unfilled gaps underneath at 972.25, and 902.00. "

YIKES !!!

Short term warning signs. VIX, see my comments earlier.

Last Friday the VIX popped 7% (smaller oval). Including Friday it’s now up almost 37% (larger oval) in four sessions

VIX - CBOE Vix index – With equity prices sadly wilting by noon on Friday, investors were threatening to completely reverse Thursday’s giddy 2% advance. Traders were despondent after a 0.5% drop in consumer spending last month, which soured the tone following Thursday’s stimulus-stuffed GDP gain. The fear-gauge expanded by 8% to 26.70 as a result and one large options player appears to have placed a trade suggesting that volatility will be omnipresent – at least through year-end.

Short term warning signs. S&P 500 Elliott Wave

Elliott Wave counts to measure the markets we can see a 5 wave down count, followed by the A-B-C corrective pattern. Elliott Wave use, of all the technical tools, lends itself to longer term investment approaches. In fact, using EW on a shorter term can be down right tough. Where do you start your counts? Where do you end them? Was that a 3rd of a 5th? Even when you stick with the longer term, your starting points can be debated. For now it seems that we have completed the first leg two legs (1 through 5 =1 leg, and A-B-C=2 leg) of a 5 wave down pattern.

Short term warning signs. Dow Transports

Dow Jones Transports forged an “outside week” last week, making a new high on the week then closing below the lows of the week. The Transports are an indicator that confirms or overall economic conditions and the Dow Industrial’s price movement.

The circled bar represents just Friday’s price action. Two bars to the left (Wednesday) shows the new highs. In addition, the volumes are now surging on down days, not what should be happening in a secular (longer term) bull market.

Look out below !!!

After staging a nice rally yesterday, the S&P 500 is on the verge of giving up ALL of the gains. Look out below if the lows from Wednesday get taken out.

More on my Swine flu & World economy comment from a few days ago.

Bird flu kills more than 60 percent of its human victims, but doesn't easily pass from person to person. Swine flu can be spread with a sneeze or handshake, but kills only a small fraction of the people it infects.

So what happens if they mix?

This is the scenario that has some scientists worried: The two viruses meet — possibly in Asia, where bird flu is endemic — and combine into a new bug that is both highly contagious and lethal and can spread around the world.

Scientists are unsure how likely this possibility is, but note that the new swine flu strain — a never-before-seen mixture of pig, human and bird viruses — has shown itself to be especially adept at snatching evolutionarily advantageous genetic material from other flu viruses.



How will this change the World Bank's $3 Trillion estimate

More smoke and mirrors ..Clunkers: Taxpayers paid $24,000 per car

NEW YORK (CNNMoney.com) -- A total of 690,000 new vehicles were sold under the Cash for Clunkers program last summer, but only 125,000 of those were vehicles that would not have been sold anyway, according to an analysis released Wednesday by the automotive Web site Edmunds.com.

Still, auto sales contributed heavily to the economy's expansion in the third quarter, adding 1.7 percentage points to the nation's gross domestic product growth.
The Cash for Clunkers program gave car buyers rebates of up to $4,500 if they traded in less fuel-efficient vehicles for new vehicles that met certain fuel economy requirements. A total of $3 billion was allotted for those rebates.

The average rebate was $4,000. But the overwhelming majority of sales would have taken place anyway at some time in the last half of 2009, according to Edmunds.com. That means the government ended up spending about $24,000 each for those 125,000 additional vehicle sales.

paying the biggest premiums since December for protection against a rise in the dollar

Market Currents, Thursday, October 29, 20093:22

More rippling effects from the apparent end to Fed debt buybacks: Options traders are paying the biggest premiums since December for protection against a rise in the dollar. The price for euro puts is outpacing euro calls and "the market is getting nervous."

Do 18M unemployed people care what our GDP is?

Things that are not good forr consumer confidence are not good for retail sales BUT today we will be looking at a very positive slice of the year in Q3, when we had Cash for Clunkers and we had housing stimulus and the stock market rose 20% while the dollar fell 7% and the Fed gave free money to the banks and IBanks, which drove many of them to record profits. Our corporations are reporting a Q3 that is much improved over Q2 because global stimulus is pumping money in and, thanks to the plunging dollar, they are paying the American workers they have left 15% less than they did last fall. That’s right suckers - you accept pay in dollars and you are not even smart enough to do what Europeans learned to do long ago - ask for currency-adjusted wages!

The farce in this earnings quarter is you have S&P 500 companies who collect 50% of their revenues overseas paying their American laborers in crappy US dollars. PRESTO - instant 15% "efficiency" savings on real labor costs. Companies have cut back on most capital spending so when you see companies telling you how well their cost-cutting program is going, keep in mind that they laid off 10% of their workers and are paying the remaining 90% just 85% of what they were getting last year when measured in any major currency on the planet except the Dollar and the Yuan.

What will happen when/if the dollar gets expensive again? Most companies have already stripped fixed costs to the bone. If they are forced to come up with 15% more net currency to pay their workforce, the only solution is to lay 15% of that workforce off. That’s why the Fed is in a weak-dollar trap. They probably sit at the table each day and try to come up with more dumb things to say to make sure no one accidentally wakes up one morning and decides to buy dollars. We don’t have a strong dollar policy - we have a weak dollar prison!

-Phillip Davis

I think this is right. Good article Mr Davis !

Jim Cramer's Mad Money, Wednesday October 28."The 5-7% correction Cramer has been predicting seems to be here"

Cramer is a disk jockey in a suit but sometimes he is right. I have noticed that he is a chartist. He is early or was this recent pull back a 'head fake' ? Today the Dow has gained 200 points on stronger than expected 3rd Q GDP. Time will tell. I am with Cramer on this one !!

==============

Stocks discussed on the in-depth session of Jim Cramer's Mad Money TV Program, Wednesday October 28.


The Correction is at hand: Google (GOOG), Apple (AAPL), SPX (SPX), Panera Bread (PNRA), Colgate-Palmolve (CL), Walmart (WMT), Coca-Cola (KO)

The 5-7% correction Cramer has been predicting seems to be here; the Nasdaq's 2% decline, the Dow's 119 point drop and a "tell" on the industrial sector, SPX (SPX), fell 11% after a "major guide down." Panera's (PNRA) strong quarter and 7% rise in stock price seems to be the exception to the rule. However, weak home sales, oil prices and computers indicate increasing bearish sentiment; "We are right to worry that a new leg down might have begun.”

The banking, oil and technology sectors that propelled the market after March lows are starting to show signs of weakness; even Google (GOOG) and Apple (AAPL) are starting to slow down. The only strength on Wednesday came from defensive stocks, such as Colgate (CL), Walmart (WMT) and Coca-Cola (KO). Cramer recommends taking profits while some stocks are still healthy, and he added,“My conclusion is this market smells no end to the recession, and that we have seen the highs” for the year.

7 month rally coming to an end ??

As seen in the action in the Dow Transports. Long ago, Charles Dow popularized his Dow Theory, which in essence views the market as healthy when both manufacturers (the Industrials) and shippers (the Transports) are rising in tandem. Divergences between the two should set off alarm bells. So while the Industrials have managed to claw their way back above 10,000, the Transports have tried and failed to surpass their mid September highs, tracing out a double top formation.

then again this just in from the US "U.S. sees no "undue" H1N1 economic impact". Who to believe ?

WASHINGTON (Reuters) - U.S. Homeland Security Secretary Janet Napolitano said on Monday she does not expect the H1N1 flu pandemic to have a larger than usual effect on the U.S. economy.

WHO TO BELIEVE ?

Estimates on flu's economic impact are more difficult to compile and can vary greatly.

But the World Bank said in July that a flu pandemic could trigger global GDP losses of 0.7 to 4.8 percentage points, depending on severity.
Regionally, official surveys suggested losses of 1.5 to 5 percentage points in U.S. gross domestic product, 2.6 to 6.8 percentage points in Asia and 1.6 to 3.3 percentage points for the European Union.

(Reuters Reporting by David Morgan; Editing by Anthony Boadle)

Will H1N1 hurt the world economic recovery ?

Pandemic (H1N1) 2009 - WHO (World Health Organization) update 71
Weekly update
As of 17 October 2009, worldwide there have been more than 414,000 laboratory confirmed cases of pandemic influenza H1N1 2009 and nearly 5000 deaths reported to WHO.

As many countries have stopped counting individual cases, particularly of milder illness, the case count is significantly lower than the actually number of cases that have occurred. WHO is actively monitoring the progress of the pandemic through frequent consultations with the WHO Regional Offices and member states and through monitoring of multiple sources of data.

New Activity:

Mongolia, Rwanda, and Sao Tome and Principe have reported pandemic influenza cases for the first time this week.

Iceland, Sudan, and Trinidad and Tobago reported their first fatal cases.

================
from: Gulf News, By Jumana Al Tamimi, Associate Editor Published: 22:43 June 27, 2009

Uncertain of the shocking global economic cost of H1N1? Ask Mexico.

When the authorities there announced a five-day suspension of all "non-essential" activities around the country shortly after the confirmation of the first case of flu on April 2, the cost was as high as $57 million per day, according to government estimates.

The national currency, the peso, fell four per cent against the dollar; the local stock market fell three per cent; and all hopes of a profitable tourism season were dashed.

So far, the number of reported cases has reached 59,814 from dozens of countries around the world, according to the World Health Organisation.

Within the several weeks since the confirmation of flu cases, signs of economic impact appeared.

Tourism, and airline stocks plunged and oil prices slid. The World Bank estimated last year that a flu pandemic could cost the global economy $3 trillion.
What increases the risks of big losses is the fact H1N1 started spreading at a time when the global economy was already under pressure from the international financial crisis started in the second half of last year.

$3 trillion thats trillion !!

Louise Yamada, technical comments

Listen to this MP3 if you have time.

http://kingworldnews.com/kingworldnews/Broadcast/Entries/2009/10/23_Louise_Yamada.html

S & P 500, correction to come or short term resistance ?

The target for this rally is SPX 1119. A close above SPX 1119 would point to a run to the next resistance level, at SPX 1226. SPX 1126 and SPX 1119 (the 50% retracement of the entire bear market) are very close together. The recent weakness may have been the result of this powerful resistance level having been approached.

If we do get to SPX 1119 in coming weeks, it will be difficult to surpass this strong resistance level without a correction first. Profit taking is part of any rally and typically it occurs at resistance levels so we may still have another round of selling ahead.

The good news though is that a close above SPX 1125 (a decisive close) would negate this correction to the bear market.

I'm back !!!!

Back from my 'mental' sabatical. Few things have changed over the past few months. Market keeps climbing the wall of worry but the economy is not showing big improvements in the US. My short positions have got beat up as indices moved higher. The VIX is back to the 24 range today after hitting near 20 last week (compared to 81.65 in March and 25 in Aug). This signals that investors are less concerned about a near term correction (this is a warning flag from a contrarian viewpoint).
This still points me in the direction that the market is overvalued and complacent.
The usual Sept/Oct correction has not happened but maybe it will be a scary Halloween correction !! Adding a position to FXP (ProShares UltraSh FTSE/Xinhua China 25 )

next wave of the Great Unwind: bad loans.

Josef Ackerman, CEO of Deutsche Bank AG, says foresees the next wave of the Great Unwind: bad loans. From Bloomberg:

“This crisis has consisted of a series of earthquakes, with changing epicenters,” Ackermann said late yesterday at an event in Zurich. “Bad loans are the next wave. Banks that have fared relatively well so far will also be affected by this.”

FDIC Bank Failure Update

The pace has really picked up recently, with the FDIC seizing almost 5 banks per week in July.

Of course the number of banks isn't the only measure. Many banks today have more branches, and far more assets and deposits.

from http://www.calculatedriskblog.com/

VIX vs. market

VIX vs. S&P500

Although the market is at the same levels it was in early December, the VIX is 60% lower. (Source: Zero Hedge)

What do you think this means ? Is the market getting too complacent ?

Financials ??? and is economy improving ???

First week of US Q2 earnings reports was good enough to drive global stock indexes surprisingly high and fast.
Financial sector announcements reveals a far more disturbing picture, for none of the heralded profits reflected results from any kind of predictable ongoing operations.

Goldman Sachs’ (GS) profits were primarily from high risk trading operations, which by nature can vary dramatically, especially with the recent theft of proprietary short term trading software. This business model is perhaps reckless but understandable, given that GS knows it can always hit the taxpayers to cover losses, but is worrisome for the markets, never mind American taxpayers.

Strong results from JPMorgan Chase (JPM), Bank of America (BAC), and Citigroup (C) came from one-time capital gains from asset sales, not sustainable operations. While JPM did have strong results from its commercial banking and asset management business, it noted declines in other key areas of operations and increasing defaults and credit risk. The rest showed profits mostly due to capital gains, not sustainable ongoing operations, and also noted rising default rates and risks of much more to come. Indeed Citigroup shows a loss if you factor out its sale of Smith Barney to Morgan Stanley (MS).

Consider that current conditions are relatively good compared to what’s coming. To give the banks a chance to earn more than they lose, Washington has thus far:

-Allowed banks to borrow for next to nothing, lend out at far higher rates
-Allowed banks to overvalue assets
-Keep consumer interest rates relatively low in order to encourage spending and fee-generating mortgage refinancing
How careful will the big banks be in lending this money, knowing that if the past is any guide, any bad loans will be offloaded onto the taxpayers? There will be plenty more bad loans. Loan losses can only grow as unemployment rises, even if the rate of job losses declines. Bank stress test worse case scenarios were for 8.9% unemployment in 2009, and it’s already at 9.5% and rising.

Looking beyond earnings, at numbers that are harder to manipulate, we see a similar picture

-The Port of Long Beach shows container shipments down nearly 30% annually.
-Freight railroad car loadings are down 25% annually, as reflected in CSX’s report.
-Tax receipts, both personal and corporate, have plummeted.

While economic data this past week was secondary to earnings, it too showed mixed results at best, with both core retail sales and industrial production weak, which does not bode well for the coming GDP estimates.

In sum, it appears that this past week’s rally should be viewed with at least as much suspicion as relief, especially with stocks already so close to their 2009 highs, with no more real evidence of recovery than we had before the rally.

Not a good week. The rally has wiped out some of my gains

Too far too fast. This is the technically important area of the chart. A move just above 945 would get a lot of folks excited about “new highs”. About 950 (with appropriate stops entered) may turn out to be the perfect selling opportunity.

Buy another DOG or for those of you who want leverage look at buying DXD ( PROSHARES ULTRASHRT DOW30)

PORTFOLIO UPDATE July 2

Since Inception (or when the Blind Squirrel started this blog)
the Benchmarks are as follows:

Dow is down about 500 points or -5.6%
Nasdaq is down about 60 points or -3.2%
TSX (Toronto) is down about 400 points or -3.7%

The Blind Squirrel is basically unchanged or +0.48%

Get a 'Dog' !

The last two week's candlestick pattern is a Bearish Engulfing Pattern (subject to confirmation). This is a bearish reversal pattern that marks a potential change in trend.

Candlestick weekly chart for DJII posted SELL-IF signal. The BUY recommendation made on 03.20.2009, when the index value was 7,225.3 . Since then DJIND has gained 17.26%

Buy DOG-NYSE @ $66.80

DOG, ProShares Short Dow30 seeks daily investment results, before fees and expenses, that correspond to the inverse (opposite) of the daily performance of the Dow Jones Industrial AverageSM Index.

natural gas in storage

Injection of 94 BCF; Below the expectation for a 100 BCF Injection

For the week ending Friday, June 19, 2009, total natural gas in storage increased 94 BCF to 2,651 BCF from 2,443 BCF a week ago. The storage level is now 631 BCF (31.2%) higher than this time last year and 482 BCF (22.2%) above the five year average. The east region had a net injection of 70 BCF. Total gas in storage in that region is at 1,234 BCF, which is 10.3% higher than the five year average. The west region reported a net injection of 12 BCF, increasing gas in storage to 420 BCF (32.1% higher than the five year average). The producing region reported a net injection of 12 BCF, with gas in storage at 997 BCF (36.2% above the five year average).

-M

The Chinese are coming .....

Sinopec agrees to buy Addax for $8-billion

China's biggest oil products company, Sinopec, has agreed to buy Toronto-listed Addax Petroleum Corp. [AXC-T] for $52.50 a share, valuing the company at more than $8-billion.

The price was somewhat higher than expected. Earlier this week, the shares were trading at about $45 a share as investors took the view that the company was fully valued. The offer represents a 47 per cent premium to the closing price on June 5, the day before Addax announced it was in discussions with potential buyers.

relationship between coal and nat gas prices

The relationship between coal and nat gas prices is more important than that between oil and gas prices in north America, as both are important fuels in the generation of electricity. Nat gas is particularly important as a peaking fuel, kicking on when demand is high for cooling in the summer. The low price of natural gas has caused quite a bit of coal-to-gas base load switching in recent months – more than expected. This should be helpful for nat gas storage. That said, if natural gas prices rise too much coal will take back market share, affectively capping natural gas prices. Moreover, in the current weak economic environment coal is quite plentiful. The electric power sector has historically high stocks of coal.

Electric Power Sector Coal Stocks



Coal production is coming off in response to high inventories and soft demand but prices are likely to remain weak in the near-term .

U.S. Monthly Coal Production





-M

Larger than expected decrease in crude oil inventories offset by larger than expected increase in gasoline and distillate inventories. Impact looks

The U.S. Department of Energy reported a 3.9 MMB decrease in crude stocks over the prior week, greater than analyst expectations for a 1.0 MMB decrease. Crude oil inventories decreased by 2.2 MMB at PADD 5 (West Coast) week-over-week. Crude oil stocks are now 1% above the five-year high on an absolute basis and are 4% above the five-year high on a days of supply basis. Gasoline stocks increased by 3.9 MMB over the prior week, greater than analyst expectations for a 1.0 MMB increase. Gasoline stocks are now 3% below the five-year high on an absolute basis and are at the five-year high on a days of supply basis. Refinery utilization increased by 1.2% week-over-week, greater than analyst expectations for 0.1% increase. Refinery utilization is now 2% below the five-year low. Distillate stocks increased by 2.1 MMB over the prior week, greater than analyst expectations for a 0.9 MMB increase week-over-week. Distillate stocks are now 20% above the five-year high on an absolute basis and are 29% above the five-year high on a days of supply basis. -M

The Federal Reserve is now the “printing press”. The end of independence at the Federal Reserve.

For most of that chart, the Federal Reserve monetized very little U.S. government debt. Then, in January of 2009 it began to monetize debt at an explosive rate. Did something change at that time?

Since then, the Federal Reserve has monetized on the order of $700 billion. Now while percentages are more important than absolute numbers, that value is more than the combined GDP of Poland and Ireland. It is about 2/3 the size of the Canadian economy. The change that arrived in January was that the Federal Reserve was to create more money in a shorter period of time than has ever been done in history.

That blue line has some important meaning for Gold investors. With the Obama Regime likely to run deficits of $2-3 trillion for the next few years, that blue line will continue to rise. The Federal Reserve is now the “printing press” for an out of control government. That blue path of debt monetization puts a long term floor under the price of $Gold. If ever an argument existed for long term ownership of $Gold, it now certainly exists with the end of independence at the Federal Reserve.

Another opinion on Inflation

While the Fed has more than doubled its balance sheet to about $2 trillion, a surge in inflation is unlikely given unemployment is the highest since 1983, McCulley said. One policy likely to be used by the Fed involves paying more interest on the reserves banks hold at the central bank rather than taking them back. Some strategists have suggested the Fed will need to soak up the reserves before embarking on a higher interest rate policy as the economy shows signs of expanding.

“I think the monetarists are coming back out of the woodwork, as if the monetary base per se had a direct connection to inflation,” McCulley said. “It doesn’t. It’s certainly hard to argue we’re going to have an overheated economy any time soon, from a starting point of nine, perhaps up to 10 percent unemployment.”

It is downright scary that so many mainstream economists have absolutely no fear of the nearly trillion dollars worth of "high powered money" now sitting there as reserves on banks' balance sheets - they've been so wrong about so many things in recent years, why should this particular issue be any different.
-Paul McCulley of Pimco

Having broken secondary support today, oil looks to have downside to the $59.50 area but is a good buy at that level.

Historically, the oil to gas ratio has been in the 8 to 1 area. In terms of heat content, the oil to gas ratio is around 6 to 1. But oil is used primarily for transportation in North America, limiting direct competition between the two fuels. Currently, gas storage is at a record high. Moreover, industrial demand is very weak due to the recession. Therefore, I expect near dated natural gas contracts to continue weak into the fall, with weather creating volatility. That said, we should see supply start to come off later this year as a result of dramatically lower drilling activity. The long term fundamentals for North American gas are not as positive as for oil. Technology is unlocking lots of gas in shale plays. I view gas as a trade. By weakness this year for a price recovery sometime next. Once price recovers to something north of $7 or $8 MMbtu activity will ramp and growing supply could become issues within 18 to 24 months depending on weather. And gas is much more volatile than oil, with weather being the primary driver of demand.
-M

Maybe I was wrong and too early ? Is oil breaking support going to drag my Nat Gas position ?

The last trade for the front month crude contract is today, and strange price fluctuations have often been cited as the contract nears closing. Today oil is down over $2. In the past this kind of change might have been explained by traders going long and being forced out of their trade so as to avoid taking delivery of the oil. If this was the case, we would expect to see the July futures as an outlier among the more forward contracts. Today this is not the case, oil is down across the board.


Is oil breaking back to the $60-ish range. It broke secondary support today. I have an advisor friend at a well known oil & gas shop thinking so.

Will my Nat Gas position suffer because of the correlation of the oil/gas ratio ?

When I entered the trade I said to enter a stop loss of 20% and hold the position into Q3.

Buy some GLD on a pull back ?

Gold 50 day Moving Average is $925
Gold 200 day Moving Average is $870

GLD (SPDR Gold Shares on NYSE)is trading at $90.54 at the close, down 1.5%.

the 50 day MA is $90.90, the 200 day MA is $85.62.

Today's pull back is almost a 2/3 retracement from the April low to recent high.

Buy some here (50 d MA) and maybe some more at the $85 (200 d MA) range.

I believe Jim Roger's comments and think that printing all those Greenbacks can't be good for US inflation.

Gold Chart

Snippets from Jim Rogers

Rogers thinks the United States and the U.K. are in bad shape and will be for some time. He likens the current situation to that of the 1930s. He says,

In the 1930s, we had a huge stock market bubble which popped. And then politicians started making many mistakes. They became protectionist. They made solvent banks take over insolvent banks and then both banks failed in the end. They are making many of the same mistakes now. What's different this time is that we are printing huge amounts of money which they did not print at that time. So, we are going to have inflation this time.

Commenting on the government's actions, Rogers says

It's a mistake what they are doing. It's giving short-term pleasure, but there's long-term pain as we are going to have much higher inflation, much higher interest rates and a worse economy down the road.

Clearly, Rogers likens the current scenario to placing a bandaid on a gunshot wound victim and calling everything 'good.' Short-term solutions do not solve long-term issues. He cites this with evidence of the bond market already beginning to taper off and he thinks this will continue as the government sells a ridiculously large amount of bonds. This can be boiled down to one simplistic notion: when governments print a lot of money, you get serious inflation.

Rogers likes gold and has no plans to sell his. In fact, he could be adding to his position should the right circumstances pop up.
The fact is that the IMF is trying to get permission from everybody to sell gold. I don't know if it will succeed or not. But if and when the IMF sells its gold, gold prices may go to a bottom. Who knows? It may go down to $700. The IMF has a lot of gold to sell. If it does, I hope I'm brave enough and smart enough to buy more.

S & P 500 is back into negative territory for 2009, worst day in 2 months

TSX plunges 4.4% on World Bank warning.

North American markets fell Monday as commodities prices collapsed on warnings from the World Bank that the global economy would decline more than it had forecast in March.

"We see a very difficult 2009, with negative growth in the OECD area. Unemployment problems are going to continue to linger," Angel Gurria, the head of the OECD, told Reuters in on the sidelines of a conference in Paris.

Another opinion on Nat Gas

June 17th, 2009 at 5:26 pm
Hi Sunil. Nice pop in natural gas during the past week. Lots of technical analysts have commented favourably during the past week. Ironically, short term momentum indicators (e.g. Stochastics) already have reached a shor term overbought level. Seasonal influences turn postive in August. Fundamentals remain dreadful due to large and growing inventories. Storage capacity already is approaching the full level. Not surprising, several companies including Encana and Chesapeake have announced production cut backs. Cooler than average weather this spring and projected until fall means lower demand. There are several interesting seasonal plays lining up this summer based on technical and fundamental prospects. Natural gas currently is not on the list.
-Don Vialoux, DVTechTalk

More Nat Gas info

Canadians can trade HNU on TSX (Horizons Beta Pro Natural Gas Bull). This investment has 2 times leverage, so not for the faint of heart ! Leverage is a double edge sword. It is nice when working but hurts when position is against you. Remember 2 times up or 2 times down when you are wrong.

Here is the bullish info:

Natural Gas so cheap (3.87 per mmBTU as of Friday) while Oil is moving ever higher? This is a significant disconnect that does not make long term sense. Historically, the average ratio between West Texas crude and Henry Hub natural gas has been 8.5 to 1. Currently, it is at a historic ratio of 19:1.
With oil at $72 per barrel, natural gas should be around $8.47. That represents a 125% potential pop in the price of natural gas if the price of oil stays constant. Many experts believe that oil is fairly priced right now, given the costs of exploration and extraction.
Natural gas is a value play with great upside potential in the intermediate term (12 months). But it is an even better play in the longer term (1-5 years).
President Obama and the Democrat controlled Congress will definitely pass some type of environmental legislation this year or early next. That legislation is aimed directly against carbon and its role in global warming (or the theory thereof, since it is not conclusively proven). In the next several months, either a "Cap and Trade" or a straight up carbon tax will be passed. The moderates in Congress and most of the heavy industrial world, faced with the reality of some type of legislation, are rallying behind a carbon tax for its simplicity and for the fact that the cost can be passed along to the consumer much more efficiently and without the distortion and potential fraud of cap and trade.
For natural gas, either scenario is very attractive. Natural gas per BTU of energy, is much cleaner than oil or coal, the two primary fossil fuel alternatives. So, if a carbon tax is passed by legislation this year, natural gas will immediately become more competitive. Its historical relationship to oil should decline even below 8.5. If it moves to 7.0, then the relative cost today should be $10 per mmBTU for natural gas.
Longer term, with or without a tax advantage over oil, natural gas promises to be used as a transitional fuel to alternative energies like solar, wind and geothermal. T Boone Pickens has proposed, and spent a considerable portion of his wealth, promoting the idea of natural gas powered vehicles. Once fuel cell powered vehicles become practical, within 10 years with government encouragement / subsidy, natural gas is likely to be the first fuel used by such vehicles. This reality will be encouraged if Pickens is successful in getting existing fuel stations in North America to add natural gas to their product offering at the pump.
Pure hydrogen vehicles are a better environmental option, since the byproduct of the chemical reaction is pure water. But the manufacture, storage and distribution of highly combustible hydrogen has many science, engineering and production problems yet to be solved. -Brian McMorris

US Real Estate prices still falling !!

The history of US real estate shows that the house prices do not bottom until about 6 or 9 months after maximum mortgage defaults at the banks. Banks will ride the repossessed home for a few quarters and then realize that the asset is a dead asset on their books and then dump the asset from the balance sheet at 'fire sale prices' (accountants call it the 'big washout' or write off of bad and non performing loans).

The mortgage market is coming up to a 'crunch' period soon. 40% of the good credit-worthy people are now at risk because of recent unemployment. These were the "normal" people (not the subprime mortgages) that have lost their jobs and can't make payments. This group is a larger percentage of the population and they had bigger mortgages than the subprime.

My other indication is the contrarian view. A year and half ago the "new" rich but not savvy buyer was buying US homes. Recently, the "rich professionals" with cash flow (but also not savvy buyer) were buying. The market will bottom when the "old money" savvy business people will invest which might be later this year.

Why ??? Check this quote from a recent Lazard Asset Management report:

"Our research indicates that home prices could decline over 40% from the levels
observed at the end of 2008. This outlook is meaningfully more negative than most
current expectations. Significant declines in mortgage borrowing rates near the end
of 2008 may have decreased the downside in home prices somewhat, but our
analysis lends support to current efforts by government officials to intervene even
more forcefully in the mortgage markets."
-Ronald Temple, Managing Director, Lazard Asset Management
Emma Rasiel, PhD, Assistant Professor of the Practice of Economics, Duke University

more reasons:

1. Mortgage rates have increased during the last few weeks by almost one percent for 30 year fixed mortgages.
2. Nonfarm payroll employment fell by 345,000 in May.
3. The number of unemployed persons increased by 787,000 to 14.5 million in May.
4. The unemployment rate continues to rise, increasing from 8.9 to 9.4 percent.
5. Real gross domestic product decreased at an annual rate of 5.7 percent in the first quarter of 2009.
6. Many amateur / first time real estate investors are jumping in to the market. Last time I saw that was at the top of the market in 2005.
7. In California and Nevada, I've seen a significant number of houses receiving many multiple bids over the asking price. Last time I saw that, again, was at the top of the market in 2005. Maybe things are different this time, and it now means that real estate is bottoming, but I doubt it. - Stockerblog.com

Monday 2pm EST, SKF and UNG both up !!

SKF $41.68, up 2.17 or 5.5% (high today was $41.79)

UNG $15.40, up 0.73 or 4.9% ( high today was $15.77)

Is this the nut the the blind squirrel will find ???

Accumulate position over the next while with a 20% stop loss for risk control.

Thinking that the 2 positions will be positive trending until Q3 and then may trade out.

Go long Nat gas !!!

"United States Natural Gas (UNG). Bespoke recently reported that United States Natural Gas (UNG) has seen a 77% increase in trading activity over the last 50 trading days. Marc Courtenay identified that the price of oil is trading at 19x that of natural gas at $3.7 a British Thermal Unit whereas history pegs the ratio at 10x. In other words, oil could pull back to $60 per barrel, and natural gas would need to jump 60% to reach the historical average." - Gary Gordon

"There are striking similarities between the stock charts of the US ETF for natural gas (UNG) now and where the stock chart for the US ETF for oil (USO) was in December-February.
The two charts tell us that despite all the bearish fundamentals for natural gas in North America (and there are lots!), the time to buy UNG is very near. The chart for the Canadian natural gas ETFs (GAS-TSX, HNU-TSX) tells the same story. " -Keith Schaefer

If natural gas gets any cheaper, there will be supply problems because gas wells will be shut in. There is also the wildcard of weather related shut downs in the late summer (hurricanes) or increased demand if there is hot weather.

"natural gas typically has its best quarterly performance during the third quarter. While natural gas' best quarter happened to occur in the third quarter of 2005 (99%), Q3 is also positive more often than any other quarter (63% of the time). Finally, the median return of natural gas since 1990 is higher than any other quarter (10.4%), and is also over twice the return of the next nearest quarter (4.5% in Q2).- Bespoke Investment Group

Sell banks or buy SKF (Ultrashort Financial ETF) ???

Market is overbought !!! S&P 500 has rallied 40% from its March lows. Eighty-four percent of the stocks in the S&P 500 are trading above their 50-day moving averages (Financials are at 89%). Prior spikes in this reading going back to last June quickly pulled back.

The IMF states that economies of the developed world will experience a deeper protracted recession due to further deterioration in residential and commercial real estate markets, tight lending conditions and rising defaults in corporate and consumer loans.

"Signs are emerging that optimism in the financial services sector may be misplaced, or at least, premature.
It’s no secret that banks have been eschewing government aid. But, in the tradition of these giant money machines, they seem to be doing so again at the expense of their long-term security — all for the sake of quarterly earnings results.
Take for example, the approval by the Treasury Department for 10 banks to repay their TARP loans more or less ahead of schedule. Rortybomb points out that the big banks may need as much as $390 billion in the worst case scenario, according to a model using rising unemployment statistics. " Daniel M. Harrison, publisher, editor and writer of The Global Perspective