Market Direction?

Short-term market direction continues to favor the upside.  Why?  For the following three reasons: (See my Twitter for the chart.)

1. Price > 200-day MA
2. 50-day MA > 200-day MA
3. 14-period Monthly RSI > 50.

For a longer-term perspective, I am watching very closely the relationship of the price of the S&P 500 to its 200-week MA.  (See the following the chart.)  Currently, the price is right at resistance (200-week MA).  If it penetrates the 1194.20 along with the above short-term indicators remaining bullish, I will have to revisit my bearish stance on equities.  Of course, with the mid-term elections on Tuesday and the Fed to report on QE2 on Wednesday, anything is possible from both a bearish or bullish scenario.

Rational Resolution to Mortgage Crisis or Preservation of the Capital Structure of Banks

Yes, the two are mutually exclusive.  I say let's have the mortgage resolution and let the free market take care of the banks. 

Are You Bullish at These Price Levels?

The sky is the limit as investors continue to believe that QE2 is the panacea to an ever-rising stock market.  This is what the QE1 has given Americans so far this year:

1. 1,431,853 bankruptcies 
2.  90,348 foreclosures
3.  132 banks shut down
4. 27,347,499 unemployed Americans 
5. 42,947,425 Americans on food stamps (That is one out of seven Americans.)

Therefore, the crazy logic goes something like this: If the first trillion dollars did not cure our economic woes, another trillion dollars will surely do the trick.  If QE2 does not work, there will be QE3.  So why worry, because the Fed has everything under control.  Right?  Now, let's get back to the S&P 500.  I don't know about you, but these price levels are more conducive to an intermediate market top, rather than a market bottom.  What do you think?

Bernanke Must Go and Go Immediately

At the Federal Reserve System and Federal Insurance Corporation Conference on Mortgage Foreclosures and the Future of Housing, Bernanke said the following: “Homeownership is only good for families and communities if it can be sustained, and home purchases that are very highly leveraged or unaffordable subject the borrower and lender to a great deal of risk.”  Where is the accountability?  Why hasn't Congress held this man responsible for this entire housing debacle and the current demise of the dollar?  He helped create and nurture this mess along with Greenspan. Bernanke is the individual who last year launched a controversial $1.25 trillion mortgage-backed securities (MBS) program to help keep mortgage rates low.  Why was it controversial?  First, the Fed does not have the authority to make such purchases.  Second, the quality of those MBS are dubious at best.  America, you better wake-up before it's too late.  I, for one, believe that it is already beyond midnight.

Dollar Debauchery

On Wednesday, September 22, I posted the following comments:

"To make matters worse, QE has artificially kept interest rates low. The ten-year Treasury Note is currently yielding 2.55%.  How?  Well, the Federal Reserve System, through its Federal Open Market Operations, has purchased something $1.5 trillion of dubious, quality assets at par from the banking system.  In return, those banks have used the proceeds to purchase high-quality Treasury securities. Banks love it, because they have been able to unload questionable assets at par and receive Treasury securities in return.  In other words, the Fed has not only propped up the balance sheets of banks but also assisted the Treasury in monetarizing our federal deficits.  So, what is the problem?  The problem is that such a policy has weakened the dollar to the point that it may decline another 15% or more. (See the following dollar chart.)"

From the above chart, I stated the target from September 22 would be $22.25 on the UUP.  Well, the low, so far, was $22.17 on October 17.  The target has been met; however, the the critical mass is still the level between $21.77 to $22.03.  With the current Fed policy of dollar debauchery, which includes QE2, we may just see the $21.77-$22.03 taken out.  That range would be approximately 7% from the current price of $22.36.

Dollar at Risk of Becoming Toxic Waste

The Wall Street Journal reports that "The Group of 20 industrialized and developing nations vowed at this weekend's meeting to avoid "competitive devaluation" of their currencies while curbing their external imbalances, in a bid to generate more balanced global economic growth. However, the G-20 didn't announce specific targets for achieving their goal of "rebalancing" the world's economy away from an over-reliance on U.S. consumers buying imported goods."  Now, doesn't that announcement sound like something the "Oil Cartel would say?"  And, of course, we all know that cartels cheat like crazy.  And, who are the biggest cheaters?  Answer: Bernanke and Geithner, who are better known as Abbott and Costello.  Over the past two months, under the leadership of Bernanke and Geithner, the dollar has been trashed, losing approximately 14% of its value; and soft commodities (cotton, corn, wheat, soy, rise, and oats) have skyrocketed, which simply means that food prices will rise significantly.  Great job Abbott and Costello!

This is what I think of the current dollar situation. 

The Adjusted Monetary Base and the S&P 500

The following chart depicts the relationship between the "Adjusted Monetary Base"and the S&P 500.  A quick perusal of the chart indicates that the relationship between the Base and S&P 500 has been very close, especially since 2009.  Ok, what is the Adjusted Monetary Base?  First, it is the one monetary component that is completely under the control of the Federal Reserve System.  (That in itself should speak volumes.) Second, it includes the total amount of currency that is either in the hands of the public or in the commercial bank deposits held at the Federal Reserve, which is known as member bank reserves.  Of the two components, member bank reserves are the largest.  


Since early 2010, the "Base" has been trending downward.  Likewise, the S&P 500 topped out approximately one month after the "Base" topped out.  This has been one reason why I have been negative on the S&P 500.  I would recommend that you not only keep a close eye on the "Base Money" but include it as one of your investment tools.

What Will This Trip Cost Americans?

President Obama will land in India on November 6 for a two-day state visit.  His two-day visit will in all probability shut down vehicular traffic in and around the city.  Now, if anyone knows anything about traffic in India, one will immediately come to the conclusion that its citizens are not going to be too happy with the inconvenience put forth by the presence of Obama.  (See the video at the end of the post.)  Don't get me wrong, I am not against our President traveling to meet with foreign dignities to solve the world's problems.  But, this twelve day-junket, two days in India, will accomplish what purpose?  (Isn't it interesting that this trip by Obama comes immediately after the mid-term elections?  In other words, it appears the purpose of the twelve-day junket is to get out of  "Dodge" immediately after the potential demise of the House Democrats on November 2, 2010.)

Now, to the cost of the trip, junket, vacation or whatever you want to call it.   The following excerpt is from the "Economic Times of India." 

"To ensure fool-proof security, the President’s team has booked the entire the Taj Mahal Hotel, including 570 rooms, all banquets and restaurants.  Since his security contingent and staff will comprise a huge number, 125 rooms at Taj President have also been booked, apart from 80 to 90 rooms each in Grand Hyatt and The Oberoi hotels.  The NCPA, where the President is expected to meet representatives from the business community, has also been entirely booked.  The officer said, 'Obama’s contingent is huge.  There are two jumbo jets coming along with Air Force One, which will be flanked by security jets. There will be 30 to 40 secret service agents, who will arrive before him. The President’s convoy has 45 cars, including the Lincoln Continental in which the President travels.'  Since Obama will stay in a hotel that is on sea front, the US Navy has made elaborate coastal security arrangements in consonance with the Indian Navy and the Coast Guard.  There will be US naval ships, along with Indian vessels, patrolling the sea till about 330-km from the shore.  This is to negate the possibility of a missile being fired from a distance,” the officer said."

Bon Voyage, Mr. President.

The Man Who Saved the World

An Absolute Must See Video on the Current State of Economic Conditions

A must watch video conference.  I know it is long at almost two hours, but you have some of the key financial and economic individuals on the same stage.  Two speakers that you must listen to are Nouriel Roubini @ the 41.55 minute mark and Chris Whalen @ the 1 hour mark.  I especially like Whalen's presentation.  So, please do yourself a favor and education yourself to what is going on in regard to the banking system, mortgage mess, and the next QE2 phase by watching the video.  Your financial well-being depends on it.

       

Citigroup Profit Soars

"Oct. 18 (Bloomberg) -- Citigroup Inc., the bank 12 percent- owned by U.S. taxpayers, said profit surged, beating analysts’ estimates as the company reduced loan-loss reserves by $1.99 billion.

Third-quarter net income was $2.17 billion, or 7 cents a share, compared with profit of $101 million, or a loss of 27 cents after preferred dividends, in the same period a year earlier, the New York-based bank said today."

Let's see now.  The net income was $2.17 billion, but the loan-loss reserves were reduced by $1.99 billion.  Oh, almost all of the third quarter net income was due to it reducing its loan-loss reserves.  Nice trick, Citigroup.  What is your justification in the face of the current mortgage mess?  There is the real probability that you are going to have to buy back all those worthless mortgages that you sold. That is, the potential for hundreds of billions of dollars in losses that will have to be eaten by you. If anything, the loan-loss provision should have been increased, not decreased Citigroup.

What is Wrong with Deflation?

Nothing! I don’t care what the Fed says. For instance, on Saturday, October 16, 2010, Eric Rosengren, President of the Federal Reserve Bank of Boston, stated that “Policymakers must act vigorously to counteract the risk of deflation.”

In the first place, I don’t consider Fed statements as being believable, given its track record. In regard to its track record, let’s look at its recent creditability.

1. March 28, 2007 (Ben Bernanke: “At this juncture … the impact on the broader economy and financial markets of the problems in the subprime markets seems likely to be contained.”)
2. October 15, 2007 (Ben Bernanke: “It is not the responsibility of the Federal Reserve – nor would it be appropriate – to protect lenders and investors from the consequences of their financial decisions.”)
3. June 9, 2008 (Ben Bernanke: (“Despite a recent spike in the nation’s unemployment rate, the danger that the economy has fallen into a substantial downturn appears to have waned.”)

Ok, you now know how I feel about the Fed. Now, what is deflation? Deflation is simply a decline in prices. Simple enough, but what causes a decline in prices? From “Basic Economics 101,” it is caused by either a decrease in demand or an increase in supply or some combination of the two. Nothing diabolic at all, just a shift in the demand and/or supply curves. Therefore, as a consumer, I like to see lower prices, because my purchasing power goes up. In other words, cash is king.

On Wisconsin Fight Song (Wisconsin 31 Ohio State 18)

Is America On A Burning Platform?

"The Federal Reserve is pulling out all the stops in attempting to invigorate the American economy. The stock market is surging. Everything is surging. The optimists are crowing that all is well. Deficits don’t matter. We can borrow our way to prosperity. Cutting taxes will not add $4 trillion to the National Debt if not paid for with spending cuts. All is well. So, the question remains. Are we actually on a perfectly sturdy solid platform? Or, are we on the Deepwater Horizon as it burns and crumbles into the sea?"

David Walker, the former Comptroller of the United States from 1998 until 2008, has been warning politicians, the media, and the American public for over a decade that we are off course and headed for disaster. In August 2007, before the financial system meltdown of 2008, Mr. Walker declared:

"The US government is on a “burning platform” of unsustainable policies and practices with fiscal deficits, chronic healthcare underfunding, immigration and overseas military commitments threatening a crisis if action is not taken soon. There are striking similarities between America’s current situation and the factors that brought down Rome, including declining moral values and political civility at home, an over-confident and over-extended military in foreign lands and fiscal irresponsibility by the central government. The fiscal imbalance meant the US was on a path toward an explosion of debt. With the looming retirement of baby boomers, spiraling healthcare costs, plummeting savings rates and increasing reliance on foreign lenders, we face unprecedented fiscal risks. Current US policy on education, energy, the environment, immigration and Iraq also was on an unsustainable path. Our very prosperity is placing greater demands on our physical infrastructure. Billions of dollars will be needed to modernize everything from highways and airports to water and sewage systems."

Please take the time this weekend and read the entire article entitled, "Burning Platform."

Mortgage Mess

This mess stems from "robo-signers or back-office workers," who approved hundreds of documents daily without reading them, to mortgages that were bundled into pools and sold to investors as securities, which is known as securitization. 

Real-estate law requires the physical transfer of paperwork whenever mortgages trade hands, and analysts, according to the Wall Street Journal,  are raising questions about how often that happened during the housing boom.  One concern is that banks may have lost, or didn't ever have, mortgage certificates.  If that happened, banks will have to pause foreclosures for months as they track down certificates and refile paperwork. And, that is the real problem.  In other words, did those banks that are currently foreclosing on homes actually own those properties? 

The result of this mortgage mess is going to slow the foreclosure process even more but not change the outcome.  For example, according to J.P. Morgan Chase, in the state of Florida, which requires banks to foreclosure through the court system, the average borrower had spent 678 days without paying before being evicted through foreclosure.  In Florida, 1 out of 7 mortgages are in this situation.  [Sidebar: If one applies the Real Estate Rule of 32, which states that the total of all your monthly debt payments cannot exceed 32% of your monthly income to be eligible for a real estate loan, that would be like getting a 32% increase in one's salary for the next 678 days.  This is one reason why I believe that consumer spending has been as strong as it has been in the face of economic weakness is because these individuals, who are not making their P&I payments, are redirecting these funds from mortgage payments to other types of consumption.]

Why is This Man Smiling?

Good Old Fashion American Ingenuity

The Great John Toilet is the creation of a company that designs bathroom products for larger sized people. They're filling a need for a growing America.  This toilet is 150% larger contact surface than normal but also allows for children or smaller sized people to use it as well.  The toilet seat is 6" longer in front and 17" higher which makes for ease of getting up. The seat is designed so that it will not shift or pinch under the weight.  But please, go for a walk and get some exercise!

Banksters (That is the polite name.)

 

This is the bank that we taxpayers bailed out; and, now, they are foreclosing on homes they do not even own!  Folks, this is a major fraud.  And guess what, Fannie and Freddie are deeply involved in this entire mortgage-foreclosure crisis.  Way to go, Fannie and Freddie! 

It's a Job

And what is wrong with the mailroom?  In today's economy, it is a good job.

DJIA Closes Above 11,000

A lot of people were excited today that the DJIA closed above 11,000, more specifically 11,006.48.  Now, let me put this in perspective.  Ten years ago, the DJIA stood at 11,000.  Therefore, the DJIA over the past ten years has done nothing!  I, for one, can not get too excited about the DJIA being dead in the water for ten years.  As an investor, it has been a loss decade.  Now, let's go one step forward and look at what the DJIA should be today if it just kept pace with inflation over the past ten years.  Are you ready?  Based on inflation, it should be 14,041.92,  or 27.57% higher than what it is today.  If you don't believe me or want proof, run the numbers yourself at The Federal Reserve Bank of Minneapolis.

Liar, Liar

This song is dedicated to the Bureau of Labor Statistics (BLS), who simply refuse to be completely honest with the American people about the true employment picture.

The Scariest Jobs Chart Ever

We are so far behind the "eight ball" in creating jobs during this economic expansion, which so far is laughable. However, the majority of economic pundits are still saying the Fed's QE2 will save all of us. Believable, I am not buying it!  And, neither should you!

Market's Parapettio Moment Fast Approaching

Let's see now, unemployment at 9.6% (U6 @ 17.1%), one out of eight Americans on food stamps, foreclosures at record number, and the DIJA is above 11,000. Why is this market up? Everyone, except me and a few others, expects QE2 to be our nation's savior.

Food Stamp Nation

Close to 43 million people now receive food stamps. The average recipient of food stamps in June 2010 received more than $133 in assistance. The average household received more than $293. Overall, the USDA distributed more than $4.6 billion in food stamps in June alone. (Congress established the food stamp program in 1964, which was then revised by the Food Stamp Act of 1977. The program now feeds one in eight Americans, and one in four children.)

A once proud and powerful nation is fast becoming a "third-world nation.” The only way out of our dilemma is for the government to foster private-sector job initiatives, not public-sector jobs. As I have been saying for almost two years, "It's all about the jobs, stupid." Today, the BLS reported that the unemployment rate held steady at 9.6%, which is definitely understated. When you look at the number of individuals that have been removed from the employment statistics and/or just given up looking for a job, the unemployment rate is 17.1%. In other words, no private-sector job growth means no income, no consumer spending, and no capital formation & investment, which simply leads to a very bleak picture for our economy going forward.

Gallup Finds U.S. Unemployment at 10.1% in September

Unemployment, as measured by Gallup without seasonal adjustment, increased to 10.1% in September -- up sharply from 9.3% in August and 8.9% in July.  I believe the Gallup number along with the negative employment report that ADP reported yesterday for the private sector employment picture. However, given that everyone will be watching closely to the BLS number tomorrow, I expect the government's (BLS) final unemployment report before the midterm elections will understate the true unemployment rate.

Happy Days Are Here Again

Let's see now the private-sector jobs fell by 39,000 in September from August, according to a report released today by ADP and consultancy Macroeconomic Advisers said.  The reason why this is important, because it deals specifically with the private sector.  This is the sector that we want to see job growth, not the government sector!  Also, global growth will slow more sharply than expected in 2011 as advanced economies slash their budgets amid the continuing sovereign debt crisis, the International Monetary Fund (IMF) said today. As a matter of fact, the growth prospects for the U.S. took the IMF's largest downgrade, falling to 2.3% from a previous estimate of 2.9%  And, what did the DJIA do today?  It was up, of course.  Don't worry, be happy.  Once again, the market is totally focused on QE2.

This brings me to the theme song for today, which is "Happy Days are Here Again."  This song was the quintessential depression era song.  By the way, FDR used this song for his 1932 Presidential Campaign.  Trouble is with his Keynesian economic policies it took America ten years and WW II to have those happy days again.  Then, why is it that we came out of the 1920/21 depression after only one year?  Click-on following article entitled, "The Forgotten Depression of 1920" to see what economic policies brought America out the 1920 depression in such a short order.  Then, compare those economic policies to our current economic policies.  I am a great believer in what Yahusha (Jesus) said in Yohanan (John) 8:32 "And you shall know the truth, and the truth shall make you free."  It is true for an individual and for a nation!

Economic Resources

I have two main sources that I utilize to gauge overall economic activity and private employment.  In regard to to economic activity, I monitor closely the Chicago Fed National Activity Index, which is a weighted average of 85 existing monthly indicators.  The 85 economic indicators that are included in the index are drawn from four broad categories of data: production and income; employment, unemployment, and hours; personal consumption and housing; and sales, orders, and inventories. Each of these data series measures some aspect of overall macroeconomic activity. 

For private sector employment, I use the ADP National Employment Report.  It is a measure of private sector employment derived from an anonymous subset of approximately 500,000 of its U.S. business clients.  This is the true measure of job creation within the private sector.  Why is this of importance?  These private jobs is what grows the economy, not government created job.  The problem that I have with the Bureau of Labor Statistics (BLS) is that I don't consider them to be totally objective in reporting monthly employment numbers. 

Therefore, if you really want to know the "truth" in regard to the economy and the private sector employment picture, check out those two sites.  In other words, become your own economist.

The Sky is the Limit! Really Now?

This market only knows one way, and that is up, up and away, which is demoralizing all the "Bears" out there, inclusive of myself.  I believe the following two reasons explain the current market's behavior:

1. The market believes that the Republicans are going to control Congress after the November 2 elections.
2. The market loves the prospect of QE2 and beyond.  Just today Charles Evans, President of the Fed of Chicago called for aggressive QE creation.

The following chart depicts the S&P 500 with some of my comments.

In keeping with my recent tradition of providing music for how the market is behaving, let's hear from the Fifth Dimension. (By the way, instead of "balloon, substitute MARKET.")  Enjoy.

Are You Bearish or Bullish?

Currently, sentiment figures are at peak levels, not trough levels.  For example, stock market optimism is at 87%, gold at 90% bulls, silver at 95% bulls, cotton at 97% bulls, and sugar at 98% bulls.  And, of course, the poor dollar, which everyone continues to hate, is at 5% bulls.  That is probably a good reason to buy the dollar, because everyone has probably already sold it. 

The reason for such high bullish sentiment numbers, with the exception of the $, can be summed up with by the acronym QE2.  Wall Street believes that as long as QE2 (Quantitative Easing Part 2) is a Fed option, the economy will boom and stocks along with all financial assets (gold, silver, real estate, commodities, etc.) will continue to motor much higher.  But, there appears to be a problem.  Why does the Fed need QE2, if QE1 did its job?  The answer is because QE1 failed, and QE2 will likewise fail.  It is as simple as that!  Let me explain it this way.  Since QE1 started in 2008, the Fed's balance sheet increased by $2.46 trillion, while during the same time horizon U.S. credit market debt declined by $296 billion.  (Up until 2008, U.S. credit market debt rose for 63 consecutive years.  That in itself should make an inflationist take notice.)  All that QE1 expansion could not stem the tide of credit contraction, which is deflation.  

Just look at the following chart of the various money measures, especially M3.  A negative growth rate for M3 is due to credit market debt contraction.  As long as the growth rate for M3 is negative, deflation, not inflation, is the name of the game.  That is look for deflating financial assets, not inflating financial assets, going forward.