Twitter Post

This is what I said on my Twitter account (twitter.com/debauche) last Wednesday, November 23, "$INDU should bounce back (Bear Rally) to 11,600 from these very oversold levels."  And, sure enough, the market came back from Thanksgiving with a bang.  Main reasons are, as indicted on Twitter, oversold levels and seasonality.   (See the following chart.)  Today, the high on the $INDU was 11,624 but closed at 11,556.  Can it go higher?  Of course, it can.  However, the 200-day EMA now stands at 11,693, which is the new resistance level.  Saying all this, the fact is still that the long-term of the market is still down. 

Eurozone Finance Ministers OK $10.7 Billion Greek Loan

You are going to love this one!  The Associated Press reports that "Eurozone finance ministers have approved $10.7 billion bailout loan installment for Greece."  Now get this.  "The EU had demanded, and received, letters from the leaders of Greece's main political parties pledging support for tough austerity measures to get the loan."  How often have we heard this statement by Greece?  To be honest with you, I can not count that high!  And, where will the EU get the $10.7 billion?  Oh, it will simply print it, just like our Fed.  The game is just about up.  No one believes that the EU will survive.  Who are they really trying to fool?  I guess themselves.  Good luck with plan, but there is always the next plan.

SuperDud

As everyone knows by now, the so-called "Supercommittee" has been a total disaster, failure.  It, of course, should come as no surprise, since it was doomed from the start because of the partisan composition of the committee.  It is very sad that we have come to the point where it is all about politics, not what is best for America.  Here we have a committee that could not agree on how to cut government spending by $120 billion, or something like 3%, from total government spending of $3.6 trillion.  Maybe, just maybe, Congress could learn something from a drug addict.  However, I doubt it, because we haven't hit rock bottom yet.

SPX Update for Week Ended November 18, 2011

Double-click inside of chart to enlarge it.

Federal Reserve Now Largest Owner of U.S. Government Debt—Surpassing China

The Federal Reserve said that as of September 2011, it owned $1.665 trillion in U.S. Treasury securities. That was more than double the $812 billion in U.S. Treasury securities the Fed said it owned as of September 2010.  Meanwhile, China owned $1.1483 trillion in U.S. Treasury securities, which was down slightly from the $1.1519 trillion in U.S. Treasury securities the Chinese owned as of the end of September 2010. 

Given our fractional-reserve banking system, that $1.7 trillion of Fed credit has the potential to expand liquidity in our economy by a factor of 10, or approximately $16 trillion.  That is a lot of moola, which can be equated to a lot of inflation if it wasn't for the decline in money velocity.  See the following chart.

As long as the velocity of money is trending down and below its long-term average of 1.68, price deflation rules the day.

Recessions and Silver Prices

The November 2011 issue of Robert Prechter's Elliott Wave Theorist draws an interesting relationship between recessions and silver prices.  His conclusion is that if one is bearish on the economy, one should be bearish on silver.  Likewise, if one is bullish on the economy, one should be bullish on silver.  In other words, being bearish on the economy, but bullish on silver would go against history.  See the following chart from the Elliott Wave Theorist.  He does point out that during hyper-inflationary periods, precious metals would be the investment of choice.  However, we are not at that hyper-inflationary zone yet, according to Mr. Prechter.  He sees further weakness in silver, likewise with gold.

Two-Thirds of Senate, Nearly Half of House Rank as Millionaires

According to the Center for Responsive Politics, "Being a millionaire typically qualifies you as part of the American financial elite.  But in Congress, it only makes you average.  About 47 percent of Congress, or 250 current members of Congress, are millionaires.  The median net worth of a current U.S. Senator stood at an average of $2.63 million in 2010, while the median net worth among House Members was $756,765."

I wonder if "insider trading," which is legal for a member of Congress to do, had anything to do with the millionaire status.  That is, the net wealth of a member coming into Congress verses net worth leaving Congress.  That would be a great study.  I wonder if I could get a government grant to undertake such a study.  Oh, it would have to be approved by Congress.  On second thought, I don't think such a grant would be approved.  Do you?

What is 19 Feet High?

The fact that GE paid no taxes in 2010 was widely reported earlier this year, but the size of its tax return was not reported.  Are you really for the "size of its tax return?"  It will literally blow you away.  For 2010, GE's tax return would have been 57,000 pages had it been filed on paper, which would equate to 19 feet high if printed out and stacked.  No, that is not a misprint.  57,000 pages are correct.

On its $14 billion in profits, $9 billion dollars came from overseas, outside the jurisdiction of U.S. tax law.  Also, GE wasn't taxed on $5 billion in U.S. profits; because it utilized numerous deductions and tax credits, including tax breaks for investments in low-income housing, green energy, and research & development, as well as depreciation of property.

National Debt Rises Over $15 Trillion

It is official our National Debt is now above $15 trillion.  Keep-in-mind the "Debt Ceiling" that was put into place in August is $15.194 trillion.  Also, our GDP is $15.024 trillion, or our National Debt equals GDP.  Now, what are you going to do, Washington?  No, what are we, as Americans, going to demand from Washington to resolve our debt crisis?

I am calling for a "National Week of Mourning," which will commence tomorrow, November 17, 2011.  All American flags should be flown at "half staff" for the next week.  It is truly a very sad day for all Americans.

Postal Service Reports $5 billion Loss

The loss could have been worse, to the amount of $10.6 billion.  However, through the graciousness of your Congress, a $5.5 billion payment that was required to fund retiree health benefits was postponed.  I wonder who is going to pay that amount?  Oh, silly me, you, of course, as the U.S. taxpayer.  Hopefully, your friendly postal carrier will thank you with tomorrow's mail delivery.

I Wonder Why?

Did you know that Congress is exempt from insider trading laws?  Maybe it is about time that we change the way Congress does business. 



Food for Thought

Don't Let Me Down, Bears!

French and Germans Explore Idea of Smaller Euro Zone

On Thursday, September 22, 2011, I posted the following message, which was entitled, “Member Countries of the European Union (EU).”

The EU currently has 27 member countries, which have transferred some of their sovereignty, or lawmaking authority, to the EU. I believe that very shortly we will have something far less than 27 EU members.  The number that I have in mind is "10."  Which ten will eventually make up the EU? 

Well now, Reuters report, "German and French officials have discussed plans for a radical overhaul of the European Union that would involve establishing a more integrated and potentially smaller euro zone.  French President Nicolas Sarkozy gave some insight to his thinking during an address to students in the eastern French city of Strasbourg on Tuesday, when he said a two-speed Europe -- the euro zone moving ahead more rapidly than all 27 countries in the EU -- was the only model for the future.  Also, the discussions among senior policymakers in Paris, Berlin and Brussels go further, raising the possibility of one or more countries leaving the euro zone, while the remaining core pushes on towards deeper economic integration, including on tax and fiscal policy."

Now, where did I come up with my “10 nations?”   I arrived at it from Biblical prophecy.  Look up and read for yourself in Daniel 7: 19-27 and Revelation 17: 12-13.

President Obama Calls Off Christmas Tree Tax

Yes, it is true.  He is rescinding the tax on Christmas trees.  I guess he doesn't want to be known as President Scrooge. 

Unemployment Rate Drops to 9% with the Creation of 80,000 Jobs for October

Now, I will give you the real truth of the employment numbers.  The infamous "Birth/Death Model" of the BLS added 103,000 jobs, which is a statistical adjustment, not real jobs!  Therefore, if we back out that statistic, we lost 23,000 jobs for the month of October.  So far for 2011, the "Birth/Death Model" has added something like 530,000 jobs, or 42% of all jobs created.  And yet, people still believe what comes from the BLS.  Well, stupid is as stupid does. 

Do You Know Your Fannie from Your Freddie?

Fannie Mae and Freddie Mac are Government Sponsored Enterprises (GSE) in the home mortgage business.  They have the exact same business model, and they do the exact same thing.  That is, they buy mortgages on the secondary market, pool them, and then sell them as mortgage-backed securities to investors on the open market.  Everything else regarding government guarantees, explicit guarantees, implicit guarantees, subsidies and direct government funding is exactly the same for Freddie Mac as it is for Fannie Mae.

The main difference between Freddie Mac and Fannie Mae is that Fannie Mae primarily buys mortgages issued by banks and Freddie Mac primarily buys mortgages issued by thrifts (savings and loans).

The Associated Press (AP) reported today that Freddie Mac has requested $6 billion in additional aid after posting a wider loss in the third quarter.  Freddie Mac said that it lost $6 billion in the July-September quarter.  That compares with a loss of $4.1 billion in the same quarter of 2010.

The government rescued Freddie Mac and sibling Fannie Mae in September 2008 after massive losses on risky mortgages threatened to topple them.  Since then, a federal regulator has controlled their financial decisions.  (We can all see what good that has done!)

Taxpayers have spent about $169 billion to rescue Fannie and Freddie, which is the most expensive bailout of the 2008 financial crisis.  The government estimates it will cost at least $51 billion more to support the companies through 2014, and maybe as much as $142 billion in the most extreme case.

Fannie and Freddie own or guarantee about 50% of all U.S. mortgages, or nearly 31 million home loans worth more than $5 trillion.  Along with other federal agencies, they backed nearly 90 percent of new mortgages over the past year.

As mentioned previously, Fannie and Freddie buy home loans from banks and other lenders, package them into bonds with a guarantee against default, and then sell them to investors around the world.  When property values drop, homeowners default, because they are unable to afford the payments or because they owe more than the property is worth.  Because of the guarantees, Fannie and Freddie must pay for the losses.  (That would of course be you, acting as the American taxpayer.)

Fannie and Freddie are required to pay 10% dividends on the government money they receive.  Freddie paid $1.6 billion in dividends to the U.S. Treasury Department in the July-September quarter.

Mark-to-Market Accounting (FAS 157), Greece, Credit Default Swaps (CDS), and Sabanes Oxley

It all started on March 16, 2009 when FASB proposed that companies use more flexibility in valuing their assets under "mark-to-market" accounting.  A move that financial institutions said would ease balance-sheet pressures many were feeling during the economic crisis of the subprime debacle.  On April 2, 2009, after a 15-day public comment period, FASB eased the mark-to-market rules.  Financial institutions are still required by the rules to mark transactions to market prices but more so in a steady market and less so when the market is inactive.  In other words, companies, especially financial institutions, can do whatever they like.  Today, you cannot trust any balance sheet given to you today.  (One reason why I am a technical analyst, not a fundamental analyst.)  It is really that simple.  The reason is that the government demanded that FASB allow these lies as a business practice when it comes to the alleged value of securities. 

Then, on April 9, 2009, FASB issued the official update to FAS 157 that eases the mark-to-market rules when the market is unsteady or inactive.  Early adopters were allowed to apply the ruling as of March 15, 2009, and the rest as of June 15, 2009.  It was anticipated that these changes could significantly boost banks' statements of earnings and allow them to defer reporting losses.  The changes, however, affected accounting standards applicable to a broad range of derivatives, not just banks holding mortgage-backed securities.

Opponents argue that the implications for investors are that the valuation of assets underlying such securities will be increasingly difficult to analyze, not less so.  An example would be determining a company's actual assets, equity and earnings, which will be overstated if the assets are not allowed to be marked down appropriately.

As expected today (October 27, 2011), here is ISDA with the most farcical of decisions, similar to FASB in 2009.  From Reuters: "A new voluntary deal for holders of Greek debt to accept deeper losses is unlikely to trigger a 'credit event' that would cause a payout on default insurance (CDS), said a top lawyer at the International Swaps and Derivatives Association.  Greek bondholders face losses of 50 % under a plan to lower the country's debt burden and contain the euro zone's long-running debt crisis.  The aim is to complete negotiations on the package by the end of the year.  But because participation in the deal is voluntary rather than forced, it would typically not trigger payment on CDS contracts."

And now we have MF Global (October 31, 2011), who is missing something like a billion dollars of client funds.  Or, should I simply say that MF Global stole its clients’ funds, which is exactly what happened.  Once again, where are the regulators?  MF Global was not just your common “Ma and Pa Brokerage Company.”  It was a “Primary Government Security Dealer,” who is supposed to have unquestionable financial strength.  By the way, I thought Dodd-Frank was supposed to put in place checks and balances to stop this type of activity.   And, then there is Sarbanes Oxley.  There have been multiple bank failures by public companies that filed balance sheets under penalty of criminal prosecution just weeks before they failed.  These banks had balance sheets that showed perfectly, healthy institutions.  The FDIC has documented dozens of bank failures, privately-held and publicly-traded, where those balance sheets were proven to be factually false, as the losses have been 20%, 30%, 40% or even more just a few weeks later.   It is beyond comprehension that the assets in question could have actually lost 30% or 40% of their value within that period of time.  The only explanation is that these financial statements were indeed falsified.  Sarbanes-Oxley makes this a criminal matter.  Where are the indictments against the CEOs of these institutions?  (Sources: Market-Ticker and Wall Street Journal)

Interesting Chart: History Does Repeat

Food Stamp Participation: 73% Increase Since 2007

Note: Click inside of table to enlarge it.