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updated 1/5/2009 The Week Ahead 1/5/2009 Any week this year with Friday as the first Friday of the month will be big for financial markets. That is because on the first Friday of every month the government releases the Employment Situation Report from which we get Non-Farm Payroll data and the Unemployment rate. All eyes will be on the the jobs sector for at least the first half of '09. December Non-Farm Payrolls are expected down by 475,000 jobs with the Unemployment Rate rising to 7%. Ahead of that though we get to see November Factory Orders and the December ISM Services Index on Tuesday. Come Thursday we'll also get the release of Initial Unemployment Claims filed last week. This data point could set up expectations from Friday's NFP release. Apart from data this week pay attention to President Elect Obama's announcement Monday about the details of his vision for a stimulus package, and watch oil for reactions to any escalation of war making in the Middle East. The USD will be sensitive to movements in the price of oil this week as well as the interest rate picture as those participating in the rally of 10-yr Treasuries begin to reassess the outlook and move rates back off the floor. The Week Ahead 12/29/2008 Another short week of trading is ahead as we ring in the New Year on Thursday. With only four trading days left in the year (for many only 3 as Friday off will make for a nice four day weekend), most market participants will be happy to sit on their hands and not risk giving back some of what they made, or increase their losses further. The economic calendar is light this week as well, with only Consumer Confidence, Initial Claims, and the Chicago NAPM report to drive market activity. Initial Claims, with expectations of a number in the high 500's, will draw close scrutiny again this week. The Chicago NAPM release will likely show continued contraction in the manufacturing sector. Geo-politics is back on the front burner as Israel once again has had to slap down Hamas. As always, the risk is the impact on oil prices. This renewed tension will put a floor under oil for the week. The one thing the US economy has going for it right now is the collapse in oil prices since July, we don't want to see that reversed. The dollar will suffer further loses if oil prices get back above $43 per barrel this week. 2008, what a year for financial markets, glad that is over. "Do you wish to know if that day is coming?" The day society is near ruin. "Watch money. Money is the barometer of a society's virtue. When you see that trading is done, not by consent, but by compulsion---when you see that in order to produce, you need to obtain permission from men who produce nothing---when you see that money is flowing to those who deal, not in goods, but in favors---when you see that men get richer by graft and by pull than by work, and your laws don't protect you against them, but protect them against you---when you see corruption being rewarded and honesty becoming a self-sacrifice---you may know that your society is doomed. Money is so noble a medium that it does not compete with guns and it does not make terms with brutality. It will not permit a country to survive as half-property, half-loot." Ayn Rand, Atlas Shrugged. As Washington, DC and Wall Street get more cozy together, her words have a ring of truth and warning for today's America. 12/25/2008 --------------------------------------------------------------------------- MERRY CHRISTMAS AND HAPPY NEW YEAR TO MY FELLOW AMERICAN'S ------------------------------------------------------------------ 12/23/2008 California Gov. Arnold Schwarzenegger wants to be President Two things to Arnie: First, you can't be President because you were born in Austria. I know you've got your buddy Senator Arlen Specter (R-PA...aka; King RINO) working on trying to change the US Constitution for you, and I know you're emboldened by the fact Obama is about to become our next President and it's not exactly clear he was born in the US. Be that as it may, your life story is too well known, you weren't born anywhere near America, and efforts by Specter will fail. Second, you've failed as Governor of California. You got into office by a fluke in state political history, you've accomplished next to nothing you said you would, and of course the state you run is about to go bankrupt. So, no Arnold, you cannot be President. Accept it and move on. Christmas, there are worse things to believe in Stephen Colbert's Christmas special closed with a wonderful song about far worse things to believe in than Christmas. It was Stephen's soft handed effort to draw attention to the sad and pathetic annual disdain for Christmas by non-Christian minorities. It was a duet with Elvis Costello...nicely done guys. Once we stipulate American retailers annoyingly over commercialize Christmas and begin the celebration way to early every year, it's an all around positive national holiday. First and foremost it is a religious holiday for Christians celebrating the birth of Jesus Christ, the central figure in Christianity. Second, it's a secular holiday celebrating children who are well behaved, a time of year for loved ones to gather together exchanging gifts to bring joy to each other, and to offer love and help to those who are less fortunate. For a couple-few weeks a year our streets and homes are a bit more pretty with all the lights and wreaths and decorated trees across the landscape. And, again we can stipulate Christmas music hits the airwaves too soon, and sometimes too often, but you can't deny how lovely most Christmas songs are, especially the classics. For those who don't care for the music, change the radio station. Otherwise, is it all really that bad? Non-Christian minorities have to back off, recognize they live in a Christian nation, and just enjoy the mostly joyful and pretty time of year. There are much worse things to believe in. Home Builders/Developers trying to find ways to get TARP money Sorry guys, you get nothing. Home Builders and Developers want government money to help keep doing what they do. Sadly, what we need instead is for a pause in speculative new home and commercial construction. Their request should be rejected without consideration. Caroline Kennedy gets Hillary Clinton's Senate seat Really? Come on Man! My fellow American's, we are failing ourselves. The Week Ahead, 12/22/2008 It's probably a three day trading week with Christmas on Thursday. Many market participants will stretch the holiday to a four day weekend. Daily volumes should be light across all asset classes, but intra day trading ranges (think FX) could be outsized. There are four key economic data points this week, led off by housing. Given the Christmas holiday we will get a look at both New Home Sales and Existing home sales at the same time on the same day, Tuesday at 10:00AM. It will be another needed glimpse into the health of the national housing market. Two other data points of interest will be November Durable Goods Orders excluding autos and Initial Unemployment Claims for last week, both released on Wednesday at 8:30AM. Big picture, support in the S&P is still around 776, the EUR/USD is range bound from 1.3850-1.4340, and it looks like 90 is a good level of support for USD/JPY. The Japanese Central Bank is a little anxious down at these levels. Bonds, well not much to say, rates are at or about zero...safe and sound, I hope. Bernie Madoff feeding on his fellow Jews The insular world of the Jewish community is being revealed to all Americans as the Bernie Madoff ponzi scheme comes crashing down. "I'm one of them," "he's one of us," must have been the underlying motivation for so many to so blindly invest most or all of their money with Madoff. So far it appears the vast majority of investors (individuals, charities, hedge funds) and other non-investor actors (lawyers, accountants, involved relatives) in this unfolding drama are of Jewish faith. We will get a revealing look at the power of the Jewish lobby in America as efforts appear to be already underway in Washington, DC to get public funds to make Madoff's investors whole, or nearly whole again. Before any investigation is even underway, and contrary to common sense legal advice at such an early stage in a case like this, Chris Cox, the Chairman of the SEC has basically already put the US taxpayer on the hook for this mess by suggesting, when asked about the SEC's role in the scandal, it's the SEC's fault. Such a fool hardy admission opens the legal door of responsibility for this mess to be put on the SEC and therefore the American tax payer. The only ones to blame for this scandal are Bernie Madoff and the investors who blindly invested their money with him...period! 25 Reasons to buy an American branded car Reasons: Buick Lacrosse; Chevrolet Malibu; Chevrolet Corvette; Chevrolet Impala; Pontiac Solstice/Saturn Sky; Saturn Aura; Cadillac CTS; Cadillac STS; Ford Focus Coupe; Ford Fusion; Ford Mustang; Ford Taurus; Lincoln MK5; Chrysler 300; Dodge Avenger; Dodge Charger; Dodge Viper; Saturn Outlook/Buick Enclave/GMC Acadia; Chevrolet Tahoe; Saturn Vue; Cadillac SRX; Ford Edge/Lincoln MKX; Dodge Grand Caravan; Jeep Wrangler; Chevrolet Silverado; Ford F Series. Any of these largely American made vehicles are perfect substitutes for their import branded competition. The Big 3 need our help. If our elected officials, complicit in creating problems for the Big 3 over these last 30 years, are unwilling to help with a bridge loan, implicitly revealing their allegiance to Japanese, Korean, and German auto makers, then we the American citizenry must step in. The vehicles listed above are worthy of a test drive. Take a look around the highway, the parking lot, your own driveway...too many import branded vehicles. Always Try to Buy American. Start tomorrow. 25 reasons America is in decline Reasons: Senators Daniel Akaka (D-HI); Max Baucus (D-MT); Joe Biden (D-DE); Robert Byrd (D-WV); Thad Cochran (R-MS); Larry Craig (R-ID); Chris Dodd (D-CT); Pete Domenici (R-NM); Chuck Grassley (R-IA); Tom Harkin (D-IA); Orin Hatch (R-UT); Daniel Inouye (D-HI); Ed Kennedy (D-MA); Patrick Lehy (D-VT); Carl Levin (D-MI); Barbara Mikulski (D-MD); Bill Nelson (D-FL); Pat Roberts (R-KS); Bernie Sanders (I-VT); Chuck Shumer (D-NY); Richard Shelby (R-AL); Olympia Snow (R-ME); Arlen Spector (R-PA); Ted Stevens (R-AK); and John Warner (R-VA). Each of these Americans have been serving in Congress for at least 28 years. Robert Byrd and Ted Kennedy are the longest serving among the group. These individuals, each repeatedly elected by the rest of us, have reigned over the demise of America's public education system, an ever increasing trade deficit, an ever increasing federal budget deficit, an historic 30 plus year immigration wave with no end in sight, encroachment of American's national sovereignty by the UN, allowed the Judicial branch to take over issues that should be legislated, the mismanagement of the mortgage monsters Fannie Mae and Freddie Mac, oversight failures including the attacks of 9/11, the collapse of Enron and Worldcom, and the financial mess we find ourselves in right now. I could make a longer list. These 14 Democrats and 11 Republicans are part of the problem not the solution. As the Big 3 struggle for survival, as the housing market deflates from it's bubble, as manufacturing jobs continue to disappear here and reappear in Asia, these 25 of our elected officials continue to fail us. They have overstayed their helpfulness. They should not be re-elected. They're embarrassing! Life, Liberty, and the Pursuit of Happiness Simple words put on paper long ago in dire need of reemphasis today. At this time in our history those words seem so distant as our elected and appointed officials tasked with attempting to mitigate the negative impacts of the financial mess we've got ourselves into seem directly focused on making sure we continue consuming, rather than our safety (life), our freedoms (liberty), and general contentment in our communities (happiness). Consumption is no doubt a part of all of that, but must be subordinate, or more properly said, from now on subordinated to savings and wealth creation. Our leaders seemed poised to make sure they send out more checks to most of us with the understanding we are to spend it on discretionary items. You know, the things we don't really need. Pathetic. This is what we pay their salaries for? Life, Liberty, the Pursuit of Happiness can be achieved without unnecessary consumption. Don't take the bait my fellow Americans. Consumption for consumption only is a waste of money, time, energy, and space. Maintain your life, cherish your freedom, and do your best to be happy. Such a simple message if spoken by only one of our leaders would be a fresh burst of air across America. Watch out, our velocity is dropping making life hard for the Fed Who would have thought there would actually be an appropriate time to discuss advanced economics in public. The velocity (V) of money, how many times a dollar bill is passed along in the economy is relevant for public discussion. Velocity is defined as total spending (nominal GDP, or the price level time total output) divided by the quantity of money (M) in the economy. It is relevant for discussion because it is slowing to many decades lows and complicating the Fed's ability to prime the pump of consumption. Individuals and businesses are saving/hording cash. Throughout most of America's post WWII history, the velocity of money has remained rather stable. In the midst of this historic financial difficulty we find ourselves in, velocity is no longer stable. For all the efforts the Fed has made over the past 12 months to get additional liquidity into the financial system, and ultimately to businesses and retail borrowers, the desired outcome has still not shown itself to be developing, namely increased lending and continued personal consumption levels near 70 percent of GDP. One of the problems is the understandable reaction by most of us to spend less and save more. Spending less and saving more at levels not seen in the US for many decades, and causing a sharp fall off in the velocity of money causing increased liquidity provided by the Fed to remain parked and idle. It seems altogether reasonable. Some of us will bear the burden of the economic consequences, but there really is no alternative. The longer you horde your bills the fewer times they can change hands potentially resulting in decreased national output. 12/1/2008 What is the equity market telling us after another yo-yo move down 600 plus yesterday? The short answer, not much, except market participants are nervous and fear still dominates greed. Unless you are an equity day trader, avert your eyes from the stock market for now. The stock market at this time is for traders, not investors. Each day we see the talking heads on our TV's try to come up with an explanation why the Dow is one day up 400 points and the next down 600. Fear and speculation is all that can really be said about the price action we're witnessing. If you must watch equities, please stop watching the Dow Jones Industrial Average, it's only 30 stocks comprised of companies that long ago abandoned the American economy for the "global" economy. Watch the S&P 500 for your equity insight. If you have equity exposure, set a stop-loss for your position, and step back from the screen. For a financial gauge of the economy, watch the bond markets, both gov't and corporate. Obama, apparently not a big fan of the US Constitution First, it's still unclear President Elect Obama was born in the United States. The birth certificate he has presented as proof of his birth in Hawaii is suspect at best (take note of pc language not even in vogue yet in the early 1960's). Can I get an actual place of birth rather than just a state? Have you seen a real birth certificate from Hawaii circa 1960's? It doesn't at all resemble his. For all you reading who are older than 38, check your own birth certificate and see if it looks like or contains info at all like Obama's. Be that as it may, it's an issue being swept under the rug by our political leaders. Second, he is nominating Senator Hillary Clinton as Secretary of State. This is in violation of the US Constitution. The Constitution reads: Article I, Section 6: No Senator or Representative shall, during the Time for which he was elected, be appointed to any civil Office under the Authority of the United States which shall have been created, or the Emoluments whereof shall have been increased during such time; and no Person holding any Office under the United States, shall be a Member of either House during his Continuance in Office. The Sec State's salary was in fact increased while Hillary was in the Senate...she is not eligible for the job...period! This won't be the first time a President sworn to uphold the Constitution has looked askance at it by putting a sitting member of Congress in their administration. Amongst the 80 million of us eligible for the job of Secretary of State I'm sure there is someone else besides Hillary who could be appointed without trampling our nations founding document. Beyond the Constitutional issue, can you believe Obama has appointed Hillary to his administration? Stunning. He's asking for trouble. Just when I thought Obama's victory would consign the Clintons to the sidelines, he puts both Hillary and Bill smack back in our faces. Thanks a lot Barack. Politics trumping country once again. So sad. Americans abandoning Americans, shame on us all As someone who has long spoken out against Americas trade policy and the importance of buying American to support American industry, jobs, wealth creation, and national stability, I'm deeply saddened by the state of America's American owned auto industry. All that comes to mind is Americans abandoning Americans. Elected officials and policy makers abandoned the auto companies, management abandoned the line workers, the line workers abandoned management, American publishers, marketers, and PR reps abandoned the auto companies, but most of all American consumers-you and I- abandoned GM, Ford, and Chrysler. The why's of this sad story are too numerous and detailed to lay out here...perhaps a book...but I want to say to my fellow citizens, shame on us. Today I'm referencing the auto sector, but American's abandoning American's could be used to describe the state of our country across a broad range of topics. The two party political system is one which comes quickly to mind. The Big 3 need our help. It is important for the collective mental and economic health of us all that America continues to be an owner and in control of our own auto industry. For all of us who have bought a new imported vehicle, lets be clear, you likely abandoned your fellow Americans in favor of supporting foreign nationals in Asia or Europe. In practice it's not as simple as the statement suggests, but the practical outcome in terms of damage to our collective economic health remains. US trade policy managers abandoned the Big 3 in favor of geo-political stability related to Cold War efforts some 40 years ago. The Big 3 have been working from a position of disadvantage against imports from Asia since the 1960's. Disadvantages in terms of labor costs, the costs of capital, government regulation, tax rates, political correctness, and a less well educated work force. The people that make up the Big 3 need some support from their fellow Americans. Congress should expeditiously extend some sort of short term rescue loan package to the auto companies to get them through the economic difficulties we all face stemming from the credit difficulties spawned by the problems in the banking sector. Importantly, you and I, American citizens, should come together in a unified patriotic way and ALWAYS TRY TO BUY AMERICAN when shopping for your next automobile. Barack's first decision doesn't demonstrate change to this voter First, congrats to Barrack and his campaign staff. Even if you didn't vote for Barack, it's still hard not to feel good about the historic implications of this election. Many tens of millions of American citizens (presumably) who are not black voted for Barack Obama, a testament to the man himself and the state of race relations in American today. History and race aside, I am deeply concerned about an Obama Presidency. That feeling of concern was affirmed after his first appointment of Rahm Emanuel as his Chief of Staff. For two years Barack runs a campaign on "Change" and he comes out of the gate with a former Clinton Administration advisor and multi-term Congressman in Rahm. AIPAC and Israel now have a strong ally watching the door to the Oval office...so much for his "Change" related to Middle East policy and the his concern for the plight of the Palestinians. Based on what I've heard and read, Rahm Emanuel is more politician than public servant. This appointment was not about "Change" or country, but politics. Think long and hard before you pull the lever for Barack Obama Is he a Socialist? Yes. Is that something new for a Democrat? No. Is it something new for America? No. America has been moving left towards Socialism since the 1960's. It would not be hard to argue in many ways America is already a Socialist nation. One only has to look at the Federal Budget, or for that matter the budgets of say California and New York, to discover the evidence of Socialism. The move has been incremental and deliberate. A vote for Barack Obama will accelerate the process as no proud American could imagine. On this day it's not a stretch to say we are collectively very near the point of no return with respect to becoming a failed state as a result of Leftist ideology. I will stipulate strongly John McCain is far from a good choice. In fact the best honest argument I can make in his favor is he is the least worst candidate. He has been part of the problem for a long time. But, but, he is a known political commodity, and while clearly a man with a touch of Lefty in him he is not nearly as of concern as Barack. Obama wants NEW DEAL II, but I promise you, we, you and I as fellow citizens do not need or want that outcome. Obama brings us quickly past the point of no return...with McCain, in four years it still won't be too late. Take note, when Barack speaks publicly he rarely says anything specific. Take note when Barack speaks it's about government fixing your problems. Isn't the record clear on that one already? If nothing else, the notion of a Barack White House with a Pelosi/Reid/Frank Congress should be enough to stop you from pulling the lever for Barack H. Obama. Did you hear? Barack Obama won the 2008 Presidential election I know, I know, you haven't yet voted, it's not even November 4th. Please, why bother, Barack has been crowned President by the MSM and they've apparently convinced the candidate of the same. Even Libyan leader Momar Kadaffi has declared the Muslim Barack Obama President and is convinced it will be good for Islam. Barack may win, but I ask the powers that be to allow we simple Americans to actually cast our votes first. I know that in and of itself is becoming farcical with all the early voting and bogus registrations by ACORN rampant across the country, but process is important sometimes. If the majority of Americans (think electoral not popular) want to move the country further to the left, pay more taxes, and "change the world" (note: this goal has nothing to do with the responsibilities of the President as indicated in the US Constitution) they will pull the lever for Obama. MSM and the rest of the world, please let us go through the motions, and give us a bit more objectivity during the last days up to the election. Keep in mind, our other choice is barely any more palatable. Connecting dots: Democrats, Osama, China, Structured Finance, President & Congress A good starting point for our current difficulties is November 20, 1994. It's Bill Clinton's second year in office, and he ratifies the The International Convention of Elimination Of All Forms Of Racial Discrimination, a subsection of a UN Treaty from the 1960's. This opens the door for Congress and the Clinton administration to legally compel banks and other lending institutions to begin making mortgage loans to low income Americans so they can own their own homes and the American dream can be achieved. Affirmative action has hit the housing market and the sub-prime mortgage is the means for the Left to achieve their goal. By the late 1990's with the help of Fannie Mae and Freddie Mac, and programs like the Community Re-investment Act, most of the power players are on board. They have a plan to diversify their risk to low income poor credit mortgage borrowers by bundling the mortgages, turn them into securities with a price, a yield, a maturity and a stamp of approval from a rating agency (S&P, Moody's). Not only are they sold to investors of all kinds, but the securities become tradable products for banks, investment banks, hedge funds, and the like. By 2000, the housing market was good, not to hot, but consistent with it's post WWII averages on a national basis. September 11, 2001, Osama makes good on his promise to hit the US. The US economy takes a big economic hit. Capital spending comes to a near halt, and a mini credit crunch takes hold. The Fed, led by Alan Greenspan is compelled to aggressively lower short terms interest rates, with the Fed Funds rate getting down to 1% by late 2002. In early October 2002 the fed action begins to take hold as the economy strengthens, stocks begin what will be a five year bull run, and the housing bubble begins inflating. By 2003 the Fed sees the risks to their historically low rates and begins a series of 26 consecutive interest rate hikes culminating in 2006. For all it's efforts the Fed can't stop the housing bubble from continuing to inflate because long term interest rates (think 10yr treasury) refuse to rise and in fact fall. Why? China and their massive US dollar trade surplus is the short answer. In late 2000 Bill Clinton proudly signed legislation granting Permanent Normal Trade Relations (PNTR) with China. In 2000 our merchandise trade deficit with China was $84 billion, by 2004 it reached $162 billion, and by the end of 2007 our merchandise trade deficit with China was $256 billion. China, flush with USD reserves and needing a safe place to park all that cash became a big buyer of 10 yr US treasuries. This went a long way to help keep a cap on long term interest rates, thereby counteracting the efforts by the Fed on the short end of the interest rate curve. Sustained low long term interest rates allowed the housing bubble to continue to inflate reaching historic levels in terms of ownership rates and price appreciation. Meanwhile, since the late 1990's financial market participants began the structured finance craze in their community. Math PhD's became very sought after. Financial market participants wanted more products to trade and to sell, and derivatives were the answer. Collateralized Debt Obligations (CDO's) and Credit Default Swaps (CDS's) were born. It was all about bringing long term cash flows to short term cash flows, and supposedly diversifying risk. The players were helped along in 1999 by Bill Clinton's repeal of the Glass-Steagall Act which had kept separate activities of commercial banks and investment banks. Again, under Clinton in 2000 the Securities and Exchange Commission (SEC) went along with the banks and investment banks exempting derivatives (CDO's, CDS's) from regulation and oversight. In 2004 the SEC under Bush exempted investment banks (at this time Hank Paulson was CEO of Goldman Sachs) from maintaining reserves to cover loses in derivatives. Which brings us back to Congress, and both the Clinton and Bush administrations and the tremendous failure of oversight. From the time the first seeds of our current financial difficulties were sown years ago to today, Congress and consecutive administrations have had all the oversight power they've wanted. Congress failed in it's oversight role. The Clinton and Bush administrations failed in their oversight role. Of course many of us failed in the oversight of our own personal financial responsibilities as well. The sub prime mortgage mess started our financial problems, and then revealed poor risk management throughout the financial system, a strong degree of hubris and irrational exuberance, and that a PhD from Wharton or Harvard isn't that impressive after all. At times like this, Globalists are chomping at the bit WARNING, WARNING, in times of crisis our Globalist leaders (think Bush, Gordon Brown (UK), Paulson, Bernanke) will make an effort to further push their agenda towards the diminishment of the independent sovereign state (think USA) and the rise of a global governing body (think UN). You can hear it every time the powers that be speak. Listen how often the word "global" or "world" is used. The G-7 communiqué released yesterday after their meeting reveals the truth...it's a global problem requiring a global solution necessitating a relinquishing of control by nationalists (think American citizens) of their national laws and territorial boundaries. Of course, the problem does not need a global solution, and Americans do not need to send their tax dollars overseas to help foreign institutions and economies, or give foreign institutions greater control over our economy at the detriment to ourselves. Rich or poor, in times like this, know where your money is Am I going to be hurt? Is my money safe? What should I do with my money? Is now a good time to buy a house? What's the outlook for employment? These are some of the common questions I'm being asked by readers, friends and family. There is anxiety out their for most of us right now and these questions reveal it. Well, unless you're one of a few hundred Americans involved in the decision making process at the governmental level, the answer is easy: For the next six months to a year know exactly where your money is coming from, where it is, and be as near to cash as you can be. Beyond that, for those of us at the lower end of the pay scale, who live about pay check to pay check, rent their home, and don't have much in savings or do not have a 401K, their risk at the moment is their job. For those of us with savings, a 401K, or own a home, their risks are greater. They of course also face the risk of losing their job as the economy inevitably slows further, but also the lose of wealth and disrupted access to credit. For them, they must get a finger on where every dime is. They must read their financial statements carefully. They should speak to their brokers, but do not take their word without doing your own due diligence. They should speak to their banker and find out if the bank is doing anything independent of the FDIC to secure deposits. Make sure what accounts are insured and what is not. Not all accounts are insured under FDIC rules. Very importantly, set a stop loss limit for your investments. A stop loss limit represents the maximum amount of money you are willing to lose on any given investment, be it a mutual fund, individual stocks, or a home. Defense is the word of the day from a financial perspective. The FDIC has done a good job during this credit crunch to date. Boosting the insured limit to $250k was a good move and seems to have calmed the nerves of most depositors. Don't panic. Keep getting up each day to go to work and work hard. There will be pain coming out of this financial turmoil, but it will not be the end of us, stability will return, and wealth will be recreated. Lastly, if you're going to watch for financial news on TV, please go to Fox Business, CNBC, or Bloomberg TV, don't' waste your time with CBS, NBC, ABC or other cable news outlets. Otherwise, go to the internet for the more objective less hyped analysis. Technical analysis is helpful, though less so when emotions are peaked This evening on Fox Business News with Neil Cavuto, I spoke about the importance of psychology when it comes to using technical analysis. The simple point is this, appealing to past price action by way of technical analysis gives us insight into how financial market participants acted when we were last at any given price level. Implicit is an emotional state of mind of "the market." If that state of mind is different when we find ourselves trading at past levels than during the last time at that level, any analysis is weakened without discounting potential psychological differences (unusually high levels of fear or greed). Those differences manifest themselves in different degrees of greed or fear. At this time in American history, fear dominates, and apparently at a level our financial markets have not witnessed in a long time. When emotions are peaked in either direction, technical analysis can be less than the solid indicator it normally is. From 10,300 in the Dow to today's close, many solid technical levels were taken out with barely a pause. The catalyst for our financial meltdown: Affirmative Action As the powers that be scramble to undo the mess they've all made together, blame deflection is the sport of the moment. It's Congress, it's Bill Clinton, it's Bush, it's the Fed, it's nasty Wall St. people, and so on. There is only one phrase American's need to recite to put their finger on the cause of this whole mess we find ourselves in: AFFIRMATIVE ACTION. Housing for minorities at the majorities expense. Lehman CEO Fuld before Congress a farce Richard Fuld, former CEO of Lehman brothers was before Congress yesterday for questioning about the largest bankruptcy in American history. It was another embarrassing moment for Congress. I only want to make two points. First, Fuld was not contrite, looked and seemed arrogant, and blamed the bankruptcy on everything but the strategic decisions by the leaders of the company. He clearly felt entitled to nearly $320 million in take home pay since 2000. Second, the questions from Congress were weak and not on point. No one asked Fuld about the marks used for their derivative products that turned out to be dramatically off once the books were open to the public. No one asked Fuld for the reasoning to have such a huge exposure in CDO's, CDS's. More amazing and jaw dropping was to listen to Congressional members. Stumbling to find softball questions for a man that has probably contributed to every Committee Chair in Congress and held the reins while Lehman went from a great company to being put upon the trash heap of financial markets history, committee members actually asked him what he thought Congress should do to solve the credit problem facing America today. Embarrassing! September Non-Farm payroll data worse than expected September jobs data, the key market indicator each month, was released at 8:30 this morning coming in worse than expected at -159 thousand jobs. Conventional wisdom suggests this may be the best of the payroll numbers to come for the next several months as the banking troubles spill over to the whole economy. Market reactions; higher stocks, stronger dollar, higher interest rates suggest the market is still more focused on the rescue package from Congress and the continued impacts of the credit difficulties. Palin v Biden First, all the concern about Gwen Ifil being in the pocket of Obama was a big waste of energy. She was fair and kept the debate moving along. Once again, two more candidates standing for debate on the national stage did a poor job of actually answering the questions they were asked. While Palin clearly did well, seemed comfortable, and looked great, she didn't knock out Biden, which is really what she needed to do. As for Biden, one would have expected much more from a man who has been in Congress for nearly 30 years. His depth of knowledge was not impressive. Palin probably did McCain some good...again, but she also was not very deep in knowledge, seems to be a one trick "energy" pony, a little too folksy for this viewer, and did I mention she looked great. I did like it when she called Joe, O'Biden. So that's over, all set next. It's fractional reserve banking stupid! There is a lot of confusion in America about the safety and availability of the money we each put in our bank of choice. While we should have all been taught this in high school (all evidence to contrary), America's banking system is a fractional reserve system. For every dollar we each put in our bank account, over 80 cents is quickly used to lend money to others for business, homes loans, car loans, or to make strategic moves for the bank itself. The premise is that not all customers will want all their money back all at once, so at any given moment only a fraction of the banks deposits need to be liquid and available on demand. The fraction which banks have to hold is determined by the Fed. In hard times the fraction can be reduced to increase access to loans, and in good times to slow lending to avoid overheating the fraction can be raised. In any event, at any given moment in time all of our collective deposits are not immediately available. The FDIC insurance programs provides a back stop, otherwise it's first come first serve. Remember the song about how a Bill is born? The US Constitution: "Section 7. All bills for raising Revenue shall originate in the House of Representatives; but the Senate may propose or concur with Amendments as on other Bills." Another crises providing cover for ignoring the Constitution? The US Senate, in a power and publicity grab over the House, are very close to presenting a Constitutional quandary. They have voted on and passed a revenue raising rescue package for the banking sector which they are now sending to the House. This is not the way it should go. I have no doubt there is some technicality which can be cited by Senators making this Bill fall under the "propose or concur with Amendments" part of the Section 7 of the US Constitution. Come on, lets just do this by the numbers. Lets not make a bad situation worse by further trampling on the Constitution. The Bush administration has done enough of that lately. What a surprise, the USD is still safe haven For the better part of five years the powers that be have been telling Americans our day is over. BRICK: Brazil, Russia, China, India were the new power centers of the world ready to by pass America and put the USD upon the garbage heap. Talking heads spoke of a US dollar crisis. Surprise, America is still America....relative to all others. Of course that is the key for foreign exchange rates. The US dollar, in the face of one of Americas greatest financial challenges is strengthening across the board as the world gets the jitters about the fallacy of BRICK being all powerful absent the American consumer. US Treasuries, are safe haven. To buy US Treasuries, one needs to have US dollars. Two months ago EURO/USD was trading at 1.5640, today the rate is 1.3800. Americas economic systems is lousy, except when compared to all others. Embarrassed to be an American today? I know I am, and my fellow citizens should feel the same. It was embarrassing to watch our elected officials stumble about in Washington yesterday ultimately not passing legislation to bolster our banking system because peoples feelings were hurt. It's embarrassing to watch financial market participants, the risk takers of our society, waiting with bated breath, hanging on every political development in DC for evidence they will be saved from their own largess, rather than do what they claim to be so good at, step up, take some risk, and make a market. It's embarrassing to watch Rep. Barney Frank (D, MA) act as if he is not the architect of the whole plan that brought us to this point in our history, namely; Affirmative Action for Housing facilitated by the now dreaded sub-prime mortgage. We should all be ashamed of ourselves as American's today. Having said that, lets sort out this mess and move on. The Birth of America's Housing Mess In the early 1960's the UN affirmed it was a right for humans to have housing. The International Convention of Elimination Of All Forms Of Racial Discrimination was the document it produced to have ratified by member states to right the world when it came to housing. Successive US administrations rejected ratifying the Convention until the Clinton administration did so in November 1994. The left jumped on board aggressively, led by people like Barney Frank, and the Congressional Black and Hispanic caucuses. What they needed was a reduction in lending standards by banks and other mortgage lenders to allow those people who didn't have a down payment, or didn't earn enough money to buy a home, or had bad credit, or were otherwise bad risks, to own instead of rent. While banks, the Fed, Treasury, and others generally were reluctant to jump on board, they all eventually capitulated, and sub prime mortgages were born, pay options ARMS were born, and other similar instruments. The idea was to securitize all this bad lending in order to spread the risk among many financial market participants, so that when the inevitable defaults came about, no one player could be that badly hurt. Opps! The Left is responsible for starting this problem, the right is responsible for facilitating it. But, as a group of voting citizens, American's got what they voted for. One day perhaps we'll pay attention more closely. Do You Still Think There Isn't Massive Speculation In Oil? Since mid June, the price of oil has gone from $146 per barrel, down to $90, up to $130, and back down as low as $96 per barrel today, September 30. This is the clearest evidence I can present demonstrating the degree of speculative money in commodities. For sure it's not supply and demand. Heck, one of the main reasons cited for the sell off from $146 to $90 offered by the talking heads on financial news TV is the need for banks, hedge funds, and the like to get back into cash to protect their capital ratios. Oh, so they were speculating on oil. Speculation is not a bad thing, and I do not use it in as a pejorative term, it's simply the dominant aspect of commodities markets. You do know the whole of the equity market is about speculation...right? Any gov't official, or ensconced private citizen (think T Boone Pickens) who tells you the price of oil reflects the real supply and demand situation and does not have any speculative element is lying and protecting their own narrow interests. Watch out, Credit Default Swaps are next The financial market meltdown continues for independent broker dealers like Lehman Brothers. Here's the trade; buy credit default swaps sold by the target company (Lehman, Merrill Lynch, AIG) which increases the targets risk exposure, then sell the stock short. and wait for the chaos to ensue, being certain of course not to be the last one out the door. There are fortunes being made on this trade the past few months, and certainly this week. Credit default swaps (CDS), a derivative product, are insurance on bonds issued by corporations and government entities, and are the bid daddy of the derivatives market. Originally bought by buyers of bonds to protect their principle, they've morphed into tradable products within capital market groups at banks, brokers, insurers, and hedge funds such that a significant percentage of outstanding CDS are held by those who do not also own the underlying bond. The seller of the CDS, in the event of a default by the bond issuer, pays back the principle to the buyer of the CDS--who may or may not own the underlying bond--at or near 100% on the dollar. The credit default market is massive, in the trillions of dollars. This is the focus de jour, and the biggest risk product faced by regulators since the beginning of the sub prime mess began in early 2007. Watch your money carefully. For now cash seems to be safe. Article of Interest:
The Week Ahead 8/11/08 Once again this week is shaping up to be a great "trader's" market. A bunch of economic data, the Russian attack upon Georgia followed by claims from Georgian officials Russia targeted the pipeline carrying Russian oil through Georgia to the west, and another busy earnings week should provide a good deal of volatility in equities, currencies, and commodities led by crude oil. If we discover come Monday morning Russia did in fact attempt to hit, or did hit the Georgian pipeline, that will certainly halt the sell off in crude and send it back towards $120 a barrel. Given the current high correlation coefficient between the price of oil and the value of the US dollar against the Euro we can expect the dollar to give back some of it's gains from last weeks aggressive rally and weaken back towards 1.5350 against the Euro during trading on Monday. On the data front the markets will get a look at trade data, inflation data, the foreign appetite for US financial assets, a peek at manufacturing, unemployment, and a sense for how we are spending our money and feeling about it. Retail Sales and the CPI data for July, Michigan Consumer Sentiment for June, and Initial Unemployment Claims for the week ending 8/9 should get the most attention from market participants. As always, I offer the standard caveat and cautionary notes to traders: "It's all about expectations" when it comes to economic data with those in data least well forecast inducing the greatest volatility; watch any revisions to the prior period; and keep an eye on the news headlines. Article of Interest: George Will: A Century of Progress in America
FRANK ON UNEMPLOYMENT RATE: Be afraid, be very afraid. Financial markets are now anxious about a rising unemployment rate having spiked up to 5.6 percent (a rate still historically low and at or around full employment) over the past two months from a calm 5.1 percent as measured by the Household Survey conducted by the Bureau of Labor Statistics (BLS). Recently, the BLS picked up a bunch of teenagers and college students voluntarily entering the labor force by indicating their efforts to find a job during the survey week. This meant America's labor supply increased but the number of employed did not match the increase. Hence, a higher unemployment rate. It is the labor supply calculation, the number of those employed plus those who are unemployed but are actively looking for a job, which is the villain here. Those who are not looking for work but are unemployed (often called discouraged workers) are not included in the labor supply. Many economists suggest if the labor supply numbers were more honestly calculated to include all Americans of working age who are able and wanting to work, the unemployment rate for the US economy would be approaching 9-10 percent. Of course politicians have their hands in the mix and are complicit the deception. Once we get some honest courageous elected officials in Washington DC we will have to be honest with ourselves and recognize America's economy has some bigger problems than those in office today are willing and able to admit. On that day, get short equities and long bonds, because the reaction this past Friday will be a blip on the chart when compared to price action we'll see on that coming day. FRANK ON IRRATIONAL MARKETS: Neo-classical economics has one very large assumption underlying the whole theory: rational behavior. It's a necessary assumption upon which to attempt to predict human behavior when it comes to consuming and participating in the ebb and flow of financial markets. What we are witnessing in terms of the price action of crude oil, the value of the US dollar, and equities in the past weeks, particularly last week on the back of comments from the ECB on Thursday and the release of the Employment Situation Report for the month of May on Friday, is clear evidence of how the basic assumption highlighted above can be turned on it's head by irrational behavior. Trading in any financial product is based upon two things, fear and greed. Either one when the dominant sentiment create unusual volatility and general market activity. Fear is the dominant sentiment at the moment, particularly among those participants who are betting the price of oil is overdone to the high side. What we witnessed last Friday with the $16 dollar jump in the price of crude oil was the power of fear as those short crude (betting it's going lower) were forced to scramble to cover their short in a fast moving market against them. What triggered the fast moving market up? More irrational market behavior motivated by fear and uncertainty. Hawkish ECB comments on interest rates, and an unexpected jump in the unemployment rate in the US for the month of May triggered the rally. But, it should not have if most of the acting participants were able to act in a rational manner. Such is not market sentiment though. In fact, higher rates in Europe and higher unemployment in the US are indicators of slowing economies to come and suggest lowered demand for crude...not higher. Traders of oil, the US dollar, and the S&P have got themselves all caught up in the hair brained notion that the weaker dollar is positively correlated to the price of crude. Of course economic theory teaches us in the current event, these are not correlated events as being implied by market price action. Particularly when one keeps in mind the price of crude is generally priced in US dollars. Therefore, as the dollar weakens, oil should sell off as demand for oil stabilizes or diminishes in the face of higher prices for the consumer. Additionally, since oil is priced in US dollars, and the dollar is weakening against the EUR and the JPY, then the inflationary impact on those two regions is significantly less than that on the US dollar. We are in the midst of fear dominating the actions of market participants. We will continue to experience significant volatility, and overshooting to the highside both for oil and the sell off of the dollar. It's the cart and the horse problem amongst the three trading products. US dollar traders are watching oil and the S&P's for their cures on trading, oil traders are watching the US dollar, and S&P's are watching the US dollar and oil. It's a circular frenzy made more so by the ubiquitous presence of digitized algorithmic trading models. Rational actors will once again assert their control over price action, but only when the dust settles, which will be some time still. Although, all must be reconsidered if Israel attacks Iran in a surprise attack, or if Obama wins and we get his socialist fiscal policy. At that point, it's 1973 all over again. FRANK ON Q1 GDP, RECESSION?: The financial markets got their second look at Q1 GDP for the US economy. Upon revision, Q1 GDP came in at a .9 percent growth rate, about three tenths of a percent better than the market was expecting. So, recession, or no recession? Well, the answer is both yes and no. It depends on which region of the country you reside. Think of GDP as essentially an average of growth rates from all 50 states. If growth is .9 percent nationally, that implicitly means some regions may be growing near 2 percent, and some contracting by 1 percent. What is important to watch for in this data is the second derivative (the rate of change of the rate of change). It's very likely across the whole country, the second derivative is negative. Detroit for example, is clearly in recession as growth is contracting, but still more important is the second derivative is also still negative, which means Detroit's economy is contracting at an increasing rate (read still getting worse). On the other hand, New York City is still growing above the national average of .9 percent, but without question the second derivative is negative. For New York City, the economy is increasing at a decreasing rate, which means it's headed towards zero or negative growth. Like politics, economics can be all local. In slow growth times, there is always some region of America in recession. FRANK ON LOSING BUD AND THE FRIG TO KEEP IT COLD: Is there nothing sacred for Americans anymore? How is it two of America's greatest brands and household names can be so easily cast off to foreign ownership with nary a whisper except a few headlines from the business pages. Apparently, Anheuser-Busch is subject to a takeover, and GE's appliance unit has a big for sale sign on it. GE, always the margin snob feels the appliances business is beneath it now (Or, as Jeff Immelt is known for saying, "if someone can do it better than we can..."). Since, due to decades of bad trade policy and a-national consumption habits of many American's today, Asian and European appliance manufacturers have been steadily eating away at GE's appliance market share over the past 15 years. Faced with shrinking margins from stiff competition, and a balance sheet rocked by poor bets within the GE Financial group over the past year, GE is abandoning a great American brand and taking another little bit of emblematic pride away from American patriots. It should come as no surprise to learn GE is making no effort to keep GE Appliances in American hands...the leading bidder is LG from South Korea. Say goodbye to another US manufactured product. ANHEUSER-BUSCH (Bud, Michelob, Rolling Rock, Busch, et al), a great American brand, is in the sights of Belgium brewer InBev (a sub of AmBev of Brazil). Little tiny Belgium, taking over an American icon like Bud...can that be? The weak dollar, a tacit understanding between European and American officials American assets are up for sale in an effort to further diminish that pesky little patriotism problem America has always had, and a-national CEO's and institutional shareholders ready and willing to sell to the highest bidder, are the basic reasons. What is alarming to me is how easily deals like this occur today. Once we were owners, now we are owned, and that cannot lead to good things for America in the future. Doesn't anyone care anymore? Note: On the appliance front, we've already lost Maytag to Sweden's Electrolux. As for brewers, Miller is now owned by the South Africans and Coors is now owned by the Canadians. Bud is all "Buy American" Americans have left. FRANK ON OIL: Commodities generally, led by the price of crude oil, are in a price bubble. Unlike what T. Boone Pickens said yesterday on CNBC, there is at least $30-$40 worth of speculation in the price of crude oil. Yesterday, T. Boone, having said that there is not one dollar of speculative push on the price of oil, in the next breath told CNBC he is now long oil after having been short to start the year. That my friends, is the definition of speculation. And like T. Boone, thousands of others individuals, be they trading on their own account, working in the Capital Markets group of any of 50 banks and investment banks around the world, or running a hedge fund, are speculating on where the price of oil is going. Their motivation, higher incomes via bonus compensation or capital gains. Right now, they're all in the same boat convinced it can only go higher. As evidence, consider this: The price of a barrel of crude has jumped over 20 percent in the past week. Is their anyone who believes demand for oil in that same time jumped 20 percent? No, I didn't think so. More evidence: Two weeks ago a Goldman Sachs analyst predicted the price of crude would reach $200 a barrel in the next year. What happened next, oil traders took the price of oil higher on that news alone. Why? Because that's what your supposed to do when it's going higher? Isn't it? It is speculation. The herd is running right now, and for the moment in one direction. It won't run the same way for much longer. WHAT'S THE FIX: The fix is easy. It's battling the environmental left (read NGO's, nearly all of Congress and most governors) which is the hard part. Here is what must be done to get back on the path to some sort of reasonable national energy policy. First, stop the push on corn based ethanol. It's not cost efficient at this time and it's creating tremendous upward pressure on food prices globally. Not to mention the fact the motivation for corn based ethanol mainly comes out of short term political campaigning as Iowa is the first state on the political election calendar. Second, reopen the Rocky Mountains to natural gas and coal exploration. Bill Clinton signed an executive order during his second term putting coal exploration in the Rocky Mountains off limits in a deal with China. Third, open up the eastern seaboard to oil and natural gas exploration. The quick response to this one is fear for any accident's impact on tourism along the South Atlantic coastline. You know what else will be bad for tourism there...$10 a gallon gas, stagnation, geopolitical instability. Forth, reduce government regulation pushed by the environmental lobby for decades related to the construction of refineries and nuclear energy plants. Lastly, to all my fellow citizens, the NIMBY thing has got to stop. Not In My Backyard can't be the reason we consign a significant portion of our fellow citizens to unnecessary hardship. Note: The best our elected officials have come up with for this problem so far is a tax holiday. WARNING, WARNING...we need new elected officials. FRANK ON CLINTON CAMPAIGN: Hillary is not going to be the nominee for the Democrats unless she wants to create an historic level of chaos at the convention. Right? We all know this. Yet, she fights on. And, OK, do what you will. I'm sure she has some contrived motivation related to her future political fortunes in mind. The only point I want to make today relates to her campaign finances. According to just released records her campaign is $30 plus million in debt. Shouldn't this be a barometer for the success of any Presidency she may have had. How can she be President if she and her team can't manage the finances of her campaign. Which is to say, her judgment on expenditures when constrained on the revenue side is poor. Just what she would confront with the federal budget. She's a compromised 20th Century American politician, and enough of them already. Of course that leaves with John McCain and Obama. Not good.
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@frankroche.org
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Economic Data Calender Week of 1/5/2009 1/5 10:00AM Nov Construction Spending (exp: -1.2%) 1/6 10:00AM Nov Factory Orders (exp: -2.6%) 1/6 10:00AM Dec ISM Services Index (exp: 37) 1/8 8:30AM Initial Claims week ending 1/3 (exp: 550k) 1/9 8:30AM Dec Non-Farm Payrolls (exp: -475k); Unemployment Rate (exp: 7%)
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