Friday, May 6, 2011

Market dislocation coming to a computer near you...Swan Dive part deux

...very likely early next week...Bill Gross's metal (aswell as many others metal) will be tested...there is a chance that the metal will not be able to hold without capitulation...we are at the point where certain markets need to BOUNCE hard here and now...or risk an acceleration to the downside. At this point, the risks of that acceleration have increased dramatically. Bill Gross, for example, now has 18% (strike that 23% is now the number) of their in assets under management short treasuries. Covering their $240 billion in treasury shorts is not a simple matter and will take some time - unless, of course, they are blown out - which I think is a distinct probability. The results of a capitulation in that position would cause a dramatic bond rally further deepening the current liquidity stress on the risk asset classes. The liquidity contraction is further compounded for our friends at PIMCO because of the issue of the debt ceiling...if the Treasury can not issue copius amounts of new Treasury bills then, of course, there will be a supply problem for Treasuries. This will reveal itself in the market as higher bond prices due to natural demand...Though everyone seems to be focused on China, Japan (among others) selling our good ole US Treasuries there has been an all out stampede into them...and I wonder why? If you want to understand why, I suggest a reread of my previous post: Swan Dive...the real picture...

The picture is getting very interesting and BURNanke will be toast soon enough...of course, I am long the dollar in size in the low 73's on the DX contract (that's upper 72's on the index) and short the equity indexes. Extremely, dangerous chart patterns here and lots of credit contraction and portfolio stress among market participants building for a crescendo.  I will post details on the weekend...but I would be very concerned to have long positions without insurance going into next week...Nothing may happen...but certainly the odds of some significant market event look much higher than one should ignore at this point. And the most important question is how much upside is there really here if you are long? Not very much with the Russell holding a 100+ PE ratio.

This chart is looking right on far we have most likely completed wave b of an a-b-c for the red "a" wave down..."c" of "a" targets 780 on the TF. (This chart has not been updated, its the one from the other day...I will post updates on the weekend.)

Have a great weekend.

Pimco trade on the rocks...

Pimco's Bll Gross says will change his mind on shorting us treasuries if there is potential for another recession...
The main question is when will he force himself to make the switch and how badly will his "cover" curdle the markets? Remember PIMCO has 18% of their entire portfolio currently short Treasuries. I hate to remind Bill Gross - "There is no NEW NORMAL". This whole mess that BURNanke and his cohorts have made really smells bad, there is NOTHING normal about it...and the results are not going to be pretty...but this is what happens when you give a bunch of fools who get everything wrong promotions and power.

Rewarding failure is never proper and the results are never good.


I suggest a reread of my previous post: Swan Dive...the real picture...

And of course, another recession will mean more QE, which means more debt monetization, which means that naturally, the first and last buyer for Treasury bonds, the Fed, will be there for ever and ever, which means more fiat printing, which means $5+ trillion in Fed "assets", which means more inflation expectations, etc, etc. - Tyler Durden
I could not disagree with the complaceny of Tyler's assumptions more. Tyler is a smart guy...but his post represents a complete misunderstanding of the financial reprocusions that are on the table in my opinion. The fed just destroyed ton's of freshly printed dollars by inducing people into malinvestments...further efforts will yield the same results which will end up forcing the dollar shortage to new extremes...of course that would also be represented in the dollar prices too.

Magic numbers are as effective as magic money printed by uncle BURNanke

Today, the Labor Department reported that nonfarm payrolls (jobs) increased in April for an eighth consecutive monthly gain. Today's chart provides some perspective on the US job market. Note how the number of jobs steadily increased from 1961 to 2001 (top chart). During the last economic recovery (i.e. the end of 2001 to the end of 2007), job growth was unable to get back up to its long-term trend (first time since 1961). More recently, nonfarm payrolls have pulled away from its 40-year trend (1961-2001) by a record percentage (bottom chart). In fact, the current number of US jobs was first reached in early 2000.
The reality is that most of the mysterious jobs reported today are Birth and Death model estimates and only exist in the realm or fantasy. Not only that, another flaw in the Birth and Death model is that the model does not seem to understand that a the birth of a new business produces a much lower quality job than the death of an established business. Additionally, most birth company jobs are part time - often they are contracted through Kelly Temporary Services or similar firms. The reality is that the model has almost no basis in samples or fact to claim their 175,000 jobs...but I am quite sure that BURNanke will once again use this factoid to market the concept that the 600 billion QE program that has to date destoyed over $1 trillon in new money was actually successful in creating investment in the job space. BURNanke statements to that effect are about as convincing as supply and demand being the drivers of Oil, Cotten, Sugar, Coffee, Copper and Silver.

Speaking of magic numbers:
...the problem has always been the reliability of the reports, since their version of history often undergoes dramatic rewrites long after the fact. In this particular case a 7.6% year-over-year gain becomes a 0.9% year-over-year gain, and a 0.8% year-over-year growth was admittedly actually a 2.4% contraction -- all done quietly and without media scrutiny. In short, retail sales were not as good as previously purported -- for all the reasons previously described -- and hardly anyone noticed. - from Charles Hugh Smith from Of Two Minds

Thursday, May 5, 2011

The money supply and Quantitative Easing - an uncontrolled Nuclear Meltdown

Quantitative Easing according to the fed is a panacea. It works every time and does exactly what it was long as you are allowed to adjust your stated intentions, on the record and post history, as Mr. BURNanke is allowed to do. But lets take a closer look at what is going on as the QE program implodes in a nuclear fashion.

QE was designed or one a way to give banks and interested parties more money to use to inflate their mark-to-market assets as they reflected on their balance sheets. I think you can easily rest assured that if I gave someone $100,000, which I would need back at some point, and instructed them to invest it - most would much prefer to put into some sort of stock, commodity or other easily liquifiable instrument rather than starting or funding a business which requires real commitment and non-rented money. Its no different in this case, the big banks and dealers like JP Morgan used the program to buy up 70% of the entire copper market and GoldmanTax used it manipulate nearly every market that they touched with a flood of rented liquidity. In the process, third world countries, oppressive regimes who thrive by stealing from their constituents in even more incredible ways than the Central Banking Cartel and the Western Governments have...were unable to manage citizens who could not afford to eat. These are direct effects of crazy central planning policies that are designed only to prop up the culprits of malinvestment and financial malfeasance. Burnanke can say whatever he wants, but when the fed went to study foreclosure efficacy and documentation, the could not find ONE, not a single one, case that was improper and that he did not like...and we expect the FED to be able to identify inflation or risks that I setforth in this post...Their credibility is ZERO...and BURNanke should be charged.

Now lets look at what has been occurring...and the money process. The fed gives new cash to institutions via QE, they leverage it up 10x to 20x in their derivatives trades and then the exchanges raise the margin requirements so that all that rented cash now simply disappears. Perhaps that puts into perspective why bankers and officials prefer a non-regulated derivative markets where deals can be struck without objective parameters and risk management - the whole thing is based on accounting control fraud - a leveraged banker's best friend. There are two side effects going on here...
  1. The process is duplicitous and ends up dragging in people stressed by the economic ecosystem and think they desperately need to try to prevent what they see as an impending total personal catastrophe...
  2. Amature speculators who get killed playing the last part of the charade thinking they can get rich on others misfortune
In our case, 2 trillion dollars has been created by the FED recently...nearly a trillion of losses will likely be materializing near-to-mid-term in commodities speculation rife markets. More money will be destroyed by even tighter margin and credit policy by brokerages and FCM's through out the system and other markets. So, the pressure on all inflationary assets will increase and available liquidity will decrease. The one thing to keep in mind is that liquidity shortages effect both longs and shorts because traders on both sides of transactions have the capability to use leverage. Therefore, the sideeffect will be more volatility and deceptive volatility at that...up moves will be powerful, however, the downs moves will likely be even more powerful. The fed will have accomplished the feat of creating 2 trillion dollars that not only vanish entirely (as I indicated in quite a few posts last year)...but then subsequently turn into a deficit of 1 trillion or more. The fact that the new 2 trillion that the Fed recently created simply offset money destruction in real-estate, the economy as a whole and other credit instruments is not taken into account. Certainly the Fed will not take it into account and will seek to obfuscate their failures once more. Right now we are looking at the potential results of Fed money creation efforts in this case resulting in a net destruction of money to the tune of 5 trillion dollars over the last 8 months and into the near future if their 2 trillion turns into zero as the probabilities suggest it will. This of course does not include money destruction from the US debt debacle...the great money collapse scenario, if it plays out, will be clearly visible in the dollar which will rally to 30 year highs against most other currencies in my opinion. It will also be visible in the markets where a short of cash will be unable to drive asset prices higher - just as has happened in real-estate. It will be visible in the jobs markets where the effects of disasterous central planning and government policy will constrain the real economy and job engine.

Wednesday, May 4, 2011

The liquidity light switch is turning off...

Russell 2000 daily pattern...another expanding diagonal?

Where can this setup go? its not pretty and it won't be fun...but this is what I think has a good chance of happening. Additionally to this, the whole market indexes and wilshire broke the wave 1 highs so for strict elliot wavers who want to count everything as 5 wave patterns...the count will move around because of that.

Russell 2000 unwind in progress,,,dollar windup in progress

The Price to Earnings ratio for the Russell is in the stratosphere...real bubble territory. Our wedge is nearly complete and volume has come back into this inverse ETF as the index gets price movement on the downside. While it is common for overthows of these is not mandatory and even though this is such a huge pattern and it seem reasonable that there could be an over through...this weeks volume off the lows suggests that it quite a bit less likely that we get one. These are weekly bars in this chart and already this week we are eclipsing recent weekly trading volumes and very well make a new volume breakout if we get a price breakout to go with it.

Head and Shoulders breakdown on the ES 60 minute

The targets are roughly 1290 to 1300 once again...though this time I suspect we break lower. My targets for TF are 750 though the systems have covered their shorts for a whopping the Swing Positions for TF and ES etc. I am long a significant amount of the Dollar Index near today's lows and imagine the experiment by the silver and gold long crowd to attempt to keep their trade on by transfering short the dollar will produce dramatic results as their accounts head back in the direction of ZERO. This looks like it going to get VERY interesting.

Over all professionals sold every uptick very heavily today...and bounces will likely feel to longs like dips felt to shorts only worse. As I said before...time to be very careful. I have had an incredible month of trading and wish everyone the same.

Tuesday, May 3, 2011

Russell 2000 Futures

Keep in mind that commodity initial margin is going up all over the place, in many cases significantly above exchange margin (in one case up to $30K for a single SI contract) seen below. However, the DX contract margin rate has remained the same...many people are going to attempt to replicate Silver and Gold (or other commodity longs) with short DX contracts. I guess they are going to do this just to see what it looks like to wipe out the rest of their accounts...the results are likely to be a HUGE rally in the dollar and quite a lot more pressure on inflationary assets.

All in all, I have to say the Ben BURNanke did a great job...built the perfect credit inflated asset bubble blow up. I think he should have legal conesqences for his idiocy and manipulation...

Market update...

Please keep in mind that pyramiding traders - which is most momentum traders that are trading the commodity markets are suffering from initial margin whiplash. This effects both longs and shorts. Shorts in some wild runners have been getting killed and likely do not have a huge amount of free credit left in their accounts to cover the huge margin increases...Ironically, since quite a lot of damage is being done on gaps, which are the enemies of a pyramid trading paradigm since stops are meaningless when the gap happens, the reinvested profits in the long positions are evaporating fast. So, we now have a situation where there are enough people both long and short being forced to close positions that volatility will be high and many will confuse the chaotic deleveraging with directional trades. There will be many fakeouts because of this...Ultimately this type of volatility leads only one place...deleveraging -  and that translates to smaller positions and fewer players and ultimately lower and more abberant prices. The effects will likely be contagious...

Monday, May 2, 2011

'Well, when did you buy it?'"

Today: "I obviously made a big mistake not saying, 'Well, when did you buy it?'" Mr. Buffett said.
March 30: Statement announces Mr. Sokol's resignation, Mr. Buffett had said he and Mr. Sokol didn't regard the Lubrizol trades as "in any way unlawful."
What is interesting is that if I were to pick sides, and given what I hear about Mungers trades...I would believe that Warren really did not care too much about when the shares were purchased. In fact, given Warren's style I would think that he would like to invest in companies that his guys put their own money into. Perhaps he could try to explain it just like the US bankcorp shares (among others) that he does not want to mark-to-market because - "he can afford to hold them for a long time and what he holds usually goes up".

The world is full of a lot of funny hypocrisies and Warren Buffett and Charlie Munger have quite a lot of them...A persons ability to hold a security for a long time has nothing to do with what its worth even if one were to think its worth more than the market does. Why should people expect special rules? I think that many of the higher-ups are Berkshire Hathaway, expect special rules and expect to do business their way. The Berkshire way. However, it appears that all of the sudden Warren Buffett does not approve of the public image that some of those methods have brought and has chosen Sokol's reputation, as opposed to his own, to risk.

I bet that this is not the last we hear about officials at Berkshire buying stock in firms that subsequently get purchased by the company prior to the deal being consummated.

Sunday, May 1, 2011

Commentary - buy the rumor sell the news

Last week, both Ben Bernanke and President Obama put on performances that are ultimate charades. Obama I guess thinks that he can now get people to believe his document is authentic if he makes light of the whole thing as many times as possible and pretends it not important that he presented an unsound, unstress tested, manipulated and produced document. His audacity is simply amazing. Anyone wishing to see his performance can do so by clicking here. Apparently, the objective of this performance was to demonstrate his limited satirical capability and the idiocy of Donald Trump...what he accomplished instead, semes to me, to reveal just how much he was intimidated. What a ridiculous state of affairs.

Osama was killed by order of what a poetic concept that sounds out to be...however, it sounds, I think the president did a nice job on this performance (certainly much better than his press club performance) and hopefully he will use this to extract our soldiers and resources from Afghanistan...though I am not holding my breath. In any case, the results of killing Osama are not entirely clear. Will this provoke a more active Al Queda and make them more dangerous or quell them into submission and make the world safer? Clearly Osama got to die the martyr that he wanted to, his legacy is now complete and replete in addition to marketable. Whatever the case, though its a more than 10 year production, its finally done and Obama handled it well - at least he can get one feathr in his cap before his policies and complict compatriots impart their force (or farce whichever may be more appropriate) on the economy.

Ben BURNanke on the other hand, does not understand basic economics or mathematics unless they apply first to his friends and shareholder's bonuses...He answered essentially no questions of any value but he did procure quite an amazing cast of softball throwing economics reporters - none of which had the nerve to ask him any even superficially real or substantive questions. What a sad state of affairs...meanwhile as BURNanke sets the stage for the next American revolution (most likely among a few others)...its back to the regularly scheduled programming...

However, as much as many, including zerohedge, would like to have you believe that the fed is actually creating a lot of new money...upon a objective analysis the amount of money created in the system as a whole by the fed has been a great big ZERO. Nothing, Nada, Nope, Nein...All of their QE and asset purchasing and other printing mechanisms have not grown the objective money supply at all. That's because as much money as they create, there is more being destroyed elsewhere in the system. Additionally their new money is trapped in pockets that do not make it into the economy unless you happen to like commodity or stock inflation. My post Swan Dive...the real picture...Bonds versus Equities...Debt versus Cash stands as the correct interpretation of what will happen after the capitulation exhausts and when the system accounts for the real state of the money supply. Good luck with your next job Ben...

As I had indicated in this and previous posts, some markets are capitulating, Silver and the Dollar especially, while others are topping, as the Russell, SP500, Dow, Nasdaq etc. Commodities are inflationary assets (as are stocks) primarily traded via leveraged instruments and we can see the results of that leveraged speculation in the silver markets tonight down 15% from the highs with much more to come. These commodity markets are topping in very long-term cycles that will usher in long-term bear markets for them. I actually heard one analyst suggest yesterday that if there was selling out of commodity markets it would likely drive equity markets higher. I have NEVER heard a more ridiculous assertion. Remember, equities are inflationary assets and subject to leveraged trading too...So, if one were to look at the silver market tonight...the margin calls there, especially for trade pyramiding momentum traders, will cause their carry trades and their other correlated trades to unwind all at once. Silver traders who are long the Russell will be forced to sell it...and as Silver has about 30 to 40 dollars left to fall...they will likely be selling for quite a long time once it really gets going. I am short silver from an average of about 47ish... I covered some on this drop though I expect much lower prices.

There is no foundation for valuations nor promotions that have been trumpeted to the masses by the press, officials and many analysts. Fukushima, Wikileaks, Foreclosuregate, the financial crisis, Iraq, Iran and even Lybia are barely in the news anymore...though they are all still threats in their respective ways for the US according to our officials...yet we are not humored with them anymore by the media for what ever reason. The bell will not ring and the press will not sing while the markets are heading for a liquidity crash that has the potential to make the flash crash look small in comparison. And soon...So, its time to be careful, as this last gap and go, is a trap of quite significant proportions and sets up the next Swan Dive in my opinion. My targets of the last drop were 1290 to 1300...I did expect a bounce but this was way out of the proportions that I was thinking...however I think the coming drop will take us to the lower targets in the 1150 to 1200 initially.

The funny thing is that the rally out of the debt downgrade happened right after the mission to kill or capture Osama was authorized by Obama...seems like buy the rumor and sell the news to me...and also a good explanation for the inexplicable behavior and highly abberant behavior of the markets over the last week or so. Many people will be able to thank BURNanke  and his cohorts for the malinvestment and misallocation of capital that will exaccerbate the credit contraction and create such large losses in asset values.

Copper...a sign of things to come?

TF Swing system position...

S&P500 shows remarkable price and time symmetry

Apparently, most people are looking at other things, including ElliotWave International...
© 2009 m3, ltd. All rights reserved.