A paradigmatic shift in market behavior occurred after the collapse of 2008. The commonly accepted drivers of market direction, most especially economic cycles, no longer applies in this post apocalyptic financial farce. In fact, constant Fed / Government intervention and outright manipulation has produced a parallel universe where “good” economic news is bad for the markets and “bad” economic news is good for the markets.

Liquidity is the key factor an investor must follow. All else on the financial news wires serves only as a cloud to distort financial vision. The “bad” equals good paradigm in force today exists because “bad” leads the Fed to increase liquidity which inevitably finds its way into the commodity and equity markets. To argue this obvious logic, to pretend economic growth is or will be good for the markets evidences an astonishing lack of understanding. Trying to manage money today based on the understanding of past economic cycles is akin to using an abacus in a world run by supercomputers. By the time you are done sliding beads the equation has changed a infinite amount of times.

Speaking of the equation, the Yen carry trade is perhaps the most important and volatile component. A constant and wary eye must be kept on this liquidity spigot. Any and every world event that raises the fear gauge and upsets this apple cart leads to immediate suffering in the commodity and equity markets. Take a look at the chart below. Said chart is a three month graphical representation of the Yen carry trade in terms of the Australian $. You will see the dramatic unwind that occurred in March during the earthquake/Tsunami scare. Investors will remember the simultaneous swift selloffs in world markets….

…Yesterday, we experienced the same carry unwind leads to equity / commodity rout.  The 5 day AUD/JPY chart below illustrates the precipitous drop from Monday through Tuesday:

Zero Hedge explains….

All Carry Unwinding Fast – General Collateral Hits Unprecedented 1 Basis Point

While the sell off in stocks and commodities following Goldman’s latest two-ply hit job had left the FX carry alone, it appears that even the funding desks have given up and are now dumping the core carry pairs, sending the JPY once again back to the intervention border. As the chart shows all FX carry pairs just got trampled, which in the perverse vicious loop that the market has become courtesy of peak leverage, means further weakness across all assets is likely imminent.

…So, until further notice watch the events unfolding in Japan closely. Expect negative events to unsettle the carry trade and so rock the equity / commodity markets in the short term. However, remember that “bad” equals “good” in this crazy world. Remember, each world crisis will be met with an equal or greater force of liquidity from central banks. This paradigm means fiat currency will continue to deteriorate sending commodity / equity prices higher. These are the new rules of the match. Don’t complain about fairness or waste time trying to call the top. Instead, use the knowledge to profit and defend your portfolio accordingly

Tags: AUD/JPY, Australian, Fed, liquidity, yen, Yen carry trade

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Guest Post: M.S. Howells & Co. Jose Mazas – ‘The Art of Lying’

To be the top economist in the nation, you have to be a good manipulator. Greenspan let it slip once. He said, “‘I know you believe you understand what you think I said, but I am not sure you realize that what you heard is not what I meant”.

One thing to keep a straight face on is exact knowledge of future economic prints as well as the potential political pressures that policy makers are under. In the age of Wikileaks these institutional biases should not be ignored. We would, therefore, like to debunk two widely held beliefs, in the spirit of Wikileaks, by showcasing the historical record.

The first myth is that policy makers are unaware of yet to be released economic data. While it seems reasonable that policy makers should have this data well ahead of their official release, we as market participants often choose to believe that no such thing occurs. It’s just too much of a conspiracy theory, but in this case there is clear evidence that it is a myth. Evidence: See page 149 of the FOMC transcript of the January 30-31 2001 FOMC meeting. It reads, “Indeed, the Chicago Purchasing Managers’ Survey results for January that will be released tomorrow show….”

Keep in mind that this is not a government sponsored survey, which should buttress our accusation that policy makers have perfect immediate foresight for important government operated surveys/samples. This is the prudent action to undertake- to peak at the numbers.

The second myth we’d like to debunk is the denial of the political cycle. Michael Johnson has undertaken a series of analyses on the impact of the political cycle on the media sector. Rational Economists have been debating the existence of the political cycle, mostly because it is difficult to measure. Yet oftentimes just because you can’t measure something precisely in the economic/financial data does not necessitate its denial, that is why econometricians formulate hypotheses to test and the that is why we never accept the Null Hypothesis, but rather say “we don’t have enough evidence to reject it”.

So, let’s try a different approach to assess whether the Fed could at times be influenced by the political environment rather than the economic environment, thus making it its independence less than concrete. Let’s go to the tapes, the Nixon Tapes! President Nixon taped all conversations held in the Oval Office, some of them got him into trouble, but those that remain have proven their worth to presidential historians and political scientists. A brilliant article in The Journal of Economic Perspectives (Fall 2006) illustrates the very interesting behind the scenes look at how President Nixon, in a bid to try to maximize his likelihood of being re-elected, pressured then Fed Chairman Arthur Burns into easing monetary policy in spite of Burns’ belief that easing was not necessarily in the best interests of the then US economy. At one point in their private conversation, Nixon turns to Burns and says “I know there’s the myth of the autonomous Fed…” and then laughs. Burns did in fact lower interest rates after a temporary soft patch.

Unlike the Fed that tries to keep a secret, we have, in this current administration, observed instances where the unemployment report was alluded to, before its release. This has not happened this week, however, we have detected a slight change in the tone of certain Fed speakers from last week into this week; we have heard the tone softening. Boston Fed President Rosenberg said on Monday “We don’t want to take away the accommodation too quickly”. The same day, Mr. Lockhart said “I remain satisfied that the current stance of monetary policy is appropriately calibrated to the current and projected state of the economy”. Additionally Mr. Bullard turned less hawkish from the prior week and said on Tuesday, “…additional uncertainty has clouded exit outlook…”. He was referring to the recent geopolitical events, or was he referring to this week’s employment report?

Our own econometric models which incorporate forecast expectations and the biases therein suggest we are not going to get a blow out strong number on Friday. In fact, our models suggest that the pace of hiring, in terms of changes in Non-Farm Payrolls, is likely to slow from last month’s unrevised pace of 192k. We do see elevated chances of a print below 150k, but even at an elevated 43%, (vs baseline of 30%), it is still a wise bet to expect a fairly muted NFP that is slightly worse than last month’s reading. In terms of the Unemployment Rate, we see a likely reading of 8.9% or 9.0%, with lower readings being unlikelier from a statistical bias perspective.

In summary, do listen to the shifts in tone from Fed speakers and administration officials, because they may know something we don’t and which they may not want to tell you. If you believe you understand what you think I said, it may be that what you read is not what I meant.

Bret Rosenthal is a Principal of Rosenthal Capital Management

Tags: bullard, Fed, FOMC, greenspan, lockhart, M.S. Howells, NFP, Non-Farm Payrolls, rosenberg, unemployment

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Reducing the Noise: A look at the stories that really matter

Evidence of a Government Manipulated Credit Market: ZeroHedge writes:

“…over the past 30 years, the 1 Year inflation expectations has tracked the moves in the 2 Year bond very closely. Until today: the 1 year inflation expectations jumped from 3.4% to 4.6%, a 1.2% jump in one month, this is the single highest monthly jump in a decade since the 1.4% jump in December 2001, following the deflationary knee jerk reaction from the September 11 attacks. But what is most interesting… the spread between the 1 Year inflation expectation and the 2 year bond yield is now at a record wide. This means that either consumers and bonds are at record odds over how they view the inflationary environment in the future, or that there is no real bond market in the short end (all the way up to the 2 Year bond), which is dictated purely by the Fed, and its monetization activity.”

We have contended for some time now that the 2nd phase of the Precious Metals bull market will coincide with explosive earnings growth of the mining companies. This EPS growth will naturally attract capital flows from Wall St. , which is well versed in the dynamics of price relative to earnings. The story below suggests the drilling companies will be primary examples of ebullient earnings growth….

Reuters Summit-Tight mine labor, equipment to slow future plans

NEW YORK, March 25 (Reuters) – Top North American miners of gold, copper and iron ore all said this week that a sudden ramp-up of mining projects has begun to squeeze labor and equipment and before long will slow or delay projects.

Executives talking to Reuters at this year’s Mining and Steel Summit said, skilled labor, especially geologists and mining engineers, were hard to come by and lead times on heavy equipment has been stretched out for weeks or months.

While none said their current plans were being stalled by shortages–the largest miners have lengthy planning processes and lucrative compensation packages to keep top talent–but, the day was not long off when projects would feel the crunch.

“If you add up all of the projects people want to bring online, there are not enough qualified workers to make it happen,” said Laurie Brlas, chief financial officer for iron ore miner Cliffs Natural Resources , adding, “You are seeing that everywhere. We are definitely seeing it.”Metal prices have advanced to either record or long-term highs since the start of the year, impelling miners to restart idled mines, expand current projects or develop new ones.

At the Prospectors and Developers Conference in early March in Toronto, junior miners and developers also said tight labor was rapidly worsening, and likely to accelerate costs, squeeze margins, and threaten some projects.

Cliffs got a taste of the crunch when it began to develop a new body of chrome ore.

“We asked five engineering houses to bid on our project. Three of them said, We have no resources. We can’t,” she said.

Major Drilling , a mine driller specializing in difficult locations, was surprised by the rapid ramp-up of demand for its services so far this year, comparing it with the swift slowdown of late 2008. Though Barrick Gold Chief Executive Aaron Regent did not think the recent pick up in mining projects was en par with the breakneck pace of 2008’s boom, he said, “It’s obvious that things are heading up.”

Nevertheless, to keep skilled labor in places like Tanzania and South America the world’s largest gold miner was having to pay wage increases of 70 percent to reflect local inflation rates. Western Australia’s multitude of projects also commanded sizable pay hikes, though wage rates in the United States and Canada were fairly benign, he said. While Major Drilling has plenty of drill rigs, it does not have enough crews to operate them. With many miners ramping up at the same time, it has had to curry favor to keep talent. “Some guy wants a special truck. It costs $5,000 more and he doesn’t need it, but he wants it. So, he gets it. You are in a skills intensive industry,” said CEO Francis McGuire.

Goldcorp CEO Chuck Jeannes said his company was not seeing slowdowns, but for some equipment, he might have to wait 50 weeks instead of 35 or 40 weeks a year ago. “It means you place those orders earlier,” he said. As a supplier, Major Drilling must decide which assignments to take. Miners that understand the exigencies of the shortages and are willing to pay will likely win the service. On the other hand, he described one company that stuck to its rules requiring outside bidders for part of a project. “We’re saying, ‘What do you mean you have to go to bid? There are no drills out there. We’re here. We can start today. In that case, our price is going to go way up,” said McGuire. “Companies that do that are going to have a heck of a problem getting their projects done,” he added. Furthermore, he said, a number of critical supplies have been showing up later and later and quality has declined. For example, machines are working 24 hours and equipment gets  stressed, so engines regularly blow. “Something as simple as an engine for a pick-up truck. In September, you could buy that anywhere in the world, any time. Now, it’s a four-month wait no matter where you are,” he said. When Major Drilling found a country with eight of the engines, it bought them and shipped them around the world.

“That is symptomatic of the extremely rapid ramp-up. It’s a very difficult 3 to 6 months as the ramp-up goes forward.”

Disclosure: We own shares of Major Drilling (MDI)

Tags: bond market, Fed, Inflation, Major Drilling, MDI, monetization, precious metals, Zero Hedge

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The fall and financial destruction of 2008 launched a brand-new era for the credit markets. An era marked by government intervention and outright manipulation all committed in broad daylight under the protection of financial apocalyptic prophecies. Our self-styled financial superheroes (Treasury Secretary Geithner and Fed Chairman Ben “Helicopter” Bernanke), wield their collective financial imagination and money printing press like Thor’s hammer on any and all areas of the credit markets they deem worthy. Think of this behavior, if you will, as a massive financial game of ‘Whack a Mole’: When a certain sector of the credit markets pops its head out of its hole and refuses to behave, Batman and Robin fly in on a Mil V-12 and pummel accordingly. We can rail against this free market destroying and dangerous ethic, or we can take advantage of this obscene ritual and profit.

I, for one, choose profit over catharsis and along that vein offer you the following illustration of credit market evolution by our very own Credit Guru, MJ:

Near the height of the credit crisis Capital One announced that were buying back their ABS Auto bonds. They indicated that the returns available in the secondary market exceeded the returns they could earn by originating new car loans. They continued to buy back bonds in the secondary market until secondary market prices increased to the point that it became more profitable to originate new car loans rather than simply buy secondary market loans. Once the economics favored originating new car loans over buying older vintage ABS bonds….credit flowed back into the car financing business…… and car sales began to increase as pent up demand was unleashed.

The recovery in the Auto Finance market and its ability to attract investment dollars has caused Auto finance credit to materially loosen for even non-prime borrowers. The power of this trend manifested itself in GM’s decision to acquire AmeriCredit.

A similar trend materialized in the airplane leasing business. As the credit markets recovered, bonds issued by airplane leasing companies rebounded strongly. Intermediate ILFC bonds were trading in the mid-50s in February 2009 but are now trading strongly through par. Similar to the Auto Finance business, once pre-credit crisis airplane leasing bonds approached par airplane leasing companies were quick to tap the market for new financing. This new financing allowed them to order new planes and pay for planes already on order. As we have stated numerous times since the spring 2009, the reestablishment of an airplane leasing credit market has facilitated a pick-up in aircraft purchasing that we believed would benefit the entire manufacturing industry.

This same basic premise also seems to be working its way through other structured credit asset classes…although it is and has occurred at different paces. In our opinion, CMBS is in the middle of this same cycle. The rally in many pre-crisis CMBS deals and the issuing of new deals will continue to accelerate and deal spreads will tighten as investors use leverage to build their portfolio size. Current 8x-10x leverage will increase and capital raises will provide managers with a great deal of buying power. The expected increase in leverage availability and the high rates of return still available in this market will allow it to continue to attract investment. As demand for CMBS investments increase the market will once again begin to finance an increase in commercial building…..

The RMBS sector is following the CMBS sector’s lead. Although we believe that government driven uncertainty regarding GSE shrinkage and increase regulatory risk is slowing the RMBS sector’s recovery, we do not believe that there is anything in the market at this point that will actually reverse the RMBS Sector’s recovery. The aggressive leveraging of RMBS securities in Hedge Funds, REITS, and other investment vehicles is in the process of driving RMBS prices higher. We expect that the demand for RMBS paper is going to materially grow and outstrip the amount of secondary market bonds readily available as the year progresses. This is one of the reasons the FED is dumping their bonds. By the end of this year we expect a sizable increase in non-GSE related RMBS debt that will begin the process of materially loosening homebuyer credit. This would lead to an increase in residential construction work in 2012 as the loosening facilitates the release of pent up housing demand.

Tags: ABS bonds, auto finance, ben bernanke, cmbs, Credit Guru MJ, credit markets, Fed, Fed Chairman, Geithner, GSE, REIT, rmbs, Thor's Hammer, treasury secretary

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Precious Metals Outlook: Bloomberg TV Headline: Goodby Gold

Bloomberg TV ran the above story yesterday morning, interviews were conducted and a consensus was formed. Based on this simple indicator I would say that Gold Prices bottomed yesterday at around $1159.  We will call this indicator the ‘Fin. TV’ indicator. You may recall how unbelievably accurate the Fin. TV indicator was in early July when identifying the equity market low.  I explained this phenomenon in the post titled , Stock Market Strategy: The More Things Change the More They Stay the Same . The bottom line of the explanation reads: “Rosenthal Investing Axiom: When CNBC et all call for imminent market demise expect instantaneous market rally.”

So, by applying the Fin. TV rule to Gold prices we should not be surprised to see Gold trading at $1175 as I write this note. Yesterday’s cacophony of calamitous Gold comments leads to the current $15+ comeback; categorically classic!

Stock Market Strategy: Data and Comments Continue to Point Towards Q.E.2

This morning’s disappointing GDP news dovetails nicely with voting Fed member Bullard’s comments yesterday.  The Zero Hedge story, “GDP Misses Expectations, Comes At 2.4%, Plunges From Revised Q1 GDP Of 3.7%” Offers a good breakdown of the details. I would, however, caution readers who believe this news is negative for the equity markets. Please remember the all important equation: Liquidity Expands + Credit Markets Improve = Equity Market Rally . News such as disappointing GDP numbers leads Fed members to speak out openly about the need for more liquidity…            

Bullard comments on deflation: St. Louis Fed President Bullard issued a paper arguing that the Federal Open Market Committee’s extended period language may be increasing the probability of a Japanese-style deflationary outcome for the U.S. within the next several years. Bullard concludes that an appropriate quantitative easing policy offers the best hope for avoiding a low nominal interest rate, deflationary outcome. Bullard frames his discussion in the context of theoretical analysis by Benhabib et. al. 1 that emphasizes two possible long-run outcomes for the economy: one which is consistent with monetary policy as it has typically been implemented in the U.S. in recent years, and one which is consistent with the low nominal interest rate, deflationary regime observed in Japan during the same period… See report here

…And comments about more liquidity are being backed up by actual growth in worldwide liquidity as seen in the chart below. While this cycle persists expect higher equity prices at best and consolidation of gains at worst….

Tags: Fed, Fin. TV, GDP, gold, precious metals, Q.E.2, Rosenthal Investing Axiom, stock market strategy, Worldwide liquidity, Zero Hedge

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I must begin today’s missive with an ebullient congratulations to my good friend Blaine Bell! The wedding in Napa Valley this past weekend was beautiful, the bride radiant and the party atmosphere prodigious.

While my computer did make the trip to Napa, it was used for portfolio management only. Any free time this past week was spent in the lovely company of Rebecca, my girlfriend and the grape vines of Napa. Needless to say I had a tremendous amount of reading to catch up on upon my return to RCM headquarters.

If I could condense this past week’s worth of erudition into a single thought I’d say ‘the more things change the more they stay the same.’ Certainly we have witnessed a significant amount of volatility in 2010.  The ‘change’ component of the above phrase can best be described as nauseating. If you wish to see a graphical interpretation of this 2010 phenomenon feel free to subscribe to our ‘Market Moving Chart of the Day’ located in the top right corner of this page.

As for the ’staying the same’ part of the equation I will simply direct your attention to the following three headlines. In fact, I could have chosen at random any three headlines from the past week and they all sound similar. The basic gist is as follows:

First, a piece of economic news is released that disappoints. However, Wall St. and the powers that be, do their best to put the proverbial lipstick on the ever distending pig… Retail Sales Dip, but It Could Have Been Worse – Briefing. Next, some Fed member chosen to be that week’s puppet (are straws used or is Dictator Ben punishing those who wish to stray?) makes a supposed market soothing comment… Fed’s Hoenig on CNBC says the economy continues to recover modestly, and he still sees 3% economic growth in 2010.  Almost immediately following the sock’s elucidation, a contradicting, real and market troubling story hits the wire…

FOMC minutes from from Jun 22-23 meeting:

The pace of the expansion over the next year and a half was expected to be somewhat slower than previously predicted…

The participants generally made modest downward revisions to their projections for real GDP growth for the years 2010 to 2012, as well as modest upward revisions to their projections for the unemployment rate for the same period…

We are stuck between intense volatility and an insipid news cycle. At times like this I find the best tonic is a revisit with our trusty steed, technical analysis. Below please scrutinize the daily price chart of our favorite index the NYSE Comp..

As you can see, the major uptrend remains intact. Moreover, three attempts have been made to breach this trend in May, June and July to no avail. You may however, remember that everyone and their proverbial brother on CNBC and the like were calling for an epic Head and Shoulders breakdown at the beginning of this month (labeled 3 & highlighted yellow). Naturally you will not be able to find this obvious prediction on the RCM blog site. Rule number one: When CNBC et all call for imminent market demise expect instantaneous market rally. You may recall that when these jokers were calling for new highs on the market we were ‘Stalking the Bear’.

The above chart also suggests a change in trend may be in the offing. The market price has been locked in a downtrend since the April highs moving from the top of the channel to the bottom. However, as the blue, yellow and red Fibonacci Fan lines illustrate, a change in trend has been signaled.  For your convenience I have highlighted with a green box an initial target area for the current rally.  

Allow me to conclude by writing that fundamentally I can see no reason for the markets to rally. We are firmly of the mind that economic growth will not be able to continue without massive government support. Financial regulation will continue to be a hot button right up to the November elections at the very least. Regulation of the GSEs will continue to cause consternation. I will warn that a fourth breach of the uptrend line will be deadly.

However, our credit guru Michael Johnson continues to write, “ Bank CDS & CDX Index spreads point to continued equity market gains. Being short equities as credit improves is dangerous…”  So, until such time as a fourth breach has commenced, the technical picture of the market remains encouraging.

Tags: CDS, CDX index, Credit, economy, Fed, FOMC, GDP, NYSE Comp., retail sales, Stalking the Bear, stock market strategy

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Over the last couple of weeks we have witnessed a series of conflicting reports from all over the media complex as to why equity markets are under pressure. Predictably, as soon as the markets recover a bit these same pundits come up with all sorts of reasons to cheer.  Needless to say these hysterical reports, bullish or bearish, are entirely worthless.  CNBC, with its ridiculous “fat finger” report, has proved its irrelevance as a financial news source. In fact, this embarrassing story (released with less than an 1/2 hour to go in the trading session) stinks of manipulation and seems to implicate CNBC as a pawn in a propaganda ring.

But I digress, my purpose today is to offer a little clarity to the situation. So without any further ado, let’s map the market developments and see what, if any, conclusions may be reached.

Support:

Government support is the primary reason equity markets have traded higher over the last year. That support has taken the form of, to name a few, ‘cash for clunkers’, foreclosure prevention, home buyer credits and a myriad of Fed liquidity programs.

The result of this support has been the release of government supplied economic numbers that appear promising and suggest GDP expansion (Did you pick up the sarcasm in that sentence? Sorry!).

To sum up, large quantities of Fed-provided quantitative easing and rosy economic numbers are the fuel driving markets higher.

Now Europe and the European Central Bank (ECB) have joined the fray. Supposedly close to $1trillion of liquidity will be thrown into the gaping mouth of the debt monster.

Pressure:

Abysmal – as in the size of an abyss – amounts of world debt are swallowing up prodigious amounts of liquidity.

China - China’s equity markets have for some time been a leading indicator for US markets and risk assets in general.  Recently, the Shanghai Index reached into bear market territory with a 20% decline from the highs of the year.  This is not a good omen.  Moreover, China’s economic expansion could be labeled the lynchpin of world economic growth and the recent measures by China’s central bank to tighten liquidity is, to say the least, problematic for a world drowning in debt. The recent increase in consumer prices of 2.8% in China only exacerbate the problem as it would appear inflation is accelerating.

GS – Common knowledge suggests the markets swooned because of violence in Greece. This is absolutely not the case.  We can draw a direct line to the beginning of this most recent market drop and the day Goldman Sachs faced the Senate tribunal.  Government crucifying of the financial space is heating up and will only get worse as senators fight for re election this November.  GS is the undisputed heavyweight champ of the financial space and if they fall the financials as a whole will experience painful P.E. multiple contraction.  In the last few weeks GS’s credit curve has inverted. Credit protection on GS cost more for 1 year than 5 years. If this trend persists a debt downgrade for GS could be in the offing which would in turn send financial shares tumbling.

This Just In: As I write this the “Senate Finance Committee votes on amendment to create a new ratings agency; yay’s have it 64-35, amendment agreed to…” Can you hear that? That’s the sound of a GS debt downgrade being written. The congressionally approved ratings body will likely remove the conflict of interest inherent in the current private rating agencies business model. Hence, we would not be surprised to see Moody/Fitch/S&P make a preemptive downgrade.

Financial Group (FINs) – FINs have always been a leading indicator for overall market direction. If GS drags the FINs down the rest of the market will suffer. Make no mistake, as the volume of negative news and behavior towards the FINs grows louder the equity markets will suffer.

Andrew Cuomo Investigating Whether Banks Duped Rating Agencies – Huffington Post

Senators Seek Proprietary Trading Ban for Big Banks – WSJ

Greece – I would be remiss if I didn’t include this component as part of the pressure on the markets. The proposed Trillion $ bailout seems dubious at best.  Lest we forget weeks were required to raise just $30 billion and now somehow the finance ministers got together over the weekend and $700 billion was pledged?! Now these ministers must go back to their respective countries and try to get funding. This funding request should be a tough sell. After all, the German people recently voted the ruling party out of one house after the first 40 bil Euro bailout.  In fact, rumor has it a reintroduction of the German Mark may be in the offing. How about England? They have yet to participate in any bailout and now elections have created a coalition (read: do nothing) government.

The simple fact remains that all this talk of bailouts is actually missing the real point: Greece has a solvency issue not a liquidity issue.

Conclusions/Questions:

Q: Will liquidity expansion trump debt implosion?

Q: Will excess liquidity continue to find its way into the equity markets?

Q: Will Chinese tightening and supposed European austerity plans actually drain marginal liquidity?

C: As my mom would say, “we must live the questions and the answers will reveal themselves.” So, remain vigilant, defend principal and let the markets be your guide. Don’t force your will on the market and avoid complacency at all costs.

C: No matter which is the victor, the Tidal Wave of Liquidity or the Trench of Debt, one asset class will not only survive but flourish.  The precious metals, Gold and Silver, are now advancing to new highs against all fiat currencies. I have written repeatedly over the last few years that the true inflection point for Gold and Silver will arrive when their values increase even in the face of a rising US$.  The time is now.  Please hold on to the Bar!

Tags: China, Credit, ECB, euro, Fed, financial, gold, Goldman Sachs, Greece, GS, Inflation, precious metals, silver, US$

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The news cycle is moving almost as fast and furious as the equity markets. I have combined commentary from around the web that I feel best represents the issues we are all facing.

Needless to say, the CNBC story suggesting a ‘fat finger’ was the cause of the market chaos we witnessed last week is pure tripe…unless of course they are referring to a certain infamous finger located in the middle of the hand….

ZeroHedge: Summary Of The Biggest Bail Out Ever: Even Keynes Is Spinning In His Grave

Europe has now followed the Fed in its all in move to prevent the disintegration of the euro and of Europe. As we expected, the EU was leaking various rumors to gauge market interest, and as speculated earlier, the final cost ended up being just short of one trillion. Here are the key summaries:

• EU Crafts $962 billion show of force to halt crisis
• Full blown monetization: ECB will buy public and private bonds
• Fed reactivates swap lines with Bank of Canada, BOE, ECB, BOJ, and the SNB

In other words, total and unprecedented monetary lunacy, as every cental bank, under the orchestration of the Federal Reserve, will throw money at the problem until it goes away, which it won’t. As we have long expected, Bernanke is now willing to sacrifice the dollar at any cost to prevent the euro unwind. This is nothing than a very short-term fix, whose half life will be shorter still than all previous ones.

Read More…

Market-Ticker: EFA Euro Zone Notes

I’m listening real-time to the “conference” this evening… these are “first blush” comments…

They’re throwing the kitchen sink at this, but it’s not real money for the most part – it’s “guarantees.”  Exactly how they get the rest of the €600 billion is open to question.  Only €60 billion is “real money.”

Read More…

Market-Ticker: Bernanke: Liar (Again)

From The Fed:

In response to the re-emergence of strains in U.S. dollar short-term funding markets in Europe, the Bank of Canada, the Bank of England, the European Central Bank, the Federal Reserve, and the Swiss National Bank are announcing the re-establishment of temporary U.S. dollar liquidity swap facilities.

There’s been no “strain” in dollar funding markets.

There has been an extreme level of strain in Euro funding markets.

Read More…

Mark Fisher is a legend on Wall Street and in the commodity trading world. His take on the Selloff last week is spot on…

http://www.cnbc.com/id/37002752

Mark J. Lundeen from Lemetropolecafe writes: …If I’m correct that we will be revisiting the March 2009 lows, and then on to new Bear Market lows, we will see plenty of big up days ahead of us.  How’s that?  Well, unknown to most people, the really big up days occur during the Big Bear Markets.

The venerable Richard Russell wrote: “I believe that bear market has taken over again. I expect stocks to be locked into an extended downtrend for the rest of the year. For that reason, I expect a flood of bullish propaganda to pour out from the Administration, the Treasury, and the Fed. But it will be so much water over the dam, and after a while the voting public will realize that is just more of the government’s BS. The government’s rosy propaganda will become a joke.”

Tags: CNBC, equity markets, EU, euro, Fed, keynes, Richard Russell, Wall Street

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Today, I’d like to address a curious phenomenon developing in the Treasury market.

March 31st supposedly marked the end of the Fed’s quantitative easing (Q.E.) phase. We were told the Fed would no longer print money and buy mortgage backed securities. There was, of course, no discussion about the Fed printing money and buying other assets. However, ‘ending Q.E.’ carries certain implications and it would not be a stretch to say market participants were led to believe Q.E. in all forms was coming to an end.

Enter ‘curious phenomenon’: Treasury market behavior since March 31st would suggest Q.E. is alive and well. During the month of April, long rates rallied from about 4% to roughly 3.7%.  Treasury prices went up as rates went down after the Fed allegedly stopped Q.E.?! Needless to say this is not the response most market participants would expect.

I’m sure we can come up with more than one reason for this Treasury strength. Perhaps the issues emanating from Europe have driven investors into the relative safety of  US debt. Or maybe Goldman Sachs led financial fears are responsible for the Treasury bid.

However, the following excerpt from ‘The Privateer’ (A favorite publication of ours) offers a compelling argument supporting the theory that the Fed is continuing a Q.E. assault on the credit markets. If this theory is accurate, we would expect any equity market selloff to be contained to a normal uptrend retracement. Moreover, precious metals prices should continue to advance as more Q.E. equals further currency debasement which is a tasty recipe for higher Gold and Silver prices….

The US Treasury auctioned $11 Billion worth of “TIPS” on April 26. They started to sell the regular stuff on April 27 with an auction of $44 Billion in two-year paper. With the Greek debt downgrade to “junk”, hardly anyone noticed. Hardly anyone, that is, except the bidders for US Treasury paper. Indirect bidders (read foreign central banks and governments) bid for only 28 percent of the paper, down substantially from the average demand in 2009.

But much more troubling was the massive 24 percent of the paper on offer taken by the so-called “direct bidders”. The rest was presumably taken by the “primary dealers” in Treasury paper. The “direct bidders” had taken as much as 10 percent of the auction on only 12 of 42 auctions since July last year. They had taken that much only six times in all the auctions held by the US Treasury in the FIVE years from the beginning of 2004 until the end of 2008.

Even more disquieting, the identity of those who are included as “direct bidders” is never disclosed. The fact that the amount of Treasury debt taken by “direct bidders” has blown out since the Fed officially ended its quantitative easing at the end of October 2009 has led to speculation that the Fed has not REALLY ended its policy of monetising Treasury debt after all. More and more analysts (including some mainstream analysts) have come to the conclusion that the “direct bidder” is none other than the Fed. They are almost certainly right, but nobody can know for sure because the “direct bidders” are secret….

Tags: Fed, gold, Goldman Sachs, precious metals, Q.E., Quantitative Easing, silver, treasury market, U.S. Debt

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Is it a bear or a windmill we’re stalking?

You may find yourself asking that question as the equity markets drift higher seemingly oblivious to a myriad of negative news.  Classic commentary such as “the market climbs a wall of worry” or “the trend is your friend” are being bandied about with increased regularity.  Of course, these sayings are useless when the bottom falls out of the market but for now they appear reassuring as they add to the overwhelming feeling of complacency pervading the equity markets.

In the interest of  remaining open-minded and having a strong desire to avoid Don Quixote’s fate, I will offer the following analysis that could buttress a case for continued equity price support. 

Instead of relying on hackneyed phases and static commentary let’s focus on the building strength of the inflation trade.  Yesterday, the FOMC minutes were released with the following headlines… 

FOMC Minutes Released: Fed says economic activity expanded at a moderate pace in early 2010, inflation is likely to be subdued for some time

Fed Minutes say if economic outlook worsened or trend inflation declined further, “extended period” of low rates could last “quite some time” – Reuters

Read complete FOMC Minutes  

 The Fed clearly feels inflation is of no concern. Apparently, all FOMC members with the exception of Hoenig are unwilling or unable to read commodity price charts.  Several key raw materials are experiencing impressive price appreciation as seen in the following charts…

Copper:

Crude Oil:

Platinum:

Palladium:

If this commodity price surge continues then conceivably equity prices could continue to grind higher as often happens at the beginning of an inflationary period.  You may notice, I did not include a Gold or Silver price chart in the above group.  As you will see below, Gold and Silver prices have yet to hit a new high and will need to do so for the inflation trade theory to be legitimate.  

Gold:

Silver:

Tags: bear market, commodities, copper, crude, equity markets, Fed, FOMC, gold, Inflation, OIL, palladium, platinum, silver

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