2010 Jul 18 - Sun

Gold Manipulation, Deficits, Money Theory

Gold Manipulation

I've been accumulating a number of open browser windows, and need to get them closed. The only way I can close them is to write about them. So here is a mish mash of things I've collected.

The first collection looks at gold price manipulation. Many commentaters are saying that gold is a safe investment for protection against today's faltering fiat money systems. They are also saying that gold could reach highs of $1500, $2000, or even $7000. Various conspiracy theories are indicating that JP MOrgan is acting on Government orders to keep the price of Gold and Silver down. This could be one indication of why the price of gold has been trading sideways for the last fews months in direct defiance of all the money being thrown gold's way through direct investment, futures, and ETFs.

ZeroHedge has a lateral reference to market manipulation via an article on the current Coco futures market sqeeze.

To profit from the market's manipulation of the gold market, some people have put together intraday average price charts which show some interesting entry and exit times.

• ShareLynx: IntraDay Gold Manipulation
• Gold Eagle: Intraday Charts
• Gold Eagle: Another similar article
• Price Anomalies in the Gold Market

In any case, it could be said that the bullion banks are manipulating the market technicals in order to obtain a market correction for getting rid of their disportionate shorts in the futures markets. The Market Oracle thinks that gold is going down, lots due to a broken wedge formation.

If gold is indeed going down, bullion bank's shorts could be cleared, and this could represent a buying opportunity for gold. It is unclear how far the correction could go. But in any case, most places I read indicate that getting into gold is a good thing. And to keep it for a while. Possibly a long while, as described by Dylan Grice Discusses When To Take Profits On Gold: Hint - Not For A Long While.

Even while gold is undergoing some weakness, the Wall St. Cheat Sheet figures that it has considerable upwards strength. Once the manipulation is taken away, the price of gold could quickly get out of hand.

Market Leading Indicator

ETF Daily News offers a possible leading indicator: Watch The 20+ Yr Treasury Bond ETF For Clues To Likely Stock Reversals? (TLT, SPY, IEF).

Hauser's Law

The government, any government, has an insatiable hunger for more and more money. On the US side of things, there is talk of instituting a value added tax (VAT). Will it do any good?

According to an article written by David Ranson called The Revenue Limits of Tax and Spend, there appears to be a limit to how much tax a government can collect through it's various mechanisms. Hauser's Law indicates that Federal tax receipts will always fall short of 20% of GDP. So... if the government ever became efficient, they would use the opportunity to close out other departments where taxes collected decrease.

The Canadian Government instituted their GST, which is a form of production pipeline tax. Both the GST and VAT could be seen as a form of consumption tax. If you don't consume anything, you don't pay taxes. I suppose that could be seen as the best of a bad situation.

Spending

As governments spend and spend like there is no tomorrow, they create larger and larger deficits. Deficits can be covered by printing more and more money. Because there is no physical basis on which money resides, it is called a fiat money. That is, governments can simply pay for things with money it prints electronically out of thing air. Because gold is a physical quantity, and can be traded, it's value should rise with the inflation of fiat money. But the markets are appearing to be manipulated. Big Money is holding things back. By inflating away the value of fiat money, governments have a slim chance of making good on the money they've spent. But with today's economy as slow as it is, some are warning we could go into a deflationary phase. Governments don't like that, as it makes it hard to cover their debts.

On the US side of things, it is said that The American Dream Is Quickly Becoming The American Nightmare. It is hard to cut back when so many expect so much for so little.

Keynesians would like to spend more and more to get out of the economic malaize currently existing. But that just doesn't make sense anymore. The tipping point has probably been reached. It would appear that even if there were to be a recovery, the recovery wouldn't be substantial enough to pay back even a small percentage of what is owed.

The blog Credit Writedowns has an article which provides some insight into Misunderstanding Modern Monetary Theory.

For a background on hyperinflation, Dylan Grice writes on Popular Delusions, Some useful things I've learned about Germany's hyperinflation.

[/Trading/MarketNotes] permanent link

2010 Apr 03 - Sat

Market Notes - 2010/04/02

Cumberland Advisors Market Commentary indicates that there have been 8.4 million American jobs lost due to the recession, and that it may take upwards of four years to recover those jobs. That would be a recovery of about 175,000 jobs per month, every month.

The Federal Open Market Committee (FOMC) says that unemployment is going to stay at 9.5 to 9.7 percent for 2010. It may decrease by the end of 2011 to 8 percent and to around 7 percent at the end of 2012. This would tend to indicate that the majority of job recovery will not happen till 2013 at least.

Cumberland suggests that the Fed will be balancing job creation with inflation:

... there is a tradeoff between employment and prices, with inflation increasing when unemployment reaches a critical low rate. The Fed's job is to strike a balance so that sustainable economic growth that maintains full employment doesn't trigger an outbreak in inflation.

The Fed strikes this balance through something called the Phillips Curve Framework:

... as unemployment declines, labor markets become tight, employers bid up wages, capacity utilization decreases, and to maintain profits companies increase prices ... With the current substantial slack in the economy, a stagnant housing market with prices still not completely stabilized, few signs of impending inflation, and a continuing problem in the commercial real estate market, the FOMC can focus on jobs and keep interest rates low to support growth in the real economy as it gradually recovers.

Cumberland figures that

the continued weakness in the job market, no impending signs of inflation, and a fall election will keep policy interest rates at approximately their same level through this year.

This week's job report indicated payrolls rose by 162,000 jobs, which includes 48,000 temporary census workers. This could be a sign of recovery. Others say it is a recovery from February snow storm effects. However, previous months results have also been revised upwards, so it may not be so bad. Chart of the Day indicates a couple of things: job losses were more significant on this recession, and that job losses have probably bottomed out.

However, in a recent Gallup pOll finds that 20.3% of the US Workforce was underemployed in March. Gallup concludes with:

As unemployed Americans find part-time, temporary, and seasonal work, the official unemployment rate could decline. However, this does not necessarily mean more Americans are working at their desired capacity. It will continue to be important to track underemployment -- to shed light on the true state of the U.S. workforce.

Back in Nov 2, 2008, I reprinted an article regarding Why the Mortgage Crisis Happened. In Wednesday's Casey's Daily Dispatch, I read about the US Government's next big bit of legislation

would give the government unprecedented powers to split up firms considered too risky, and thus a threat to the economy, as well as put together a council of regulators to watch for risks in the financial system and create an independent consumer protection agency.

• It will end bailouts, ensuring that failing firms can be shut down without relying on taxpayer bailouts or threatening the stability of our economy.
• It will create an advance warning system in the economy, so that there is always someone responsible looking out for the next big problem.
• It will ensure that all financial practices are exposed to the sunlight of transparency, so the exotic instruments like hedge funds and derivatives don.t lurk in the shadows and businesses can compete on a level playing field.
• It will protect consumers from unsafe financial products, such as the subprime mortgages that led to the financial crisis.

It seems to me that if the government undid all the stuff they've implemented since 1933, we wouldn't be in this mess, and wouldn't need these fixes. The second item above is particularily ironic, what with one hand of the government creating the mess, and the other hand of the government attempting to police the action.

Casey's Report goes onto to say it much better than I:

I do take issue with creating yet another bureaucracy tasked with 'consumer protection'. It's my understanding that prior to the financial crisis no fewer than seven regulatory agencies were tasked with the exact kind of 'consumer protection' proposed by Dodd's new bill. And they didn't do a darn thing to help.

Other evidence of government's incapability of policing markets comes to light with a whistle blower's report of Gold Market Manipulation. It is said that the market manipulation was to:

The objective of this manipulation is to conceal the mismanagement of the U.S. dollar so that it might retain its function as the world's reserve currency. But to suppress the price of gold is to disable the barometer of the international financial system so that all markets may be more easily manipulated. This manipulation has been a primary cause of the catastrophic excesses in the markets that now threaten the whole world.

Additionally:

... the CFTC hearing revealed that there is 100-times more paper-gold outstanding than physical gold ... if we get a squeeze on the naked shorts, the sky is the limit for precious metal prices... Over the past ten years, the gold cartel has staged a controlled retreat. It has been fighting the advancing gold price with propaganda, paper short sales and the occasional dishoarding of physical metal from central bank vaults and more recently, the IMF. This retreat is I suspect about to turn into a rout, which means the upside potential for the precious metals is huge.

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2010 Mar 29 - Mon

Market Notes

Dow Theorists have seen one of their key market indicators become positive over the last couple of weeks. During the end of March, the Dow Jones Industrials Average closed above its previous closing bull market high of 10,725. The Dow Jones Transportation Average has also closed above it's previous January high. This, according to the theorists, is an indicator of an ongoing bull market. Recent daily volumes have been below average of the last 12 months, so it is not necessarily a strong bull market.

But then again, with so many people out of work (10% who are seeking, but 17% when added in the non-seekers), there is probably less money to be put in to the markets, and thus fewer shares traded.

The new Dow levels also represent a 50% retracement level of the recent bear market. This, too, would indicate a Bull market.

With a struggling stock market and decreasing house prices it is hard to determine where to put one's money for best appreciation. Even the price of gold is declining. But according to Zero Hedge, it could be total manipulation. The article mentions that the amount implicitly meant to be delivery is 100 times the physical amount that can be delivered. If you have an unallocated account, change it to physical really really soon. If people start demanding delivery, prices will then start to reflect reality.

For the subject of house pricing, Joel Bowman at The Daily Reckoning, made the following remarks about house pricing:

There's nothing wrong with someone wanting more than they can afford...it's when they get it that the cracks begin to appear. All over America, banks made loans they couldn't afford to make to people who couldn't afford to repay them. The solution ... would be to allow the market enough space to establish real world price discovery. Prices must be permitted to fall to "affordable" levels, in other words; levels that would inspire some level of market clearing.

Alas, what is good for the economy and what is politically expedient is rarely one and the same thing. The voting public, by and large, won't tolerate a "leave alone" government. They want their elected leaders to "do something," to step in and relieve them from the financial pains of a generation worth of overconsumption. In short, they want their government to force someone else - anyone else! - to pick up the tab for them.

I gather that is what the Obama government is doing, redistributing wealth for all its worth, or not worth, considering how much national debt is being run up. The phrase -- racking up debt like there is no tomorrow -- takes on a whole new meaning. But then, possibly, so do life experiences affect governing abilities: The Obamas. Personal Debt vs. Obama's, Demand That Americans Cut Back.

If you view a chart of the Dow from the 1920's to the present, you see what could be defined as a classic head and shoulders pattern... a pattern with definite bear feeling to it. But considering the time line, it could happen in the next days or years.

At Chart of the Day - How does the current rally rank?, they show that the current Dow Rally has entered the low range of the "typical" rally and would currently be classified as both short in duration and below average in magnitude.

I guess we'll have to see what the upcoming week's job reports have to say, and what they say after factoring out the hiring bump due to the employment for termporary census workers.

With the heavy debt which the US government is taking on, it is beginning to resemble the affairs of Greece. There are some writers who are saying the end of the US Empire is near. They draw comparisons with the Roman Empire during its rise and fall. Empires on the Edge of Chaos by Niall Ferguson is an interesting take on the situation. He references a series of paintings entitled The Course of Empire by Thomas Cole. "It is notable in part for reflecting popular American sentiments of the times".

There is an interesting chart at Nathan's Economic Edge, which represents debt saturation. With all the new US Debt, the chart shows that the debt is no longer serviceable. So... I guess we enjoy the bull market while we can, and start to buy puts or go short to catch the ultimate market downturn. Which might start to happen in the few coming months as commercial real estate loan renewals and the ARMS resets start to occur.

In the upcoming week we have:

• Monday: Personal Income and Outlays report for February
• Tuesday: Case-Shiller House Price Index (are house prices still declining?)
• Wednesday: ADP March Employment Report (not distorted by the Census hiring), Chicago PMI Index, Census Bureau February Factory Orders
• Thursday: Initial Weekly Unemployment Claims, ISM Manufacturing Index, Census Report on Construction Spending, Personal Bankruptcy Filings for March
• Friday: BLS March Employment Report (distorted by Feb snow storms and Census hiring)

The Census Bureau has recently reported that new home sales is still on the decline.

The Architecture Billing Index is a leading indicator for Commercial Real Estate (CRE) investment, and is still quite low.

Historically, according to the AIA, there is an "approximate nine to twelve month lag time between architecture billings and construction spending" on non-residential construction. This suggests further significant declines in CRE investment through all of 2010, and probably longer.

According to Todd Harrison at MarketWatch, savvy investors continue to monitor corporate credit as a timing mechanism for an equity downturn. In the same article, he makes mention of "10 reasons why we're witnessing a cyclical bull market in the context of a prolonged and painful secular bear stretch. "

One of his indicators is the VIX (Volatility Index), which is at a comparative low. VIX is cyclical, sometimes it is a large value and sometimes it is a small value. with it being currently small, it means it could smaller, but at some point, it is going to get bigger. When it gets bigger, the market will be moving in one of two directions, up or down. Because it is already going up, albeit slowly and with great difficulty, we will most likely find some really bad news, and the market will drop again, quickly. Dropping quickly, or going up faster, means the VIX will expand, and is therefore a slightly trailing indicator. Be ready with shorts and puts when the VIX expands with a dropping market.

The market volatility could change in a big way or in a small way. It is hard to tell. John Mauldin, in one of his newsletters has this to say on Ubiquity, Complexity Theory, and Sandpiles:

Well, in 1987 three physicists, named Per Bak, Chao Tang, and Kurt Weisenfeld, began to play the sandpile game in their lab at Brookhaven National Laboratory in New York. Now, actually piling up one grain of sand at a time is a slow process, so they wrote a computer program to do it. Not as much fun, but a whole lot faster. Not that they really cared about sandpiles. They were more interested in what are called nonequilibrium systems.

"To find out why [such unpredictability] should show up in their sandpile game, Bak and colleagues next played a trick with their computer. Imagine peering down on the pile from above, and coloring it in according to its steepness. Where it is relatively flat and stable, color it green; where steep and, in avalanche terms, 'ready to go,' color it red. "

"What do you see? They found that at the outset the pile looked mostly green, but that, as the pile grew, the green became infiltrated with ever more red. With more grains, the scattering of red danger spots grew until a dense skeleton of instability ran through the pile. Here then was a clue to its peculiar behavior: a grain falling on a red spot can, by domino-like action, cause sliding at other nearby red spots. If the red network was sparse, and all trouble spots were well isolated one from the other, then a single grain could have only limited repercussions. "

"But when the red spots come to riddle the pile, the consequences of the next grain become fiendishly unpredictable. It might trigger only a few tumblings, or it might instead set off a cataclysmic chain reaction involving millions. The sandpile seemed to have configured itself into a hypersensitive and peculiarly unstable condition in which the next falling grain could trigger a response of any size whatsoever."

Something only a math nerd could love? Scientists refer to this as a critical state. The term critical state can mean the point at which water would go to ice or steam, or the moment that critical mass induces a nuclear reaction, etc. It is the point at which something triggers a change in the basic nature or character of the object or group. Thus, (and very casually for all you physicists) we refer to something being in a critical state (or use the term critical mass) when there is the opportunity for significant change.

Buchanan concludes in his opening chapter, "There are many subtleties and twists in the story ... but the basic message, roughly speaking, is simple: The peculiar and exceptionally unstable organization of the critical state does indeed seem to be ubiquitous in our world. "

So what happens in our game? "... after the pile evolves into a critical state, many grains rest just on the verge of tumbling, and these grains link up into .fingers of instability' of all possible lengths. While many are short, others slice through the pile from one end to the other. So the chain reaction triggered by a single grain might lead to an avalanche of any size whatsoever, depending on whether that grain fell on a short, intermediate or long finger of instability."

"In this simplified setting of the sandpile, the power law also points to something else: the surprising conclusion that even the greatest of events have no special or exceptional causes. After all, every avalanche large or small starts out the same way, when a single grain falls and makes the pile just slightly too steep at one point. What makes one avalanche much larger than another has nothing to do with its original cause, and nothing to do with some special situation in the pile just before it starts. Rather, it has to do with the perpetually unstable organization of the critical state, which makes it always possible for the next grain to trigger an avalanche of any size."

Relating this to our sandpile, the longer that a critical state builds up in an economy or, in other words, the more fingers of instability that are allowed to develop connections to other fingers of instability, the greater the potential for a serious "avalanche."

It's all connected. We built a very unstable sandpile and it came crashing down and now we have to dig out from the problem. And the problem was too much debt. It will take years, as banks write off home loans and commercial real estate and more, and we get down to a more reasonable level of debt as a country and as a world.

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2010 Jan 17 - Sun

They Who Have The Money

Sometime this last week, someone made the observation of the fact that there was a 'hidden buyer' buying a large amount of treasuries during the weekly US Treasury auctions. There was speculation it might be the Chinese operating through private proxy parties.

The US government has a problem with all the money they are spending. Some one has to loan it to them. Hence the regular treasury auctions.

A couple figures came to mind. I believe I recall seeing that the Chinese have over one trillion US dollars due to trade imbalance between the US and China. Another figure has to do do with the fact that the US government has added over a trillion dollars to their defict through recent spending.

If you put those two numbers together, and tie them together with the 'hidden buyer' observation, perhaps it could be said that the Chinese are converting their US dollar currency holdings into US Treasury holdings. That way, not only have they made money through their exports, but they make additional revenue through the yields on the treasuries purchased.

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Short Interest, Solar, Lithium

Many commenters have been discussing Peak Oil, with Peak Oil being the fact that we've found all the easy supplies of oil, most of which has been pumped, and that our supplies, regardless of type, are dwindling... the peak has come and gone. To be more specific, the supply of oil, of which we only have a finite supply, is decreasing, while world demand for oil is increasing. The first day of Economics 100 teaches us the supply / demand curve and the effect on pricing. Oil prices can only go up, and up until the last dropped is supplied and consumed.

In the meantime, alternate sources of energy must be found to supply the world's unending requirement. For sourcing some fraction of our energy needs, some are turning to the nearly non-ending supply of sunlight. One way of converting sunlight into energy is through the utilization of solar panels. Solar panel technology has improved recently, and has resulted in it becoming economically viable to generate electricity via these sunlight receptors.

A number of companies are in the business of producing solar panels. In a sideways fashion, I came across TSL (Trinia Solar) yesterday. Someone had run a stock screener with the settings similar to:

• stocks with high put/call ratio
• minimum stock price of $10/share
• minimum put & call open interest of 10k contracts
• minimum average daily stock volume of 100k shares traded
• trading above its 20-day moving average
• near a 52 week high

TSL has risen briskly but has some pessimism from investors based upon puts easily outnumbering calls. If the negative sentiment unwinds, it could rise further. Another area of measuring pessimism is through monitoring short interest. The web size Short Squeeze offers up information so one can see how many shares are sold sort for a company. Short Interest can also be found within the Fundamental Record of the DTNIQ data stream.

In looking at TSL on Google today, Google shows that all similar solar stocks took a decline today. It turns out that the German government will cut its solar financial incentive schem by 16 to 17 percent.

With a price correction like this, it might be interesting to look to getting into solar at this level. But the real moral of the story is that a news service which tracks a portfolio's stock symbols is probably worth its weight in gold.

Moving along with the alternate energy theme, collected energy needs to be stored. Currently technology appears to be focussing on Lithium as the mineral of choice. A common play appears to be WLC (Western Lithium). An upcoming player as mentioned in Industrial Metals magazine might be GXY (Galaxy Resources).

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2008 Nov 23 - Sun

Seasonalality Timing System

In Mark Hulbert's November 17, 2008 article called The long-term reasserts itself, he mentions the Seasonality Timing System (STS) designed by Norman Fosback of the Fosback's Fund Forecaster Newsletter.

The STS is designed around the fact that "the stock market has a bullish bias around the trading sessions immediately prior to each exchange holiday as well as those at the turns of each month." He indicates that "STS followers will not get back into the stock market until the close next Monday, so as to be fully invested for the sessions on Tuesday and Wednesday, the two trading sessions prior to the market's Thanksgiving holiday."

According to those remarks, trading for this upcoming week should give us a rebound.

The picture turns less rosy with Paul Farrell's November 19, 2008 article 30 reasons for Great Depression 2 by 2011. Basically he says more spending with little or no increased income is a recipe for further disasters.

Peter Brimelow in a November 20, 2008 article called Bears' glass half empty or half full?, writes about Dow Theorist Richard Russell indicates that the primary bear market has been reconfirmed, and things are headed lower, perhaps to around the 7286 (the 2002 Dow Low) and 7470 (half the bull market peak), which we touched Thursday and Friday, but were saved by the news of Timothy Geithner, now president of New York Federal Reserve, would be Obamas's Treasury Secretary.

Corey Rosenbloom has confirmation of the Interesting Fibonacci Development. We have a level of support at about 7500, and a trading range up to a level of Fibonacci and psychological resistance of about 10,000.

But then more bad news could be around the corner. Lots of interesting Economic news coming this week: Existing Home Sales on Monday, Tuesday with GDP and Consumer Confidence, and then the day before the US Thanksgiving we have Durable Goods, Personal Income, Jobless Claims, Consumer Sentiment, and New Home Sales.

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2008 Nov 14 - Fri

Receding Recession Indicator

The last time the Dow was at current levels looks to be back in May of 2003. But going back a bit more, it was May of 2002 that the Dow dropped below 10,000. It hit a low of 7600 during the beginning of October 2002. December and January were relatively 'happy' months before the Dow retested 7700 in March 2003. It took a steady rise till December 2003 to cross back above the magic 10,000. The year 2004 saw a few minor dips below 10,000, but nothing serious. October 2007 seeems to have been the recent peak at around 14,000. It declined bit by bit until September/October of this year when it bit the dirt.

In the last few weeks, it hit a low of 8451 around Oct 10, another lower low October 27 of about 8175, and retested with a mid-low at 8282 on November 12.

All this to say that we haven't made any recent lower lows. Yet. Leonard Novy says a symmetrical triangle is forming prior to a head and shoulders finalization at a still lower level. We shall see.

And if history offers any pattern for the future, we could stay at this level for six to twelve months. Things could improve over the next bit. Come next year, there are supposed to be more mortgage resets, which may cause another economy/financial hit, more people losing homes, and as a result jobs. After that, hopefully people's eternal optimism will start to kick in, and it is possible we could see a 10K Dow by the end of 2009 or first quarter 2010.

According to Donald Luskin, the bear market will be over when "stocks have rallied at least 20% from any given low point, over at least two calendar months". The pattern in December 2002 almost but not quite made the 20% criteria. It wasn't till after March 2003 did things conform to pattern.

Perhaps 2008/2009 may hold a similar pattern to 2002/2003.

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2008 Aug 06 - Wed

Market Notes for August 6, 2008

This article really isn't about today. Nor is it about yesterday. It is about Monday. But becuase I only read Mark Hulbert's colummn today, which he penned yesterday, which is about Monday's 332 point gain, I've dated my article for today.

Mark's point of the day revolves around another rule of thumb: the day was not a 9-to-1 up day. This type of day is when 90% of the volume of shares that rose or fell in price was in shares that went up. The term was coined by Martin Zweig, who used to publish several investment newsletters. On Monday, for the NYSE, it was only an 8.1-to-1 day.

According to his 1986 book called "Winning on Wall Street", Zweig states "Every bull market in history, and many good intermediate advances, [has] been launched with a buying stampede that included one or more 9-to-1 up days".

In Mark's article of yesterday, he mentions that valuations are still a little high. As such, a bull market may not be in the offing yet. So far July 15 is considered our low of the current bear market.

I think because of additional mortgage resets happening later this year, we may not be completely ready for bullish thinking. Maybe a nice little volatile rally, but we may see some more lows.

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2008 Jul 16 - Wed

Market Notes: 2008/07/15
I guess the markets really are bearish about what is happening in the world. The Dow gapped downwards on open and played with 10850 for a bit. It seems that with Bernanke's Congressional testimony later in the morning being hard and to the point, the markets had their edge taken off and rebounded to a little in the positive zone. OPEC indicated that their demand forcasts are being reduced, which caused a $5 dollar drop in Brent crude in the midst of a $10 high low swing for the day as traders took their profits. Usually the Dow has an exact opposite swing, but narry a blip occurred, and actually closed down for the day under 11000.

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2008 Jul 12 - Sat

Freddie Mac and Fannie Mae

The markets are not very patiently waiting for all the sub-prime mortgages to reset later this year and next year. I've always thought that it will be during that time period in which we'll find out if we are in a repression, depression, or a recession.

It seems we have lots of near term worries. Various and sundry resets must already be taking place. The financial system seems to be stressing all over the place. I'm curious to know just how leveraged the industry is. After all, in the end, the money has to be some place. If leverage is the problem, someone is going to be left holding the bag, and I guess that is starting to happen now.

This reminds me of the great internet expansion a number of years ago. Every who thought they knew what a fibre optic cable was, starting laying the stuff across land and under water. Most if not all of those companies reorgainized or got sold at pennies on the dollar. The smart guys on the sidelines smiled and spent their pennies on valuable infrastructure. Mean while the original investors and vendors probably didn't fair so well. in the end, after the market settled, we have high capacity bandwidth at reasonable prices (well for North America anyway, we in Bermuda still pay an arm and a leg for the privilege, although that should change with the new consortium laying new fiber later this year).

That story leads me into today's newsletter by John Mauldin. He is saying that sub-prime resets aren't our only problem. Orbourous is eating its tail. Lenders to lenders and lenders to corporate beings are starting to cause problems. A figure like $1600 billion dollars of losses in the international banking system are being bandied about. That is a terrific amount of business failure, residential collapse, and bad business judgement. Is there a figure somewhere that suggests what the equivalent of a world wide Gross Domestic Product might be? (I know that appears to be a contradiction of terms, but with the ever shrinking world, there is an element of realism there). With a WW GDP, this type of loss could be put in to perspective. Grasping at straws, I came up with one form of perspecitive. According to the US Federal Reserve Statistical Release, that is $300 Billion more than the M1 money supply and about 23% of the M2 money stock measure.

Anyway, his previous articles had some concrete examples as to what sort of numbers losses were based upon. In this article, there seems to be a bunch more hand waving going on. Perhaps the Bridgewater Associates report to which he refers offers up some concrete basis for their opinion.

Finding the headwaters of investment sources is what John Mauldin's friend David Kotok specializes in. In a recent newsletter, he is saying that Freddie and Fannie (F&F), between them, hold about $5000 Billion in mortgages. Me, coming from the outback, think that a $150,000 mortgage is big. Having one of that size, and if I've used the correct number of zeros in my calculations, that could mean about 30 million mortgages. To stretch the statistic even further, that would be a mortgage for 1 out of every 10 US residents. That is a lot of cash flow to them and to their holders of sub-paper.

Both of the authors tend to agree that holding paper from F&F is not too risky being that the mortgages that they do hold are reasonably sturdy, and they both agree that holding shares is valueless. So, so long as the cashflow meets payment expectations, things shouldn't be too bad.

However, all this is contrary to what the notable publications such as WSJ are publishing, so no wonder we bounced off the Dow 11,000 level yesterday. I think Mauldin even joked about the 9XXX level not being too far off the mark in his article.

One other thing Mauldin mentioned is that he is doing a survey. As a reward for filling out his survey, he provides a link to speech in which he talks about how the markets might re-arrange themselves. Perhaps this might be similar to what happened with the post fibre-laying companies... will the new credit/debt institutions be valuable because of what they got for pennies on the dollar?

I wrote this article in order to set a baseline of expectations of what is to come. Will we, indeed be seeing more losses, more than what the subprime fiasco has caused directly? In which direction are the markets headed and what will be their prime motivator? Will it be more credit problems? I'll be able to look back here and hopefully see what happened when we start our descent into the 10K category.

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2007 Feb 28 - Wed

2007/02/27 Market Notes

Well that was an interesting day. The Dow bottomed out around 537 and rebounded up to being down 400 for the day. The one point I wanted to remind myself of was that the Dow futures were noticeably down in early morning trading, before the bell. Even before that, there were notes about early morning Chinese sell-offs happening. It is said that during yesterday's trading, "China's Shanghai Composite reversed early losses to end at a record in its first day after Lunar New Year celebrations".

Today's "declines came on concerns that the government may introduce additional macro-economic tightening measures to cool speculative activity".

It has been noted that this day approached the one day loss of September 17, 2001.

The market psychologists would probably suggest a rebound slightly for tomorrow as the professionals buy back. I can't put a date on it, but a the beginning of last year, oils caused a big dip, but the original market highs were re-attained within a week or so. Come to think of it, it may have been the year before where we had a dip and a rebound.

It is interesting to note that John Mauldin's Weekly E-Letter on Saturday talked about the 51.9% Recession based upon an inverted yield curve.

So, we have a toss up, are the pro's going to buy back in, or is retail going to bring it down more for the next couple of days.

[/Trading/MarketNotes] permanent link

2007 Feb 18 - Sun

2007/02/18 Market Notes

Upcoming on Wednesday are a couple of economic releases: the index of U.S. leading economic indicators, and the U.S. Consumer Price Index, the later of which will be released at 8:30 a.m. by the Bureau of Labour Statistics.

In looking at the daily candles for the Down JOnes Industrial Average over the last few months, it looks like trading for the upcoming week could be flat or in a downwards direction as traders do some profit taking.

The Darvas trades obviously work well on positive DOW days, and seem to keep somewhat above water on flat days. On down days, it looks like an effort will be needed to stay afloat. On down days, the goal would be to find a low point of the day, and then enter the trades there. I'm currently looking at the Arms Index to see if that will help at all.

So if my eyeballed pattern analysis is any good, Tuesday looks like it could be another relatively flat day or the start of downward temporary correction.

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