From Michael Krieger of KAM LP

War is the growth hormone of the cancer that is big government. 

- Alex Jones

A government always finds itself obliged to resort to inflationary measures when it cannot negotiate loans and dare not levy taxes, because it has reason to fear that it will forfeit approval of the policy it is following if it reveals too soon the financial and general economic consequences of that policy. Thus inflation becomes the most important psychological resource of any economic policy whose consequences have to be concealed; and so in this sense it can be called an instrument of unpopular, that is, of antidemocratic policy, since by misleading public opinion it makes possible the continued existence of a system of government that would have no hope of the consent of the people if the circumstances were clearly laid before them. That is the political function of inflation. When governments do not think it necessary to accommodate their expenditure and arrogate to themselves the right of making up the deficit by issuing notes, their ideology is merely a disguised absolutism.

- Ludwig von Mises

How Wall Street Died

Let me take you back to the fall of 1999.  I was a senior in college without a clue what I wanted to do with my life.  Wall Street was in a boom and seemed exciting.  I had always loved the financial markets since I had first discovered them years earlier; however, I wasn’t convinced this was the profession I wanted.  I had majored in Economics at school for practical purposes but I found almost all of the courses to be extraordinarily uninspiring with the exception of a few like Corporate Finance and the Economic History of China.  It was the general micro and macro economics courses that I found the most painful to sit through.  I wasn’t alone in this assessment.  Many of my close friends were Economics majors as well and we all felt the same way (I later found out this was because we were being indoctrinated in voodoo Keynesian economics) .  So even with the Economics degree I wasn’t sure that I wanted to pursue a career in finance given the fact that I found myself more interested in subjects such as English , History and Philosophy.  Nevertheless, the firms were hiring, I had the degree and it would allow me to move back to New York City without living at home. 

What I discovered as I interviewed for jobs disturbed me right away.  Every single firm with the exception of one was completely obsessed with math.  Entire interviews revolved around “how quantitative are you” and the like.  Although I hadn’t had much experience with investing I had enough to know this line of thinking seemed preposterous.  It seemed to me only basic math skills are necessary to be a successful equity investor.  Besides that, it seemed that the key is understanding that the world is always changing rapidly under the surface and therefore what is a good business today might be bankrupt tomorrow and what is a start up today could be the next Microsoft.  This seems obvious but the skill set to figuring all this out is more geared to an appreciation of human psychology, historical cycles and cultural shifts (both fads and structural changes) than math.  What I realized later is the reason they were so focused on mathematicians and Phd’s is that Wall Street was moving away from what it was always meant to be – a conduit between the holders of capital and those that wish to deploy that capital in productive economic activity.  Rather than trying to hire a well rounded workforce of intelligent college graduates the firms were hiring a cadre of quantitative robots that would play an instrumental roll in blowing up the world’s financial system.

When you get too many people of a particular mindset (in this case highly quantitative and academic) to aggregate in a field that is very much a people business and one where “street smart” common sense is of extreme importance you are asking for serious trouble.  When you couple that with a Federal Reserve that keeps interest rates too low what you get is a bunch of quants inventing products that provide a yield sufficient for pensions and others struggling to earn a return.  Products that are completely mispriced for the risk inherent in them.  I am not placing all of the blame on the Wall Street firms (although they deserve a lot and the fact people haven’t been punished severely is a huge reason why there is no confidence on main street), rather I believe the Federal Reserve deserves 95% of it.  If it wasn’t for them manipulating the price of money to absurdly low levels you wouldn’t have had the rush into toxic products in a search for yield.  While the newly enthroned Wall Street quant army would surely have done their damage nonetheless it wouldn’t have resulted in the complete destruction of the financial and monetary system that we face today.  In a nutshell, this is how I think Wall Street died and until it gets its act together will remain a corpse.  

The Elites Have Lost Their Right to Rule  

One of my favorite quotes is from Joseph Schumpeter who said “everyone has elites the important thing is to change them from time to time.”  Of course, this is what happens in a well functioning democracy.  The problem today and the reason why the United States is on the verge of some sort of revolution (I believe it will manifest as a revolution of ideas and not an armed one) is that the election of Obama has proven to everyone watching with an unbiased eye that no matter who the President is they continue to prop up an elite at the top that has been running things into the ground for years.  The appointment of Larry Summers and Tiny Turbo-Tax Timmy Geithner provided the most obvious sign that something was seriously not kosher.  Then there was the reappointment of Ben Bernanke.  While the Republicans like to simplify him as merely a socialist he represents something far worse. 

Of course it is not just Obama.  He is at the end of a long line of Presidents that think they have some sort of divine right of kings to rule.  Think about the Presidency of the United States since 1988.  Bush, Clinton, Bush…If Obama had not won the Democratic primary we would have ended up with President Hilary Clinton.  Catch my drift?  Something is not right here.  This is the United States not some sort of petty monarchy.  There is no divine right of any family or group of families to rule.  When this starts to happen you get the disaster we are now faced with.  That said, the bigger point is this.  What Obama has attempted to do is to wipe a complete economic collapse under the rug and maintain the status quo so that the current elite class in the United States remains in control.  The “people” see this ploy and are furious.  Those that screwed up the United States economy should never make another important decision about it yet they remain firmly in control of policy.  The important thing in any functioning democracy is the turnover of the elite class every now and again.  Yet, EVERY single government policy has been geared to keeping that class in power and to pass legislation that gives the Federal government more power to then buttresses this power structure down the road.  This is why Obama is so unpopular.  Everything else is just noise to keep people divided and distracted.  

Getting Into the Mind of Ben Bernanke

I do not have a clear window into the highest levels of power in many areas such as the military or the intelligence community but I do have a very good understanding of it when it comes to the financial system and the economy.  At the end of the day everyone knows that those who can create the money and credit have the ultimate power over any political system.  Therefore, at the top of the economic power of the world is the Federal Reserve and at the top of that is Ben Bernanke.  This is why I took a great deal of interest in reading the full text of his speech today.  Much will be written about it but I want to tackle it from two points.  First, who is Ben Bernanke?

You can really see into his head from reading this speech.  He is an academic who thinks he is smarter than everyone else which is why he is in the position he is in.  He thinks the key to monetary policy is to trick people into doing things that will hurt them in the end.  He believes the mal-investments he intends to push people and institutions into equals economic growth.  What surprises me so much about the investment community and the American public in general is that so many fail to understand that we live in a top down centralized economic system much more similar to China in more ways than people want to admit.  We look at how the government steers the economy in China and sneer.  How are we so different right now?
   
As far as the speech itself, it confirms something I mentioned several weeks ago.  Banana Ben absolutely wants to do a massive QE2 program.  The only thing holding him back is gold is near an all time high.  What he wants is gold much lower and stocks much lower to give him cover.  Gold has not cooperated so he is in a bind.  He cannot print a massive amount of money with gold here and stocks at 1055 because what happens if gold soars and stocks sell-off in the days that follow such an announcement?  What if the response in the treasury market is not as desired?  He is scared to do it here and he is right to be scared because such a reaction would be the end of the Fed right then and there.  The Fed will be gone anyway within a few years in my opinion but it’s going to fight hard to survive and if you want to make money in this market you need to understand that.  The most powerful institution in the world is fighting for its survival.  Never forget that.

So what is he going to do?  I believe that the Fed and government are doing a lot more than people think to manipulate all markets behind the scenes.  After all, they have publicly announced their manipulation in many other ways so does it make any sense whatsoever to assume they aren’t doing a plethora of other things behind the scenes?  Of course not.  I think that with the Fed in a bind they will accelerate and become ever more aggressive in behind the scenes games.  This will make markets even more volatile and extraordinarily challenging.  This is financial war make no mistake about it.  The only way in my opinion to survive this is to buy all dips in precious metals, agriculture and oil.  It is in these three areas that I expect to see the most price inflation as money eventually figures out the end game.  The end game is more and more people will eventually wake up to the fact that the markets are a hologram put in front of you by the magicians at the Fed.  That what constitutes real wealth in the years ahead will be owning food, energy and a means of exchange that will be accepted should a black market economy arise as it has in virtually all nations at one time or another throughout history.

In the end, the elites will be overthrown and a power vacuum will form.  The transition period will be extremely difficult as the elites will fight their demise to the end.  For you see, they care nothing for you they care about their power and control.  Nevertheless, rulers have always only ruled by the will (or apathy) of the people and when the people become overly taxed and abused they always rebel.  The main thing to think about is what kind of society do we want to rebuild from the ashes.  I am of the view that it must be a return to the Constitution and an elimination of central banking power and secrecy.  Let’s not fall for a demagogue or be pushed into a war when things are at their worst.

Have a great weekend,
Mike 

I’m sorry I’m late getting my letter out today. I was racing home from San Francisco on Highway 24 when the California Highway Patrol pulled me over for doing 80 mph in a 65 mph zone.

The officer asked me where the fire was, and I told him I was rushing back to my office to get my investment newsletter out. He asked if this was like a stock market letter, and when I said yes, he informed me that in addition to speeding, I would be cited for a pink taillight.

I pointed out that several pension funds relied on my letter for direction and that the sooner they got it, the better their performance would be. The officer then asked if CALPERS, the California Public Employees Retirement System, was one of those. When I confirmed this, he told me that this was his pension fund, that it had lost a third of its value in the last two years, and tacked on a third violation for excessive smoke belching out of my tail pipe.

I upped the ante by informing him that a lot of home owners read my letter for real estate advice. The cop sighed that his own house had dropped in value by half, and hit me again for using my cell phone while driving, a $148 fine.

Then I noticed a Marine Corp. gunnery sergeant’s pin on his uniform. I casually mentioned that I had been a jarhead captain and was a combat pilot in Desert Storm. He murmured under his breath that he hated all officers, and then noticed the life sized blow up Barbie Doll sitting in my passenger seat that I used to gain access to the carpool lane.

As he handed me my fifth citation for illegal use of a commuter lane, a minimum $340 fine, I decided to keep my mouth shut. Who knew we financial types were so unpopular on Main Street? Looks like the next time I need to rush back from the city, I’ll be riding my bicycle.

To see the data, charts, and graphs that support this research piece, as well as more iconoclastic and out-of-consensus analysis, please visit me at www.madhedgefundtrader.com . There, you will find the conventional wisdom mercilessly flailed and tortured daily, and my last two years of research reports available for free. You can also listen to me on Hedge Fund Radio by clicking on “This Week on Hedge Fund Radio” in the upper right corner of my home page.

It seems that with the amount of Austrian/Libertarian extremists here at zerohedge that anything that remotely appears as a criticism to their orthodoxy is immediately tarred and feathered. For instance, my last post went vastly misunderstood.

The reason that I (and most “establishment” economists) invoke rational expectations is not out of shear ignorance of Austrian praxeology and the belief that all human action is legitimate notwithstanding human error. No, I am simply trying to prove that, in a world where all agents are rational (in the sense that they are capable of maximizing the present value of their individual utility), the Austrian monetary business cycle theory is over-zealous in its conclusions.

Of course monetary policy and QE shifts wealth from savers and capital preservers to banks, the government and, to a lesser extent, large corporations and other debtors (which of course boosts wealth inequality, investment in non-productive government services and moral hazard, given future expectations of loose policy). And to the extent that this wealth shift results in ineffective investment and monopoly power, monetary policy is harmful to the economy. But monetary policy, in and of itself, can not cause bubbles in asset markets in a rational world that adapts to historical market observances. When the government/Fed complex subsidizes banks and investment through monetary policy, this is nothing more than a forced increase in savings. Some Austrians like to claim that interest rate manipulation somehow dislodges the structure of production from equilibrium, but when the Fed manipulates interest rates they are simply acting as a valid economic agent and effectively stealing the nation’s savings and presenting it, on a platter, to banks, corporations and the government. This may be wrong for many reasons, but this process is not, in and of itself, unsustainable into perpetuity. However, once you combine monetary policy (i.e., de facto subsidization of investor speculation) with a large enough group of euphoric economic agents, monetary policy can exacerbate exogenous bubble-producing behavior that would have generated independently, even without central bank intervention.

This is an important distinction to make since it allows us to see that not all money creation is intrinsically disruptive to market mechanics. Similar to monetary policy, when a company issues new equity (creates new shares) and re-invests the money inappropriately and irrationally, this is bad. However, when that same company issues new equity and invests it appropriately, no wealth is destroyed. If Fed-based monetary expansion/creation is used to expand inefficient government processes or corporations, wealth is destroyed, but there is no immediate link between money creation and asset bubbles.

Of course, the more astute among you will realize that no where in the preceeding paragraph did I argue in favour of the actions of the Fed to date. As the Fed is a small group of (ridiculously clueless) individual mortals, they will never be able to understand the functioning of markets to the extent necessary to control and/or smooth out business cycles. But it does not follow that the Fed absolutely has no role to play in the world and that all money creation should be abolished. In times of extreme wealth and power concentration, the Fed can conceivably level the playing field (even if to a small extent) by creating money that directly goes into the hands of the middle/lower class that is not dependent on past or future behavior. In other words, if the Fed set aside all its goals of economic kingdom-making, halted all free-market manipulation, and focussed on ensuring at least a semblance of economic equality among all citizens, it could really do some good for America. The staunch Austrian/Libertarian would claim that stealing money is never good, but this ignores all of the real-world and dastardly means by which the rich became rich and the poor became poor. Like all things in life, the “tolerable” level of a nation’s wealth inequality is grey and cannot be computed, but it does not follow that we should not make our “best guess” as to what it should be.

Austrians must not forget that money creation can, in rare and exigent circumstances such as those before us today, function as a tool for “social good” (even if not in the absolutist libertarian sense). Case and point: If 1 person managed to accumulate all the wealth of the nation (whether by government decree, cunning or even productivity), some level of money produced by a central bank and distributed directly to the nation’s people is probably not only the “right thing to do”, but is simply the only practical thing to do for any democratically governed nation. Similarly, in a world where banks, government and citizens co-operated in a credit-spurred orgy for 20 years which culminated in a tapped out US middle class on the cusp of indentured servitude to the all-powerful banks, some level of money creation distributed directly to the “masses” could be a real force for good. Sure, austerity will provide the maximal economic “growth”, but wealth redistribution (or some form of jubilee) is clearly needed as the US descends into a state of near-feudalism and extreme concentration of corporate and government power. Of course, excessive money printing could lead to hyperinflation and so the Fed must tread carefully and exercise restraint when attempting to at least partially reduce the wealth inequality plaguing America.

Money is power and the middle/lower classes of America are seeing their power and their money ebb away each and every day. To make matters worse, Fed policy is currently focussed on propping up inefficient/ineffective government processes, banksters and putting creditor/corporation interests ahead of a severely ailing American citizenship whose status as a ‘going concern’ becomes increasingly uncertain with each new economic release. 20 years of “trickle-down monetary economics” (the era of low interest rates) is enough. The American middle/lower classes need and deserve some form of equalization and retribution payment. After that, the markets should return to some level of freedom and government should be drastically reduced. Capitalism would, in essence, be given a “fresh start.”

For those of you still not convinced of the social perogative that central banks should have to engage in a one-off distribution of wealth, go read a Steinbeck novel. Start with Grapes of Wrath.

Not China, not Russia, not North Korea, not Iran, not terrorists…According to Admiral Mike Mullen, the Chairman of the Joint Chiefs of Staff, the “single biggest threat” to American national security is the US national debt, which is either $8.85 trillion (public debt), $13.4 trillion (total national debt), $20 trillion (total debt including GSE debt), or $124 trillion (total debt including unfunded obligations), depending on one’s definition of the word “debt.” And as Zero Hedge has long been warning, the imminent increase in interest rates (sooner or later), will eventually put the country in an untenable funding position. “Tax payers will be paying around $600 billion in interest on the
national debt by 2012, the chairman told students and local leaders in
Detroit.” The Chairman (the real one, not his pale imitation over at Marriner Eccles) politely forgot to add that the successful rolling of nearly $600 billion in debt per month is likely an even greater threat to national security.

More from Mike Mullen, commenting on the upcoming annual interest payment forecast:

“That’s one year’s worth of defense budget,” he said, adding that the Pentagon needs to cut back on spending.

“We’re going to have to do that if it’s going to survive at all,” Mullen said, “and do it in a way that is predictable.”

He also called on the defense industry to hire veterans and become more robust in the future.

“I need the defense industry, in particular, to be robust,” he said. “My procurement budget is over $100 billion, [and] I need to be able to leverage that as much as possible with those [companies] who reach out [to veterans].”

And since debt is now the functional equivalent of a nuclear bomb, it behooves readers to know just who the biggest threats to US national security are:

We hope it is appreciated promptly enough, that the entity highlighted in red can just as easily become the biggest domestic threat to national security, should the interests it represents, both political and financial, not get their way.

h/t Robert

The firm that was long the biggest bull on Wall Street, Morgan Stanley, with its initial 5.5% target on 10 Years by the end of 2010, has finally folded: “We are downgrading our outlook for second-half growth to 2-2.5% from 3-3.5% previously. This downgrade from above-trend to below-trend growth has  important implications for forecasts of the unemployment rate, inflation and monetary policy.” Ostensibly it also has implications on rates, with the firm now actively calling for a flattener, just in time for the 10s30s to start creeping out again. Of course, this being Morgan Stanley, nothing is ever easy, and the firm obstinately refuses to see the plunge in H2 GDP as anything more than just a temporary blip: “we don’t think this slowdown will last beyond H2, much less morph into a downturn. In his Jackson Hole speech, Chairman Bernanke seemed to agree that the current economic weakness does not augur a weaker outlook for 2011. We agree. Among the reasons: Downside risks probably will prompt policy actions, balance sheet repair will be more advanced, and we expect net exports to improve in the second half of 2010 and into 2011. In fact, we see no reason to downgrade 2011 and possible reasons to upgrade, especially if policy turns more stimulative.” Ok, Richard Berner, your colleague Jim Caron’s rates call already lost a ton of people even more money : we will be sure to remind you of the bolded statement on January 1, 2011.

Full report:

MS H2 Econ Outlook

Goldman’s David Kostin continues to pitch the firm’s recent “SIRP” investment strategy, highlighting that while the S&P was down 0.6% in the past week, the recommended trade of buying low operating leverage companies (long <GSTHOPLO> / short <GSTHOPHI>), was up 1.5%, while a recent push into dividend payers resulted in a 1.2% move higher in the firm’s dividend growth trade (long <GSTHDIVG> / short SPX). Some other observations in this week’s summary chartology: “Companies with low operating leverage have less risk to their earnings outlook from lowered revenue guidance than stocks with high operating leverage. Shortfall in mature market consumer PC demand caused Intel to cut its 3Q 2010 sales guidance by 5% and gross margin by 100 bp to 66%, implying a GAAP EPS cut of 10.5%.”

Via Pension Pulse.

Bruce Friesen of Global Investment Solutions forwarded Randall Forsyth’s article which appeared in Barron’s earlier this week, Deflation: the Neutron Bomb of Balance Sheets:

Low interests rates have made these the best of times for borrowers but the worst for savers and investors.

 

Blue-chip corporations never had it so good with the likes of Dow Jones Industrial Average members International Business Machines (IBM) able to issue new three-year notes at 1% and Johnson & Johnson (JNJ) paying less than 3% for new 10-year debt.

 

But
these historically low bond yields have a darker side: According to a
new report from Fitch Ratings, ultra-low interest rates will exacerbate
the underfunding of many U.S. corporations’ pension plans.

 

Just as with American workers who have failed to save enough for retirement and have seen their assets lose value, companies also will have no choice but set aside more of their earnings. And just as that means belt-tightening for consumers, it means corporations have less to distribute to their shareholders.

 

The
burden of funding traditional pension plans—known as defined-benefit
plans—is why they have waned in Corporate America. More common are
defined-contribution plans—such as the ubiquitous 401(k)s—that have
supplanted DB plans in the private sector. As has been reported widely,
DB plans remain the standard in the public sector, which are decimating budgets of many states and municipalities.

 

But,
according to Fitch, the low-yield, deflationary environment is adding
to the problems of underfunded corporate pension plans. Again, the
problem is two-fold: The decline in the values of investments, such as
traditional stocks and commercial real estate, has hurt the asset side.
The rush into so-called alternative investments such as hedge funds
right at their peaks didn’t help. The flip side is that low interest
rates increase the present value of future liabilities.

 

(Time
out for those who aren’t finance geeks. If you put $1 in a savings
account at 7%, in 10 years you would have $2. Trust me on that. That
means the future value of $1 in 10 years, compounded at 7%, is $2.
Conversely, the present value of that $2 invested for 10 years is $1.

 

But
what if interest rates are just half as high, or 3.5%, a far more
realistic yield for a 10-year, high-grade corporate bond? The present
value of that $2 in 10 years is $1.42. Trust me again on that, or get a
financial calculator or find one on the Web. In other words, where it
took only $1 for you to wind up with $2 in 10 years if you invest at 7%,
it takes an investment of $1.42 to end up with that same $2 in 10
years at 3.5%. That means you have to set aside 42% more today to meet
your savings goal a decade hence.)

 

Thus,
a decline in bond yields can be as devastating to a savings plan as a
drop in the stock market. According to Kenneth S. Hackel, president of
CT Capital, a financial advisory firm, 1% cut in a retirement plan’s
assumed rate of return is roughly equal to a 15% decline in stock
prices.

 

Fitch’s analysts find the mean assumed return for
corporate pension plans in 2008 and 2009 was 8%. That’s with an
allocation to fixed-income assets of 34% of the total. Treasuries and
investment-grade corporate bonds yield far less than 8%, which is
closer to the very long-term return from equities, which means they
haven’t locked in much of yesterday’s higher yields. And, in case you
need to be reminded, over the past decade or so, the return from stocks
has been practically nil.

 

In line
with Hackel’s rough calculation, Fitch reckons a 1% cut in the assumed
discount rate for companies’ DB plan can result in a 10%-20% increase
in the present value of future liabilities. How to bridge that gap?

 

“The
fact is that there are no shortcuts—prudent management will likely
require contributions well in excess of the minimum required given low
yields and low equity returns,” Fitch analysts write. Simply hoping for
higher equity returns or bond yields simply isn’t prudent, they add.

 

So,
what’s the answer? You know those hefty cash holdings on corporate
balance sheets on which the bulls keep harping? Fitch thinks pension
funding requirements will have dibs on corporate cash flows, and then
the stock of cash on companies’ balance sheets.

 

That’s the thing about deflation; it’s like a neutron bomb for corporate, public-sector and consumer balance sheets.
Asset values and returns get decimated while liabilities remain
standing. Except that falling interest rates make those future
liabilities more onerous, requiring more belt-tightening, which only
exacerbates the deflation.

As I’ve repeatedly
stated, deflation is the arch nemesis of the financial sector and the
Fed will do whatever it takes to avert it. Moreover, in order to address
pension deficits, you need a rise in bond yields (lowers present
value of future liabilities) and a rise in asset prices. In other words,
you need a lot more days like Friday where stocks took off and bond
yields backed up.

The Fed’s policy has been geared towards the
big banks and their big hedge fund clients. Reflate and inflate is the
official policy. By borrowing at zero and investing in higher yielding
Treasuries, banks lock in the spread, making instant profits which they
then use to trade risk assets all around the world.

Is this
policy succeeding? Yes and no. It’s helping banks shore up their balance
sheets and some elite hedge funds who thrive on volatility, but doing
little to help the real economy which remains weak at this stage of the
cycle.

However, that all may be changing. Over the weekend, I
will go over some encouraging signs that receive little or no attention
in mainstream media. Below, listen to an interview with Nigel Gault,
chief U.S. economist at IHS Global Insight as he discusses his views on
the US economy and his take on Ben Bernanke’s speech at the Fed’s annual Jackson Hole confab.

By Dian L. Chu, Economic Forecasts & Opinions

While the fierce 3PAR bidding war is becoming even more exciting than a live Sotheby auction, the most active market sector in terms of consolidation is undeniably Technology, and there is a reason for this wave of M&As.

At the forefront of any analysis it is always important to follow the money. This is the real driver of this trend that has been going on for the past year, and will only intensify over the next four months.

So, who has all the money in the world to spend on major technology purchases? The answer would be large corporations and big governments with both the money and need to cut costs to be more efficient and productive through more advanced technology infrastructure.

Law of Diminishing Returns & Survival

Tech sector is not immune to the Law of Diminishing Returns, which means margins will inevitably continually come down as technological products and services become commoditized. The high margins are always in the new growth areas of technology that have yet to become commoditized. Thus enter all the hoopla over cloud computing. This is an area that will produce the high margin growth opportunities in technology for at least the next five years.

All the big players want to make sure they get in a better position to fully capitalize and compete in this new area of high margins. It is the death of a technology company to be left in the realm of commoditized product offerings. The battle over 3PAR between HP (HPQ) and Dell is really about the future survival in the technology arena.

Dell – Too Late in the Diversification Game

Dell should have been thinking along these terms five years ago the way HP has diversified itself along the higher margin spectrum to offset the commoditized portion of their business portfolio. Instead, Dell has failed at becoming competitive pursuing its strategy of the past three years of trying to come up with “cool” products to drive higher margins—-a la Apple (AAPL).   

Now, Dell is trying to play catch-up in an attempt to duplicate HP’s successful transition from strictly a commodity provider to that of a value added business enterprise based revenue model. Well, Dell is probably too far behind and don`t have enough resources at this point to go this route, in my opinion.

And this little 3PAR dogfight is just a microcosm of what is taking place in strategy sessions all over Silicon Valley, and boardrooms across the world as technology companies constantly have to fight to stay relevant.

Not Enough Margins to Go Around

The problem is that there are not enough resources to go around in the high growth areas. There are too many big players fighting for the same territory, whereas it was much easier in the past to divide up the space and say Dell and HP do hardware, Cisco does routers and Networking, IBM does large mainframe and consulting, etc. All that has changed as the sector has become intensely competitive, with every player increasingly encroaching onto each other’s turf, particular in the higher margin categories.

But here is the rub–there can only be high margins with few competitors. As more competitors fight for the same space in the category, inevitably margins for the category start shrinking.  As such, there will continue to be these smaller deals in tech as companies try to position themselves to better compete in these high margin growth areas. However, this is really just missing the forest for the trees.

The bigger picture is that the tech sector is still relatively fragmented with too many big players competing for the same high margin growth categories, and not all of them are going to survive. Some of the big players will need to consolidate with some of the other big players in the sector in order to preserve any kind of pricing power. Otherwise, ultimately they will all be reduced to low-margin commodity providers, even in the currently attractive high margin category.

A Short List Fitting the M&A Prerequisites

The list of big technology players includes Microsoft, IBM, Oracle, Cisco, Apple, HP, Intel and Google. Some firm on this list most likely will need to be subsumed under the umbrella of one of the other in the group.

One prerequisite of acquiring another big player is a healthy stock price and market cap. Since these deals will be so big to be all cash, a firm`s market cap and stock price will become crucial in stock swap conversion ratio, which will be a major component of any deal. For example, HP`s current market cap–just under $89 Billion—is the smallest on the list, and thus precludes them from being a major player.

The second element will be a perceived strategic fit between both firms. A third requirement will be a bold leader who is ahead of the curve, and fighting the battle of next five years, instead of just this year. Another component may include a lack of attractive organic growth prospects in the acquiring firm. But in general, the stronger company will acquire the weaker company.

Remember, in these deals it is not where the two firms are today, they may seem like alliances with no true synergies, but it is where both companies are heading three years down the line as future competitors.

On a side note, a smaller firm can actually acquire a much larger firm and be quite successful. Several come to mind, but it is more risky, and given the current economic environment, will be a concern for boards in considering this type of bold move.

Potential Deal Scenarios

Microsoft, IBM, and Apple are the strongest companies on this list. I would have included HP on this list a couple of months ago, but as noted earlier, their current low stock price precludes them from being active as a major acquirer.

Apple is sitting on tons of cash, but acquisition actually goes against their fundamental strategy of seeking growth organically. Furthermore, Apple is so distinct in developing products that fit in with the Apple Culture that the only firm on this list that I could envision Apple acquiring would be Cisco, as the other possibility—Intel–would probably have anti-trust issues that would be insurmountable.

IBM could acquire HP much easier from an anti-trust perspective than, say, Oracle, but both acquisitions would make for strategic sense along different lines. Meanwhile, the most likely deals for Microsoft would be them buying Cisco or HP, as these are the only two with a strategic fit and without as much anti-Trust concerns.

An Oracle – HP alliance would be intriguing, but again I think Oracle is too small to acquire HP, but from a business enterprise software and hardware standpoint maybe three years down the line there would be some excellent sales synergies to be gained from this combination.

A Cisco –HP alliance would make considerable strategic sense, but neither of them is in a position to acquire the other–Cisco is not quite large enough to acquire HP, and HP stock is still in crisis mode to be the acquirer either.

Intel and Google are sort of stuck in the middle as both want to branch out into other areas and diversify their revenue streams, as both have not succeeded so well with their organic growth initiatives outside of their core competency over the last five years. 

However, both Intel and Google either lack enough synergies for the others to acquire, or are problematic from an anti-trust perspective. Furthermore, I don`t foresee either firms realizing they need to make a bold acquisition to genuinely diversify their revenue streams until it is too late, and they have both become commoditized players in technology.

Anti-trust Not As Problematic

Let me mention here that anti-trust issues are not as problematic for these types of Mega Mergers as people might think. The tech sector has become very crowded with at least six to eight major players in a given category instead of two or three major competitors in the old days. This fact reduces anti-trust concerns to a deal being done in many potential scenarios.

Fight for the Greener Grass

So yes, in technology, the grass is greener on the other side. And everybody has their hands in everybody else`s kitchen so to speak. Apple wants to start making video game players, Microsoft wants to create a great smart phone, Amazon wants to make all encompassing Tablets, HP wants into storage, Dell wants to be like HP, they tried being like Apple, etc. But in the end all these companies are going to merge into the same high growth areas, and fight it out with distinct winners and losers.

And the advance of cloud computing is only highlighting the fact that there are too many big players, and not enough available high margin growth areas for all to flourish. Eventually, some will have to team up with others, some will be relegated to low margin commodity players, and only a handful of the strong-and-fit-to-survive will emerge at the finish line as Mega Tech Giants that dominate the high-end of the technology landscape in the future.

Dian L. Chu, Aug. 27

In our attempts to simplify the comprehension of the ongoing serfdomization of the US population, we would like to present one of the more persuasive charts which the administration would likely be loath to demonstrate. Having collated monthly data from the FMS’ Daily Treasury Statement on incremental tax revenues (individual, gross), and new debt issuance, we observe the following rather surprising pattern: since September 2008, or the month when capitalism collapsed, and the Fed, and ever other global Central Bank had to step in as a backstop of last recourse to the western way of life, the US government has undertaken the most peculiar matching program: simply said, for every dollar of individual tax revenue, the government has issued just over one dollar of incremental debt. In other words, in the past two years, tax revenues alone would have proven insufficient by over half to fill the budget gap. In yet other words, the US Treasury is now the functional equivalent of the entire US population and then some, when it comes to keeping the US economy afloat. From another perspective, with an average take down of roughly 50% of each recent auction by Indirect bidders, nearly a quarter (half of half) of US budget deficit needs is funded directly by foreigners. Should (in)formal trade wars escalate, and should the US see an embargo of foreign debt participation, then overnight a quarter of US spending will be unfundable: this includes such critical key expenditures as defense and social security spending. Also, it is important to recall, that of the $3.35 trillion in debt issued over the prior two year period, the Fed has directly (via UST purchases) and indirectly (via MBS purchases, and thus the forced rotation of MBS securities into UST securities for agency holders such as PIMCO) purchased the other half. Thus between foreigners, and the Fed, the US consumer’s traditional contribution to funding the US economy has been diluted by half. And unfortunately, as the chart below shows, absent some dramatic deux ex machina, there is no chance this trend in which US debt issuance is the functional equivalent of taxpayer contributions, will ever end.

Another way of visualizing the incremental substitution of the US consumer with debt:

Some technical details:

• Total net debt issued since September 2008: $3,351 billion (from $10.025TR to $13.376TR)
• Gross tax receipts since September 2008: $3,185 billion. Note this is not net of refunds. Should one exclude the $660 billion in refunds issued over the same period, the net contribution by taxpayers is just over $2.5 trillion, meaning that the value of each dollar of debt issued is a quarter greater than each dollar in taxpayer revenues.
• This number would be somewhat offset by Corporate tax revenues, which over the same period amount to $440 billion gross and $230 billion net of corporate tax refunds.

In other words, with each passing day, the material contribution of the labor of Americans to their country is becoming increasingly diluted in the form of paper backed by the full faith and credit of the very country Americans live in. In this environment, it is easy to see why a chance in the tax regime, where the balance between tax revenue contributions and debt funding, is already so precarious, could have dire consequences on the American way of life. Should individual tax contributions fall off a cliff, as many contend, it means that the share of debt a portion of total US funding will have to increase from over 50% to a number materially higher, and the closer it approaches to 100%, the easier it is to make the case that the US economy is nothing but a ponzi system, in the purest definition of the word.

(this analysis completely ignores the toxic debt spiral should interest rates ever increase in the future; Zero Hedge has previously discussed the liquidity horizon to default in various scenarios should prevailing debt interest rates beging to rise. And with average outstanding debt duration slowly but surely increasing, the second the Fed loses hold of Mid and Long-Term interest rates, it is all over - in other words QE will be a necessary staple until such time as the Fed is prepared to go the repudiation/hyperinflation route).

P.S., and a scary thought, if representation is somewhat equivalent to taxation, or, its modern equivalent, deficit funding, does this mean that the seven Fed Board Members have a greater right of representation than all of American society combined? It sure seems that way.

The Narrow Road to the Deep North:  Fixed Income Skew and Signatures of Japanification (pdf)

Submitted by JM

Submitted by Cameron Hanover

Submitted by David Galland at Casey Research

Uncle Scam

The latest data on global gold trends, Q2 2010, just popped into my email box from the World Gold Council. 

The bad news is that the higher nominal price of gold has caused a 5% decrease in jewelry sales over the prior year.

If you’re thinking “Hey, that’s not that bad!”, you’d be right. On this
date last year, gold closed at $950… which is $286 below where it
trades as I write. In other words, a 30% rise in price has resulted in a
decrease of just 5% in jewelry sales.

And even that number is skewed, because the currency value of the gold
purchased is up – way up. For example, India – the 800-pound gorilla in
the global gold jewelry market – saw total gold jewelry sales fall
only by 2%, but in local currency terms, there was a 20% increase in
the nominal value of the gold trading hands. China, which only
relatively recently reauthorized private gold purchases, saw a 5%
increase in jewelry demand, but that translated into a 35% increase in
local currency terms.

So, that’s the bad news.

The good news – at least for fiat money skeptics – is that total
physical gold demand in Q2 rose by a whopping 36%. More tellingly, the
increase was 77% when you take into account the dollar value of the
ounces purchased.

As you’ve already figured out, the bulk of the physical demand is
coming from investment – with the amount of gold held by ETFs growing
414% over the previous year.

Too far, too fast? I don’t think so.

In my opinion, as the fiat money monsters are brought to bay, the price
of gold can really only go higher. Overly confident? I don’t think so.

That’s because when people lose faith in a currency, as they will
before this crisis is over, they unfailingly rush to exchange the
unbacked paper money for something more tangible. While pretty much
anything with an intrinsic value will do – real estate, antique cars,
old masters – for all the reasons that Aristotle enunciated, gold is
viewed in a class of its own, and so has an unblemished history as a
universally accepted store of value. And, thanks to its portability,
divisibility, durability, and consistency, it has also always been
looked upon as a convenient form of money.

The most pressing macro-observation I’d like to make – an observation
that’s critical for investors to understand (though most don’t or
won’t) – is that the tectonic monetary shift now underway is truly
global in nature. And it’s not going to be over until a new and
markedly different monetary regime has been implemented.

It’s like this: Throughout history governments have experimented with
fiat money. They have done so because the benefits to the government
and the insiders that invariably latch on to power are just so damn
attractive. The Romans did it by debasing their coinage, but the modern
version goes one better by completely disconnecting a currency from
any value whatsoever, and then wantonly printing as politically
motivated needs or wants arise.

The latest fiat system kicked off in earnest in 1944 when Uncle Scam,
in Bretton Woods, NH, got the leaders of the world’s war-weary
countries to agree to accept the U.S. dollar as their reserve currency.
In return, the U.S. agreed that the currency notes it would
subsequently issue would be convertible into a corresponding amount of
gold. Then Tricky Nixon came along in 1971 and canceled the right of the
bearer to swap the notes for gold. Overnight, the link between the
currency and anything tangible was lost. 

That, of course, opened the door to all subsequent politicians to
engage in the whole print, print, print thing. The keystone asset of
the former system – gold – soon became a distant memory for the new
crop of central bankers and, remarkably, to the bearers of the notes.

For any number of reasons, most of which related to the illusion of
increasing prosperity, people simply stopped paying attention to what
Uncle Scam was up to. Of course, that illusion was largely based on the
increase in nominal wealth: if one year you’re worth $100,000 and
three years later you are worth $150,000, the tendency is to feel
richer even if your actual purchasing power has gone up by far less or
even has declined due to a debasement of the currency.

Today’s dollar is worth just 18 cents in 1971 terms.

But all scams must, in time, come to an end. And that’s what’s going on
now. It ends here. Before this is over, the current iteration of the
U.S. dollar – the vaporous construct with no actual value – will lose
its value as money.

Which brings me to an important nuance in this discussion.

Most failed fiat money experiments involve a single currency. The most
convenient recent example is provided by Mugabe’s Zimbabwe. Rather than
actually supporting the creation of marketable goods and services in
what he sees as his private fiefdom, he took the low road of
energetically abusing his fiat currency to the vanishing point.

In a situation such as that, the local citizenry suffers – as well as
anyone foolish enough to be holding bonds denominated in the debased
currency. But that’s about it.

In the current scenario, the keystone of the entire global monetary
system is the U.S. dollar. Which means that the primary reserve
holdings of virtually all the world’s significant central banks are at
risk of going up in smoke.

And it’s even worse than that, because the dollar is also the number
one trade currency – which means corporations around the world are
sitting on huge holdings or are dependent on commercial contracts
denominated in dollars. 

And even that’s not the end of it. Because Uncle Scam has long served
as a role model to other world leaders, those leaders have
enthusiastically followed suit and universally launched fiat monetary
systems of their own. It’s bad enough that the world’s reserve currency
is a fiction – but the situation becomes really dire when you accept
as fact that all the world’s currencies are a fiction.

Man, we’re in a lot of trouble.

If you have so far resisted our constant urgings to make gold – which
is to say, real money – a core portfolio holding, it’s not too late.
Just start buying on the inevitable dips. I can assure you that as the
fiat monetary structures continue to crumble – and they will – more and
more people will be turning to gold. The latest World Gold Council
data is just a straw in the wind.   

In fact, thanks to the convenience of the gold ETFs (which you should
make an effort to understand before blindly investing in them – there
are important differences between them), once the show really gets
underway, the relative trickle of investment funds moving into gold
today will quickly become a torrent, completely outrunning available
gold supplies and sending prices much, much higher – and in a hurry.

While no one can say when the big spike in gold will occur, one can say
accurately that, given the systematic frailty, it could literally
happen on any given day. That’s what happens when scams are unveiled.
Remember Bernie Madoff? How many people do you think tried to give him
money the day after he was arrested, versus desperately scrambled to
get their money out of his sticky web? The answers are “No one” and
“Everyone” – that’s what happens when people lose faith in a currency.

Of course, gold bullion, and gold bullion proxies, aren’t the
only asset classes that will do well in the coming currency collapse.
The chart below shows what looks to be a trend change in the gold
stocks. In previous recent stock market corrections, people thought of
gold stocks more in terms of being stocks and overlooked their direct
connection to gold. That appears to be changing, with a divergence
between gold stocks and the broader markets. The leverage in gold
stocks to gold bullion could make them especially attractive.

Regardless of what you do, do something – because to stumble on as
if this crisis will end with a whimper would be a dire mistake.

The primary key variable when it comes to determining the future direction of US market is no longer corporate fundamentals and technicals, nor the US economy itself, as much as the daily gyrations in the Japanese Yen, which defines the move in the S&P on a tick for tick basis. As such, what the BoJ will do is likely far more relevant to US capital markets (or the sad joke that passes for them these days) than anything the Fed can pull out of its hat. And while there has been much posturing out of various Japanese administrations that deflation will not be tolerated (presumably unlike the past 20 years), and that FX intervention is near, few actually believe anything coming out of the BoJ or the Finance Ministry these days. Yet looking at what domestic Japanese investors are doing may provide a better clue as to what is in store for the Yen. As Barclays points out, in time of heavy FX intervention, such as the last period between 2002 and 2004, Japanese holdings of foreign securities tend to surge: a good example being precisely that period, during which Japanese holdings of US Treasuries increased by $320 billion, to go side by side with a BoJ which was actively selling Yen and buying up Dollars. In essence, investors there were frontrunning (or at worst investing side by side with) the BOJ. And as weekly data demonstrate, Japanese investors are once again gearing up for intervention, having purchased $60 billion of foreign securities in July and $75 billion so far in August, the highest number in half a decade. While the BoJ’s talk is cheap, Japanese investors appear to have decided that at prevailing JPY levels the BoJ has no option but to start its intervention regime.

From Barclays:

One factor that could lead to a continuation of the rally is Japanese FX intervention. Following the sharp rise in the value of yen, recent press articles have highlighted the possibility that the Japanese Ministry of Finance may intervene in the foreign exchange market. This would be a significant shift as its last intervention was in March 2004. Figure 7 shows that the MOF intervened quite frequently in 2003/4 and ended up selling JPY 35trn for US dollars, resulting in a sharp increase in FX reserves.

US Treasuries were the main beneficiaries as Japan’s holdings of Treasuries (as reported in the Treasury annual survey) increased by $320bn, accounting for 85% of the total increase in FX reserves from June 2002 to June 2004. Although the long-term impact of these purchases is tough to judge, as rates were quite volatile, (led by the convexity hedging episode, and improving economy) there is some evidence of short-term impact.  Figure 8 shows the regression between MOF purchases of dollars and the change in 10y rates on the day of the intervention (adjusted for the move in front-end rates). Larger interventions were accompanied by a larger rate rally. Japanese investors already seem to gearing up for some sort of intervention. Figure 9 shows that they bought $60bn in foreign securities (stocks, bond and short-term instruments), in July (mostly bonds), marking a significant shift from previous months. The weekly data suggest that the pace has picked up further, to $75bn, in August. The investor breakdown shows that although banks accounted for a large share, other financial intermediaries also stepped up their purchases.

We view this development as a risk to an outright short position and will monitor developments closely.

Of course, another explanation is that correlation is simply not causation, and the higher the Yen rises, the more bonds Japanese investors will end up purcasing in a Catch 22, with or without an actual intervention. Which is precisely what the BoJ is hoping for. If today’s action of a massive routs in Yen carry pairs is any indication, Masaaki Shirakawa achieved his ploy… at least for now. And just in case, the rumor has yet again leaked via Nikkei that the BoJ is once again considering an emergency meeting in which only one thing can possible be discussed. Alas, as the SNB has found out the hard way, today’s speculators learn to call the bluff on central banks very quickly. Either the BOJ will follow through with action within a week, or the Yen will surge to fresh record highs.

This week’s CFTC Commitment of Traders action, submitted by Libanman Futures.

But first our summary on the key COT activity: net spec long positions in wheat futures on the CBOT and the KCBOT hit fresh records, at 36.7k and 67.6k: is more food inflation on the immediate horizon? Net spec shorts in US Treasury Bonds, and LT Us Treasury Bonds, while still just negative at -5.8k, and -2.6k, respectively, are at the highest they have been in 2010: keep an eye on this metric as a positive inflection point may be the contrarian signal to sell. At least those concerned about the price of chocolate may rest easy: Cocoa ICE futures dipped to the lowest net spec total for 2010, at 8,092k. In currencies, the JPY posted the second highest net long exposure for 2010 at +51,069 Net Spec, an increase of 1,000 from a week prior, and a far cry from the -55.7k recorded on April 13. EUR net positions also droppe notably, after hitting a 2010 high of -3,731k, the net spec contracts have declined to -21.6k as of August 24.

General Commodities:

Financial Options:

In this week’s update on technical chart formations, Goldman’s John Noyce has nothing optimistic to tell clients. Noyce observes that while the market may have entered a short-term consolidation period with the 1,038-1,045, “looking further out the setup on the weekly charts of the S&P and the VIX, plus those for broader asset markets – fixed income in particular – make us think that a sustained bounce is unlikely and that broader risks remain on the downside.” Yet the most interesting chart formation is the imminent flattening of the 2s30s… not here, but in the UK. Will the Julian Robertson “suicide” trade shift across the Atlantic?

And other key observations on the SPX:

The setup on the weekly chart still looks very heavy – The market moving lower following the bearish weekly reversal which was posted two weeks ago:

• As discussed previously this was the third bearish weekly reversal pattern posted this year. Each one being posted from a marginally lower high  (January 1,150, June 1,131 and August 1,129). This seems to be a signal that the market has lost the momentum associated with the ‘09 uptrend.
• Looking at the market broadly a large Head and Shoulders like structure still appears to be in the process of forming (bearish).
• So while it’s reasonable for the market to consolidate, eventual further downside appears likely.
• To point to stabilisation we’d really need to see a weekly close above the June high at 1,131.
• The ultimate target of the H&S top is approximately 900.

Some other asset classes:

AUDUSD attempting to make a sustained break below the 0.8870-0.8840 pivot region

• Given the high correlation between AUDUSD and equities, the fact that the S&P has moved to support and entered a period of consolidation argues it’s reasonable that AUUSD does the same and consolidates around the 0.8870-8.8840 pivot.
• However, thinking further out, the overall setup continues to look heavy.
  • The bounce from the July lows took the form of a wedge, an exhaustion pattern which usually culminates in relatively sharp and extended downside corrections (AUDUSD has previously formed similar patterns prior to sharp corrections)
  • The eventual move below the 0.8870-0.8840 pivot which this implies would complete an H&S top targeting 0.85 and should also argue that the recovery from the May lows to the August highs was an ABC correction in Elliott terms
• Taking all of the above, plus developments in correlated markets as discussed on the following slides, into account, it’s very difficult to argue that AUDUSD is going to stabilise quickly. Further downside looks very likely eventually.

Those who are riding the AUD higher (whether vs the USD or the JPY) may want to consider the following:

AUD’s yield advantage is being eroded – Australian 2-year yields have now broken lower from their recent triangle like consolidation, If viewed as a double top the immediate downside target is now 4.08%.

The Australia/U.S. 2-year spread is also turning lower…

• The structure of the rate spread is quite different to that of 2-year Australian yields alone.
• But the implications are similar, the divergent wedge like move into the 76.4 retrace of the sharp drop from the wides of the previous cycle set in  February ‘08 implies a significant narrowing in the rate differential is likely.
• The chart [above right] shows the Australia/U.S. 2-year spread overlaid with AUDUSD. The two have remained well correlated over the past three months. Therefore it’s very reasonable to think a continued in the spread would be AUDUSD negative. Currently AUDUSD already looks a little over-valued relative to the level as implied as “fair value” by the spread (as highlighted by the blue box on the chart above).

And possibly the most notable observation: the imminent tightening of a Treasury Curve – this time that of the UK 2s10s, which we are confident will be the next major pain trade.

The market is now breaking materially below the 55-wma for the first time since July ‘08

• The 200-wma as an extended target stands nearly 200bps below current levels. Very close to the prior cyclical peak/wide for the curve from March ‘03.
• Fiscal austerity leads to low rates for a long time and a reach for yield further out the curve?

Anyway, all this is probably completely irrelevant, as are all fundamentals (after all, who knows who the next idiot HP/Dell combination is that will pay 4 times fair value for some non-descript company). The only trade is and has been since March 2009, to frontrun the Fed, and/or to be faster than the bulk of the sheep investors, and to hopefully beat the computers are their own frontrunning game. Everything else is sure to generate losses.

For those who do care, the full Noyse presentation can be found here.

In this week’s Big Interview, the WSJ’s Simon Constable interviews Robert Shiller who flat out says that an economic double dip may be “imminent.” This compares to his earlier warning that he saw the chances of a double dip at over 50%. Guess that probability has now doubled. Notably, Shiller also believes that when the NBER looks back at the data, Q3 of this year will mark the beginning of the second dip of the recession. Ironically, since up to now the previous recession has never actually officially ended, very soon the NBER will merely confirm that the recession which started in December 2007, will have continued for three years, in what is possibly the longest recession on record. Furthermore, those looking to sell houses are advised not to listen to the interview, as the co-creator of the Case-Shiller Home Price Index also added that he
is worried housing prices could decline for another five years. He
noted that Japan saw land prices decline for 15 consecutive years up to
2006. Following up on this week’s weakest new home sales data in history this should probably not come as a big surprise to most. Also for bond fans, Shiller confirmed Rosenberg’s view that bonds are not in a bubble. Hopefully Mr. Shiller bond prophecying skills in bonds are better than in houses, where it was mostly in hindsight in early 2007 when the bubble had already popped.

So sit back, grab some popcorn and listen to this 20 minute interview on how GDP is about to take a leg down, and buy some stocks (or not, the robots already front ran your decision before you even thought of it), cause in the new very inappropriately named normal one does the opposite of what one does in a normal world.

From Elliot Spar of Stifel Nicolas

Selling the opening rally worked again. How easy is this becoming? The bears were on their way to the bank after the Intel pre-announcement but I don’t think they stayed on the Fidelity green path. Everyone got short and then the Bernanke prepared statement said the Fed stands ready to act. When traders realized that INTC was going to reopen flattish, the buyers came back in a big way. Did anyone notice that the key 1040 level held on the S&P 500? How about that VIX? It held below Wednesday’s peak. What’s next? There are overhead down trend lines that have to be taken out in
order to change the short-term trend:

Down Trend lines:      SPX 1070
                                 Nasdaq Comp 2160
                                 RUT 605 (a bit above now)
                                 NDX 1810
Bottom-line: 1040 is your stop out point on the S&P 500 for your long market type stocks.

COMMODITY IN FOCUS
October Crude Oil
CL/V0 1 74.27 (+ .91)
Bulls have a lot of work to do here. First down trend line at 74.50 and then 76. A slippery chart.

INTEREST RATES IN THE NEWS
10 Yr. Treasury Yield Index TNX 1 26.29 (+ 1.30)
Looks like a key reversal day. A close above 25.80 would be another plus for the TNX. Next resistance up at 26.80 area.

VOLATILITY INDEXES IN FOCUS
VIX, VXN, RVX
Today’s drop has them all testing up trend line support. A clear break implies higher stock prices.

Full report (PDF)

Presumably this is in response to the ongoing lock out of Michael Mayo, who as Fox Business previously reported claims Citi is cooking its books by misreporting its deferred tax assets, by Citi management. We assume the letters are of a congratulatory nature, and commend Citi management on alleged ongoing fraud, also sharing tips on how the firm’s HFT traders can flash dash its worthless stock to a few trillion/share, guaranteeing that unlike in daily isolated flash crashes none of the transactions will be D/K’ed.

The analyst, Mike Mayo, of the securities firm CLSA, has been telling investors that Citigroup (C: 3.68 ,+0.02 ,+0.68%) should take a writedown, or a loss on some $50 billion of “deferred-tax assets,” or DTAs. That is a tax credit the firm has on its financial statement that Mayo says is inflating profits at the big bank by as much as $10 billion.

For that critique, Mayo has been denied one-on-one meetings with top players of the firm, including CEO Vikram Pandit, Chief Financial Officer John Gerspach, and any other member of management, while other analysts enjoy full access to the bank’s top executives, FBN has learned.

More here.

More as the fluid situation solidifes:

Gasparino’s sources say the SEC has sent Citi at least two letters asking them to justify their accounting DTAs in question by Mayo. Citi tells Gasparino “We are in continuous contact with our regulators, including the SEC, as part of its normal comment and review process on our SEC filings.  We respond to all such comments in due course.”  In addition, Citi told Gasparino: “We will meet with Mr. Mayo in due course.”

.. that’s the big question for tomorrow’s GDP report. First of all, we have a small change in the MCO, which is the signal for a possible large move coming in the next few trading sessions. Second of all, this was not a very good bullish confirmation day for more upside, but we’re used to surprises, so normal TA in that respect has to be taken with a grain of salt.  Lastly, it appears we have a bearish dark cloud cover candlestick on SPY EOD, but it needs to confirm tomorrow. 

A few charts and some interesting things to keep in mind on the daily charts going forward.

Good trading to you all tomorrow!  Don’t let me down- take their money and run!

How about a little spaghetti western music to get you in the mood for trading on Friday?  Buon Appetito. Mwahahahaha

Looking over Wednesday’s trading landscape, the thing that stands out in a big way is that it appears the risk trade is possibly back on again. We saw it in oil, we saw it in the RUT, and it has to be respected going forward or you risk getting your lips ripped off. It’s times like these you have to put on the blinders, the ear plugs and anything else you need to do to focus on price. Forget about rule violations and/or expectations, because if they’re trying to make the freight train leave the station here, you don’t want to be tied to the tracks, okay? This could be a short-term dead cat bounce from oversold conditions, or something bigger, but whatever it is, if you’re on the wrong side you know how this story ends. Get neutral in your head – no bias- no expectations, just trade with the sharks as they navigate above the alligators. This is when focus counts more than anything. I trust that you’ll all watch the details of the moving pieces intra-day and keep each other safe.   Don’t forget to check the EOD prints on TICK for further strength or weakness, monitor the copper chart, log the 5 day TRIN average… details, details, details. 

Included in the charts tonight are a full look at SPY intra-day chart, replete with previous CCs up higher. Do we get there? I don’t know, but you’ll have what my eyes have seen in case you need it for reference.

Zig’s T for tomorrow 

Stay safe and sane TTWrs… I’ll be on my way home to SoCal for a little visit tomorrow night, and will catch you when I get back again.  Guard the castle from the flying monkeys.  143  <3

Just a comment cleaner and a few charts for you to keep on watch. We’ve obviously had an interesting week so far, and I’m sure we’re in for more surprises as the next three trading days unfold. With various EW counts, DM alerts and cycle dates coming up shortly things should stay interesting. For me, at least, we’re in one of those places on the charts where the trade is not so clear, and not so extreme you can almost write the next chapter in your sleep, so caution is warranted in either direction. If you’re not seeing a solid case for a trade, the best advice is to SOH and wait until a lightbulb goes off in your head. Both longs and shorts have been battered enough that this should be second nature to everyone, but I just want to urge you to be careful. Many indicators "look" like they’re in oversold territory, but they also looked like they were in overbought territory for the better part of 2009 and that actually caught many shorts unprepared. This works both ways, so if you’re a knife catcher make sure you have a well defined trade signal, target and exit plan- the same of course, goes for shorts.

I have a few charts to share tonight- several regarding the tech sector. Osi and I both came up with a possible Gann cycle target of 9/8/10 last evening, and what’s interesting about that date is: the market will be closed for the Labor Day holiday, so although when watching those cycle dates you want to consider +/- 2-3 days on either side, this will be close to the time the "big boys" bring their toys home from the Hamptons and start the real shenanigans. Anyway- as we get closer to that time frame we’ll study the cycles more closely and see what we can zero in on to our advantage. Below you’ll also see Osi’s Gann calculations for price on the SPY.

See you all in the morning! Oh wait! It IS morning already and my sleep cycle is so messed up I’m a walking zombie. Good trading to my fellow zombies on Wednesday!

Osi’s Gann Calculations for possible price targets

That was actually a pretty fun day if you were scalping and playing some patterns and so forth. But then again, traders are crazy, so our version of fun would make a non-trader fully nuts. The Gartley pattern I pointed out earlier in the afternoon really hit beautifully in both time and price.

I need to make this short tonight (ahem,) but wanted to welcome our newbies, and let them know we hope they’ll find this place to be of benefit. We throw everything but the kitchen sink at the tape, and although it might seem confusing at first, eventually you’ll find a pretty well-coordinated group of traders who have something they throw out there to enhance whatever form of TA you’re using. Anyway- enough of that, let’s look at a few charts.

Reading Jack’s wonderful post yesterday made me realize I needed to look back over the really long-term charts at this point, and so I offer you another view of what I think might unfold, which hasn’t changed much since I posted this chart early this year. This could take some time, and I mean years, unless Armageddon is coming, but as technicians we prep for all possibilities. Anyway- have fun tomorrow traders- stay focused and on your toes as always. Although some of us might show a bearish view of things with T/A at times, we remain positive in our thoughts for our own success no matter which way the tape is moving. Believe in yourself- it doesn’t cost a thing.

How about a little subliminal music for this tape? I think the first time I heard this song I was up in Vancouver, so here’s to BeefStick and Inna- have fun guys- I’m green with envy I can’t be there too.

I just went over a pile of charts looking for something- anything that would give an edge, and I really don’t see it at this point. Monday has the usual ST cycle advantage for the longs, but beyond that- the daily and weekly charts give nothing solid, imho. It’s flip of the coin time by the look of it. If we continue down into the high 1050s on Monday, I’d be more apt to trade for a bounce from there, but carefully. If we bounce Monday- I like the short odds setting up for mid-week, etc.. Anyway- a quick weekend hodge podge of charts., and a few individual names I ‘m watching. Just remember- Laundry’s date was not "exact" in 2007, although pretty darned close. I’m not liking the high level of focus on the HO either at this point, but only due to the chronic use of these popular TA signals/woo doo that have trapped bears once too many times.

Also- for 13/34 fans, check out those EMAs on the current index charts. *Those* I like a lot here, as well as NYSI and NYMO at this point for MT trend trading.

For the Benefit of Mr. Kite and Osi, in case he forgets: Full moon on Tuesday.

And a huge regret on my part….

Best to you all this coming week- look sharp. 

“I don’t mind you thinking I’m stupid, but don’t talk to me like I’m stupid” – Harlan Ellison

Tell ‘em Harlan.

First item of business- it appears we had some snarkiness miraculously appear while I was away, and let it be known: I have fought tooth and nail with DDT to create a safe, snark-free trading zone for not only the regular posters, but the newbies and most of all, those who are lurking out there. There really is no room for magniloquent egos here, and we are heavy on humility and humor. Drama queens need not apply. I hope that message is clear. ‘Nuff said.

In the chart display, I also wanted you to see the 36 week cycle from the ‘00 top and where we are at this point, along with a fresh look at some of the Gann calcs. Additionally, I have charts to review from both Wallfly and Osi below.

AG flashed us the confirmation on the HO this afternoon, in case you missed it. All systems are a go. Thanks for stopping in with that info, AG. I dropped the ball while on vacation.

Best to you tomorrow, traders.

Okay.. Crank it up as we head into Ohhhhhpex.

Not much into precious metals (except for making Birthday presents to all relatives and friend in American Silver Eagles – they call me crazy behind my back), but /SI (ETF SLV) looks suspiciously good on the long side.

Following up on post as of August 11th
http://trading-to-win.blogspot.com/2010/08/pardon-mynat-gas-bad-taste.html

Nat gas did go to 133 line, we’ll see what happens next.  I added up another ugly channel (descending from the far left of the chart – why I did that – have no idea, but looks pretty)

As for broader market – I have no opinion now, I am in the watch mode, that short prediction around August 6th Time Series was the last high probability trade.  I am not messing with trades based on daily chart for now.

A lot can be said about $VIX, I can talk about it for hours, non-stop, I normally having verbal diarrhea when I talk about $VIX. So, prepare yourself and lets get going.

And this is all I have to say about $VIX

On a positive note – I feel jealous that you guys and girls (pardon me…girls and guys) caught few such a tradable DeMark-ian days…I wish I was there.\\

I am not an economist and not pretending to be – if I was I would not be using charts, but would try to explain yesterday with smartly massaged funny-mentals.

SO looking at the chart of 30 years US Treasury Bond Futures I can not explain to myself why is that if "crisis is over" and "the worst is behind us" (I am not even referring to economic recovery, but just observing state of credit) why is that people are pushing premiums up to 2007 "End of the financial world" level?

Unless DeMark knows more than I do (and it is truthfully so) and weekly Sell setup

Combined with Daily Sell Setup (it terminates Sell Countdown since it was in the process during it) right at TDST

will produce yield spike – I have very mixed feelings about safety of out fiscal policies…someone – can we declare FED obsolete?  They have not done anything except for bailing out their buddies – when enough is enough?

On August 4th, just to prove that being a Trading To Win "Member" has no value (I’ve been sarcastic indeed) I urged "Members" to cancel subscriptions due to my even more limited participation in blog life… some did bail out and canceled (but I will not remove anyone from the Members List for as long as there are spots available), so on August 4th I posted

http://stocks-real-time.blogspot.com/2010/08/few-charts-and-some-thinking-aloud.html

where I was bragging about dollar instantaneously changing direction – funnily enough – it DID.  Also I was laughing out loud at "Crude Breakout on NO VOLUME" – what do I know – it just plunged immediately!!!

Could have been good trades….coulda-woulda-shoulda…definitely worth $15 wooden dollars per month.

Today’s chart Crude chart – watch out for that 133 line!

Dollar – observe gray area

Damn Golden Fork!

Taste of Monday – INTEREST RATES!!!

It was an ugly week in the market with the Total Stock Market Index down by 4.2%–Ugly if you are a bull.  It was a fantastic week for the bears.  Telecommunications was the sector down the least.  As you might guess, the search for yield is on again, and some telecommuncation issues are staid dividend payers.

Though outside the scope of this post, past dividends do not always equal current dividends.  Make sure that you conduct reasonable due diligence to evaluate the quality and ability of continuance of dividends.

One of my long-time blog friends, MarkM, pointed out that preferred shares were a superb performer.  Here’s a chart of PFF.

ZBB and DYN were the two biggest contributors to this sector’s relative volume performance.

If you wish to scroll through all of the sector charts and drill down for greater detail, you can do so by following THIS LINK.

I wish you good trading this week.  I also want to thank my friends here for their supportive feedback on my ‘lament’ post.  It mean much to me.

This post will be dedicated to calculating your hedge using the S&P 500 emini futures.

First order of business is to know how many dollars you are up for the DAY. Let’s say for the sake of the example on Friday when the ES was hovering on support around 1106 you were up an arbitrary number of $3,400 alright so from the close on Thursday which was 1124.5 and the current ES price of 1106, is 18.5pts ES. $50 per point per contract so $925. So we take 3,400/925= 3.67 contracts. When we used to hedge we liked to round down, and it is more of a personal preference whether you would like to be slightly over or under hedged. So if you chose to round up and used 4 contracts in this example and decided due to how close we were to support, increasing delta, market internals etc that you wanted to protect your gains. You would buy 4 contracts at lets say 1106, and by the end of the day your hedge would have made 1119.5-1106=13.5, 13.5×50=675, 675×4=2,700. So instead of having 3,400 become $700 in gains, you have locked in your $3,400.

As a general rule of thumb in this example IF you decided to hold your hedge overnight due to fluctuating beta you would drop the 4th contract and be holding 3. You can always drop your hedge pre-market, overnight or during regular trading hours. So on one hand you are muting your gains but that is a small price to pay for protecting profits, lowering risk and peace of mind against gaps. When you hold overnight your hedge can be losing you money but generally when the market opens your other positions will make up the loss. But understand the risks of holding overnight!! Worst scenario would be you held too much overnight and got a margin call because of some news that happened while you were sleeping! So unless you know what you are doing don’t hold overnight.

The other beauty about this technique in hedging is that it allows you to practice day trading the futures for free. If the trade goes against you, your other positions should make up the loss. So if you are net short, then hedge by going long and taking every high probability signal to go long. Worst that can happen in that scenario is the market continues down and your other positions make up the loss. Although if for the flash crash for example some stocks did not react very strongly to it so being hedged on the ES could have hurt you. That however is an outlier event, that should be prepared for.

NOW for the other side of this sword, some people will hedge by chasing the market. That is a mistake because that will most likely lead to you losing on your hedge and locking in muted gains. IF you plan on using this technique I would recommend learning some day trading set-ups and studying the flow of the futures market, and if it resonates with you practice hedging in paper.

Anyways I hope this helps. I think David’s disclaimer also covers his guest posters but if not, you are responsible for your own actions.

Not even going back so far to recall my concerned phrase in mid June: "I hope Brandt took profits on nat gas", lets start from July…

Back in the first week of July someone on the blog asked me if I would short Nat Gas here…I forgot what poor excuse for technical analysis I presented, but the bottom line was "No, I would rather not to short it here"

And as always when I am not in the trade it proved to be an excellent coin flip and /NG started to drift higher.

In a while, end of July to be more precise, I mentioned on the blog that multiple "Fibonacci Time Series" coming up and "Natural Gas traders better be watching their long profits" – next thing we know damn thing is going down hitting lower trendline of the channel in no time at all.

Lets see what this ball will tell me (yeah, this crystal ball, yo – what did you think I am talking about????)

It is hovering right at lower channel’s trendline, today (overnight) is bar 8 of buy setup, I think it might test PRSGuitar’s 133 line which is right at 4.135 TDST.

Depending on test outcome – there might be a trade here…but not before that

Well TTWrs, today begins a summer hiatus for me from TTW. I have permission and blessings from our Russian Godfather. I know you’ll all do a great job of keeping the plates spinning here with DDT. I’ve been blogging almost non-stop since late last summer and one of the advantages to trading is you get to make your own hours and call the shots. I need to take advantage of that while the weather is nice and the beach is beckoning me. I will be away between 3-4 weeks, getting some needed projects done at TTW South, taking a trip to the West Indies where the computers are few and the cell phone reception is horrible (hooray!,) and I’ll also be headed for some time on the West Coast. Of course I’ll be trading in the middle of everything- some of my best trades have been in the middle of layovers amongst loud kids, a howling cat in a travel case and carry-ons.

In between I will pop in when I can and make sure you’re all being kind and generous to each other. That is, and will always be, the hallmark of this blog, along with sharing our methods and systems, because otherwise what good are they if you’re keeping it all to yourself? We’ve all learned that the risk/reward is fantastic and giving and giving and giving a little more. It’s why we’re here day after day, and surely why I admire you all so very much. Sure you can feel satisfied that you’re banking coin by yourself, but I guarantee you, you won’t feel less money by spreading your trading “wealth/knowledge,” even a little. Take Osi, for example. He could do like others and bundle his indicators and put a price on them, but he just endlessly creates and gives. I love him for that, and I know you all do too. Also, a big public thanks to GG for his post and taking time to do that for all of us. It was great, GG, and I’m glad no one has to look at George’s moobs now for awhile.

P.S. Do yourselves a favor and stay away from the negative news as much as you can filter it out. Save visits to ZH and the rest for the weekends when you absolutely cannot trade anyway. Hold on to your personal power, unless of course you’re willing to give that away to the kleptocracy too? I didn’t think so. Trade your very best, I know you will.

P.S.S. I’ll see you soon.

For those of you who know my code: 143, and I’ll miss you very much.

A little heart to heart with the Gold Gerb. 

Are your trades not working? Are you about to throw the towel in? Good! That means you are close. Close to making a change that is.
Has every instinct in every aspect of your trading often been wrong? Do you feel like there’s a conspiracy in the trading room personally trading against you? Good. even closer. I encourage you to thrown in the towel. That’s right, go opposite. "Blasphemy!" you say, "are you telling me to walk away from the Market?" NO – at least no yet, I say. Go Opposite in Your Thinking. Let’s face it, for every single trade in the Market, there is two sides of the trade: Buyer & Seller. Both are obviously thinking different thoughts. So let’s play some mind games, and find the Opposite shall we?

The Market has been soft for days, and looks ripe for a waterfall event.
Old Thinking: I’m gonna short this ride to the bottom!
Opposite Thinking: This softness is profit taking and accumulation, I’m loading up for the next rally!

The Market after a severe fall is bouncing
Old Thinking: What idiot would go long here?
Opposite Thinking: Bears are taking profits, and short covering is at a premium now.

The Market is sideways for weeks with no direction
Old Thinking: I’m going to watch every minute for the slightest hint of breakout.
Opposite Thinking: This is boring, I’m going to go mow the grass.

These are a just a few of the many mind warps that we as traders face every day.
I encourage you to examine some of the one’s you have, and try to see the other side.
It could be just the ‘Opposite Thing’ you need to succeed.

But what may be the most important strategy of all is Opposite Playing.
Consider the Casino; it generally pays out enough to keep the suckers coming back, right?
what if the Casino sours the teat? What if a slot, or a table, or a house occasionally does not payout nicely? The player ‘does the opposite’ and moves on.

..same with Wall Street my friend. If the Market is not rewarding traders, traders will go away, liquidity will dry up, spreads widen, prices crash, pandemonium!
I hope you Just Walk Away when it doesn’t pay, Wallstreet will beg you to come back..I promise, a House afterall needs it ‘participants’.

Last week I indicated that I would not provide the weekly sector report in the future. Given the feedback, I’ve elected to continue in a modified form–I will no longer prepare a chart book since this information is available on FINVIZ. I’ll use this weekly post to highlight points of interest and to give you some links. While the job report delivered a disappointing number on Friday, the weekly sectors, except for banks, were positive.  Healthcare (+3.17%) and Basic Resources (+4.13%) had strong showings.  It is worth noting that Healthcare has been the worst performing sector over the last six months.

Here’s a table of the sub-sectors that have the greatest short interest for the week:

Source:  FINVIZ

Mylan Labs (MYL) has the largest short interest at a whopping 25.27%.  Click on the ticker to see a chart.

Now let’s take a look at the sectors with the highest relative volume:

(Source FINVIZ)

The largest relative volume mover (4.51)  in Medical Practioners was Transcend Services (TRCR).

For easy to view charts on individual subsectors, click here to be transported to FINVIZ.  You can order these charts in a number of ways. I hope that you find this new format helpful in providing an overview in addition to giving you some exposure to tools that can aid your own variation of research. I wish you good trading this week.

Let’s see if you can figure out which hut is mine.

I really don’t have a lot to say as my brain is charted out and ready to look at anything but more charts for a few days. I have a couple of things below to share with you, and I’ve also plugged in the April 21st peak high on the Gann calculator for some interesting dates ahead to watch for in the weeks ahead.

While we watched the usual shenanigans from the hooligans this afternoon, we did not close on the high tick like we did through most of last week’s ramp job. Not a sign of strength, but we’ll see what they decide to pull on Monday. The daily charts should give us better clues at that point.

Have a restful, fun weekend out there. Next week maybe we’ll have enough money to pack it in and head on over to Big’s and start construction on our compound. Thank you one and all for your hard work- that’s why I love this blog- everyone pulls their weight and pitches in. You’re the best in my book. A special message to TWD out there- we miss you and hope you’re having fun. Hurry back!

You know it’s true
All the things you do come back to you…..

No, not for a job- for tomorrow’s manure UE number. What happened to all those shovel ready jobs, btw? We now have 40.8 million.. say that again.. forty point eight MILLION people on food stamps. Hopey, changey, shoot me green -we’ve been saved, hallelujah.

Back to business- a few charts from our trifecta watch, and I have an interesting video for you about the September VIX options. I’ve also snapped the screen of those options so you can see the volume today and current open interest if you don’t have access to view them via your own platform.

Good trading to us all tomorrow, and may we all prosper as much as Inna, so that Big will let us all move to his house. jajajaja!

Today’s marks the 34th day since the July 1st low- a nice Fibonacci number. As we discussed earlier in the chat, oil inventories are still building and the initial target was hit on the Gartley pattern and /CL closed with a doji below the .786 Fib target. Is it time to short it? Wait for the trade and SOH until the next moves prove the pattern (or not.) I think I mentioned to Inna earlier this week, I can’t see this tape moving down until copper and oil turn around at the very least. Just to put the icing on the cake, GS went parabolic this morning, and that surely won’t help the shorts either.  Urghhhh.  One thing is for sure, and I’ll give Merriman credit on this- correlations are out the window at this point- just trade the charts and don’t worry your pretty little heads about any of it making sense. It doesn’t need to make sense, it just needs to make us money. 

TNX also painted a bullish engulfing on the daily, and if TNX leads, this is not a good sign for the shorts. I’m also tracking the TICK intra-day, and it keeps looking weaker and weaker as price moves up, but I’m not sure if it’s just coiling to push this tape higher or what’s going on there, but it’s something to keep an eye on. I also don’t see a decent signal on the TRIN at this point either to get excited about. So it’s back to SOH and scalping intra-day for now. 

Economic calendar tomorrow includes: Chain Store Sales, Monster Employment Index and Jobless Claims, 8:30 AM. Natural Gas inventory at 10:30, Geithner speaks at noon, Fed Balance Sheet and Money Supply at 4:30 P.M. Friday will feature the UE numbers and later on in the day Consumer Credit- 3:00.

I’ll be gone most, if not all of tomorrow, so keep the peace and trade your very best.  See you on Friday if not sooner you little trading maniacs. 

Were you able to stay awake for that session today? All eyes seem to be on the US dollar again, and we’re watching all of the moving parts in anticipation of where support might occur on the charts.

Not much progress in either direction on the indexes today, thank you Captain Obvious. Longs might consider this just a day of rest and consolidation to move higher, while shorts are thinking this is the eye of the hurricane. So what do we walk away with then? My two favorite things to monitor for risk appetite- the RUT and TRANS, which both outperformed the INDU, SPX and NDX to the downside. Charts below for some key resistance and support levels.  The weekly charts might have more work to do however, so it’s worth keeping a close eye on those at this juncture.  NYSI once again closed positive on the day, but the NYMO is currently retreating toward the zero line.

Economic calendar for tomorrow includes:  Challenger Job Cut Report at 7:30, followed by the ADP UE Report at 8:15.  ISM Non-Manufacturing at 10:00 and EIA Petroleum Status at 10:30 AM, EDT.

For those of you who might have missed the big solar flare news, there’s a cool video to see it happen on 8/1.  Have a great trading day tomorrow, gang!

… it might not be time to come out just yet. I need to make this short and sweet tonight, but wanted to toss out a few ideas should we be looking at more tape floating in the next few days. I’m still tracking the Gartley on /CL, as well as keeping my other eye on copper up here. If you look at the possible targets on these two, it all makes perfect sense, and should come together nicely with the SPX moving into resistance at the same time. For all I know, oil makes its move to finish this off by tomorrow and before Wednesday’s inventory report. But it should also be noted, this pattern can do a belly flop just like any other pattern. Obviously, this isn’t written in stone, and nothing more than a guessing game, but I thought I’d put it out here. This scenario would probably also play well with a move of the dollar down to the .618 Fib retracement at the same time. Oh.. if it could be that easy, right? I could just as easily show you the chart on IWM with what could be a massive bull flag with a target of 72.10, so it’s not time to count chickens and/or play chicken with this tape just yet.

What I’m finding interesting at this point is that everyone has their eyes on the same target for SPX and grumbling about the demise of the dollar. We remember what happened when the headlines of the Euro’s race to the bottom was everywhere, so it’s just something else to consider. The failure of the RUT and TRAN to make new recovery highs intraday is also something to consider. I’m fully aware of some of the resistance levels that were tested and/or breached today in either price or MA levels, but I just don’t have time to do detailed charts on those for now. In any event, the IT downtrend is truly in jeopardy as of today.

Good trading to everyone tomorrow. Great day in TTW again! Oh, and before I forget- congrats to our Wheat, Corn and Sugar traders! Well done guys!

Okay.. forget trying to count the D wave and E waves, and enjoy the Count of Tuscany

DDT here
Quick memory trip (writing in the basement with windows closed with dark clauses holding my Mossberg 500 Tactical Edition by right hand and Glock 23 by the left one – paranoia keeps me alive)
Here is from Members Site as of July 21st:

…because daily chart looks like bloody good diamond bottom for all I know…yeah – and again – familiar yellow trendline persisting on SPY chart for a long time now – if it was neckline – would not it break down already???

 Would it be nice to think like crooks and walk like crooks and talk like crooks…look who is talking!

SPX hourly completed A-B-C corrective around January peak, I might expect yet one more push tomorrow morning and then downside “surprise”?

While looking over a multitude of charts just now, I come away with one thought in mind- it’s about as clear as mud. Unlike my view and conviction back near the top in April, when we had more than enough clues a near-term top was approaching via international charts, indicator charts, LIBOR and the like, but the current view is mixed technically from what I can see.

As you all know, I am constantly watching breadth during the intra-day action, and the noticeable and constant rise of new highs v. new lows on the NYSE has been giving me a glaring bullish stare, but much like I noticed back in April, the NDX is balanced at best right now, but I see no clear advantage as a clue via NDX NH/NLs just yet either. The bears have been chatting about various cycle markers for the past two weeks, but all we’ve seen so far are interim dumps and pumps over and over again. Will these cycle markers hit or is this just another Don Quixote moment in the trading cycle? I have no answer for that.

What I do see is mixed evidence in favor on the side of the bulls VST right now, and in light of the July bounce, but I keep it in the back of my mind that complacency on their part could also be their undoing, and could come swiftly when least expected. That’s not a way to trade though, and if the only thing you do is wait to short, you could be waiting a long time while money is being made and the tape creeps higher. Basically, there is no clear-cut path here other than very short-term ups and downs if you can scalp and stay as safe as possible. Are you afraid you’ll miss the trade of the century/Black Swan/moment-in-history? That’s the wrong tree to bark up as a trader, and will leave you frustrated and angry, rather than productive in your trading. How do I know this? Because I battle at the skirmish line of bias on a daily basis personally, and have to constantly work on bringing myself back to center. My own best trades last week were based on what I saw unfolding on the charts, not what I wanted to happen, or worse… expected to happen based on my bias. I’ve observed EW, DM, Gann, pattern trades and then some- all scrambling to re-adjust their counts and projections for the past month because that’s exactly all this is- projections and guesses, and often without a good look at anything but a single chart in front of them. Fifteen minutes turns into 3 days, an ABC turns into an extension or a truncation, 180 degrees turns into 250 degrees, three white soldiers turns into a hanging man doji… and the beat goes on. By the way, this includes me- I am guilty as charged. But, bottom line, these are the only tools we have and we’re not much of a match against liquidity pumping, surprise rug pulling and other various hat tricks. Some would say this is the sign of a near-term top. I say bunk- we are specks in a big sea of crooks. I trade for the cold, hard cash not brownie points for getting lucky with a technical projection days in advance. When the ducks all line up neatly, this job is a little easier, but we don’t have those circumstances currently and it’s a tough tape to trade for both sides.

So where are we? We still have no higher low/higher high in place on any of the indices medium term, so an early victory dance from the bulls is premature. They hit July with positive divergence, but eventually the music stops and negative divergence can come like crack addict in an unlocked Best Buy. We have a ST higher low, but multiple lower lows/lower highs are still intact. Unless and until that’s negated, the MT trend remains down, with expectations of head-fakes until this trend is negated on multiple time frames. TRAN is the only signal I see with a perfect double top, if that’s a double top that will hold. See how clear this really is? About as clear as mud. The absolute key will be to stay bias neutral and objective with the charts in front of us, and jump on opportunities as they present.

Sorry for the long-winded text, but there’s so little time during the trading week and I wanted to share my thoughts, and stay a little more quiet during the weekdays to focus on my own trading book, as I’m juggling more positions than I normally do.

Enjoy the charts from Wallfly and Osi if you missed them on the previous post. Thanks to both of them for their hard work. Best to you all as the trading week begins on Sunday night.

Yeah, that’s right, I used pink on the video surround, so sue me.

<——— This is going to be somebody tomorrow, but knowing who it’s going to be is what we wait for until that bell rings at 9:30 AM. No need to remind you we have GDP announced tomorrow at 8:30 AM, followed by Chicago PMI at 9:45 and Consumer Sentiment at 9:55.

Before I put up some charts I’d just like to thank everybody for a really good week in TTW. Without being too confident, we’ve had our traders do pretty darn good so far, and hopefully we’ll all navigate well into the weekend. Stay alert, whatever you do, and if you happen to catch something please post so we can all stay on task together. I know there are probably some lurkers out there who hang with us every day, please feel free to jump in whenever you’re ready- we won’t bite. (mostly) GG even has his rabies shots up to date.

For you regulars: no changing your avatars for awhile or I’ll send you to avatar jail. We don’t take this offense lightly around these parts. Let’s see what the bears have in their favor because no use stating the obvious- the bulls have the Fed, the HFTs and all the money and liars handbook The bears might just have Cato hiding in the closet. For those tracking the astro stuff- at 9:31 AM tomorrow morning is Mars oppose Uranus. The Mars aspects were apparently a favorite of W.D. Gann for trigger points, so just a little background why it might be good to watch that calendar I shared about a week ago. We have several more Mars events coming up over the weekend and into next week. Just remember though, dead cat bounces can come quickly and out of nowhere, so be on your toes. Also keep in mind this Cardinal Climax is a process, not an event. Everything leading up to it and after is also important.

Gann wheel, date only. We could see an interesting alignment happen tomorrow.	Wallfly’s DeMark Chart (thank you as always, Wall. )

Last but definitely not least – NYMO

Have fun trading tomorrow. See you then!

Was going through the daily charts, looked at SLV, GLD, USO etc (I wonder if there is such symbol) and everywhere I look I see A-B-Cs on daily, low reward, messy trades.  But Dollar (I know I know – I shall not use dumb Commodity based ETF for charting/analysis – but I am in the poor man’s mode…someone called me "cheap"???

So, UUP is in one humongous ABC as well and it looks like it is quite ready to start wB corrective UP – coupled with completed Countdown 13 buy Daily and RSI sitting flat on 40 I might be tempted to start looking for few long /DX contracts.

ANd here is a chart of daily /6E (EURO FX futures) – although it is not 1:1 relation, but 58% weight of EUR in Dollar index is good enough for comparing and the point is – those who traded that bounce (June 6th) off the bottom of the channel and off TDRL of TDST of Countdown Buy – have made a lot of moolah.

Here is 30minutes SPY chart, it has provided good entry points (long and short ) since June 18th top. UP  Wave looks incomplete, but if it terminates – here and now is a time based on down wave that started on June18th with w1 low July 1st (Special K. did her best to bring that possibility to our stubborn attention). Looking at RSI – it hanging onto 60 level unable to move higher – not bullish in my books.

Next up is an hourly chart – we spent entire day consolidating, but unable to move above TD Risk Level.  We did talk about 112 level as a first possible turn point – it might just be it for now.

Daily is close to TDST around 113, retraced 50% of down move from June top, that ongoing sell setup does not look too strong – are we going to see 950+sh area on this leg down?  If I only knew…