THE TREND IS YOUR FRIEND (wave 3 in motion)

[Bottom Line]: The stock market remains in a third wave down at several degrees of the trend. Third waves are most often the strongest waves in an impulse sequence. Elliott called them “Wonders to Behold”.

With both presidential candidates espousing “change” as one of their main campaign themes, once again it’s the financial markets that are leading the way. I cannot stress strongly enough how truly historic the current shift is from extreme optimism to a movement toward extreme pessimism and the current “change” that it is causing.

Imagine the U.S. government (i.e., taxpayers) taken an equity stake in a private global insurance company (AIG), the single oldest money market fund breaks the sacred $1-per-share threshold (Reserve Money Fund), three-month US T-bills fall to their lowest level since World War II, Russia suspends trading on its stock exchange “indefinitely,” a former Secretary of the US Treasury says the market’s almost “frozen,” the largest bond fund manager in the world has one of his biggest up days ever (Sept. 8 ) and then just six days later (Sept. 16) has one of his biggest down days (PIMCO), Gold soars the most in nearly 10 years in a matter of days, while Platinum falls 50% in a matter of weeks. All the while, the U.S. Senate majority leader says “no one knows what to do.” This latter statement may be the most honest one from a politician that we’ve ever heard.

In a bull market, the psychology attending these events would represent a tremendous buying opportunity. Whereas in a bear market, they represent the recognition phase of a third wave down. As I’ve been discussing, we are starting a third wave sequence in what appears to be the beginning of a long period of DEFLATION.

By now you should all be positioned in the short ETF’s I recommended in my last update on July 31. Again hear are the entries:

SH = 67.07 or better
DOG = 65.23 or better
SDS = 64.64 or better
DXD = 59.85 or better

This trend is so strong that it failed to fill the GAP I discussed in my last update (1322.37/1316.29) an uncommon thing to occur and it also failed to pivot to the Fibonacci 50% in minor wave 2. This type of behavior in the price structure of the trend is signaling that this third wave could really extend beyond the guidelines (see charts 1 and 2).

CHART 1

CHART 2

Bailout is the name, “change” is the game.

As the geniuses in Washington continue to bailout their Wall Street buddies with the uncollected tax money that our children and grandchildren will have to pay for the next two generations, the two presidential candidates are selling “change” as November 4th approaches.

Change with what? By the time you’re sworn into office in January of 2009 there will be no money to finance any change. There is $5.3 trillion of treasury notes outstanding, and we’ve just been put on the hook for another $5.3 trillion dollars owed in bonds by Fannie Mae and Freddie Mac in their reckless lending scheme. Not counting the already 500+ billion the Fed has loaned out through the discount window and accepting CDO’s “aka” toxic waste as collateral.

What they should be campaigning on, that they will be the one to hold accountable the people that have put us in this mess (jail time please…..thank you). Then, maybe you might restore some confidence in the American capital markets.

Washington you are a disgrace! The corruption has reached such monumental levels that they go hand in hand with the levels of optimism that were reached during the bubble years of the housing market, they where and are of historic proportions.

You can’t give a license to any entity without regulating it? If you are going to issue a license to a chartered bank or an investment bank to do business you must regulate it COMPLETELY, Not half ass.

Washington and Wall Street have allowed hundreds of trillion of dollars in derivatives to be negotiated in some dark room without any supervision or transparency. The SEC, FED, FDIC…etc did not have a clue of what was going on. Or were they just turning a blind eye while this hanky panky was going on so their bodies on Wall Street could make fortunes. And now that it has blown up in their faces they want our children and grandchildren to pay for it.

Many need to go to jail and we should start with the members of the Creature from Jekyll Island (the Federal Reserve System). At the rate they’re spending they will no longer be a reserve.

Stay safe

Until next time

Leo

IPC USA

IPC USA

El IPC USA se mide de 2 maneras. El banco central de USA “The Federal Reserve Bank” excluye energía y comida y lo llama “CORE CPI” en base a este comportamiento maneja su política monetaria.

En los últimos 7 años se alega la transparencia por parte del gobierno en el manejo del “Consumer Price Index”. El gobierno ha venido reportando incrementos del 2 al 3% anual en el Core CPI (ver grafica 1) pero los recursos naturales han subido de precio mas del 200% por esa misma época como lo muestra el CCI (ver grafica 2). El gobierno alega que la subida de precios en los recursos naturales es un componente de mínimo efecto en el comportamiento del CPI y dicen que el aumento en el costo de salarios es el crucial. Yo no estoy de acuerdo.

Dudo que en los próximos 12 a 18 meses el CPI se mueva de su rango. Los precios de commodities continúan cayendo y el barril de petróleo debe de continuar bajando y pegarle a los $80.00 USD en los próximos 12 meses, con la posibilidad de bajar más. Este ingrediente tan importante de la economía mundial debe de mantener la subida en los precios de commodities en check. Y con la contracción que se avecina en la economía de USA no veo en mi radar drásticas subidas de salarios sobre todo que la taza de desempleo ha subido del 4.9% al 6.1% en los últimos 12 meses, por el contrario, con el estrés que viene sufriendo el sector financiero no me sorprendería una disminución en el CPI y el FED bajar los intereses interbancarios al 1%.

GRAFICA 1

GRAFICA 2

A lo que si le pondría mas cuidado es al comienzo de un posible “Bull Market” en el dólar.

¿La caída en commodities es el reflejo de un dólar fortaleciéndose o de una economía global debilitándose? En mi opinión, las dos.

La gran mayoría de los commodities son cotizados en dólares. Es lógico que si el dólar se fortalece estos recursos naturales bajen de precio, y esto es precisamente lo que estamos viendo.

Aunque esto no tiene lógica ya que la moneda de un país es el reflejo de sus condiciones económicas, y la economía americana no ha hecho más que debilitarse en los últimos 24 meses.

Si esto es cierto. ¿Porque el dólar se sigue fortaleciendo? En mi opinión la única respuesta que puedo encontrar es. ¡Deflación Global!

El dólar ha sido la moneda de reserva en el mundo desde el triunfo de los aliados en la segunda guerra mundial (1945). Hasta hace unos 4 a 7 años que dejo de serlo, por los problemas macroeconómicos que se venían viendo en USA.

Pero ahora que las economías de los países y continentes ricos como Europa, Inglaterra, Australia…etc. comienzan a mostrar que también tienen problemas de burbujas en sus  sectores inmobiliarios y hasta niveles más altos de apalancamiento que en el propio USA el mercado ha regresado al dólar buscando refugió.

Yo no puedo decir con exactitud con la evidencia que hay hasta el momento si el dólar ha comenzado un bull market. Pero lo que si puedo acertar con seguridad es que va ha tener un pívot bastante fuerte (ver grafica 3).

Primero, porque tengo 5 ondas de caída en la tendencia que comenzó en el 2001, tocando fondo en marzo de este año. La línea de tendencia (línea café) ha sido claramente penetrada, divulgando un posible cambio de tendencia. Pero si es solo un pívot es muy probable que amenace el pico de la onda cuatro (línea verde). Este avance podría llevar al EUR/USD a $1.16 y a GBP/USD a $1.30 y también le pondría presión a las monedas de los países emergentes incluyendo al USD/COP.

GRAFICA 3

Segundo, porque los indicadores que uso para medir fuerza, velocidad y aceleración de tendencia me están diciendo que al DX le queda combustible en el tanque para seguir subiendo (ver grafica 4). Lo único que cambiaria este fuerte pívot/tendencia seria que el banco central de USA se hiciera cargo de todas las perdidas financieras que vienen. Ya absorbió y perdono a los Chinos y Rusos garantizando los 5.3 trillones de dólares de bonos de Fannie Mae y Freddy Mac. Pero dudo que cometa esa brutalidad, y no creo que el pueblo lo permita.

GRAFICA 4

El $COP debe continuar subiendo en los próximos meses. Basándome en los indicadores de tendencia y lo mencionado en el DX, el debe encontrar fuerte resistencia entre el Fibonacci 0.50 y 0.618 (ver grafica 5).

GRAFICA 5

Mucha suerte

Leo

The spin doctors have their work cut out today.

S&P500

US DOLLAR

Fannie, Freddie Bailout Carries Huge New Risk

Monday, July 14, 2008 10:51 AM

By: Hans Parisis

I’m becoming even more bearish than I already was.

Here’s why:

The U.S. Treasury will ask Congress to allow an unspecified amount of equity injections into Fannie Mae and Freddie Mac. The Treasury has already asked to increase the current $2.25 billion credit line for each of the government-chartered banks.

Meanwhile, the Federal Reserve has created a lending facility for Fannie and Freddie for loans collateralized with their own debt and with Treasuries.

JPMorgan analysts — prompted by the U.S. Treasury’s move on the banks on Sunday — see no respite for structured finance.

Quoting those analysts:

Unlike the Russian default crisis, failed hedge fund Long-Term Capital Management or the technology, media, and telecom stocks crises, ‘we are unable to see a ‘club’ structure with the ability to make industry-wide decisions to resolve the issue and hence proactively rather than reactively intervene.’

‘We conclude, the Fed action could trigger a short-term rally but with what we see as a lack of leadership, the structured credit crisis is spilling into 2009.’

JPMorgan thinks three ‘curve balls’ remain unresolved: U.S. ‘pure’ investment banks, monolines, and highly leveraged banks.

I think the big issues remain the following: banks are overleveraged, and notwithstanding government support (which can’t go on forever) fears about counterparty risk and liquidity are still pervasive.

Fear has spread from commercial paper markets to repos, credit default swaps, and will continue — say JPMorgan’s equity research team — to eat right into traditional credit.

How many bailouts can the U.S. government manage? First there was the superSIV, the fund to back the structured investment vehicles. Then there was the Bear Stearns bailout with JPMorgan. Hot on the heels of that, the monoline insurers, MBIA and Ambac Financial.

And now, Fannie and Freddie… Not to mention, via the Federal Deposit Insurance Corporate late Friday, home lender Indymac, which got taken over by regulators.
Straws? Camel? Back?

So, the big, unanswered question becomes, will foreign governments keep buying U.S. agency debt?

Consider these potential ’straws’ hovering over our already stumbling camel:

• Central bank holdings of agencies (including those of Fannie Mae and Freddie Mac) have soared over the past two years and likely exceed $1 trillion. China accounts for half that total, Japan has over $250 billion (split between private and official sector holdings), and Russia holds about $100 billion (especially short-term). The implicit government guarantee means that the agencies could run out of equity before central banks lose their willingness to buy agency paper.

• Potential serious repercussions of a flight of foreign capital if there is a sudden perception that agency debt entails heavy risks.

• Government-backed entity bonds, like those of Fannie Mae and Freddie Mac, are not officially backed by the U.S. government and trade at a significant risk premium to Treasury bonds, but the implicit guarantee made them attractive to many investors, including governments like China. Chinese and Russian holdings of agency bonds nearly doubled in the year ending June 2007, according to U.S. Treasury data.

• Exposure to U.S. government agency bonds more widespread than that to subprime-related mortgage-backed securities among emerging markets. With concerns about the solvency of Fannie and Freddie and the chance that they might be nationalized, holders are worried.

• The widening of the agency debt spread relative to Treasuries — from 10 basis points to about 100 basis points — has reduced the mark-to-market value of such agency debt.
• Foreign investors own $1.3 trillion in agency debt. Among them, China, Japan, the Cayman Islands, Luxembourg, and Belgium hold the highest shares of long-term debt. Havens like the Caymans may reflect the holdings managed on behalf of other holders.

• China and Japan had the largest total exposure to the U.S. mortgage market, though unlike European markets it was more clustered among higher-rated securities.
• In mid-2007, the Chinese central bank portfolio included as much as $100 billion in U.S. mortgage-backed securities.

• The acceleration in Chinese reserve growth coincided with an increase in China’s risk appetite. The purchase of debt securities by China’s banks also picked up in the course of 2006. Many of these securities were financed using funds borrowed from the People’s Bank of China through foreign-exchange swaps.

• In 2007, foreign investors bought 55 percent of $32 billion in new Fannie Mae benchmark notes. Their share shot up from about 49 percent of the $39 billion of new notes in 2006 and from the 37 percent share in the past decade.

So, I’m becoming even more bearish than I already was.

Why? Because now the Fed and Treasury seem to be aiming for an explicit government bailout guarantee for Fannie and Freddie, which in fact will be a guarantee of a guarantee.

For the moment at least, I’ve lost my confidence. Given all of the straws over our quivering camel, what kind of guarantee will be allocated to the other government-backed entities?

Who’s going to trust those guarantees?

I’ve put the dollar on ‘negative’ watch and will act, that is, sell on pure technical signals. We aren’t there yet. I remain, however, in energy, “serious’ inflation-fighting currencies, agriculture, and physical gold kept in always-accessible places.

© 2008 Newsmax. All rights reserved.

Fed’s Bear Stearns Assets Down $1 Billion in Value

Fed’s Bear Stearns Assets Down $1 Billion in Value

The assets that the Federal Reserve agreed to take from Bear Stearns in March to enable its sale to JPMorgan Chase have already dropped in value by $1 billion, the central bank announced.

The assets, mostly mortgage-backed securities, totaled $28.9 billion as of June 26, down from $30 billion at the time of Bear’s rescue in mid-March.

The original valuation of the assets, which don’t include subprime mortgages, came from Bear Stearns, while the revision came from the Fed and its advisor, BlackRock. The Fed intends to update the portfolio’s value quarterly.

The loss so far wouldn’t cost tax payers anything. That’s because JPMorgan agreed to cover the first $1.15 billion of any losses on the sale of the assets.

Moreover, given that none of the assets have been sold yet, any losses now exist only on paper. The Fed is expected to sell the assets over a period of 10 years, hoping to avoid any losses or market disruption.

Fed Chairman Ben Bernanke says BlackRock is “reasonably confident that we will be able to recover the full amount if we dispose of these assets on a measured basis, rather than to sell them all at once,” according to The Wall Street Journal.

The Fed may even earn a profit on the sales, Bernanke says.

But some on Capitol Hill haven’t been so sanguine. “What it looks like…is that we’ve socialized risk, and we’ve privatized reward,” Senate Banking Committee Chairman Christopher Dodd (D-Conn.) said at an April hearing, The Journal notes.

“We’re on the hook. Hopefully it doesn’t happen, but we’re on the hook.”

The Fed originally agreed to make the loan in March, because JPMorgan said without such a loan it was unwilling to take over Bear Stearns.

The Fed claimed it bailed out the fifth largest securities firm because had it not, then Bear Stearns would have been insolvent, and that would have created financial havoc in the broader financial markets.

And since Bear was a counter party to trades with notional values in the trillions of dollars, liquidation of the securities firm could have triggered a complete meltdown in the global financial system.

A newly created firm named Maiden Lane LLC was designated to hold the assets and finance a loan (Maiden Lane is a street near the New York Federal Reserve Bank headquarters in Manhattan).

JPMorgan supplied $1.15 billion, which would cover the first losses from any decline in the assets’ value.

The Fed and BlackRock are valuing the portfolio in accordance with accounting guidelines that call for an estimate based on sales in an “orderly market,”’ rather than a hypothetical forced liquidation.

The value doesn’t necessarily reflect what the securities would fetch if Maiden Lane tried to sell now.

Breaking News from MoneyNews.com

CCI, in its last hurrah!

The pain in demand forces price pressure and the price chart of the Continuous Commodity Index CCI is telling the story.

One last hurrah before a significant pull back, the slowing in the global economy can’t coexist with these out of control rises; something has to give.

Good luck

CCI 1

Marc Faber: Bernanke, Fed a ‘Joke’

Thursday, July 10, 2008 12:06 PM
The Federal Reserve has misled the public, and its fiscal policy has greatly damaged the U.S. economy. But the big Wall Street banks and brokerage firms will be bailed out by the Fed if they get in trouble because they’re members of the same “club.”

Those are the opinions of Marc Faber, economist, author, former Managing Director of Drexel Burnham Lambert, and editor of The Gloom Boom & Doom Report, a monthly investment newsletter.

“Let’s say if I’m a manufacturer and I’m a bad businessman and I go out of business, who’s going to help me? But Bear Stearns and the Wall Street elite because they’re tied into the Treasury and the Federal Reserve and they lunch together, it’s a club … and they’re bailed out. I mean it’s a joke.”

“The first thing that people should do is stop listening to the Federal Reserve in America, and specifically to Mr. Ben Bernanke,” Faber said in a recent CNBC interview.

“They are misleading the public and investors by claiming they want to have a strong dollar and that they’re concerned about inflation.

“But when it comes to actions, they show no concern about inflation and [about] the ordinary Americans and middle class at all.”

Faber believes the Fed cut interest rates too sharply and should’ve stopped cutting at 4 percent.

“Great damage was done to the U.S. economy when the Fed rate was cut from September [2007] from 5 ¼ percent to 2 percent. These [current] rates are negative real interest rates, and the purpose of money is to be a store of value.”

“When rates are negative it destroys the wealth of honest depositors who have their money in the bank and don’t want to speculate…The Federal Reserve is the greatest speculator. They force people to speculate,” Faber says.

In Faber’s recent note to investors he writes with extreme pessimism that he expects 150 bank failures in the next 12 months.

“I think a lot of banks are already bankrupt,” Faber says.

“And a lot of insurance companies and financial institutions, but they hide their rotten assets in level three asset categories, where you don’t need to value them.”

“I think the financial sector by and large has much larger problems than is perceived by the investment community. The stock market to some extent is telling you that, is giving you the price signals.”

A bank failure does not necessarily hurt depositors or clients, Faber says.

“I don’t think there would be anything wrong if Bear Stearns or another investment bank would fail because you could transfer the assets of clients to another investment bank or to another broker. I was working at Drexel Burnham,” he says.

“We went bankrupt. Nothing happened to the clients. Their assets were transferred somewhere else.”

Yet after the Bear Stearns bailout, the Fed has essentially promised bailouts for the largest firms if they go belly up, says Faber.

“It’s a very questionable practice in life to have a financial sector that made so much money in the good days, and when something goes bad the government just bails them out. It sets a very bad precedent.”

© 2008 Newsmax. All rights reserved