In Uncharted Waters

As I have mentioned before, the United States is in an economic environment we have never witnessed before in the history of our country.  While I have discussed the major economic imbalances in my blog that have developed over a long period of time (such as trade, budget, and currency issues), the necessary economic adjustments remain elusive and obscure.

In my opinion, the world's central banks have printed trillions of dollars of currency and tripled their balance sheets to support the debt currently outstanding around the world.  As the assets that back the record amount of debt continue to deteriorate or are written off in some cases, the debt imbalances will need to be worked out with more consumer, government, and corporate defaults.  With the removal of debt stimulus polices, the potential toxic combination of defaults and budget cuts that have been offsetting the deflationary drain of debt servicing on economic growth now look to be a long-term issue.  The health of the world financial system is at risk.

The developing issue is now governments cannot continue to borrow from bond investors and now subject to the same debt servicing problems as citizens and are subject to further austerity.  Leaders in the United States want to deal with the “fiscal cliff” by announcing budget cuts and tax increases. The combination will detract from any chance of economic growth for the United States near-term. Corporations around the world continue to hoard cash in advance of the potential falloff in economy activity and as a result unemployment remains at crisis levels.  

 The major question of how the excessive imbalances will work out remains. What should we do to protect our own financial future?  One possible answer is I think we need to treat this economic environment as an explorer did many years ago.

As we learned from history books, explorers set out to prove the majority view wrong that the world was round and not flat.  They had vision and wanted to find new lands with potential riches for the Kings and Queens that supplied the necessary financing for voyages.  The explorers “sailed off into uncharted waters” and were very brave and did not want to tell the leaders they failed.  They relied on ships that were supplied with a significant amount of men, food, and the best materials to try to account for any problem along the way.  Still, many died on the voyage to find new lands and riches. While they tried to be prepared for any event, many still lost their lives on the journey.  Those who survived came back heroes and brought back new riches.

Yes, I believe we are in uncharted waters and plan accordingly.      

 

The Developing Problem with ETF's

Exchange traded funds have exploded to the investment scene over the last few years with many different sectors, types, and even volatility based ways to benefit from market trend changes.  The main issue is that many of the funds are becoming less liquid and in some cases are closing.

My concern is with a market crash, that the liquidity in these funds may dry up and become more difficult to sell in an extreme market event. Keep an eye on your ETF's and check the trading volume. Make sure it is active enough to provide liquidity for entry and exit points.

The market appears to be starting a major leg down, and liquidity will be important as this trend develops.

Are Corporate Cash balances too high?

A look at the over $2 trillion in cash at U.S. corporations has been an economic concern and debated about by politician's. Should the money be put to better productive use to spur domestic economic growth? 

First, a number of large multi-national corporations hold significant cash balances outside the United States. While the rules for a two year period were changed that offered corporation's tax advantages to bring the funds back to the United States, the plan did not work. The main reason is that major multi-national production facilities are now offshore and used in the normal cash flow cycle in the country of production.

The second issue is that the collective debt level of companies have surged to over $6 trillion from $2 trillion  few years ago.  In effect, management teams have decided to borrow funds instead of using cash to invest in productive assets. The cash on hand will now be needed to payoff creditors in case of a reduction in  demand.

While borrowing rates continue to be at record lows, many management teams are too concerned about end demand to enter new markets or acquire other companies to secure their competitive position.  Management teams appear to be building up a significant cash war chest to prevent any liquidity issues as leveraged companies find it more difficult to access the credit markets.



 

The Grand Illusion Continues

A number of announcements were made by Central Banks and others and confirmed that government leaders and Central Banks "Will Do Whatever It Takes" to avoid an economic collapse.  Wait just a minute; Prevent?  Today marks the four year anniversary of the Lehman Brothers/Bear Stearns collapse and "The Great Recession of 2008".  For most people, it has been a long and painful experience.  As a number of my business associates already know, the economic collapse was not avoided and has continued.

What we have now is a "Virtual Economy" not a "Real Economy".  Video game players should know that a number of computer programmers can create a "virtual world" in which you explore, fight, and conquer enemy's. The Fed and the governments around the world have created a similar game called the "Virtual Economy" and left the "Real Economy" in shambles. Let me explain: 

What has always been the reality depends on which side you are on. You are either in The Have Camp or Have Not Camp.  In the Have camp (or virtual reality economy), the outlook is bright as bond prices, mortgage backed securities, and the stock indexes have rebounded on trillions of dollars of capital market purchases by Central banks/Governments that have propped up asset prices. The Virtual Economy has rebounded and wealth has returned to the Have Camp.
 
In the Have Not Camp (or the real economy), the majority of citizens have been left to fend off the collapsing housing prices, lack of jobs/high unemployment, and soaring food/gasoline prices as the "Real Economy" remains in a depression.

Just what is the end game here?  Will the "Virtual Economy" players come out of their world and back to the "Real Economy", or will citizens around the world be drawn into the new "Virtual Economy Bubble Game"?  After all, virtual games are fun for the winners! However, in the Virtual Economy will need more players, or the Central Banks will need to print more money since the "Real Economy" has none. In the Virtual Economy game, the rules are that Government's and Central Banks issue bonds or the Central Banks print money to replace "Real Money". 

The disconnect between the economy and the capital markets is as wide as I have ever seen it. The difference between the "Virtual Economy" and the "Real Economy" is frightening to me as the game continues. 

When will the Have Camp come out of the "Virtual Reality Economy" and realize that it is just a crazy game that cannot be won? The virtual economy game cannot be won by the Have Camp, unless new players are drawn into the bubble.

The real game here is called a Ponzi scheme. Please don't fall for the new bubbles being created in the "Virtual Economy" or we may end up like Lehman Brothers or Bear Stearns who ended up being in the Have Not Camp. Sorry, the game is over. Time to come back to reality!         

9/11 Tribute

While we await some major economic events, I think we should take time today to pause and reflect on our lives.  I had a few friends who survived the 9/11 attack and know how grateful they are to still be living today.

As we all know our family, friends, citizens and first responders were victims of multiple acts of terror on that day. We all know other Americans gave their lives and perished trying to prevent further attacks on this country on 9/11. 

As my friends who survived the terrorist attacks told the stories of first responders who went up many flights of stairs going to save others while many where exiting a building, or discussed some other event that occurred that day that saved their lives we must remember to all be grateful we live with other Americans willing to help us.
 
My own story is small compared to the other stories that day.  I had a flight scheduled to leave in the afternoon on September 11th. While watching the events unfold before my eyes on the television, I knew I was fortunate that my flight was not earlier in the morning or in the airport of the planes that were a target of the heartless killers.

I had also borrowed a book from the Market Technicians Association library, which was destroyed in the World Trade Center that day.  I waited long enough for the association to relocate and rebuild. Then I sent the book back that I borrowed with a special note.  Somehow that book had a very special meaning to me as it survived the attack and the library was rebuilt.

I will take a walk tonight around a local lake with my family to pray and honor the victims of this event. I will also pray that world leaders avoid conflicts in the future and strive toward peace.  I have learned in my life it is far easier to destroy than to build.

       

Actions Speak Louder than Words

Around the world investors, consumers, and citizens are waiting on the "magic announcement" from either political leaders or Central Bank heads to solve the problem of weak economic growth, high unemployment, and the risk of capital flight.

Recent articles suggest that savings/money is leaving Spain at a rapid percentage of GDP.  When money leaves the economic system, economic activity will contract and not expand.  The money contraction is being replaced by Central Bank or government purchases of bonds to continue to support a failing economic system or a depression.  As most citizens know, the United States is in a depression. Most economic statistics keep coming in weak or weaker.  Investors, consumers, and citizens are starting to ask the most important question; Will economic activity or the economy ever get better?

While Europe is suffering, the U.S. announced the ISM factory activity index is now below 50. Most economists consider the economy is contracting when the index falls below 50.  The European Central Bank heads will meet again September 6th trying to float the idea of unlimited bond purchases in the E.U. to prevent the wide credit spreads between higher rates of Spain and Italy compared to Germany.  While the major issue remaining is the pending court ruling in Germany due at the middle of September to allow the ECB to purchase any bonds at all.

As most citizens now know by now, the magic announcement is just an illusion.

  

A Happy Birthday!

Well, I just turned 54 today.  I know the people in the Gulf do not like my birthday as another hurricane is coming ashore.

Gas prices continue to rise along with food prices.  As far as deflation, consumer confidence dropped sharply. I find it interesting that the headlines are positive and the consumer is getting more negative. I think we know who is right as the consumers need to pay the bills everyday and are more exposed to the "real economy" than analysts on Wall Street.

Be safe and Good luck!

Don

The Main Problem In America

Do not look for the Federal Reserve or Central Banks to help much over the next year.  The problem has taken a long time to develop and now needs a long time to correct the imbalances in the Economic system. While many people have been focused on other events, the main issue is Germany's court will need to rule on further use of the EFSF or ESM facility by mid September. 

Please look at the look below for the main issue in America today.  I found the comments interesting.

http://finance.yahoo.com/blogs/daily-ticker/middle-class-broke-pew-study-reveals-real-problem-155018682.html

I sound like a Broken Record

The stock market is a rigged game as far as I am concerned for short-term traders.  Do not get into believing short-term news events.  Short sellers continue to get squeezed out on any new news of ECB or Federal Reserve stimulus plans either real or perceived by investors.  Usually the market moves up before any Central bank action and then falls sharply on the "actual event".  Time and time again any further action has not worked.  Continue to hold VIX and UUP as fundamentals have not changed.  My opinion is that further central bank action is a long-term negative for the stock market as investors continue to "hope".

While we are waiting for some real economic change, I am looking for some positive groups or sectors for some long-term investments.  Some real investment potential is ahead and as long-term investors you may want to take a look at Senior Living REITS, Heath Care REITS, and natural gas for potential positive areas once the major top is in place.  The market has been prone to a sharp collapses in a short period of time so be ready when the drop occurs.  The recent move up is not a surprise as Central Banks continue to manipulate investor sentiment. What is a surprise is most trading investors continued to be drawn into investing at peak prices by these actions.    

ECB comments to save the Euro are coming up short

A few weeks ago I made a comment about how a court ruling snag in Germany would prevent the Eurozone from using the EFSF or the future ESM to be able to buy Spanish and Italian bonds. The ECB comments last week appear to be false as they wait for court rulings due in Germany on September 12, 2012. In addition all 17 members of the Eurozone need to approve a change in the rules to allow sovereign bond purchases by the EFSF or ESM. Do not look for the ECB to act until all countries agree.

Investors will start to realize that not all countries in the Eurozone will agree to bail out weaker nations soon.  Please read the interesting article from CNBC for further details.

http://www.cnbc.com/id/48456183

The main points are as follows:  A final decision would follow after September 12, when Germany’s top court rules on the ratification of the ESM, which will replace the existing EFSF, the paper said.  Analysts point out that there are significant obstacles to such a move. The ESM cannot come into force until Germany approves it. “This is all speculation which is completely unjustified at this stage,” Alistair Newton, political analyst at Nomura told CNBC.

In addition, all 17 euro zone members would need to agree to such a move, and the Dutch and Finns have already expressed their reluctance.

ECB please save us!

Well the Fed meeting has come and gone and the real hope is that Central Banks around the world will flood the system with money and start a real economic recovery. The hope is now on the Central Banks to solve the world economic mess as political leaders cannot.  Talk is cheap and the ECB is now on the hook saying that they will flood the system with as much money as it takes to solve the issue. When I first researched the issue, the European problem last year the amount of funding required for banks and the governments to just finance debt and deficits was over $2 trillion dollars. I am sure the problem is larger now as the economies are sinking into recession.  So, if the ECB does not announce another major $800 billion plan tomorrow look for the markets to crash.

On another subject, I certainly believe individual investors are losing faith in the stock market due to high frequency trading.  Back in 1987, the crash that day was partly caused by program trading.  Look for the same meltdown again, and afterwards people will be pointing fingers again. 

http://finance.yahoo.com/news/latest-market-glitch-shows-trading-174547006.html

Groundhog Day

Investors love when the Central Banks print money to help solve the sovereign debt and banking crisis. As investors we have seen this many times before.  Looks like a scene from the movie groundhog day as the actions have been repeated time and time again without any real lasting solution to the main economic issues.  Will companies expand or borrow money to create jobs? No. Are savers being wiped out by low interest rates compared to inflation. Yes. Any answer to high unemployment rates in the U.S. and Europe?  No.  Is the short-term stock market artificially inflated by these actions? Yes.  Is the long term world economy being hurt by these short term actions? Yes. The world eeconomy will be facing even more headwinds as the ECB and the Fed drains the liquidity added. Investors need to be careful what they ask for on Groundhog Day. Just as a reminder, the Fed has offered dollar swap lines and the amount has been increasing since May up from $22 to $30 billion. The Euro problem is worse not better as these lines are not zero and heading higher again. Look at the link by the New York Fed required for full disclosure to taxpayers. http://www.newyorkfed.org/markets/fxswap/fxswap_recent.cfm. In my opinion this is the last great time to exit the market. We have seen this movie before.

Just looked at the S&P 500 chart and noticed the crossover of the MACD 12/26/9 and Slow Stochastics 18/10/10 indicators I use.  Look for a major decline starting now. The Exponential moving averages are now rolling over 20/30/50 providing additional resistance.

Ban on Short Seliing in Spain and Italy

Now that the financial markets are under pressure, leaders in Italy and Spain decided to announce a ban on legal short selling.  Just another attempt to regulate in a depression. 
I believe that short selling provides future buyers in a declining market.  The attempt to regulate trading will likely backfire as investors decide the market is a rigged game and not participate.  At least in Las Vegas, I know a slot needs to pay off sometimes. 
It is O.K. if short sellers get caught in a short squeeze, but not alright if they profit from mismanagement of companies.  Does that sound fair?   The reason I like the VIX as a hedge to a declining market is it soared today is that regulators cannot attempt to control volatility.  Volatility is a natural reaction to further panic by investors. Look for future attempts by leaders to continue to ban, regulate, manipulate, and control the economic winners and losers.  However, the public is smarter this time and may revolt to further attempts to save savers and investors at the expense of all taxpayers.

I think one foot's off the edge of the cliff. Look out below!

Recently I was invited on a consulting assignment and now back in Iowa.  Sorry for the lack of posts recently, but to me nothing has changed with the market.  The stock rally has been minor on no major news events.  The Wall Street spin on earnings releases and weak guidance appeared to be falling on deaf ears in most cases.  A few stocks were pounded on the earnings misses recently.

Pay attention to the riots starting in Spain with the long term bond yield now over 7.2% in the country.  No bread no peace!
With the U.S. corn crop now appearing to be really bad, the outlook for more strain on the U.S. consumer has started.  The deflation process should now weaken end demand further ex food, and while I cannot predict a drought, the end deflationary environment for items other than food will likely lead to prices falling faster now.  As far as positions I recommended, I would look to exit UUP on a move on the Euro below $1.19 to the dollar. Do not hurry and take your time as Italy will be next in line for funds causing more pressure on the Euro.

The VIX looks poised for a move sharply higher.  The index has performed well despite the stock rally.  I am buying the XVZ to participate in the stock decline I see straight ahead. 

As a further note, if any firm would like to hire me for my services, I am in the market.  Of course that has been the case for a while. Feel free to contact me with a post.  However, as the way Wall Street works "bears are not invited" to the party.  I will love to turn into a bull someday, but 2012-2013 will not be a pleasant experience for most of my former associates/co workers.  All my friends on Wall Street I wish good luck and I may see you in the unemployment lines soon. I know many of you have expressed a desire to leave the business and I can understand why.  You are the real heroes as you continue to try to help clients in a depression.   

EFSF or ESM snag?

Well the devil is in the details as bank investors holding preferred and certain debt of Spanish banks will be wiped out before the funds from the EFSF are released.  In Germany, the issue has gone to court to stop the disbursement of the funds.  The ruling will not be for 90 days. 

J.P Morgan is set to discuss the "whale trade" tomorrow.  Stay tuned in! 

The Cliff

Got a chance to see Dark Shadows over the weekend and a few loved ones were falling off the cliff who could not break a witches spell! 
Feel like the economy is like that right now right at the edge of the cliff under a spell of easy monetary policy by the world's central banks!  On Friday, the market fell sharply as employment numbers in the U.S. remained weak, the German economy appears to be slowing along with China.  Spanish rates jumped sharply to above 7% as European leaders said they have not reached a agreement to release the $100 billion to Spanish banks before July 20th. 
In Germany, Merkel appears to be not only in hot water with other European leaders, but when she got home was blasted by other politicans.  I was reading that Holland's leaders are not in favor of bailing out weaker European countries to hurt their credit ratings.
What we have is a cliffhanger!

Let the Battle begin

I have followed the stock market since 1975, and I have never witnessed the type of event that occurred the last two days in the stock market.  Either investors are all now bipolar (one day euphoric/next day in depression) or the governments/central banks around the world want to make sure they print all the money they can and give it to the world banks to prevent a global meltdown due to bad consumer and business debts.  While I believe government officials want to prevent a meltdown of the world banking system, I believe the capitalist system as a result of these policies is under severe attack.  The outcome will be total government control as the private sector has given up and left the mess for leaders to clean up. I did not experience the "New Deal" and feel I am too old to pick up a shovel and fix up the national park system when private businesses cannot or will not hire.

In the United States and the E.U., the printing presses have being running full blast since the 2008 peak printing money to buy all kinds of debt.  The money supply has tripled in both regions.  The best G.D.P. growth is behind us as interest rates have fallen.  Unemployment in the United States and Europe remains high by an historical measures.  When the Central banks will need to liquidate the MBS, Treasury, Sovereign debts) on their balance sheets who will be the buyer of last resort?  Sorry, the private sector is tapped out.  I would not look at the corporate balance sheet strength either as the cash as a percent of annual depreciation looks in-line.  Yes, cash is at record highs but so are expenses.

Watch for a quick reversal during the summer and the market to head sharply lower.  If not the government bought another couple of months.  Sorry, as an umpire I need to call it as I see it. Out! not safe! I heard the crowd booing now!  

Get ready for the Fireworks!

After a brief bounce, investors pounce on any hint of positive news as a great chance to buy.  While the European leaders are starting to fight about how to solve the latest regional problem in Spain, the U.S. market has been focused on some weakening manufacturing numbers.  Unemployment and job growth remains sluggish, and some earnings disappointments may be in store for multinational firms in the second quarter earnings releases starting soon.

My outlook is for the S&P 500 to decline to below 1,100 at a minimum by the end of September.  I remain in the UUP position and you may want to purchase some VIX funds to protect your portfolio.

1364 on the S and P 500 and then what happened?

The S&P 500 hit 1364 on the money and stated to sell off.  The market surged on the hope of central banks around the world coming to bailout countries with looser monetary policies.  The question to ask yourself, have you been the last fool who holds stocks while the Central banks have been buying assets the last two years along with you? Who will by the buyer when the central banks need to liquidate?

Think about it tomorrow when the Federal Reserve makes the grand announcement tomorrow that every investor in the world wants to hear. Operation Twist or QE3. Who cares!

Important inflection point in financial markets

I have been doing extensive research on a number of models lately.  The technical outlook has not changed.  The key question is the "world depression" over or will we just have a normal major correction in the United States of at least 19%?  Let me ponder the question for a moment while I type.  Now I have the the answer.  While investors were focusing on "old news" regarding the Greek election, France's elections were ignored.  Let's have some fun and just think for a moment if Germany decides to leave the Euro.  Why not? They are the strongest country in the EU and why bailout a number of weaker countries?  In addition, the economic indicators in Europe are falling rapidly even if the banks are bailed out.  Think the U.S. is exempt from Europe?  Do you know where your money market funds have been investing lately for yield? Probably in Europe.  Watch Spain and Italy closely.  Spain's yields shot up over 7% today and Italy is too big to bailout with funds from the ESM. With the U.S. politicians in gridlock until election day, do not look for any action on the tax cuts expiring this year. Since the stock market looks ahead, the world economies are looking pretty weak and all correlated now. Look out below!  

Another one bites the dust

Wow, it is nice to get into the full blown technical analysis again.  The market had an initial spike up and is correcting now.  While I look for the market to short-term go lower, I think one more rally is in store before investors should bailout completely.  S&P 1364 is the final best target for a wave 2 bounce unfolding in a three wave pattern.  The market is in a B wave down with a C wave equal to the first move up in store.  A big crash down is likely after that. Interesting timing as the market may rally on the Greek election news next week. As far as the next target for the S&P 500, my initial calculations project it will be a minimum of 19% to the downside.  So, if you are conservative, you may not want to wait around for a few points to the upside!

The domino's continue to fall with Cyprus asking for a $5 billion Euro loan from Russia.  Why wait to have the IMF approve a loan, when you can go straight to one of the nations with a surplus.  I think the request is really interesting.  Cyprus also has a better debt to GDP ratio due to a social security surplus of $ 7 billion. The country has a total debt of $17 billion and subtracting the social security surplus drops the total to $10 billion.  Who does that sound like?  You guessed it, The United States.

Very interesting day today as the stock market in Spain rallied and then sold off hard.  The U.S. market did the same thing today.  I was looking at the double top eached today and wondering if the market is going to rally further to 1360 or go to the 1213 area first.  While the weight of the short-term technical indicators where oversold before the explosive rally last Thursday, the market has now retraced .382 of the entire recent move down. Now to determine if .50 or a .618 retracement is still possible.  We need to wait on further market action this week and watch carefully.  A wave 2 usually retraces more than .382.  If this is it, the market is signaling further weakness. 

One fact of life in this market is you need to stay "on your toes".  While I was traveling for a consulting project, the bounce in the market occurred.  As I am writing this piece, European leaders decided to spend another $100 billion dollars or more to "bail out" Spanish banks.  The issue with the ESM is that only government's can borrow from the facility. Another interesting lesson learned for the future.  So, the major question is who will put up the $100 billion this time?

The market looks poised to rally further at this point.  However, the 1360 area will start the next dramatic leg down in the market. The CRB index, along with markets around the world seem poised for a major fall.  The major question is when all the bailouts are completed of the banks, the risk will be on government's to pay.  If the government's cannot pay, interest rates are poised to rise.  While we shuffle around deck chairs on the Titanic, the real underlying economies are weaker despite government leaders suggesting "everything is fine".

No changes. Bounce over last couple of days has occurred. Market above the 200 day.  A break back below the 200 day will be very negative and confirm the downtrend to 1213 area is in place. Tomorrow will be key as to direction of the market short-term. 

Floating Trial Balloons

The markets around the world seem to be waiting on further steps by European officials to stop the banking crisis gripping the area.  Many” trial balloons “ have been floated by the media over the last week ranging from a E.U. banking unification, IMF bailout of Spanish banks, use of the ESM, another LTRO round by the European Central Bank, direct Spanish aid to their banks by issuing bonds, and the potential of Euro bonds being issued.  Pick your favorite story and investors will jump back on the potential solution(s) as a reason for a short-term rally.  I look for the market to continue to decline as the S&P 500 has broken below the 200 day moving average late Friday.  While a bounce back above the 200 day is possible, the relief rally should be used to sell as I still expect the S&P 500 to continue to decline to around the 1213 level. I made a rough calculation using an equal point total decline to the last wave down.  I look for a bounce after the level is reached.     

Deflation is the fear not inflation.

Investors seem to be catching the onto the falling domino theory as the Euro Zone is sinking under the weight of higher interest rates and proposed fiscal austerity.  Today, the major headlines of U.S. job growth and Spain have dwarfed  another example of European citizens refusing cuts in their standard of living.  Ireland’s citizens have voted against harsh austerity and more backlashes from the population from other European citizens in the region are expected.  The United States, China, or India does not appear to be immune to the spreading virus of deflation.  My future fear with holding government bonds is that while investors are rushing to the safety as they provide some yield as short-term interest rates are near zero, the ability of governments around the world to continue to fund stimulus by borrowing to offset the lack of private economic growth cannot end in a positive way.  As a few European countries have found out, you cannot spend your way to prosperity.  Bond investors in Portugal, Ireland, Spain and Italy have watched bond prices sink under the weight of government budget deficits to bailout banks and the economies in the region.  Most citizens now are as addicted to fiscal spending as an addict is to heroin.  While you may get short-term relief, you will face the long-term effects of the decision to avoid feeling the short-term pain. The last comment may offend readers, but government bonds will not end up being the place to be as they are in a “bubble” now. 
Historically, interest rates in the United States need to offer 3% just to offset inflation. So while you have "enjoyed the ride" while investors have been focused on lowering inflation, deflation will in the end hurt bond prices more as governments will end up not being able to pay.  What is the end game here?  As citizens, we should be tired of talking about government and central banking stimulus.  The result has not been an improvement in unemployment.  The only answer is the tough medicine of liquidation of debts by a combination of defaults, bankruptcies, and austerity with spending cuts in both the public and private sectors. The only other way  to solve this crisis is a fresh start with employment growth in the private sector.  If businesses hire, then the public can regain a balance sheet that can be able to rebound from the ashes of past policies.  My fear is a lot of economic pain and a change in leadership is needed at the governement and corporate level before a turn is in sight.

The Rain in Spain

The news releases from the United States were not positive as jobless claims continue to rise along with leading economic indicators and consumer sentiment surveys dropping. 

The big news in Europe is Spain’s deputy prime minister Soraya Saenz de Santamaria is flying to Washington to meet with Tim Geithner and IMF director Lagarde.  While Largarde has recently taken a harsh stance with troubled Euro countries, the near-term outcome does not look promising for IMF aid very soon.  While I expect the IMF will be involved before the Euro crisis is over, the political debate between countries for an increased role in the IMF and world affairs will move to the front and center.  Emerging countries appear to have the financial strength versus developed countries to be able to contribute. 

While Bank of Italy’s governor Ignazio appear to be stating the obvious that investors now doubting cohesion about European governance and the ability to ensure the survival of  the Euro, Italian prime minister Monti warned of a backlash against fiscal and structural discipline.

In Spain, banks are stuck with an estimated $184 billion Euros of bad property debt and the government just provided Bankia another $23 billion and most investors believe the bank is now nationalized.  Look for the ECB and Europe’s political leaders to announce or talk about using the European Stability Mechanism (ESM) to provide liquidity to Spanish banks.  After all, it is reported that $65 billion of withdrawals have occurred as Spanish citizens start to doubt the banking system.

An update on UUP.  Since the low on April 30^th, the Dollar bullish fund has gained 5.6% while the S&P 500 has declined by roughly 6%.       

Downside target for Euro and S&P 500

The recent call on the market and the Euro has been correct with the S and P 500 dropping to the 1290 area and the Euro now below $1.24 to the U.S. Dollar.  I expected a bounce at 1290 and that happened while I was away.  The S&P 500 appears to have more downside directly ahead to a target of 1213.  The Euro is completing a five wave down structure looking at a target of $1.19.
From these levels, a bounce should occur leading the S&P 500 to a .618 bounce to the 1344 level. The Euro should retrace at least .382 to around the $1.29 area.
The headlines are troubling with major banking liquidity issues in Spain along with government bond yields now over 6.68%.  In Italy 10 year yields are now back over 6%.     

Sell in May and go away

This morning in Europe the shares of Bankia (In Spain) were plunging by over 27% as the bank was nationalized last week.  Reports are that customers had withdrawn over $1 billion in the last week from the institution.  The news has started to affect other banks in the region with Italian banks hit hard. The news along with the Philly Fed index turning weaker along with the U.S. Leading Economic Indicators turning down has hit the S&P index hard.
Sell in May and go away seems to be the trend for this summer. I will join the trend by taking a break from writing for a week while I am on vacation. I will review the S&P 500 targets when I return.

Bank downgrades in Italy

While investors are focused on Greece and J.P. Morgan this week, the Euro crisis is just starting.  Look at the news released this week that investors have not focused on:
Moody's Investor Service cited Italy's recession and increasing bad debt as it downgraded the deposit and long-term-debt ratings of 26 banks in the country.  Meanwhile, the credit rating agency warned that Spanish banks face challenges despite setting aside €30 billion to cover losses related to real estate loans.  A Moody's official said the rating agency will postpone possible downgrades on more than 100 banks worldwide as it assesses fallout from JPMorgan Chase's trading loss and other factors.

The real underlying problem in the E.U. to focus on is Italy and Spain.  The other issue is if the E.U. and U.S. economies are slowing down or entering another recession/depression phase, China’s exports will slow popping the bubble in Asia.  Iron ore price has already fallen “off a cliff” and is one “canary in the coal mine” indicator to exit stocks.

While the Federal Reserve may announce QE 3 and the ECB will likely announce LTRO 3, how long before investors start to question the “lenders of last resort” cannot do anymore without running the risk of devaluing currencies around the world.  With the latest talk in Washington is focused on fiscal restraint or cutting spending, U.S. politicians must be careful just to cut wasteful spending or risk slowing the U.S. economy further.  Looking ahead the ECB, Federal Reserve, the European Union and the U.S. government are backed into a corner on monetary and fiscal policy. The real concern will be higher unemployment and the price level collapsing over the next year.  With the announcement this week by Moody’s, banks will be unwilling to lend and will be selling assets or shrinking balance sheets in the years ahead.  Let’s watch these events for a while to see if announcements may provide some short-term relief.

Crisis just starting

With the news today from Greece, the other financial dominoes will be in the minds of bond investors soon. The announcement of the loss at J.P. Morgan will be interesting as to what position they took a loss on. Was the position on Greek bonds or other hedges?  The top five financial institutions for derivatives I mentioned should be monitored closely for upcoming announcements.  No change as of now on the target of 1290 on the S&P 500.

I will review the S&P 500 target to see if a lower target is possible at this time. However, in technical terms this is only the start of the downturn.  This is possibly only wave one of major wave three to the downside.  We are due for a wave two bounce after wave one only after a full wave waves down are completed. A wave two bounce will like retrace .618% of the final low at 1290 or lower. This downturn is in the very early stages with more trouble ahead likely this fall. 

J.P. Morgan and Credit Derivative Issues

According to Bloomberg, J.P. Morgan just has taken a $2 billion credit derivative dollar loss related to a “hedge”.  While analysts have been questioning the loss, my recent comments on the total size of the derivative market will result in further announcements of this size.  What will be interesting to me will be how the top five players I previously mentioned will handle the Greek Credit Default Obligations among other derivative financial dominos in the European Union.

http://www.bloomberg.com/news/2012-05-10/jpmorgan-chase-says-cio-unit-suffered-significant-loss.html

Euro Crisis II

The markets around the world are selling off on the news from Greece as the new leadership is attacking the “barbarous austerity”.  As the financial dominos start to drop in Europe, Spain’s ten year yield is back over 6% this morning.  One of my concerns has been the amount of U.S. money market fund investment positions outside the United States in search of yield.  An estimated 35% of assets of U.S. money market funds are in European holdings.  I was very concerned about this last fall, until the U.S. Federal Reserve extended swap agreements to help with the last liquidity crisis.  The European bank liquidity issue has been propped up with over $1 trillion Euros borrowed from the ECB called the LTRO.  The LTRO is a three year lending operation to European banks.  Usually a “lender of last resort” does not need to extend credit to banks for such a long period of time.  When European banks unwilling to lend to each other due to increased counterparty risk, the short term spike funds parked at the ECB’s Central Bank Deposit facility is another warning sign and concern for liquidity in the region.      

Another look at unemployment in the United States

After reading an interesting article about how many people are not in the labor market, I wanted to add some comments about 86 million people not working in the United States.  If you take 86 million people not working and divide it by total population of 311 million, around 27.65% of the U.S. population does not work.  The interesting part of this article is the major debate surrounding about the two groups who suffer the most.  The population under 25 and over 50 has the highest rates of unemployment.  A change in employer’s hiring practices and engaging workers back into the labor force will be the key to the future economic growth in the United States.  While employers need to focus on working conditions, compensation, and benefits to attract workers, the labor pool needs time and in some cases a new attitude to adjust to the new positions available by deciding to accept additional education or training. One interesting current example I can point to is welding classes in Des Moines are in demand, as a current shortage of workers exists. A lot of blame can be shared or fingers can be pointed on why companies cannot find workers, but when employees have been laid off from traditional manufacturing, industrial, or oil field positions for many years, you cannot expect the population will spend time or money to be educated or go through training required.  You can expect the population to head for other career growth areas. While technology positions seem to be in demand, not everyone can go back to school at age 50 to take the financial risk of retraining for another career that may not develop.  One interesting point in the article is the 36 million people who may have decided to stop looking, or instead to care for children or support spouses who do work.       

http://money.cnn.com/2012/05/03/news/economy/unemployment-rate/index.htm?iid=HP_LN#

Unemployment and Job Report

The market has appeared to finally turn as I suggested dropping on the employment report.  The target I was looking at before the wave down is over is 1290 on the S and P 500.  While everyone seems to focus on the narrower version of the unemployment rate dropping to 8.1%, the wider version of the U-6 is the key to the U.S. economy turning around. The rate of job growth of 115,000, when economists expected over 160,000 is troubling.

Please look at this link:  http://portalseven.com/employment/unemployment_rate_u6.jsp to look at the U-6 unemployment rate historical data in the U.S.

Spain and other Europe Events

With Spain now officially in recession and another domino falling with the events is the Netherlands, it is amazing to me the Euro is not trading 1 to 1 with the U.S. Dollar.  While in the near-term the U.S. economy appears to be holding up better, the outlook appears dim in the E.U. as citizens will need to decide on some tough economic measures to insure the currency survives in the present form.  With unemployment over 25% in Spain, and with youth unemployment running double that rate the country looks poised to join Italy as the next major dominos to topple over in the E.U.  How can I forget Portugal? Stay tuned.

Derivatives Market

Derivatives Market

The market for derivatives is enormous representing an estimated $235 trillion in the United States and $707 trillion globally. The main types of derivatives in the United States are Interest rate swaps at $204.6 trillion, FX $26.5 trillion, Credit Default Swaps $15.2 trillion, Equity $1.6 trillion and Commodity $1.4 trillion.

While netting is 90.8% of the total exposure, the size of the positions are $78.1 trillion for J.P. Morgan, $56 trillion for Citibank, $53 trillion for Bank of America, $48 trillion for Goldman Sachs, and $1.79 trillion for Morgan Stanley.

According to the European Banking Authority (EBA), the largest bank exposure to sovereign debt is listed below.

Bank Country Value of Sovereign Debt (In Billions)

Intesa Sanpaolo Italy $ 59.20

BBVA Spain $ 58.10

Unicredit Italy $ 50.10

Santander Spain $ 45.90

BNP Paribas France $ 35.50

Dexia Belgium $ 21.80

Commerzbank Germany $ 17.30

Credit Agricole France $ 14.80

HRE Holding Germany $ 11.10

Barclays Great Britain $ 10.10

Deutsche Bank Germany $ 9.50

As sovereign debt becomes a further strain on European bank balance sheets as interest rates climb, the ECB as already provided around $1 trillion dollars from the LTRO.  However, it looks like the money borrowed from the ECB will be used to pay off bank debt maturing this year.    

The final round of voting in France will be May 6^th with Sorkozy trailing as I am writing this piece.  The recent problems surfacing in the Netherlands will result in further issues for the E.U. over the summer as elections will likely result in further change creating uncertainty.  I decided to purchase UUP-PowerShares DB US Dollar Index Bullish as a play on the collapse of the Euro.  I view the situation as only a “matter of time” and willing to say that the Euro crisis is over a $2 trillion dollar problem and the IMF will likely be involved as the dominos fall over one-by-one under the weight of short-term debt burdens in the banking system and over $1.7 trillion dollars of refinancing needed this year by E.U. members.

French Election

With the economic house of cards in Europe collapsing, one of the major themes is the political turnover in Greece, Italy, and now the election in France on April 22nd will take front and center stage.  The politicians have been the target of European citizens who are causalities of severe downturn hitting the E.U.  The election outcome in France is meaningful and if Sorkozy is defeated it may be a major inflection point.  German and French leaders joined as major allies trying to hold the entire region together.  As France and Germany have the strongest credit ratings in the European Union, other investing outsiders may view the election as an example of how an individual country in the E.U. is unwilling to help other members.  The recent increase in bond yields in Spain is showing how bond investors are starting to view sovereign risk as an important theme in the E.U.    

Collapse of the Euro

Last evening, the news release of existing home sales was weak in the U.S. and job claims were 386,000 this morning. The rate of new job creation has seemed to slow again. While the Spanish auction concerns continue to be an issue with the European market, the King of Spain was off elephant hunting while telling citizens to tighten their belts.  Headlines like this (I can’t make this up), have me very concerned about how detached world leaders are from the major underlying economic problems.  My near-term concern is the collapse of the Euro, and I am looking at DXY as a play on the collapse of the Euro.  While this issue will weigh on global economic growth long term, the trend in the Euro and Europe should be down as the general population suffers from unemployment. 

S and P 500 Short-Term Peak

The market has recently peaked and is turning down.  Major concerns in Europe seemed to be dismissed by the "talking heads" on television now used to the World Central bank interventions to "bailout the market" every time liquidity becomes an issue.

Using technical analysis to help, the recent bounce from the low at 1360 has now retraced 50% of the move down.  The next move down will be equal to around 100 S&P points to the downside.  With the technology group appearing to leading the downside, the recent IBM and Qualcomm earnings releases lead to more short-term concern. The next wave down should lead the market to 1290 area.

Welcome to the Emerald City!

Hello everyone!

First, I am excited to start sharing my thoughts and opinions with everyone.  With over 32 years of experience in investments and the financial industry, I have tossed around the idea of creating a forum or blog where I can interact with people from all over the globe to benefit investors. Also, I want to welcome and listen to other opinions to exchange knowledge.  The Internet is an amazing tool for communication, and I am hoping I will be able to contribute by being able to intrigue anyone interested in macro economics. The world economic environment is in a constant state of change.  I want to share some of my real life experiences in the investment industry with others to highlight developing themes.  My ultimate goal is to create a unique forum of ideas that you won't find anywhere else.