a failed breakout on the indexes...

Friday was a good signal to begin shorting the equity markets again, atleast for the short term. The monthly jobs numbers came out far better than expected and the market closed flat on the day. For the previous 3-4 months the market has been scoffing at the worse than expected numbers and bidding the market higher. This is a good sign that this dead cat bounce rally has run its course. Now, although I am expecting a sell off in commodities and stocks over the next couple of weeks, I still think that the bulltards still have some umph left in them and there will be another rally attempt that could push the indexes up to the 9500-10000 level on the dow and the 1000 level on the sp500. I currently cannot see any reason for the markets to climb higher than that, unless....

Unless we have a dollar crisis. The dollar has been rallying over the last couple of days and that has been giving us the much needed correction in stocks and commodities, because when the buying power of the dollar becomes worth more, it takes less of them to buy stocks and commodities, but the dollar has appeared to have resumed its multi decade decline versus foriegn currencies. Now an overall longterm weakening currency is not anything to panic about, a dollar crisis is. In a dollar crisis, anybody who was a holder of cash or credit, would as quickly as possible, spend their dollars on whatever they thought was going to be worth something at the end of the day like gold,silver,oil futures, food, guns, bullets, stocks,...YES I said stocks.

Now, I had been pondering the thought of what would happen to the stock market if we were to enter a period of hyper inflation where people were trying to get out of dollars, and I had thought that it was entirely possible for a huge, massive stockmarket bubble to occur in that situation. Now last week, I read an article that the famous investor Jim Rogers was pondering the exact same thing. He said that he would not try to short this stock market for this very reason.

Now this would just further increase the confusion of this entire financial mess. There is so many unknowns about what is going to happen that if you cannot stay focused on these markets than you should probably get as diversified as possible. Here is what I recommend:

*Minimum of 10% of your wealth should be stored in precious metals until this crisis is passed us by. I would pick up Gold around the 900-935 level. I would recommend owning more Gold than that, but there is so much uncertainty in this market as well. In the 30's, the government made it illegal to own Gold. If this were to happen today, it would most certainly create a black market for the shiny metal, which would increase the value of it considerably, but I wouldn't want to be 100% dependent on it. The main goal here with precious metals is to offset the effects of out of control inflation.

*I would get some exposure to the short side U.S. Treasury bonds. There is an etf that is an ultra short 20year Bond. The major sell off in the U.S. Treasury bond market is only in the early stages, and as we saw the massive runups in the ultra short financial etf's during the credit crisis, this etf is sure to make you some nice returns. The symbol here is TBT, I would wait for a pull back here though before I pulled the trigger. I am not familiar with trading the bond market, but I am sure that there is exellent ways to make money there as well on the short side of bonds.

*I would get some exposure to some foriegn currencies, as I have said before, I like the Norwegian Krone and my new favorite is the Australian Dollar. The Krone is backed by the price of oil, and the Australian Dollar is backed by the strength of the mining industry. Whether we plunge into hyper inflation, or we have a normal recovery like others over the past 20years, commodities are poised to perform, so these currencies should perform well in either scenario.

*Stocks- I would have some exposure to stocks. Again, the Federal Reserve is not going to allow us to go through a long bout with deflation, so they are going to continue to ramp up the printing pressed until things start to turn around. Now, it is either going to be a normal recovery, or it is going to be a hyper inflation recovery (which I am strongly leaning towards). In either scenario, there is going to be inflation and the commidity based names are going to be the place to be, and this would include metals and miners, oil and oil services, agricultural, infrastructure, and bulk shipping. There was an opportunity to get into these names at unbelievable prices and I don't think that we will see that opportunity again. So I would wait for a pull back over the next couple of weeks and than I would pick some of these companies up.

I'll give some further thoughts later.

Cash21

Things are starting to crack.

Gold, oil, oil services, silver, agricultural stocks, etc....., they all started to roll over today. This should cause money to flow back into treasuries for a week or two. This run has ran its course in my opinion. Also, the dollar rebounded sharply today, its chart is turning up as well.

Yesterday I turned my Norwegian Krones back into dollars for a 5% return on my money. I plan on waiting for a rebound in the dollar, and then I am looking at the Australian dollar to invest my money. Fundamentally, I think that the N. Krone is the best long term place to store your wealth, if you have to be in a currency, but short term, the return on the Australian Dollar looks like it will be better.

Gold should pull back into the 925-930 range were it will be attractive again. I believe that after this pull back that we will then push through the 1000$ mark, maybe by September.

Treasuries is the one investment that changes everything. If the rest of the world gets really concerned about our currency, and our ability to repay our debt, there will be a massive sell off in treasuries, the dollar, and U.S. Stocks. I do believe the this will be the ultimate out come, and I am watching it like a hawk. Until then, there is plenty of money to be made trading this market.

Looking forward to Friday's jobs numbers for a direction for the markets. If there is a large improvement on the number than we could surge to the 10000 dow mark and 1050 on the SP. I dont see it happening though. I think that the poor numbers are going to persist.


Cash21

Money searching for a place to go....

Bond market capitulation may be further away than I thought. Today, the Bond market sold off big time today, retesting the lows of last week, both on the 10year and the 30year. All of the pundits are saying that investors are thinking that the recession is over, and that they are getting their money invested into stocks. I have a different perspective: I believe that Bond holders are acknowledging the fact that the Federal reserve is assisting the U.S. Treasury by monetizing their debt, or basically making the currency and the debt worthless via the printing presses. Therefore, stocks and commodities are going up by default, because there is not other better option. This rally today was widely led by commodity based companies. Oil was higher as well as soft commodities. Precious metals were weak today, which was surprising to me.

If the Bond market continues its slide, there could be skyrocketing inflation and interest rates ahead of us. It would be prudent for any investor to have some hard assets in this environment. The level to watch now is the 4% mark on the 10 year note. If we break that level than we are in for some major trouble.

Banks did not participate in todays rally as much as you would expect, that to me suggests that this rally is getting weaker. You have to have the banks, as well as the consumer discetionary stocks participating. The XLF (financials etf) and XLY(consumer discretionary etf) failed to take out the previous highs from a couple of weeks ago, so I see this as a sign that we are near a top for the short term. But if Bond investors continue to flee those "safer"investments, there is no telling what might happen.

Cash21

Treasury Bond Capitulation?

Well, the bond market has sold off quite considerably over the last couple of weeks. The treasury keeps flooding the market with new paper to fund government's giant budget for this year. It appears now that yields are getting attractive enough for the stock investors to lock in their profits and move into the "safe" inestment of us treasuries. Commodity investors will also probably lock in their profits from over the last couple of months in the short term and move into treasuries as well. This should give the treasury market a little bit of relief over the short term, but it wont get it out of the woods.

The dollar continued to drop this week falling heavily against all major currencies. From a charting stand point, there have been some major techinical breakouts by several different currencies versus th dollar. This weakness is finally starting to cause have an effect on commodity prices like gold and oil. Clearly looking through the charts, one can see that we are due for a relief rally in the dollar which should put pressure on commodities.

The currencies that I like are the New Zealand Dollar, Australian Dollar, Canadian Dollar. I do not know a lot about those currencies, but the charts look great. I do personally own the Norwegian Krone, it is my favorite, due to the fact that Norway has no national debt, and its currency is backed by oil. You can invest in foriegn currencies through a bank called Everbank. Just do an internet search and it will show up. They also let you invest in paper gold and silver.


Gold hit 975 by friday afternoon, and oil closed at 66$ a barrel. These charts are looking very toppy, silver also has nearly retraced to an old support area which should act as resistance. Having said all of this, everything is pretty much in place for a sell everything commodity and stock based and move the money into cash and treasuries, and go and enjoy your summer if you were lucky enough to buy into these things in feb/march.

My forcast for the rest of the year is for a sell of in the stock market/commodity markets over the next month to month and a half and then the rally should resume and work its way up to the levels that they currently at. They may push a little higher but I would not bet on it. The new forclosures in the commercial real estate market will start to show up negatively on banks balance sheets later in the year, and that will probably give us another potential crash scenario like we had last fall.

It will be very interesting to watch the bond market over the course of the year as the treasury auctions more debt onto the open market. This week was scary at times how quickly rates moved up. But now that the rates are higher, it should draw new money back into treasuries for a while.

Overall, despite the rally we will surely get over the short term in bonds, we are still in the early stages of a securlar bear market for U.S. bonds, and things are going to get a lot worse over the next couple of years. Interest rates are going to go through the roof. The only way for things to turn around for the bond market is if the government would finally gain some kind of fiscal responsibility, cut the budget, raise taxes (nobody is a fan of this one), and to move away from the consumer based economy that we have become, and become a producer once again. The government is trying to avoid this route because it is the painful one, and politicians will lose their popularity because of it.

I had a lot on my mind, sorry for being so long winded.

Cash21

Bonds showing strength, for now.

Today, the bond market strengthened which is expected due to the sell off in the equity markets, as I talked about last week. I expect another day of weakness in stocks, and than the perma-bulls will give it another attmempt to push prices up higher. The key is to watch whether or not the major indexes will push through their highs. If so, then the bond market will resume its fall, pushing rates up higher and commodities higher as well.

I want to repeat, that the status quo of higher stocks=lower bond prices, and lower stocks=higher bond prices, is only a sure bet if the economy as a whole is expected to have a normal recession, with a normal recovery, and that the government keeps its spending in check, which none of these is the case.

Remember, that from January 1st till the beginning of March, stocks and bonds were both selling off, allmost in tandem.

Now this is the death spiral that we are afraid of: All of the pundits on the business news, all of the politicians, and all of the experts on wall street have been saying that the economy has hit bottom, and that now is the time to be buying stocks. This same thing happened throughout all of last year, but on a smaller scale. After the Bear Stearns debacle, everyone signaled the all clear horn that the worst was passed, the market rallied, and then more bad news trickled in only to have another big sell off. Everyone on the t.v. would be saying the they expected next quarter, or maybe two quarters things would be getting better. That is the same thing that is going on right now. Everyone is banking on the 3rd and 4th quarters things to turn around.

Let me tell you this. This notion that the economy is going to turn around late this year or maybe early in 2010 is the only thing holding our fragile economy together. The false hope that somehow foreclosures are going to stop, the commercial real estate bubble doesn't pop, job growth will begin to grow, and that the consumer will start to spend again is what gives current U.S. Treasury holders hope that our government will be able to bring in the tax dollars to begin to pay back the debt.

Now I do believe that the largest U.S. debt holders are not buying into this false hope, but they are in a bind because if they were to start to dump large amount of our debt, they wouldn't be able to sell it quick enough to keep from destroying the worth of what they had left. So my theory is that the big debt holders like China, Russia, etc.. will divest out of U.S. debt, putting constant pressure on bond prices, pushing interest rates up higher. Now if you have been paying attention to the news, you should now that the federal reserve has made a commitment to purchase treasuries, in an effort to drive down interest rates to help in the recovery effort. Now if the Fed is purchasing Treasury Debt, and China and the rest of the world is selling it, the fed is going to be forced to purchase at a higher rate if they want to artificially keep down interest rates.

Do you see the vicious cycle we are going into. I am not a pessimist, I am a realist. You cannot create an oversupply of anything, and expect the value of it to remain strong.

I could go on and on about this and I do not have a higher education, and your telling me the people running our monetary system and the people running our government dont know what they are doing?

please comment

Cash21

Dollar taking it on the chin?

Today I wanted to draw some attention to the currencies markets. There is some definite weakening in the dollar over the past couple of weeks. From a charts perspective, the Canadian dollar has been very strong putting in higher highs, and higher lows. The Yen is breaking out against the dollar, it is very close to a major breakout. The Euro has broken a trendline and is now pushing up against some resistance. The Pound has a messy reverse head and shoulders pattern. The Australian dollar has put in a textbook double bottome in, and is heading higher. And the New Zealand dollar is about to break out of a beautiful reverse head and shoulders pattern.

Now this blog is mainly focused on the fundumentals of our economy, but these charts are disturbing. This may just be a precurser to the to what we will be seeing later in the year, but if we keep heading in this direction, it could cause major problems with U.S. Treasuries.

What does a weak dollar do to U.S. Treasuries? I'm glad you asked!

1. A weak dollar decreases the intrinsic value of treasuries. Basically if you loaned somebody a hundred dollars when you could buy a new tire for your car with it, after the currency is weakened, you get payed back and now you can only buy a tire for you kids tricycle. Granted, U.S. Bond holders are getting paid a small yield, but it is not enough of a return to make up for the loss due to inflation. So just as the dollar deflates, debt deflates, this is why it is far better to be a borrower of money right now than a lender, providing you have a secure means of paying your debt.

2. Due to #1, holders of U.S. treasuries will look for better places to invest their money. They will sell their U.S. treasuries and seek out better investments like commodities, multinational companies, and foriegn currencies. This will cause the Bond prices to fall, just like stock prices fall. Once other bond holders, that were ignorant of the weakening dollar, realize that they are losing money on their "safe" investment, they too will liquidate their positions. And due to the 11trillion$ oversupply of debt, there is only one direction that bond prices can go, and that is down.

3. Because of the money flowing out of treasuries, those dollars will flow into other asset classes like commodities, multinationals, and foriegn currencies, causing the value of those mentioned to rise. This will put more pressure on the remaining U.S. Treasury holders to liquidate their positions, causing more pressure on the value of the bonds.

4. This will cause more and more pressure on the dollar, which will bring us full circle again.

If there is somebody that maybe has an education that could please give me a scenario where we will not have to face this kind of death spiral, I would appreciate it.

Here is another problem that is brewing, and remember, the key word is "delinquincies", being delinquint is what happens just prior to foreclosure. Did the stress tests figure in the possibility of a commercial real estate bubble popping in the form of mass foreclosures?

http://www.msnbc.msn.com/id/30701874

I have much more to say on these issues.

Please comment,

Cash21

Summer Season=better jobs numbers

The better than expected jobs numbers, although its bodes well as a headline, is probably due to the spring and summer seasons where seasonal jobs begin due to the warmer climate. The numbers for Febuary and March were revised downward, and the unemployment rate hit 8.9%. I wonder how those people are going to make their credit card payments and house payments, and auto loans, etc...

Bonds look like they are going to retrace upwards a little, as the stock market starts to pull back. The traditional "flight to quality" will take its course, maybe. Generally, when the stock market sells off, those dollars go into "safe" investments like U.S. Treasuries. But if you overlay a chart of the 30year treasury and the Dow Jones Industrial Average, you will see that while the Dow was hitting its lows in March, there was also a sell off going on in the treasury market. This, to me, says that the investors were both selling american stocks and U.S. Bonds, I see this as long term very bearish for our economy.

Treasurys will rally initially when the stock market begins to fall again but if the market continues to fall, I believe that you will see the Bond market and stock market begin to fall together in tandem, just like the bonds and share prices of Lehman and Bear Stearns.

Yesterdays sell off was partially due to the lack of interest in the 30year treasury auction, and the sell off in treasuries that ensued. Classic over supply conditions in the treasury market.

Cash21