Leaders of the Group of 20 meet on Thursday and Friday in Pittsburgh and U.S. President Barack Obama said on Sunday he would push world leaders for a reshaping of the global economy in response to the crisis.

World stocks, measured by MSCI have risen over 26 percent this year, recouping more than half of last year’s losses, underpinned by repeated pledges by G20 policymakers to keep emergency support for the economy in place.

“The market might look slightly overbought near term, but the economy is definitely improving, corporate profits are definitely improving, interest rates are staying low, valuations aren’t expensive,” said Nick Nelson, European equity strategist at UBS. MSCI world equity index <.MIWD00000PUS> fell 0.7 percent, while the FTSEurofirst 300 index <.FTEU3> lost 0.6 percent.

Emerging stocks <.MSCIEF> also dropped 0.6 percent.

U.S. stock futures were down around 0.5 percent , paring losses after Dell said it would acquire Perot Systemsfor $3.9 billion. Perot System’s shares surged 66 percent in pre-market trading.

EXIT STRATEGY

The Fed is expected to keep its benchmark Fed Funds rate unchanged at 0.25 percent on Wednesday, and investors are looking for signs of how quickly it might remove its extraordinary programmes to revive lending and hiring.

While any signal that the Fed might start unwinding its loose monetary policy shows the central bank is acknowledging the recovery, it could be negative for risky assets as it could fan speculation of an interest rate hike.

The Fed has pledged to buy up to $1.45 trillion of mortgage-backed securities and debt issued by government sponsored Fannie Mae and Freddie Mac by end-2009.

Concerns about weak fuel demand pushed U.S. crude oil down 2.4 percent to $70.25 a barrel after Asia’s No.1 refiner Sinopec said that diesel China continued to lag economic recovery with fuel sales so far this year still below the rates seen a year ago.

The September bund future was steady, unable to take advantage of falling equities and investors grew concerned about the prospect of euro zone and U.S. debt supply.

The dollar <.DXY> rose 0.6 percent against a basket of major currencies, after hitting a one-year low last week, while the U.S. currency rose 1 percent to 92.21 yen .

“The yen may end up being the biggest winner against the dollar. It has yet to significantly overshoot against the dollar, unlike every other G10 currency. Real yields are moving in its favour and nominal yields versus the U.S. are negligible,” Deutsche Bank said in a note to clients.

“Dollar/yen will likely break below last year’s low of 87 and could even reach 80 over the next 3-6 months.”

Sterling fell to a five-month low of 90.79 pence per euro after the Bank of England said the British currency’s long-run sustainable exchange rate may have fallen due to an increased focus on Britain’s economic imbalances following the global credit crisis.

(Reuters Sept. 21)

Included in the book is a great strategy for determining stock market performance, which Tharp calls the “1-2-3 model.” It takes its name from the three factors that Tharp believes affect the market most: the valuation of the market, the interest rate climate as determined by the Fed, and the price of the market.

The model is very simple to follow. If all three factors are in your favor, it’s time to buy. If only two factors are in your favor, it’s time to hold. If two out of the three factors are against you, it’s time to sell. Think of it like a basic traffic light system:

Green light – buy

Yellow light – hold

Red light – sell

According to Tharp, under green light conditions (going back to 1927) stocks have risen on average 19.5% a year; under yellow light conditions stocks have risen on average 10.7% a year; and under red light conditions stocks have lost 9.7% a year.
To put it another way, the three most important questions to answer about the stock market are:

1. Is the stock market too expensive?
2. Are the Feds in the way?
3. Is the market going up?

Investors awaited a statement from the Federal Reserve, due at around 2:15 p.m. EDT (1815 GMT), for clues on how the U.S. central bank assesses the economy.

Technology shares rose after better-than-expected quarterly profit and sales from Oracle Corp . The software maker’s stock was among the Nasdaq’s top advancers, up 7.9 percent at $21.43. Shares of IBM rose 0.7 percent to $105.17 on the New York Stock Exchange and helped left the Dow industrials.

The Fed is widely expected to leave the benchmark fed funds rate at almost zero, but investors will hone in on its statement for clues on the central bank’s economic outlook.

“The policy statement is likely to say the economy is still mired in slow growth and inflation is not a problem,” said Bruce Bittles, chief investment strategist at Robert W. Baird & Co in Nashville, Tennessee.

The Dow Jones industrial average  was up 55.40 points, or 0.67 percent, at 8,378.31. The Standard & Poor’s 500 Index was up 12.69 points, or 1.42 percent, at 907.79. The Nasdaq Composite Index was up 38.48 points, or 2.18 percent, at 1,803.40.

New orders for durable goods, which are long-lasting U.S. manufactured products such as refrigerators and washing machines, increased by a much stronger-than-expected 1.8 percent in May, and the median price of new homes hit its highest level since December, even though sales slipped, economic data showed.

“… There was a lot of concern about the economy and all of a sudden the economy shows some signs of life, and so does the market,” Bittles said.

Although stocks rose sharply from early March through May, gains have stalled recently as investors sought signs the economy is recovering enough to justify the market’s rally.

The broad S&P 500 index is up 34 percent from a 12-1/2-year closing low on March 9, it had soared as much as 40 percent during the spring rally.

NEW YORK, June 24 (Reuters)

Regardless of any formal announcement of whether or not the United States drops into an actual recession, the ongoing credit crisis guarantees a contraction of the American economy by virtually every measure we know. That period of darkness will be marked by a dramatic slowdown in economic activity, as well as by rising unemployment, additional declines in U.S. stock prices, and constant volatility. It could last as long as 12-18 months.

But when the dawn does come, it will be one to remember. If U.S. President-elect Barack Obama gets it right – and I have every reason to believe that he will – then investors will be presented with the greatest investment opportunity of our generation. At that point, shares of American companies will be at such low levels that wholesale buying by individuals, mutual funds, pension funds, institutional money managers, and foreign-controlled sovereign wealth funds, will generate gains that will not only make us whole, they will make us rich once again.

A Market Mandela

Creating an analysis of the U.S. economy’s outlook for the New Year is akin to creating a mandala, a geometric work of art whose pattern, symbolically or metaphysically, represents a microcosm of the universe from the human perspective. In some Buddhist temples, mandalas are made of tiny colored beads, painstakingly created by several monks as a form of meditation. In celebration of the ever-changing nature of the universe, the mandala is then joyously shaken by its creators, until it is once again nothing more than chaos embodied in a box of colored beads.

Regardless of the big picture, analysis of a mandala – or the economy – always starts at the center and emanates outward. With the U.S. economy, that centerpiece is credit. The credit crisis has shaken the complex mandala that is our economy and transformed the United States economy into chaos. It’s complex because this economic-forecast mandala derived its form from thousands of individual pieces – in the case of the economy, from scores of data points, many of which are currently dark and foreboding.

The credit crisis we are experiencing results from the contraction – or worse, the cessation – of lending. Under normal circumstances, institutions and markets freely facilitate capital movement between lenders and borrowers. But that’s not happening, now.

Because of a lack of transparency into the balance sheets of borrowers holding such complex and illiquid securities as collateralized debt obligations, credit-default swaps, and non-performing loans, and because of increasing recessionary fears affecting businesses and households, lenders don’t want to increase their loan exposure. Banks are holding onto the cash and liquid securities they control, using them as a cushion against their own potential losses. The U.S. Treasury Department’s direct-to-bank capital injections do not alter these banking realities. In fact, as a Money Morning investigative story recently demonstrated, instead of using these taxpayer-provided infusions to increase their lending, these banks are using the money to finance takeover deals.

The Recipe for a Recession

Whether or not the United States is technically in a recession ultimately will be divined by the National Bureau of Economic Research (NBER). The business-cycle dating committee of this privately run, nonprofit economic research group is right now studying five factors in an attempt to determine if the United States has entered a recession and, if so, when that downturn started, MarketWatch.com reported. Those five factors are:

• Gross Domestic Product (GDP).
• Industrial production.
• Employment
• Income.
• Retail sales.

Regardless of any formal announcement by the NBER of whether we’re in a recession, the credit crisis guarantees a general contraction of economic activity, by every measure.

“Any doubt that we’re officially in a recession can be put aside,” Anthony Karydakis, former chief U.S. economist for JPMorgan Asset Management (JPM) – and now a professor at New York University’s Stern School of Business – recently wrote in Fortune magazine. “The rapid deterioration of labor markets points to a sharp decline in hours worked and output in the fourth quarter. This is likely to lead to a decline in personal consumption to the tune of 5.0% or so for that period. Since [consumer spending] makes up about 70% of the economy, the stage has already been set for real GDP to shrink at a more than 4.0% rate in the fourth quarter.”

Confirmation of that belief is evident by looking at each of the NBER’s five key indicators.

• Gross Domestic Product (GDP): The U.S. Commerce Department estimated that the U.S. economy, as measured by GDP, rose 0.9% in the first quarter. In the second quarter, GDP advanced an estimated 2.8%. For the third quarter, GDP declined an estimated 0.3%. My own econometric models suggest that GDP actually contracted at a 1.5% pace in the third quarter and will decline another 2.75% in the fourth quarter. For the year, that would mean the U.S. economy actually fell 0.55%. The U.S. economy last posted a full year’s negative GDP in 1991, when it declined 0.2%. Verdict: Recession.
• Industrial Production: This measure of output by the nation’s factories and mines dropped 2.8% in September, and a very steep 6.0% in the third quarter. Verdict: Recession.
• Employment: The U.S. Bureau of Labor Statistics announced Friday that October’s unemployment rate was 6.5%, a jump of 0.4%, which was double what most economists expected, and also its highest level in 14 years. The economy has now lost a total of 1.2 million jobs since the beginning of the year, with nearly half of those losses occurring in the last three months alone, pointing to an acceleration in the pace of erosion in labor markets. Karydakis, the Stern School professor, wrote in
  Fortune : “By way of comparison, during the 2001 recession and in the sluggish growth that followed in 2002-03, the unemployment rate reached a peak of only 6.3%, in June 2003. We’ve already exceeded that mark and, given that we are still in the early phase of the current recession, the unemployment rate should be expected to push toward the 7.5% range – and possibly higher – during the next three months to six months.”
  Verdict: Recession.
• Income: Personal income increased $24.5 billion, or 0.2%, and disposable personal income (DPI) increased $25.7 billion, or 0.2%, in September. Personal consumption expenditures (PCE) decreased $33.6 billion, or 0.3%. Excluding the rebate payments made to U.S. taxpayers under the Economic Stimulus Act of 2008, DPI increased $30.3 billion, or 0.3%, in September, and increased $44.0 billion, or 0.4%, in August. Verdict: Too close to call.
• Retail Sales: October retail sales are coming in well below already-diminished expectations, and some reports have been downright depressing – including The Neiman Marcus Group Inc. -26.8%; The Gap Inc. (GPS) -16%; The Nordstrom Group (JWN) -15.7%; J.C. Penny Co. Inc. (JCP) -13%; Kohl’s Corp. (KSS) -9%;  Ltd. Brands Inc. (LTD) -9%; Target Corp. Inc. (TGT) -4.8%; and Wal-Mart Stores Inc. (WMT) +2.4%. In a report last week, Moody’s Investors Service (MCO) projected that the retail sector’s woes will continue into 2009 as consumers cut back on buying apparel, footwear and accessories “in order to save money for essentials.” The credit rating firm said in a separate report that holiday spending “will prove even weaker than expected,” amid October’s financial-market swoon. Verdict: Recession.

If U.S. exports are taken out of the GDP calculations going back to January, it’s apparent that there has been very little domestic growth in the economy. And when revisions are finalized in the next few months, we’ll be looking back at the recession that we’re all but certain is upon us right now. Until the credit markets are freed up and borrowers are extended credit at reasonable rates, it’s unlikely that credit, the centerpiece of the economy, will be anything other than a major cog in the wheel.

There are some signs of a thaw, but not anytime soon. The U.S. Federal Reserve’s lowering of the Fed Funds target rate to 1.0%, and coordinated rate reductions by the Bank of England and the European Central Bank, as well as other major world-wide central banks, may start to ease the stranglehold gripping the worldwide credit markets. The London interbank offered rate (Libor), a critical interest rate against which trillions of dollars of mortgages, bank loans and derivatives are priced, dropped to 2.39% last week from a high of 4.82% on Oct. 10.

The prospect of President-elect Obama’s choosing a different means of attacking the credit crisis will be closely watched and, by itself, may create an air of confidence that perceptions will change. But changed perceptions will not be enough.

The truth about our economic outlook is that it is predicated on demonstrably better transparency. If U.S. banks follow the lead of their European counterparts, which have recently been freed from fair-value, mark-to-market accounting, and which may retroactively mark assets to “internal models” back to July, then balance-sheet clarity will continue to be cloaked in darkness. Lack of confidence in the banking system will persist, especially among the banks themselves. The first order of attack needs to be the creation of a fundamental leadership position that leads to an open, transparent and accountable measure of balance sheet assets and liabilities. As long as failing banks are being propped up, this cycle of credit contraction will persist.

The outlook for the economy is inextricably tied to the price of oil. The run-up of benchmark crude this summer to the record $145 a barrel level, and its subsequent fall to half that level, has wreaked havoc throughout the economy. Similarly, the run-up in commodity prices, and their subsequent fall, also has caused a lot of damage. Together, the dramatic rise and fall in the pricde of oil and other commodities is a harbinger of greater volatility in the future.

Follow the Money

Follow the money. Capital rapidly inflated the tech-stock bubble. When that bubble burst, capital flowed into and flooded the hard-asset world of real estate. When that bubble burst fast, speculative money dove into oil and commodities. When the U.S. and world economies looked weak, those bubbles burst. The looming threat of inflation this past summer instantly gave way after the drop of oil, gold, metals and agricultural commodities. And now, deflation is seen as the looming threat on the horizon.

Which threat should we worry about?

The answer is – both. The prospect for near-term deflation seems all too real. As raw material prices fall and finished good prices fall due to a lack of purchasing power resulting from lack of credit and world-wide recessionary fears, the U.S. consumer has fundamentally changed his or her collective psychology. Is U.S. consumerism, which is responsible for 70% of GDP, in full retreat? If it is, as all measures project, then it’s likely that government stimulus efforts will overshoot their intended mark.
Just look at what the United States has done already as it battles this financial crisis. It has:

• Handed out more than $150 billion in stimulus rebate checks.
• Floated a $700 billion financial bailout rescue plan – almost $160 billion of which has already been placed.
• Bailed out American International Group Inc. (AIG), to the tune of $125 billion.
• Covered JP Morgan Chase & Co.’s bet on taking over
  The Bear Stearns Cos. – to the tune of $29 billion.
• Looked to lend struggling automakers $25 billion.
• Agreed to guarantee depositors at all banks.
• Stepped in to buy commercial paper that no one else will buy.
• Guaranteed money-market-fund investors.
• And backstopped the Federal Deposit Insurance Corp. (FDIC), Fannie Mae (FNM) and Freddie Mac (FRE).

And now we’re getting wind of another stimulus package and more help for everyone.

If, in six months to a year, the credit markets are facilitating borrowers again, the massive buildup of U.S. debt will result in a falling dollar and higher interest rates.

That spells inflation.

A massive re-inflation of the economy portends another flood of speculative money into oil and commodities. The cycles are increasingly condensed, more volatile and will be increasingly more disruptive.

Welcome to the brave new world of global finance and speculation.

The Federal Reserve’s balance sheet has ballooned from $900 billion to more than $1.8 trillion. That’s 13% of GDP. The Treasury Department has telegraphed its intention to float $550 billion of debt in the fourth quarter and estimates it will have to float another $368 billion in the first quarter of 2009. Our national debt will then be close to 49% of GDP.

If there is an easing of credit in the economy, and borrowers come to market with the pent-up demand that has not been met for the past year, the competition for funds will raise interest rates. Higher interest rates will counter any stimulus effect from government programs.

Who will buy U.S. Treasury debt if the world is less apprehensive about credit quality? Lenders will once again seek higher returns, potentially forcing the Treasury Department to increase its rates. The potential of this event may sink the dollar if investors perceive that the U.S. economy is stagnant and the world is awash in dollars. The yield curve – the spread between the Treasury’s two-year and the 10-year paper – has been steepening. A steepening yield curve, where short-term borrowing costs are low and long-term rates considerably higher, is good for banks that borrow short and lend long.

But if the perception of risk diminishes, and the perception of future inflation increases, the yield curve will invert and the threat of rising rates will cause a sell-off in the short end of the curve and a rush into longer-dated maturities. Any increase in short-term interest rates would be painful for struggling banks. An inverted yield curve would be devastating, and inevitably would lead to more bank failures.

Home on the Range …

At the core of the U.S. economy sits a desperately ailing piece of the mandala – the U.S. housing market. The once bright prospect of home ownership, which historically formed a beautiful economic picture, right now doesn’t exist. For most Americans, the family home constituted the bulk of their wealth. Or at least it did. And this family financial portrait will get worse before it gets better, since the real estate collapse is far from over. Goldman Sachs Group Inc. (GS), for instance, projects another 15% drop in housing prices.

I think that’s conservative. Mortgage rates are actually rising as Fannie and Freddie have to pay higher interest on their short-term notes and bonds. Thirty-year fixed-rate mortgage paper averaged 6.47% last week, up from its 52-week low of 5.36%. The 15-year fixed paper was trading at 6.18%, up from its 52-week low of 4.91% (based on Bankrate.com (RATE) rate surveys). This trend is definitely not our friend. As housing prices continue to fall, and inventories stagnate and grow in many areas, homeowners are increasingly underwater and are increasingly entertaining foreclosure as a viable economic alternative to indentured servitude.
The Hope for Homeowners Plan, which looks to lower interest rates and reduce principal on mortgages, and which makes homeowners pay a share of the appreciation on their home to their lender when they sell it, was initiated in October and was expected to garner some 400,000 takers. As of last week, according to The Wall Street Journal, there had been only 42 takers. That’s not a misprint – 42 – I even checked with The Journal.

In the real estate realm, the proverbial “other shoe” hasn’t dropped yet, but certainly is dangling – and that’s commercial real estate. As homeowners writhe in agony and stop spending, retailers will go out of business, businesses of all stripes will suffer and commercial real estate will implode. The leverage left over from just the private equity foray into commercial real estate in the acquisitive 2006-2007 period is staggering. Refinancing will be impossible. Banks are stuck with hundreds of billions of dollars of leveraged loans that they took on as bridge and mezzanine financing from the private-equity shops alone, at the time believing they would  be able to securitize those loans and sell them off to investors.

There’s no chance of that, now.

One deal in particular illustrates this entire mess.  Private equity behemoth The Blackstone Group LP (BX) took Hilton Hotels Corp. private for $26 billion. Blackstone put up $6 billion of its own money as equity and borrowed the other $20 billion from Bear Stearns, Bank of America Corp. (BAC), Deutsche Bank AG (DB), Goldman Sachs, Morgan Stanley (MS), Merrill Lynch & Co. Inc. (MER) and Lehman Brothers Holdings Inc. (OTC: LEHMQ).

Based on a current analysis of the deal at the multiple of seven times projected cash flow that the market currently puts on Starwood Hotels & Resorts Worldwide Inc. (HOT) -  Hilton’s nearest rival – if Blackstone values its property comparably, it will have to mark its Hilton holdings down 50%, because it paid 13 times projected cash flow. That wipes out all of Blackstone’s equity in the deal. What’s more, the $4 billion portion of the loan that Bear Stearns took on, courtesy of JP Morgan Chase casting off Bear’s orphaned liabilities, now sits on the Fed’s balance sheet – and isn’t likely to go anywhere anytime soon.

Until the real estate cycle completes its implosion and begins to stabilize, there’s nothing that will fundamentally alter the outlook for the economy. This is Ground Zero. President-elect Obama must resist creating only a political solution to the overwhelming economic problem of declining house prices and declining real estate prices in general. Any attempt to put a band aid on this economic plague will only delay the day of reckoning. I regret deeply the conclusion that the lake must be drained before we can realistically climb out of it. But there just aren’t enough ferrymen to get us all to shore.

Always a Silver Lining – My Forecast

The outlook for the economy is not rosy – and that’s an understatement. But there is a silver lining. Even in the near term, the stock market will present innumerable wealth-creation opportunities.

• First, there are plenty of shorting opportunities out there now, and more will present themselves in the future.
• Second, in due course – in perhaps 12-18 months – we will be presented with the investment opportunity of our generation. If President-elect Obama gets it right, and I believe he’s got the potential to bring us all together and get the country through this (and if you’re reading this Mr. President-elect, I’d like to put in my vote for [New York Fed President] Timothy Geithner as next U.S. treasury secretary), American companies will be able to be purchased so cheaply that fortunes will be made. The recovery will not only make us whole, it will make our people and our nation rich again.

I have absolutely no doubt that the United States will lead the world back into balance. The sea change that has arrived is the result of the conservative experiment having lost its true moorings, pushing the economy into disaster. Not that a wholesale swinging of the pendulum to the other side would be good. In fact, it would be disastrous. We have the potential to end up with a new, fair, transparent and judiciously regulated environment where capital formation can again spread its wings and the U.S. economy can fly.

There are new hands reaching into the colorful box of beads that comprise the American landscape and economy. From any human perspective, the United States is more than a microcosm of the universe; it is the center of the world as we know it. It will take time to construct the new mandala. We all need to meditate on the process to ensure that the design we embrace will ultimately be inclusive, forward-looking and – like all great art – an inspiration to all who view it.

For the U.S. Economy in the New Year, the Pain Will Precede the Promise

Editor’s Note: This is the second installment of a new series that looks at the global investing outlook for 2009.

With that being said, the calendar this week is full of some important reports that could set the tone for the early part of next year.

On Tuesday, the Building Permits report for November is released, and is anticipated to show only a slight decline of around 8k units. I am not sure if this is simply due to the seasonal slowdown of building in northern climates, or if perhaps builders have finally found an equilibrium point with the market, but I view it as a positive sign if the number holds close to expectations.

The same can be said about the November Housing Starts report that comes out at the same time. A decline is expected, but again, it could just be do to seasonal issues (you can’t build in northern climates when the ground is frozen) rather than a worsening housing sector.

The big reports of the week are the November CPI and Core CPI figures.  Much like last week’s PPI and Core PPI reports, the Core CPI figure is expected to show a slight increase while the CPI figure will likely show a continued drop. Energy costs (oil) continue to drop, and this will be reflected in the CPI figure.

The Philly Fed report comes out Thursday morning, and it looks like reality has set in again. As I reported last month, expectations for the November report were for a rather large improvement versus October. Well not only did that not come true, but the report was actually worse than October. This month, expectations are for a slight decline.

The attention grabber this week is the FOMC Policy Statement on Tuesday. As it stands, expectations are for a huge rate cut. Currently the Fed Funds rate is 1.00%, and the probability chart shows a 65 percent chance of a cut down to 0.25%. This is especially shocking for two reasons. One is the shear size of the cut, which would be three-quarters of a percent. The second aspect is that if the cut is down to 0.25%, it leaves only one more bullet left in the gun for the Fed to cut rates.

Source: FOMC Statement Highlights The Week … Will The Fed Be Left With One Bullet?

Yes… So, Obama’s call that the economy will get worse before it gets better, plays well with his pledge to spend more money…

This spending pledge really helped the currencies yesterday, otherwise I wouldn’t have spent 30-seconds talking about it! You see, the markets are slowly coming back to the fundamentals, the risk takers are slowly coming back too, and when that happens in earnest, we should see the end of this stupid Trading Theme that has gone on far too long for my taste! But back to the markets’ reaction to the announcement… Of course, you have to remember that we still have over a month before Obama takes office, and unless he’s going to pound this message in everyone’s heads every day until then, this could all be forgotten soon… And then we’ll be able to tell if the Trading Theme is a thing of the past, or if we have to continue to live with this for some time to come.

So, the currencies rallied throughout the day yesterday, but saw some consolidation overnight, and then very tight trading ranges this morning in Europe. The euro traded briefly with a 1.29 handle yesterday… This morning, German Investor Confidence as measured by the think tank, ZEW, unexpectedly rose for a second month. Apparently, Investors like the European Central Bank (ECB) rate cuts, eh? While this repot on the outside would appear to be positive for the euro, the markets are still focused on the Credit Crisis… So, it has had little to no impact.

The Bank of Canada (BOC) meets to discuss rates today… I’m sure they will cut them, why wouldn’t they follow the rest of the world’s Central Banks in a race to zero percent? The rate announcement will come around 9 am this morning, and the “experts” are forecasting a 50 BPS rate cut. But I say, why go so low? They can point to the rest of the world and say, see, we’re just keeping up with the Joneses… So… Yours truly expects 75 BPS… Canadian Housing Starts fell 22% last month! So… This, larger rate cut, won’t hurt or help the loonie, as the markets “just don’t care!” anymore… You can hear them singing… I don’t care anymore… I don’t care anymore… I don’t care, what you do…

OK, If I can’t play, then I’m taking my bat and ball and going home! Yes, the famous tantrum thrown by millions of kids over the years, looks like it’s being played out again over at the Brokerage that owns a bull… Yesterday, I told you about Merrill’s CEO John Thain, in a tiff over a $10 million bonus with the compensation committee. Well, yesterday Mr. Thain, according to the Wall Street Journal, said “no mas” , forget about it! He has announced that he will not accept a bonus this year. “That’s right, if I can’t have $10 million, I won’t take anything!” OK, the last quote was mine, but that’s what I hear him saying… Hey! Why not take the $10 million down to the Salvation Army!

Yes, I know, that’s all is “stuff” and not of currencies… So I digress…I couldn’t pass it by though, you know me!… So, I apologize! So, back to the currencies and economies, eh?

Well… It didn’t take the people that bought Anheuser Busch long to begin their cost cutting… The Anheuser-InBev people announced yesterday that 1,000 of my fellow St. Louisans will be cut from the payrolls… You can see them in the boardroom frothing at the mouth when the Jobs Jamboree was printed on Friday… This is how I see this going down… “Hey, did you see that 533K jobs were lost in November, Carlos? Yes, I did, and that gives us a chance to move up our job cutting to now, as we can point to the “economy” as the culprit in the job cuts.”

Hey, did you see the “Money and Politics Show” on TV last night? (I didn’t, as I’m sure I was in bed!) But, the former CEO of Bear Stearns, Alan Greenberg, was interviewed and he said that, “There’s no more Wall Street. That model doesn’t work because it’s at the mercy of rumors. The entire make-up of Wall Street has changed forever.”

Hmmm… Interesting take, don’t you think? Or could be just sour grapes, as his company was forced to sell at bargain basement prices to JP Morgan.

Are you following the hearing on the fall of Fannie and Freddie? Well, the Washington Post says that the House Committee on Oversight and Gov’t Reform will hear that… “Internal Freddie Mac documents show that senior executives at the company were warned years ago that they were offering mortgages that could pose dangers to the firm, hurt borrowers and generate more risky loans throughout the industry.”

There will also be a memo that circulated Freddie… “former Freddie chief enterprise risk officer David Andrukonis wrote that the company was buying mortgages that appear “to target borrowers who would have trouble qualifying for a mortgage if their financial position were adequately disclosed.”

I could really go into a tailspin right here, and head down the road that points fingers and calls for public hangings and that sort of thing, but I’ll stop right there! No need to rehash this stuff!

But doesn’t hearing that stuff just get your blood boiling!

The Tribune Company did indeed file for bankruptcy yesterday, as the rumors said they would.

OK… I was looking at a rate screen on the Bloomie yesterday, and noticed something that really struck me as interesting. The Fed Funds rate is 1/16th… But wait! Didn’t the Fed cut the Fed Funds rate to 1% at the last meeting? Yes, they did grasshopper, but… The people in the trenches are trading Fed Funds to each other at 1/16th… Does that tell you something? Well… It tells me that my inclinations that the Fed is going to move rates to near zero, are bang on! These daily transactions wouldn’t be trading this low, unless rates were going there! Bernanke-san… Just call him Bernanke-san, as you sing, I’m turning Japanese, yes, I turning Japanese, I really think so!

For new readers, that whole production is all about the fact that I believe that the U.S. is following Japan and Japan’s leaders in how they dealt with the decade of economic mess… If you go back to the mid-90’s you’ll find the Japanese economy circling the bowl, and the Japanese Gov’t and Central Bank, issuing stimulus package after stimulus package, building huge amounts of Gov’t debt, and cutting interest rates to zero… Now… Ask yourself, what country / Central Bank does that remind you of in 2008? By Joe, you’ve got it! You sank my battleship! It’s the U.S. / Fed!

Still no word on the Gov’t’s answer for the Big 3 automakers here in the U.S. We’re waiting for the final answers if you will on whether the Big 3 get bailout money, how much, and will they get a “Car Czar” to oversee them… The stock jockeys liked the news yesterday that it looked like a thumbs up for the Big 3… Until then… We wait.

The Chinese renminbi is back on the rally tracks VS the dollar after some hemming and hawing over the Paulson / China talks… I still don’t expect much from this, but slow positive moves are better than none!

Currencies today 12/9/08: A$ .6555, kiwi .5415, C$.7960, euro 1.2860, sterling 1.4775, Swiss .8245, ISK 261, rand 10.19, krone 7.12, SEK 8.17, forint 205, zloty 3.0590, koruna 20.03, yen 92.60, baht 35.45, sing 1.5040, HKD 7.75, INR 49.59, China 6.8734, pesos 13.46, BRL 2.4780, dollar index 86.16, Oil $43.45, Silver $9.88, and Gold… $770.50

Source: Spending More Money

Silver’s peak occurred an hour or so later. The boyz weren’t going to allow a runaway gold price after the Fed’s interest rate decision. To give you an idea of how hard they’ve been sitting on the gold market, consider this…in the last 36 hours (as of midnight last night)…the US dollar was down almost four full cents, the US Fed Funds rate was cut by a third…and gold was only up $30-40. Check your own charts if you doubt me. The gold price should have been up several multiples of that. Trading was heavier in silver than in gold…and in actual fact, if you remove the effect of switches…gold trading was extremely quiet.

However, the precious metals stocks have been on fire for the last couple of days…and I’d like to think that the smart money and the insiders know that gold and silver prices are going much higher. The Commitment of Traders report for both precious metals (and every other commodity for that matter) hasn’t been this bullish in at least five years…and the one due out tomorrow will be even more so. If there ever was a time for a moon shot…this is it…as the set up is perfect for it. But like I said, we still have to get past JPMorgan, HSBC USA…and a US election.

Open interest changes for Tuesday were a surprise. The gold o.i. seemed semi-normal…down 588 contracts to 313,709…but it was the o.i. in silver that was the eye-opener. Instead of dropping a bunch…o.i. was up 1,818 contracts instead. I wonder what combination of long liquidation/buying, short covering and spreads gave rise to that number? It’s impossible to tell. I only hope that this information is in tomorrow’s COT. It should be, because the cut-off for the report was Tuesday at the close of regular trading on the Comex…and the bottom occurred in early Tuesday morning trading in London.

I got an e-mail from Ted Butler yesterday which is worth sharing. It has to do with backwardation in the silver price. We’re not there yet, but the events of the last several days indicate that we seem to be heading in that direction. Here’s the e-mail, where I’m paraphrasing a bit…”Based on the settlement prices just posted (yesterday afternoon at the close of regular business on the Comex…around 1:30 Eastern time), the silver spreads have tightened noticeably over the last few days. Last week the Dec/Mar silver spread was about 4.5 cents. On Monday it was 3.8 cents, and is now down to 1.4 cents today (now yesterday). There is some tightening on gold spreads, but not as pronounced as silver.” In a subsequent telephone conversation, Ted mentioned that it’s the bad guys (JPM/HSBC) that control the spreads…and this narrowing will not go unnoticed by traders who follow these sorts of things. Ted explained to me that backwardation is synonymous with a shortage of good delivery silver…i.e. 1,000 ounce bars. IF we end up in backwardation (which is what this recent data suggests is about to happen), then nobody will be able to deny that there is a shortage. I’ll keep you posted.

In other gold news, I see in a Reuters story that Newmont Mining has reported that “The company’s average production cost per ounce of gold rose to $480, from $374, a year earlier…while its average costs per pound of copper rose to $1.98, from 64 cents, in the year earlier quarter.” Those are substantial increases! Yesterday, both the GLD and SLV were unchanged.

In other news, a story in the NY Times said that lenders are significantly curtailing both their credit card offers and lofty credit lines. The paper adds that the retrenchment is even impacting credit-worthy consumers. Of interest, the article notes that after writing off an estimated $21 billion in bad credit card loans in the first half of the year, analysts believe the industry is likely to lose at least another $55B over the next 18 months. On Monday, GM and Chrysler wanted to borrow $5 billion so they could afford to merge. Yesterday they upped the ante to $15 billion! In a headline out of The Times in London “West goes cap in hand to the East for credit crunch help”. And lastly, a headline from a Yahoo U.K. reads “Russia military offers Cuba air defence aid”. How many of you are old enough to remember the Cuban Missile Crisis? Just asking.

Two stories today. The first is from Hugo Salinas Price…one of the richest men in Mexico. I mentioned him last week when I was talking about the silver Libertad production being slashed by the Bank of Mexico. This directly affects him, as his large chain of stores in Mexico each has a branch of Banco Azteca in it…and he makes sure that they all sell the Libertad…and they do. His stores are the biggest Libertad distributors in all of Mexico. The story is an absolute ‘MUST READ‘ and is headlined “Banco Azteca: New policy on purchase and sale of silver ‘Libertad’ coins.” The link is here.

My second offering is a photo essay of runaway hyperinflation…which may be coming to us one of these days. This will give you some idea of what to expect. It’s all in pictures…with very few lines of text…a Gee-Dubya type of executive summary if there ever was one. The link is here.

click to enlarge

A liberal is someone who feels a great debt to his fellow man, which debt he proposes to pay off with your money. – G. Gordon Liddy

Yesterday’s Dow performance was underwhelming…as it literally fell of a cliff in the last half hour of trading. Even I was surprised. However, as I put the finishing touches on this in the small hours of Thursday morning, I see that the Nikkei was up a bunch…and now the S&P futures are spun higher…so the PPT is obviously going to give it the old college try again today in preparation for end of the month mark-ups. We’ll see what next week…and the new month…brings. I’m not optimistic.

Source: And Then There’s This…Thursday, October 30th, 2008

Good day… And a Tub Thumpin’ Thursday to you! It certainly was a Tub Thumpin’ Wednesday for the currencies, foreign stocks, commodities, and the Philadelphia Phillies! This by no means that the deep dense fog that has hung over the markets for 3 months has lifted for good… It did, however, lift for one day, and what a day it was!

Oh, and the Fed did indeedly do cut their Fed Funds rate to 1%, which works out great since Fed Funds had been trading at 1% anyway! I had a reported from Dow Jones call me a few minutes after the rate cut and ask me my opinion on what the dollar was doing, which at the time was rallying back a bit… I said it looked like a classic case of buy the rumor sell the fact, that enough speculators were pushing the dollar lower ahead of the rate cut in hopes that a larger cut would be made. That, however, was not the case, and the dollar rallied… But only for about 20 minutes, and then it took a rid on the slippery slope, with the euro pushing to the 1.29 handle as I left for the day.

I turned on the currency screens this morning, and what to my wondering eyes did appear, but the euro trading back above 1.30, I gave a cheer! Not that I have a dog in this race, I just like to see people make money… So, I immediately began to think, Now Chuck, is this for real? Or… Just a false dawn? Well… You know, the dollar really had gone too far, too fast this month and was due for a correction, and what better day to have a correction than a day when your currency was debased by 50 BPS! The dollar was going higher so fast it reminded me of a story I heard a very long time ago, and can’t remember if my dad or mom told me, but it goes like this… Chuck, nothing grows to the moon, stars and sun, but sometimes it looks as though something might… But don’t worry, it will come back to earth.

And so it was for the dollar this month… Of course this all could be wiped out by the fact that tomorrow is month-end, and we could see some adjustments being made in foreign stock funds… Let me explain… These foreign stock funds are off by quite a bit this month, and since they are foreign stock funds, they are denominated in foreign currencies… So, to adjust the amount of currency needed to fund the well, fund… These funds might have to sell currencies tomorrow. So, keep that in mind… But after yesterday’s performance, who knows?

The other day, I mentioned how the Emerging Market Currencies had really taken the brunt of the dollar strength… But… I saw where there was an announcement overnight of IMF and Fed dollar swap lines for emerging markets. This is a bold and reassuring measure to address the liquidity problem for the Emerging Markets… I don’t know if it will be enough, but for now it has brought some calm to these markets.

So… U.S. rates are at 1%… This is the level that former Fed Chairman, Big Al Greenspan, brought rates to in 2003 and left them there far too long, through 8 successive meetings before lifting rates in June of 2004. During that time, Gold rose 16%… The S&P 500 rallied too, and bond yields went up… But… We certainly do live in a different world than just 4 years ago, don’t we? I just don’t like interest rates this low, but a Fed has got to do what they’ve got to do. And I think the Fed Heads believe that they will be “Saved by Zero”… Maybe, someday, Saved by Zero… But I think they’ll have another thing coming! You’ve got another thing coming!

The current Fed Chairman, Big Ben Bernanke, or triple B, issued a statement following the rate cut, that was quite somber… To me, he painted a very dark, depressing picture of the economy, and… I think he left the door wide open to further rate cuts, taking us on that path toward 0%… I doubt they’ll actually ever get to 0%, but we could be getting within’ spittin’ distance of 0%…

I could go on and on regarding these low interest rates, but I don’t feel like getting my blood pressure all boiling, and yelling at the walls! This is the first day in what seems to be a month of Sundays, that I can look at the currency screens and smile… So, I’m not going there, and you can’t make me!

Don’t know if you’ve noticed, but the Chinese renminbi has remained virtually unchanged this week… Yes, the peg was dropped in July of 2005, and it should move some each day, right? Well… When you realize that the reality of the situation is simply that China is a Communist Country, and can do what ever they well please with their currency! And it looks to me as though China has restored the peg… Maybe it’s just a move to sit on the sidelines during these tumultuous times in the financial markets…

OK… I just saw the euro gap up from 1.3075 to 1.3135 in a heartbeat! It was crazy! Now this is going too fast! Why can’t these currency traders make up their minds? OK, I’m not complaining, this time! But, really… On Monday of this week we were looking at some devastating currency levels, and by Thursday they have reversed about 6%!

And you know what all this dollar weakness and euphoria brings to the currency table don’t you? Of course you do! Risk trades, Carry Trades, dollar and yen weakness, Aussie, Kiwi, and other higher yielders stronger… Yen is still below 100, so that’s a good thing… And maybe, the Bank of Japan (BOJ) will lose the scent of currency intervention… Or, maybe they’ll just stop talking about things that would weaken the yen… For now!

I’ve been around the currencies since 1985… Trading them since 1992… I’ve never seen the volatility that I see every day since July in the currencies… Crazy, I’m crazy for feeling so lonely… No wait! Ahhh… Patsy Cline, one of my all-time faves! And, on a sidebar here… What’s the most played song ever in jukeboxes? Crazy…

OK… Don’t know where I was going there, but quickly turned to trivia, UGH! Today, we’ll see the color of the 1st estimate of 3rd QTR GDP… This ought to be interesting…. Remember in the 3rd QTR, the dollar was stronger, so imports won’t be there to pump up GDP like they did in the 2nd QTR. Hans and Franz, pump you up! The experts believe that 3rd QTR GDP will be negative to the tune of -.5%… I’m going to go out on a limb and say it will be worse than that… But the fact that it’s negative, really reinforces my claims that we’re already in a recession.

We’ll also see Personal Consumption for the 3rd QTR… This is a report that the Fed Heads usually pay close attention to. Personal Consumption is expected to have fallen -2.4% in the 3rd QTR… That’s another rate cut arrow in the Fed Heads’ quiver… Personal Consumption falling is akin to falling inflation, which you and I know is a bunch of bunk! But the Fed believes what it wants to believe…

And with it being a Tub Thumpin’ Thursday, we’ll see the Weekly Initial Jobless Claims like we do every Thursday. This report has showed that the Initial Jobless Claims will not slow down. The Weekly number remains around 475K, and the Continuing Claims number adds to the figure every week. This all will lead to unemployment rising to at least 7% in the near future…

Again… I received a letter yesterday from someone that ripped me for not providing solutions and always criticizing… Hmmmm… I said for years now… Reduce the debt, reduce the debt, reduce the dept… That’s the Solution! I think everyone can think of one way the Gov’t and Consumers could reduce their debt… And that’s the Solution! I’ve beaten the proverbial dead horse with that statement… Reduce the debt! Geez Louise… Oh, and did I mention… Reduce the debt!

And with the smoothness of a Carlos Santana guitar solo… I slip right over to talk about my friends, Addison Wiggin, and Kate Incontrerra’s book I.O.U.S.A. that accompanies the movie of the same name that was released last August. I read the book on all the flights during the currency tour, and even recited parts of it in my presentations. This is a must read for everyone, period. It makes no difference if you are rich, poor, middle class, in debt or not. It doesn’t matter what you wear, just as long as you are there…. See how I slipped right over to I.O.U.S.A. from my tirade about Reduce the debt? I’ve learned something from writing a daily newsletter for 16 years!

And… You can get your copy of I.O.U.S.A. by clicking this link…

Currencies today 10/30/08: A$ .6870, kiwi .5995, C$ .84, euro 1.3140, sterling 1.6575, Swiss .8855, ISK (still no quote), rand 9.91, krone 6.5770, SEK 7.5050, forint 194.70, zloty 2.7040, koruna 18.60, yen 98.70, baht 34.85, sing 1.4610, HKD 7.5110, INR 49.67, China 6.8410, pesos 12.81, BRL 2.1150, dollar index 83.64, Oil $68.25, Silver $10.06, and Gold… $770.15

Source: Today’s Pfennig October 30, 2008

At the New York close, all three major U.S. indices had sizeable gains:

* The blue-chip Dow Jones Industrial Average Index soared 889.35 points, an increase of over 10%, to close at 9,065.12.
* The tech-laden Nasdaq Composite Index jumped 143.57 points, an increase of 9.5%, to reach 1,649.47.
* And the broader Standard & Poor’s 500 Index shot up 91.59 points, an increase of over 10%, to settle at 940.51.

“The valuations are extremely compelling right now,” Dan Veru, who helps manage about $2 billion at Palisade Capital Management in Fort Lee, New Jersey, told Bloomberg News. “When you’re in extreme oversold conditions, the market is prone to these types of wild swings. The key thing is, can we hold these gains?”

It was the second-biggest daily point gain for the blue-chip Dow, which had a record-setting 936-point one-day gain earlier this month.
With a “lack of selling pressure” late in the afternoon, “the buyers began to ride in on their horses, and that brought in some additional buyers and short-covering,” Robert Pavlik, chief investment officer at Oaktree Asset Management, told MarketWatch.

All sectors posted gains across the board with energy, up 11.76%, and basic materials, up 11.74%, marking the largest gains.

The Fed’s Federal Open Market Committee (FOMC) is expected to release its statement on monetary policy tomorrow (Wednesday) afternoon.

The Fed is widely expected to reduce its benchmark Federal Funds target rate as the likelihood of a U.S. recession continues to increase and inflation pressures have abated.

The Fed Funds rate currently stands at 1.50% and a cut of 25-50 basis points is expected.

“The cut is already in the market,” John Ryding, economist at RDQ Economics told AFP.

“The question is whether it’s 25 or 50 basis points.”

Source: Dow Zooms Above 9,000 on Eve of Expected Fed Rate Cut

Now the blame for spiraling food and oil prices is increasingly being laid at the door of Fed Chairman Ben Bernanke for cutting the fed funds rate to 2% and unleashing yet another wave of inflationary surplus liquidity.

The fallout is now being seen as India, China, the Philippines and Indonesia hike their own interest rates to rein in rising prices.

Consumer prices jumped 7.7% last month, down from 8.5% in April, but inflation there remains top of the list of economic concerns.

While the US and most of Asia struggle to put the inflation geenie back in the bottle, David Stevenson in Money Week heaps praise on European Central Bank president Jean-Claude Trichet, who is fast becoming the hero of inflation fighters everywhere…

Because yesterday, amid the usual turgid guff that central bankers usually churn out when they’re doing nothing very much, he came up with a bit of a bombshell – an imminent interest rate rise.

Although key rates are being kept unchanged for now, the ECB’s Governing Council has been getting more and more twitchy about climbing consumer prices which have risen “significantly” since last autumn due to soaring energy and food prices. And now Monsieur Trichet and co. expect inflation to stay high for longer than it first thought, because money supply is still growing too fast.

So not only are Euro central bankers staying “in a state of heightened alertness”, they’re prepared to “act in a firm and timely manner to ensure that medium term risks to price stability do not materialize”, and to show “strong determination to anchor medium and long-term inflation expectations in line with price stability.”

In short, expect an ECB rate hike next month.

It’s certainly seems to have come as a bit of a shock to many analysts. Just a week ago, Capital Economics was fairly confidently predicting that with eurozone inflation set to ease later this year, “the next move in interest rates should be down”.

But it’s good to see that some central bankers this side of the Atlantic are still taking their jobs seriously and trying to maintain the value of their currency. Which, it seems, the ECB can do rather more easily than Bank of England governor Mervyn King.

He’d probably like to do the same as the eurozone, with UK inflation seeping above the 3% mark at which he has to pen an open letter to Chancellor Darling explaining what’s gone wrong, but his hands are tied while the UK economy is falling off a cliff. And it looks like the knots are getting tighter by the day, with the unwelcome news that Mr Darling has now decided to give Mr King some extra outside ‘help’ in “advising” the Bank about “financial stability”.

That sounds horribly like Government-speak for finding ways to fiddle around with the Old Lady’s independence, and specifically to find ways of altering the Bank’s 2% inflation mandate. That would be a serious mistake – changing the target again would just chuck any remaining financial credibility the UK has left, right out of the window.

Talking of being a credible inflation-battling central banker, US Federal Reserve boss Ben Bernanke certainly isn’t one, having presided over a cavalier slashing of American interest rates in the face of a worse inflationary storm than the ECB is battling. But to be fair to the Fed, not quite all his colleagues are in quite the same boat.

Richmond Fed president Jeffrey Lacker has just ‘fessed up to his fears that the Fed’s lending to securities firms introduced in March could stoke up problems in the future, because it might “induce greater risk taking, which in turn could give rise to more frequent crises”.

In other words, we could soon be right back in the same boom-to bubble-to-bust mess from which we’re now suffering.

Thank goodness someone in authority in the US has seen the dangers. Though it’s a shame that Mr Lacker isn’t running the whole Stateside central bank show. Then we might see some rate rises over there, too.