So gold is now publicly loved by armchair investors, famous hedge fund managers and central banks… even as we write, Erin Burnett is “squawking” about it on CNBC. Are your contrarian senses tingling yet?

“So many hedge fund managers and pundits are singing the same tune: long gold and short U.S. Treasuries,” our friend Dan Denning wrote in today’s Daily Reckoning. “The bond bubble could go on much longer than anyone expects. And when so many people agree on something, none of them are usually right. As a contrarian, you’d be worried about becoming a victim right about now.”

Finish reading this article on DailyReckoning.com.

1) We don’t like the smell of fish. This rally began with a ‘leaked’ memo from Citigroup announcing a return to profitability and was given legs by banks’ bogus quarterly earnings. Washington has added to the stench with its fudge tests for banks, its PPIP proposal and its active campaigning to relax mark-to-market accounting rules.

2) Much of the buying was caused by short sellers covering their positions (a massive “short squeeze”).

3) “Junk” stocks have been leading the rally. The real winners have been beaten-down stocks with the riskiest outlooks. They generally have had the highest level of debt and the lowest return on equity.

4) Historically, sucker’s rallies are the norm, not the exception. Sharp crashes are often followed by sharp, but short lived, bear market rallies. The 2000–2002 bear market had three, with the Dow gaining an average of 21%. The 1929 to 1932 bear had six, with an average gain of 47 per cent. Even the poor Japanese have suffered their head fakes. The Nikkei has seen about 14 false downs since it crashed in 1991.

5) Generally, bottoms don’t feel like this. Bear markets typically end with a whimper rather than a bang. A recent study by Hussman Econometrics analysed numerous US market bottoms and bear market rallies. It revealed that, with the exception of the 1987 crash, the month before the lowest point of a downturn saw a gradual descent.

6) Stocks are still too expensive. As Yale University professor Robert Shiller says, all four big bubbles of the 20th century troughed at between 5 and 8 times earnings. Stocks did not even fall below 11 times earnings in the recent low.

7) Insiders have been selling the rally. According to TrimTabs, April saw the lowest level of insider buying ever recorded, with insider selling 14 times as high. And companies sold 64% more shares than they bought.

Sentiment isn’t low enough yet for our taste. As Russell Napier says in Anatomy of a Bear , “For the great bear market bottoms, you need a society-wide revulsion with equities. It just doesn’t smell like the big one yet.”

9) The risk of corporate bond defaults is at highs unseen since the Great Depression. Moody’s expects the corporate default rate in the US to reach 14.6% by year end – a near doubling from the first quarter’s default rate of 7.4%.

10) Corporate earnings continue to suffer. Earnings weren’t as bad as expected last quarter. But they are expected to continue to decline until sometime next year.

11) The S&P 500 remains under its 20-month moving average. Every sustainable bull market has been marked by the S&P rising above its 20 month average.

Suffice it to say, we’re sticking to our guns. As Merrill Lynch economist David Rosenberg recently counseled, “For those that missed the big nine-week move, don’t worry. Be patient. The story was right – the tortoise always wins the race.”

The pan-European FTSEurofirst 300 was down around 1 percent, hitting a lifetime low. Earlier, Japan’s Nikkei ended down just shy of a 26-year.

MSCI’s main world stock index was down 0.2 percent on the day, after having tumbled 4.9 percent on Monday, its worst performance since early December.

Global stocks have been pummelled this year by a left-right combination of poor economic news and continuing travails within banks and the global financial system in general.

The MSCI index is down more than 22 percent on the year so far and has lost around 58 percent of its value since hitting an all-time high in late 2007.

The Nikkei ended down 0.7 percent. The benchmark hovered just short of a 26-year low amid worries about the U.S. financial system. The broader Topix slipped 1.1 percent to 726.80, its lowest close since December 1983.

Gargantuan losses on world stock markets, however, are piquing the interest of investors who see value appearing and the potential for at least a short-term reversal.

“Stocks do appear to be oversold at current levels, meaning there is a possibility for a near-term and significant rally,” Bob Doll, chief investment officer for global equities at BlackRock, said in a note.

But he added: “The downside risks remain troubling.”

WAIT AND SEE

The dollar weakened as traders bought the euro and other relatively higher-yielding currencies after the Reserve Bank of Australia unexpectedly left interest rates on hold.

But activity was subdued as investors took a wait-and-see stance over the financial system and deepening global recession.

The dollar index, a gauge of its strength against a basket of six other major currencies, hit a three-year high in overnight trade as investors sought shelter in the world’s most liquid currency. It was down 0.5 percent on Tuesday.

The euro rose 0.4 percent from late U.S. trade to $1.2629 , recovering losses suffered in the wake of European Union leaders’ rejection of a mass bailout for eastern Europe, which weighed on the single currency the previous day. Euro zone government bond yields pushed higher.

The interest rate-sensitive two-year Schatz yield was up 2 basis points at 1.227 percent. It remained within orbit of a euro lifetime low 1.15 percent struck on Feb. 18.

The 10-year Bund yield was up 3 basis points at 3.061 percent. Bond yields move inversely with prices.

REUTERS (March 3, 2009)

A Chinese newspaper reported that Chinese officials are calling for Beijing to sell U.S. Treasuries… Whoa! This is completely different than people outside of China giving them their 2-cents worth of opinions on how they should run their economy (read, Schumer, Graham, Bernanke, Paulson, and now Geithner a.k.a “the cheater”)… Let’s go to the story…

“BEIJING (Nikkei)–Calls are growing in China for the government to reduce its holdings of U.S. Treasury securities, as some observers expect their prices to decline amid heavy issuance to fund U.S. economic stimulus plans.

Such sentiment — in part motivated by indignation over recent American assertions that China is partially responsible for the global financial crisis — threatens to cast a cloud over relations between Beijing and the new U.S.
administration.

“China should sell some of its U.S. government bonds and increase its euro and yen assets,” Yu Yongding, a former member of the People’s Bank of China’s policy board, wrote in a Chinese newspaper earlier this month. Yu warned that the supply of Treasuries may far exceed demand in the future.

Such remarks by Yu, who currently serves as director-general of the Chinese Academy of Social Sciences’ Institute of World Economics and Politics, has sparked discussion within the government on how to manage its foreign reserves, according to a source familiar with the matter.”

I told the boys and girls on the desk about the story, and Ty noted that the markets weren’t really picking up on it… But by noon, you could tell something was going on, as the euro traded to 1.30 (+2 figures), Gold was up $40, and the Long Bond in Treasuries was down 2 whole points!

Now, I’m not saying that “this is finally the last shoe to drop” You see, just because a Chinese official calls for Beijing to sell their Treasuries, doesn’t mean Beijing does. However, look at the damage done to the dollar, and Treasuries when we have a single individual within China calling for this!

So… Judging from the currency reaction overnight… There’s been no follow up to the NIKKEI story… But what a performance from Gold! WOW! The shiny metal traded over $900 for a short time on Friday… I do see the Gold futures on the internet, and they are showing Gold will be over $900 today…

Pound sterling has bounced off its lows from last week, after Barclays announced they did NOT need Capital from the Government… This is the first “good” news from the U.K. in weeks, but I suspect it won’t last too long, as this is just one Bank… There are plenty others in the U.K. that won’t be able to make a statement like that!

And speaking of Banks… I see where BNP Paribas posted a huge loss in the 4th QTR on their investment banking woes… So, it’s not just U.S. , and U.K. Investment Banks with losses… The key here is “investment” banks… The ones that got deep into the subprime bonds, credit default swaps, and didn’t manage the “risks” correctly… Any way, this news from BNP Paribas is probably weighing heavily on the euro this morning, and one of the reasons the single unit has given up it’s gains from Friday…

So… As I said above, the Trading Theme for the dollar is in place, which means… The euro gets sold along with the other alternative euro currencies like Norway, Sweden, Denmark, and Switzerland… But the High yielders, like Aussie, kiwi, Brazil, and South Africa, really take shots to the chin… On the other side of the coin, the Japanese yen rallies like there’s no tomorrow…

The U.S. data cupboard is chock-full-o-data this week, and the Fed’s FOMC meets tomorrow, but won’t announce their rate decision until Wednesday. I’ve always wondered just what these Fed Heads do during these two-day meetings… I’ve always contended that they most likely played board games… Or Battleship! I can hear Kohn, telling, Bernanke, “Ben, by Joe, you’ve sunk my battleship!” (if you do it in an English accent it’s funny)…

We begin the week with Existing Home Sales and Leading Indicators… I keep saying over and over again that if the markets had 1. read the Pfennig… Or more likely 2. paid attention to the Leading Indicators they would have not been blind sided by this recession! Leading Indicators have told us for months now that things were not going to be all seashells and balloons for the economy… And voila! Well… I think Leading Indicators will continue to tell us there are more problems ahead, as they are forecast to be negative -.3%… And Existing Home Sales? The rot on that vine has been exposed for over a year 1/2 now…

Tomorrow we get the Case-Shiller Home Price Index, and Consumer Confidence… Wednesday, we’ll get the Fed’s rate decision, which I told you last week, to forget about any more rate cuts, they are so close to zero, they are at zero… Thursday brings us the Weekly Initial Jobless Claims, which last week, got very close to 600K, Durable Goods Orders, and New Home Sales… And then finally on Friday, we get 4th QTR GDP… Which I told you, and a Huge crowd at the Wealth Masters Conference in November, that 4th QTR GDP would be a negative -5.0%…

Well, it looks as though it probably will be an even greater negative than I forecast back then…

OK… Let me give you a bit of a lesson on what’s happening with the economy and this recession… You see… Every other time in the modern era that the U.S. economy has contracted more than 5% in a quarter, falling inventories have been a major reason, if not the single biggest factor. Unfortunately, the really bad recessions, like this one is going to turn out to be, get worse by the Companies getting rid of all their inventory, you know, stuff that isn’t selling! Then… Once the inventories are sold off, the economy can grow quickly again, but at the cost of inflation, as the Companies sold off their stuff, and now there’s demand for it again.

But so far in this recession, falling inventories haven’t been the problem. Of course you have to forget about housing here… NO, this recession is a direct result of the Credit Crisis that was first exposed in August of 2007… Which, I’m afraid, doesn’t bode well for a turn around in the recession, that a lot of economists are calling for in the 1st QTR of this year… The recession is deep rooted, and will be protracted until someone figures out how to get this credit crisis unlocked!

I’m still holding out hope that by summer, we see an unlocked Credit market… Then it would take a couple of months before the economy could get some “legs”… Then… We could see this spiral of demand again, and inflation rising, like in previous recoveries from recessions… And this is why I believe that in the 2nd half of 2009, we’ll see a return to the fundamentals, and all this awful debt creation that was done to “stop” the correction, will be on display again, and a dollar sell off, along with U.S. Treasuries should be in store…

But, if the Chinese jump the gun, and begin selling ahead of that time, then the dollar sell off could obviously move forward on the calendar!

I think what the markets are looking for these days, and especially after the NIKKEI story on Friday, is some sort of hedge against Treasuries… All that safe haven buying, that I’ve been talking about for months now, has created what I call the last balloon / bubble in this cycle…

And then finally before we head to the Big Finish… There’s this… A story that Ty found the other day, and sent to me… When I went to read it, I saw that the writer is a young man, that used to swim against and play water polo against my oldest son, Andrew! The lad’s name is Jamie Saettele, and he’s now the Senior Currency Stategist for DailyFX.com…

Jamie is a stategist, so he works with charts… And he believes that the euro is forming a base for a Large Rally… He points out that each time the euro rallies, and then drops, the drop is less than the previous drop… You may recall that I pointed this type of information on Gold a couple of weeks ago, and said that it looked like it would rebound to $900, and voila! Here it is… So… Let’s see if the charts work for the euro, the same way, eh?

Currencies today 1/26/09: A$ .6570, kiwi .5290, C$ .8190, euro 1.2970, sterling 1.3870, Swiss .8625, rand 10.1820, krone 6.8750, SEK 8.1750, forint 222, zloty 3.3815, koruna 21.5920, yen
89.30, sing 1.4980, HKD 7.7580, INR 48.90, China 6.8465, pesos 13.93, BRL 2.3140, dollar index 85.69, Oil $45.90, Silver $12, and Gold… $898.30

Source: Chock-Full-O-Data Week!

Right? Well, fact is, the action has actually been greatly muted if we allow for the shocking volatility in gold’s No.1 competitor for “safe haven” funds, the almighty US Dollar.

You see, like so much else, the market action just described only sets Gold in terms of the greenback (against which it has still tripled since July 1999).

Versus pretty much every other world currency, in contrast, gold in fact enjoyed a banner month this October – delivering gut-wrenching volatility plus new record highs – starting right here in London, home to the world’s $60 billion-a-day trade in wholesale Gold Bullion Bars (a.k.a. the “spot market”).

Mid-month, gold also leapt to new record highs for Australian, Canadian, Danish, Estonian, Hong Kong, Hungarian, Icelandic, New Zealand, Norwegian, South African, South Korean, Swedish, Turkish and Russian investors.

Oh, and the 350 million souls in the Eurozone. Plus the 1.1 billion people of India.

Prices of gold have of course slipped back – and sharply – against all major currencies since reaching €685 an ounce for European investors and savers on Oct. 10th. (That marked a near-tripling from the low of Jan. 2000.) In the spot market, gold’s now trading almost 13% lower as the month-end draws near.

And notable by its absence from the rogues’ gallery of fast-sinking currency zones listed above is the Chinese Yuan, as well. More spectacularly, the world-destroying Japanese Yen has squashed the prices of gold since turning sharply higher against everything – real estate, global equities, emerging-market debt, even the Tokyo Nikkei – in mid-July.

But if we really are witnessing a global currency crisis led by the destructive reversal of the Yen Carry Trade (and it certainly looks like it from inside a wallet of Sterling or Ne Zealand Dollars, let alone Forints or Krona), then just what kind of fight is gold putting up as the apparent “ultimate” safe-guard against currency shocks?

Regular visitors to this site may recall a chart we offered in August this year, a chart showing the Prices of gold in terms of the world’s top 10 currencies by economic output. It’s not perfect; the GDP weightings for 2008 will need revising, perhaps, when this year’s full-year data becomes available early next year.

But as a measure of truly globalized gold price, it both softens the US Dollar’s long slide of 2002-2008 on the currency markets, as well as tempering this month’s intemperate highs in gold bullion vs. the Aussie, Loonie, HK Dollar, Forint, Kiwi, Krone, Rand, Won, Lira, Ruble, Euro, Pound Sterling, Rupee and various Kronas.

You can’t help but spot the volatility – otherwise known as “My gold just crapped out!”

The way “quant jocks” figure the violence in asset prices, in fact, the daily volatility in this global gold price has more than doubled since August to a three-decade record.

You might also note, however, that gold really has risen sharply against all major world currencies so far this decade, not just the US Dollar. And no one should imagine it will be an easy ride – whether up or down – from here.

There’s too much at stake when you try to measure that $60 billion daily turnover in physical gold against the $3.2 trillion daily turnover in official government currencies.

Adrian Ash
for The Daily Reckoning Australia

Source: Prices of Gold in the Top 10 World Currencies

But then stock markets don’t deal in the present. They are “the great expectation machine” as one author had it. They look as far ahead as they can and try to picture how it will look. Evidently, they see an improving picture later in the year. Sounds encouraging, though as with all forecasts it could prove dead wrong. Much as the Met Office produces long-range weather forecasts using the latest technology which also can go hopelessly awry. Even their short term forecasting can be a disaster for those of us who remember Michael Fish dismissing the wild notion of a hurricane one fateful evening in October ’87.

What financial markets spy in the distance and what the rest of us experience day to day are two different things, of course. Warren Buffett thinks the US recession will be longer and deeper than most expect as consumers struggle with a wealth squeeze from falling house prices coupled with higher expenses from fuel and food prices. The Fed lopped another 25 basis points off the Fed funds rate as new data reveals the US grew in the fourth quarter of last year, but not by much. US interest rates now sit at 2%, about half the rate of inflation.

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_______________________________________________________________________________________

Recession is not the central forecast for most analysts of the UK economy but the signs of deterioration continue apace. Most visibly in the housing market, a powerful symbol in our home owning culture, which continues to weaken. British bank HBOS is the latest to report house prices are falling – by 3.7% over the year to April.

Easing commodity prices if sustained will be welcomed by the world’s central bankers. It takes some of the “push” out of “cost-push” inflation – where higher input costs force higher prices – and opens up more wiggle room for further easing in interest rates. The impact of relentless price increases showed up once again in the latest UK factory gate prices this week.

Manufacturers have been paying more for raw materials and charging higher prices on finished goods.Given a slowing global economy, commodity prices should ease up as aggregate demand turns down. But then there’s the elephant in the room in the shape of China. As such a sustained easing of commodity is probably a big ask, at the very least until after the closing ceremony at the Beijing Olympics this summer.

The dollar has rallied from its recent low against the euro. A euro now buys $1.54 against a recent low of $1.60. As for the pound, it buys you a satisfactory $1.98 if you’re flying west and a miserly €1.28 if you’re flying east.

Our currency of choice, gold, has had a tough week down around $90 since its mid-April high. Is it over for gold? Not in our book. The inflation-adjusted high is more than twice its current level and when central banks are done reflating the global economy, we suspect it could go a lot higher yet.

Enjoy your week-end.

Regards,

Rob Mackrill
The Daily Reckoning

At midday in New York, the blue-chip Dow Jones Industrial Average Index was down 76.86 points (-0.60%), to trade at 12,748.16. The tech-laden Nasdaq Composite Index shed 17.41 points (-0.72%), to reach 2,390.63. And the broader Standard & Poor’s 500 Index decreased 8.41 points (-0.61%), to hit 1,379.76.

Most sectors were down, with the energy sector (up 0.43%) and the basic materials sector (up 0.08%) posting the only gains. The consumer cyclical sector (down 1.75%) and the technology sector (down 1.12%) had the largest declines.

“Earnings and earnings estimates are coming down,” Mike Ryan, the New York-based head of wealth management research for the Americas at UBS Financial Services Inc., which oversees about $734 billion, said in an interview on Bloomberg Television. “We’re likely to see stocks continuing to be under pressure” in the first half of 2008.

Despite a 24% increase in profit, McDonald’s Corp. (MCD) slumped after it announced a slight decrease in same-store sales for March.

Shares of UnitedHealth Group Inc. (UNH) and Texas Instruments Inc. (TXN) were also down sharply after announcing first quarter results.

In overseas markets earlier today, Japan’s Nikkei 225 Index lost 1.1% with a decrease of 148.73 points to close at 13,547.82. Hong Kong’s blue-chip Hang Seng Index gained almost 1% with a 217.48-point climb, to 24,939.15.

European bourses were down, with the Paris-based CAC40, London’s FTSE 100, Madrid’s IBEX 35 and the Frankfurt-based DAX all posting losses.

At midday, the dollar had lost ground against the euro (down 0.457%) and the pound sterling (down 0.812%), but gained ground against the yen (up 0.204%).

At midday in New York, the blue-chip Dow Jones Industrial Average Index was down 40.87 points (-0.32%), to trade at 12,578.40. The tech-laden Nasdaq Composite Index dropped 20.58 points (-0.88%), to reach 2,329.53. And the broader Standard & Poor’s 500 Index decreased 6.31 points (-0.46%), to hit 1,358.40.

Most sectors were down, with the transportation sector (down 1.31%) posting the largest decline.

“Analysts are expecting a pretty dour earnings season, and so are portfolio managers,” Charles Reinhard, director of portfolio strategy at Neuberger Berman, a unit of Lehman Brothers Holdings Inc. (LEH) that manages $129 billion, said in a Bloomberg Television interview. “The market is discounting a lot.”

Pharmaceutical firm Pfizer Inc. (PFE) dropped after announcing a 19% drop in first quarter profits as generic drugs continue to take a hit on the drug giant’s bottom line.

But blue-chip technology stock, International Business Machines Corp. (IBM), gained after the Dow component announced a 26% increase in first quarter profit, beating analyst estimates, and boosted its outlook for full-year 2008.

“IBM beat revenue and earnings expectations substantially with strength across the board,” American Technology Research Analyst Shaw Wu told MarketWatch. “We find this quite impressive in light of the tough economic environment.”

In overseas markets earlier today, Japan’s Nikkei 225 Index gained 1.9% with an increase of 252.17 points to close at 13,398.30. Hong Kong’s blue-chip Hang Seng Index rose 1.6% with a 380.61-point increase, to close at 24,258.96.

In Europe, most major bourses were down, with London’s FTSE 100, Madrid’s IBEX 35 and the Frankfurt-based DAX all posting losses. Only the Paris-based CAC40 managed to eke out a slight 7.04-point gain.

At midday, the dollar had gained ground against the euro (up 0.251%) and the yen (up 0.778%), but lost ground against the pound sterling (down 0.811%).

“On Friday, we had the bad surprise from [General Electric Co. (GE)],” Ken Tower, chief market strategist at Covered Bridge Tactical, told MarketWatch. “But this week, we’re seeing investors pleasantly surprised that earnings overall are not as bad, supporting the view of a shallow economic decline instead of a more severe one.”

At midday in New York, the blue-chip Dow Jones Industrial Average Index was up 179.37 points (1.45%), to trade at 12,541.84. The tech-laden Nasdaq Composite Index gained 48.43 points (2.12%), to reach 2,334.47. And the broader Standard & Poor’s 500 Index increased 18.68 points (1.40%), to hit 1,353.11.

All sectors were up, with the basic materials sector (up 3.02%) and the technology sector (up 2.55%) posting the largest gains.

Intel Corp. (INTC) shares got a boost from strong first quarter sales results in Asia and Europe. Sales increased 9.3% to $9.67 billion, beating analyst estimates.

“These big market-share multinationals are still benefiting from economic growth outside the U.S.,” Keith Wirtz, Cincinnati-based chief investment officer at Fifth Third Asset Management, told Bloomberg News. “It tells me conditions are not all that bad on a global basis.”

March industrial production also rose slightly for the month with a 0.3% increase.

“The manufacturing sector may not be expanding but it is not contracting either, which is good news,” Joel Naroff, president and chief economist of Naroff Economic Advisors, said in a note to clients today.

In overseas markets, Japan’s Nikkei 225 Index gained 1.2% with an increase of 155.55 points to close at 13,146.13. Hong Kong’s blue-chip Hang Seng Index was relatively flat with a 22.98-point drop, to close at 23,878.35.

The FTSEurofirst 300 index of top European shares gained 1.6%. Other major European bourses were up, with the Paris-based CAC40, London’s FTSE 100, Madrid’s IBEX 35 and the Frankfurt-based DAX all posting gains.

At midday, the dollar had lost ground against the euro (down 1.072%), the yen (down 0.010%) and the pound sterling (down 0.785%).