Chuck Butler (The Daily Reckoning):
As I checked the currencies throughout the day yesterday, I noticed that as the day went on, the non-dollar currencies were stronger, led by the Big Dog, euro (EUR)… But then late last night, and I mean late last night, I checked them, and those gains had been wiped out.

So, when I arrived here this morning, I had one thing on the top of my list of things to do, and that was to find out what happened… Come on, I said to myself, it had to be more than the “risk on, risk off” stuff that’s been hanging over the markets like the Sword of Damocles! But, when you get right down to the nitty gritty, that’s all it was… For once again, there was some data, or story, or rumor, that spooked the markets into believing the global recovery isn’t going to happen, and the “risk off” came into play.

So what was it that spooked the markets… Well… The only thing I can find was the report yesterday about falling Housing Starts that Chris told you about… Did you know that about 14% of US homeowners were either delinquent on their mortgage or in some stage of foreclosure? That is the highest rate since the group started collecting the data in 1972!

But there was something else that was announced as the day went on, that I think probably spooked the markets more than anything else… And that is a key House panel approved two amendments to a sweeping financial-overhaul bill that would give federal watchdogs new authority to audit the Federal Reserve, and would establish a fund of as much as $200 billion to help dissolve large, troubled institutions. Rep. Ron Paul (R., Texas) offered the amendment seeking to subject the Fed to audits.

The House Financial Services Committee voted 41-28 to approve the amendments, wrapping up weeks of debate but postponing a final vote on the bill until after Thanksgiving.

OK… More deficit spending for sure, and I’m positive that this was “hung on this bill” to audit the Fed as the only way it would get through the gauntlet.
Click here to finish Mr. Butler’s article at The Daily Reckoning.

Since April, the commodity has embarked on an extreme upside move, shooting to highs not seen since sugar hit $0.45 per pound in 1981. The chart below illustrates it perfectly…

Sugar Chart: http://www.investmentu.com/images/sugar_082509.gif

The main reason for such a large jump was news from India, which indicated a potentially low sugar crop.

Over the past couple of weeks, the sugar market has surprised many analysts by trading even higher. I say that because while fundamental news like this often results in impressive-looking moves, its impact has a limited lifespan.

So be warned. Moves like this usually indicate that the news is factored into the price and we’re entering the last phase of the bullish run.

Based on my experience in the commodities markets, where I’ve seen this type of pattern many times, I believe we’re headed for an inevitable turnaround for the sugar market. Here’s what you can do to profit form this, and two other commodities to keep an eye on.

How to Play the Sugar Market to the Downside

If you want to play the sugar market to the downside, I suggest you buy put option contracts, or by selling limited-risk call option spreads. At the moment, the October 2009 and March 2010 option contracts are the most active.

As you can see on the chart of the October 2009 futures contract above, the price surpassed the $0.2300 per pound level twice, moved back to $0.2150 per pound, then trotted past the $0.2300 mark again.

This is what technical analysts call a “triple top” and if sugar doesn’t move above $0.2300 again, we can seriously count on the market having a big retracement lower – most likely between $0.1900 and $0.2000 per pound.

So if you play the downside and it does make that retracement, I’d suggest taking profits at that $0.1900 to $0.2000 level.

Oil Heading For $80… And Beyond: Three Ways to Play the Move

Given the historic rise and fall of the oil market and the current state of the global economy, you’d never think that it could even consider the idea of moving higher again.

But the market continues to amaze everyone with its resilience and strength, with the current price hovering around the $74.50 per barrel area.

And with conflicting reports on the global demand for oil over both the near term and long term – plus weekly inventory reports that show a strong buildup of supplies one week, followed by draw-downs the next week – it’s easy to see how this can be a very treacherous market.

Here’s the deal: Regardless of what statistics are released and how Congressional attempts curtail oil trading limits, it’s clear that the oil market continues to bring in speculators from all levels – and will most likely keep trekking higher.

Check out the oil chart below. The price is currently trading above all three main moving averages (20-day, 50-day, 200-day) and is now looking to pop above the recent high of $75.27 from June 11. If that happens, we could easily see oil shoot to $80 from there – with $90 probably right behind.

Oil Chart: http://www.investmentu.com/images/oil_082509.gif

There are a couple ways to play the oil market – be it on the long or short side…

• The futures and futures options that trade on the floor of the NYMEX. This is usually best for experienced commodities investors.
• Through an ETF like United States Oil (NYSE: USO), which tracks the price performance. This gives you broad exposure to the market through one investment, rather than playing individual companies. It’s also a less expensive way to play the market and doesn’t require a commodity trading account.

You can either play the USO shares directly, or the options on the ETF. No matter whether you’re bullish or bearish, pick an option expiration period at least three to six months in the future, as that will give your directional call ample time to mature.

The Grain Markets: Summertime Means We’re on “Grain Watch”

Finally, let’s hit the grain markets (corn, wheat, soybeans)…

During summer, these markets can really turn to the upside, as the growing season can be extremely volatile, particularly if the weather is less than ideal.

The June-October period typically sees more speculation in the grain markets than any other time of year, purely because of the prospect of more volatility. Regardless of what any fundamental data may show, nothing can compare to the sheer panic-buying when we receive weather reports that show how a drought could wipe out a year’s worth of crop.

And some of it doesn’t even need to necessarily happen… it’s merely the potential for it happening, based on previous history. Fortunes can be made or lost in just those few summer months.

Buy Corn Commodities Low… And Ride the Bullish Move Higher

This year, for example, we’ve seen corn and wheat prices shuffle around their annual lows, due to government reports that show ample planting, high carry-over levels from last year and crop production that is ahead of schedule.

Corn Chart: http://www.investmentu.com/images/corn_082509.gif

With corn currently at its lows, if any potential weather disruption does occur over the next few months, taking a bullish position here could be a low-risk way to get involved.

Like with the sugar market, the best way to play corn is through limited-risk option strategies. Stick with expiration months of December 2009 or March 2010, so that you give the market plenty of time to mount a bullish move.

Good trading,

Lee Lowell

Source: These Three Commodities Are Set to Move… Are You Ready to Profit?

Porter Stansberry explains the forces behind the current rally The Daily Crux

America is running out of rope The Market Ticker

The world financial system’s Achilles’ heel The Daily Reckoning

Roubini on a U shaped recovery Naked Capitalism

Larry Flynt calls for a national strike The Huffington Post

Look for an X shaped recovery Real Clear Markets

The risk of double dip recession rising Financial Times

What the stress tests didn’t predict NYT

There was a message waiting for me from Zolgarg, Supreme Overlord of this sector of the galaxy. I put off opening it, because communications from Galactic Command Central (GCC) are always a big hassle for me, and I am always torn between doing my usual lazy job by just making something up and taking the rest of the day off, or doing a really good job and maybe getting transferred off this stupid planet as my reward, thus allowing me to get away from a population of moronic people that actually believe such stupid crap as “everyone can make money by investing for the long-term”, “inflation should be above zero”, and “the government can painlessly buy its way out of any mess it can make, just by creating the money to pay for it.”

Finally, I knew that my delaying the inevitable was starting to look bad, so I opened it. What he wanted was the worst of all; a report on the economic situation on Earth, since Earthlings are of particular interest to economists throughout the universe, being that Earthlings are considered by advanced civilizations to be one of the rather lower-middle forms of life in the universe, in that many Earthlings, culminating in Ludwig von Mises and the Austrian school of economics, proved that the species has the intellect to conceive of the idea that excessive inflation in the money supply leads to inflation in consumer prices, which leads to social upheaval.

And the people of this planet have discovered universal reading and writing, and so they know from their own history books what happens to any idiot country that uses, and then abuses, a fiat money and bank debt until the sum total of debt becomes literally un-payable.

What makes Earthlings so interesting is… Why don’t they do what they know they should, especially since the freaking Constitution of the United States of America requires that money be only of only silver and gold, so that a fiat currency would be impossible?

Of course, the next thing is… How can we make a bet on it? And that is, I suspect, the essence of this latest message from Zolgarg, as rumor has it that he already has more Quatloons wagered than he can afford on when the economy collapses, and another big wad of Quatoloons on the exact day the U.S. government declares war on Iran so as to start World War Three as a distraction to an angry, bankrupted citizenry and country, and we all figure that one day Zolgarg is going to find his bookie coming over there with a couple of goons and they will break off one of his tentacles.

I mean, it’s no secret that that we know what will happen when you let a government allow the money supply be constantly expanded; disaster!

And everybody, even unto the farthest reaches of interstellar space, knows what happens when a government uses that money to expand itself, like now, when the federal, state and local governments now employ one out of seven workers and collectively spends one-half of GDP; disaster again!

But Zolgarg obviously overestimated the collective smarts of Earthlings in protesting with riots and recall elections, and underestimated the sheer degree of frantic desperation of the Federal Reserve and governments.

I tried to warn him that even Keynes himself said that “Markets can remain irrational longer than you can remain solvent”, but nobody listens to me, and neither did he..

But his answer is logical; if you’re going to bet, you gotta got with the fundamentals, and so by virtue of a corrupt and intellectually-bankrupt Federal Reserve perpetually lowering interest rates, using a fiat currency, using literally zero reserves in the banking system, with a complicit corrupt Congress (except Ron Paul), it is just a matter of time, and the payoff is knowing HOW much time!

None of this is going to help me, or him, but he is not going to believe me, and it just means more work for to write the stupid report.

In the end I reverted to my slug-like, worthless ways, and just sent him a copy of Jim Willie of the Hat Trick Letter saying, “The Bear Stearns and Fannie Mae stories are loud billboard statements that the United States is now MONETIZING BANKRUPTCY. A profound USDollar risk remains constant. The US system is now insolvent, from the USGovt to USEconomic trade to US banks to US households.”

I added an Executive Summary of “Not yet, but soon, because we are freaking doomed!”

To hopefully lighten the mood, I included a cartoon by Dan Piraro at bizarro.com with my report, which shows a business executive explaining to his staff the downward-sloping graph on the wall behind him. He says, “I wouldn’t say the ship is ’sinking’, but the mast is broken, we’re out of food and water, sharks are circling and the captain is insane.” Hahahaha!

P.S. To get The Daily Reckoning sent directly to your inbox, sign up for our free email newsletter, or if you prefer to use RSS, subscribe to the Daily Reckoning RSS feed.

Source: The Earthling Economics Experiment