Good day… And a Happy Friday to one and all! Yesterday, I welcomed you to October. I had been prepared to tell you about a famous radio station here in St. Louis, that has long called October… Rocktober… But forgot, as usual! But anyway… It’s the first Fantastico Friday of Rocktober!

Today is a Jobs Jamboree Friday too! And… I’m not getting a good feeling about today’s labor report at the Jobs Jamboree. The forecast is for jobs losses to fall from -216,000 to -175,000, but the unemployment rate to tick up to 9.8% from 9.7%… I got the feeling, baby, baby, I got the feeling… Oops, a little James Brown on Fantastico Friday never hurts! But what I was saying was I’m getting the feeling that there are risks to this forecast… And that the job losses could come in higher, which would really be a BAD thing for the recovery flag wavers and risk takers, I’m sorry to say…

You see, the recovery flag wavers and risk takers are wishing, and hoping, and thinking and praying that the data in the U.S. continues to show some sign of life. Any signs that the U.S. economy could be slipping backwards, would deep six stocks for sure, and if last year’s trading tells us anything, it would have an adverse affect on Commodities and Currencies too!

So… This is a BIGGIE, today, folks… So strap yourself in, and make sure you keep your arms and legs inside at all times during the ride!

Yesterday’s currency trading left a lot to be desired… There was little movement from the overnight sessions which tomahawked the non-dollar currencies. That’s a good thing… But the downside risk today is just too much for me right now… Maybe after 7:30 CT I’ll be able to breathe again, for that’s when the Jobs Jamboree prints… Again, Japanese yen enjoys the sun from both sides of their house… When the dollar is weak, yen rallies with the other non-dollar currencies… When the dollar is strong, yen rallies alongside the dollar! It’s good to be the yen! (that is before the Ministry of Finance in Japan begins to intervene!)

Hey! Remember when I bashed the Cars for Clunkers scheme, I mean program, and exposed it for what it was, and what it would do to future sales of automobiles? Well, as they say… The proof is in the pudding!

Yesterday, it was reported that General Motors (NYSE:GRM) had posted a 45% drop in September U.S. light-vehicle sales, while Chrysler’s sales fell 42%. Ford saw a much more modest drop of 5.1%. Among Japanese auto makers, Toyota said its September U.S. sales declined 16% from a year earlier, while Nissan saw its results fall 7% and Honda said its sales slid 23%. The auto industry was hurt by the expiration of the U.S. government’s “cash-for-clunkers” rebate program.

Yes… I told you this would happen… I also think that any Gov’t program to prop up the economy is just falling into the ghost of Japan’s hands… I’ve explained this before, about how when Japan experienced a HUGE market correction after their go-go 80’s, they panicked and began throwing money at the problem, instead of just letting the markets run their course… The Japanese introduced stimulus package after stimulus package, and Gov’t program after Gov’t program, like Quantitative Easing… And look how well that’s worked out for them!

So the ghost of Japanese recoveries that never panned out, is haunting the U.S. Gov’t now!

Today is also the start of a G-7 meeting in Istanbul… Istanbul was once Constantinople! Or so the song goes… Any way… The rumors coming out of the pre-meeting stuff is that G-7 will no longer make a statement or issue a communiqué’ regarding currencies, as they now feel that the only group that should have that responsibility is the G-20, which last week took the world economies watchdog title from G-8…

Currency traders have long used these G-7 communiqué statements as a tool that indicates direction for currencies… And while that has actually come to fruition a handful of times over the years, for the most part, G-7 was nothing but a boondoggle!

One thing that’s out there that you won’t see a lot of people talking about is the vote going on in Ireland today, on the Lisbon Treaty, which the Irish people voted down last year… This Lisbon Treaty changes the way the European Union works, and would amend the Maastricht Treaty… It was intended that all member European Union states would ratify this before now… So, this vote is like the Sword of Damocles hanging over the euro for Monday morning…

You see, the vote will be taken today, counted tomorrow, and announced Sunday, which will cause a knee-jerk reaction to the euro trading on Monday… Right now, the polls show the Treaty will be accepted this time by the Irish. If passed, it goes to Poland and the Czech Republic, and if they vote yes then it would lead to ratification, which would be a good thing for the euro… A no vote would be bad thing, just like it was in June of 2008, when Ireland voted no the first time around.

Yesterday, the IMF issued a report on Currency Composition of Global FX Reserves… And this is quite telling I believe, for the report showed a continued diversification away from the dollar, in the 2nd QTR of this year… I had to laugh last year, when I was on the FXU Currency Tours, and one of the guys there said that the fall of currency reserves allocation of dollars from over 80% to 64%, was nothing but currency appreciation by the euro… I would point to the these IMF reports, when I talked so that I didn’t make a big thing out of it…

Did you see the story in the Wall Street Journal (WSJ) regarding Lehman Brothers? This story has conspiracy stamped all over it, so you know me, I was all over this story like a cheap suit! Here’s the gist of the story from the WSJ… “An examiner is looking into how the Federal Reserve was promptly repaid billions of dollars in cash and securities it lent to Lehman Brothers before the bank filed for bankruptcy, while other creditors are still owed money. The court appointed Anton Valukas, chairman of Jenner & Block and a former U.S. attorney, to explore whether the Fed received improper preferential treatment.”

Chuck again… Now, you, me and the lamppost all know what went on here, just by that description in the WSJ… But, we’ll wait for the report, I guess…

The U.S. stocks really got taken to the woodshed at the close yesterday, and the futures in the overnight markets are weak… So… Guess where the money goes when they sell stocks? That’s right, U.S. Treasuries… So, just about the time you think that the mom and pop’s of the world that went to Treasuries last year in the so-called Flight to Safety, had taken on enough losses, and were going to get out… Here comes the stock correction that I’ve been talking about… Or maybe not… Maybe this is just a couple of days of selling… Or maybe it is the correction…

So, if dollars are flowing into Treasuries, the yields of those Treasuries are going down once again… UGH! This just doesn’t make any sense to me! Didn’t these people that went to the so-called Safety of Treasuries last year, but lost money, learn anything? Or did enough time pass and they’ve “forgotten the pain”?

Oh Heck! This just feeds more air into the Treasury Bubble… Which means that it grows larger and larger, and also means that when it does POP, the losses will be severe and all across the board… I mean, isn’t that what we’ve learned about what happens when a bubble POPS in the past?

Yesterday, the data cupboard was busy… We had the Weekly Initial Jobless Claims post a higher number than was expected, coming at 551,000, VS last week’s 534,000… I always love it when the Jobs Jamboree follows a Weekly Initial Jobless Claims repot… Because… The Weekly report shows that, in this case, that 551,000 jobs were potentially lost last week, and today’s monthly report by the BLS will show something far less…

We also saw that the U.S. Consumer continues to spend more than they make, as Personal Spending was up 1.3%, while Personal Income was only up .2%…

And then finally we saw the U.S. ISM Index (manufacturing) come in weaker than expected, but remain above 50, at 52.6… That’s a weaker number than the August figure which was 52.9… And I would think that someone would have noticed this… But we had the TV on all day, and I had it one when I got home, and never saw mention of this anywhere!

And then there was this… Colleague, Aaron Stevenson, called me yesterday morning, trying to beat the deadline for stuff to add to the Pfennig… He missed… So I have it for today… Remember yesterday morning, when I announced that BOA CEO Ken Lewis was retiring, and that I thought that to be strange?

Well, Aaron was all over this, telling me that he worked for BOA for a number of years, and sat in on meetings with Ken Lewis, and that Ken Lewis was not the kind of person to take “early retirement”… In fact, Aaron says, “that 4 months ago, I heard an interview with Ken Lewis, and he said I’m 62, I’m not ready to retire.” Aaron said that he was a “no surrender, no quit, kind of guy.” Hmmm… I wonder what changed in 4 months? Well, Aaron thinks, and I agree, that he was forced out by the Feds, for speaking his mind on the BOA / Merrill Lynch deal that was brokered by the Fed and Treasury…

OK… To recap… Today is a Jobs Jamboree Friday, and I’m getting the feeling that it will be disappointing VS the forecast of 175,000 job losses. G-7 meets this weekend, and there might be a change in the what they say after each meeting. The ghost of Japanese recoveries, is at work in the U.S. Ireland votes on the Lisbon Treaty today, and the dollar remains well bid VS the non-dollar currencies… Except yen!

And this… On Monday next week, I will be doing an educational presentation for the folks at DTI… You can find out more here: http://www.dtitrader.com/trading_education_MMM_everbank.htm

Currencies today 10/2/09: .8630, kiwi .7130, C$ .9175, euro 1.4550, sterling 1.5850, Swiss .9620, rand 7.72, krone 5.8250, SEK 7.0420, forint 186.20, zloty 2.9185, koruna 17.4750, RUB 30.20, yen 89.30, sing 1.4170, HKD 7.75, INR 47.75, China 6.8265, pesos 13.77, BRL 1.7860, dollar index 77.20, Oil $69.69, 10-year 3.15%, Silver $16.25, and Gold… $996.75

That’s it for today…Time to get working on making this Friday, Fantastico!

Chuck Butler

Source: A Jobs Jamboree Friday!

That means interest rates will remain at artificially low levels for some time to come.

And it also means the central bank’s policymaking arm, the Federal Open Market Committee (FOMC), has finally and firmly cemented its role as the Keynesian death panel for the savers of America.

The malign influence of the late economist John Maynard Keynes is nowhere more destructive than it is in the area of saving. After all, it was Keynes who proclaimed that his ideal economy would see “the euthanasia of the rentier” – an abolishment of the class of people who live off of income from savings.

We know that Keynes’ theories are still rampant in choosing U.S. fiscal policy, which has given us the largest peacetime budget deficit in history. Wednesday’s statement by the central bank’s policymaking Federal Open Market Committee (FOMC) shows that the monetary sector is enthralled by Keynes’ destructive views. As savers and investors, it’s about time we got a voice in this. After all, it’s entirely possible that we don’t want to be killed – not even mercifully – by the FOMC’s zero interest-rate policy and its erosion of our savings.

The current economic situation has the United States in an embryonic – but unmistakeable – recovery. Commodities prices are soaring and the U.S. stocks, as measured by the Standard & Poor’s 500 Index, are up 55% from their March 9 low.

If you were setting monetary policy for such a country, you’d surely make it only moderately stimulative, because the dangers of soaring commodities prices and what looks very much like a stock market bubble are considerable. With the “core” consumer price index (CPI) having risen 1.4% in the last 12 months, that would suggest a Federal Funds target of somewhere in the 2%-3% range. That would constitute a “real” short-term interest rate of 0.6%-1.6%, just below the neutral level of about 2%.

Needless to say, the Fed has a problem.

A No-Win Proposition for Savers

If it moved interest rates back to the appropriate rate quickly, it would cause a huge market panic: A move of 2% or more in the Federal Funds target would hit hard at the market’s confidence.

However, it could begin moving in that direction, perhaps by raising the target by a quarter percentage point – which would take it to a range of 0.25%-0.50%. That would not tighten policy much, but would indicate the Fed’s intention to tighten it in the future.

The market reaction would be considerable; if it knew higher interest rates were coming, the stock market would slow its ascent and commodity prices would stop soaring. The latter would be very good news, indeed, for the U.S. economy and for U.S. consumers generally.

By taking the opposite view, and nailing itself to the zero interest rate policy, the Fed has made it very difficult to raise interest rates when it needs to, which will be pretty soon.  However, there’s another effect – this one affecting savers – which will do even more long-term damage.

Commentators have for years been bemoaning the low U.S. savings rate, pointing out that it causes the U.S. balance-of-payments deficits, making us beholden to China, the Middle East and other places that may or may not be our friends. However, my question is, why the hell should anybody save if they don’t get paid to do so?

In this environment, savers get ripped off in three ways:

• First, they get almost nothing on their savings, except by taking lots of risk.

• Second, the value of their savings gets eaten away by inflation. That’s only 1.4% currently at the “core” level, which purposely excludes more-volatile food-and-energy prices (more on that in a moment). And that’s only if you believe the “official” figures, which I don’t entirely – they’ve been tweaked much too often. However, the rise in commodity prices, the weakness in the U.S. dollar and the beginnings of economic recovery suggest that inflation will be considerably higher in the months ahead. And that’s even if you don’t include the “volatile” food-and-energy prices, as the government doesn’t (Though it should: Real people can’t live their lives without consuming food and energy, and thusly suffer from “real” – and not “core” – inflation).

• Third, after they’re received very little on their money and had their money eaten away by inflation at rate that exceeds their savings return, those savers still have to pay income tax on interest and dividends, even when those returns don’t make up for the inflationary erosion of capital.

The Fed has been running a monetary policy that rips off savers since 1995. That means that the central bank has spent the last 14 years pushing up the money supply at a rate that greatly exceeds nominal gross domestic product (GDP).

So it’s not at all surprising that people don’t save much; they’re being paid not to do so. The Fed’s policy is very convenient for all those who borrow money – from the big banks and investment banks to the homeowners who took out too large a mortgage and can’t service it.

In other words, it’s become a very one-sided game.

Three Strategies for Savers

As savers, we can take several steps. We can agitate, like the “tea party” protesters. It’s about time U.S. Federal Reserve Chairman Ben S. Bernanke stopped basking in his approval by all the Keynesians and felt the anger of real people, whose savings he is destroying.

Apart from that, we can invest in a way that gets around Bernanke’s machinations. Three moves in particular make a lot of sense:

• First, we should save as much as possible tax-free, since the tax system discriminates against us. So max out IRA contributions, education funds, and any other investments that shield part of your holdings from the taxman’s bite.

• Second, we can put our money outside Bernanke’s reach – in foreign markets. The European Central Bank (ECB) at least mildly cares about savers, and has pursued a more careful policy than the Fed. Within the EU, Germany is recovering nicely, partly because it had very little fiscal stimulus, and has almost no inflation. Outside the EU, Japan and Korea are both recovering nicely, and so are worth looking at, as their policies are at least independent. (Japan, under the previous government, had a Bernanke-like determination to ignore the needs of its savers. But that may have changed under the new government).

• Finally, we savers can engage in the ultimate Bernanke protest, and buy gold, silver or the shares of mining companies. Once the Fed reverses its policy, these will be rotten investments. But it’s pretty clear that the Fed is not going to give savers an even deal soon. In that case, if the Fed doesn’t reward us, gold and silver will. The dollar will decline, and gold and silver prices will rise, until eventually the Fed is forced to act. But my bet is the Fed will move very slowly, so we’ll get plenty of warning.

We savers have rights, too. And we also have money.

It’s about time we invested it where its enemies can’t erode it.

Source: The New ‘Death Panel’ for Savers

In its simplest form, the phrase refers to buying the pullbacks whether it’s in the market indexes or individual stocks — as long as they are at some sort of support level. So let’s take a look at most recent dip and the most recent rip over the last week.

For us, it all starts with the short-term index charts. From there we move into the individual stocks, as three out of four stocks generally trade with the overall trend of the market. Lately, that overall trend has been up, and stock investors have been enjoying gains in a big way. In fact, in the last month alone, the S&P 500 has gained nearly 5% as stocks bolstered by signs of economic recovery took back some of the losses they suffered in 2008.

As you can see, support is clearly defined and the full stochcastics are in oversold territory. Those are your clues to get ready. This tells you that you are “In The Zone” and its time to see if individual stocks are showing this as well. Here’s a recent example in Perfect World (NASDAQ: PWRD):

In just a week, this stock rocketed from $36 to $44. That’s a home run in the world of swing trading, and it’s a gain that any investor could have had a chance at by just buying the dips and selling the rips. All you have to do is follow the formula…

What I want you to notice is what they all have in common:

1. All have been pulling back off highs — The Dip
2. All pulled back to at or near the 50-day moving average (the blue line)
3. All have the full stochastics in oversold territory.

So now, what do you do about it? Well, there are two ways to take these trades.

One is to take them right there at a support level — at or near the 50-day moving average with a 10% stop. The other is to wait for the crossover of the pink line as shown to the upside. The latter is the safer trade, however from the dips lows of the 50-day average or a support level is a lot of room that would be missed by waiting for that to occur. This really means that you are paying up for the stock by waiting for the pink line trigger.

Sincerely,
David Grandey

Source: Deciphering this Trader’s Simple Profit System

With this recent rush of upbeat economic news, it’s no wonder commentators are trumpeting the rebound of the U.S. economy.

But I think it’s time to short U.S. stocks.

Shocked?

Don’t be.

What most experts see as a strengthening U.S. rebound, I see as an increasingly dangerous “false dawn” – for these two key reasons:

• An overly expansive monetary policy that’s almost certain to spawn inflation.
• And a record-level budget deficit that will cause interest rates to spike, crimping economic growth.

A Foundation for Trouble

U.S. policies that were intended to combat the financial crisis that broke last year – as well as the recession that’s been plaguing us since December 2007 – have actually inflicted a lot of weakness upon our economic system.

For instance, the federal government has made $11.6 trillion in financing commitments, many of which will saddle us with debt for generations – some of it forever. Outlays of that magnitude in a $14 trillion economy are bound to have lasting implications: Think of the consumer who has a series of maxxed-out credit cards – he’ll make the minimum payments, but the actual balance will never get paid down.

And the foundation for this financial fiasco was actually constructed several years ago.

After the bursting of the 1996-2000 “dot-com” bubble, the U.S. Federal Reserve re-inflated the money supply. That caused stocks to resume their upward march, and as we now know, also inflated a housing bubble of such enormous size that it caused a general financial-system crash when that real estate bubble burst in 2007-08.

This time around, the Fed has been even more expansive. The benchmark Federal Funds Rate was 1.0% in 2002-04. This time it is 0.25%. What’s more, this time around we’ve had a $2 trillion expansion of the Fed balance sheet, a doubling of the monetary base and $300 billion worth of direct central bank purchases of government debt. Given this orgy of Fed expansionism, it’s likely that the onset of inflation – whether it’s in consumer prices or asset prices – will be correspondingly worse. In fact, we’re already seeing that gold prices are once again making a run at their all-time high. And crude oil hovers at about $70 per barrel, a level that would have been unimaginable before 2004.

Now that he’s been nominated for reappointment, U.S. Federal Reserve Chairman Ben S. Bernanke says he will tighten monetary policy in good time. But why should we believe him? If he tries to tighten significantly, he will incur the wrath of the Obama administration and the Democrats in Congress.

Even back during the 2001-04 time frame – when there was an administration in place that claimed to believe in monetary stringency – the Fed didn’t tighten. Bernanke himself was among the most aggressive opponents of tightening. Back in 2002, in fact, when inflation was running at a perfectly respectable 2%, Bernanke actually spun myths about the imminent onset of “deflation.”

Given what we know, it seems that if the current economic bounce shows even the slightest signs of faltering, Bernanke won’t tighten – he’ll pump even more money into the U.S. financial system. Rest assured that the administration, Congress, and much of the media will be cheering his move.

Borrow Now, Hurt Later

If an overly expansive monetary policy was the only problem we faced, it might not be so bad. Unfortunately, there’s more.

Lots more.

Unlike in 2002 – in fact, unlike any other time in U.S. history – this country now has a budget deficit in excess of 10% of gross domestic product (GDP). For fiscal 2009, that was forgivable: We’ve had a major recession, and a shattering financial crisis, which the federal government has tried to battle with aggressive bailout programs.

Here’s the problem, however: The projected deficit remains above 10% of GDP for fiscal 2010, even though no additional bailouts are contemplated and the Obama administration is projecting a modest-but-steady economic recovery.

The result is harder to predict – this country hasn’t travelled down this particular path before. This strategy bears some resemblance to the position Japan found itself in during its so-called “Lost Decade” of the 1990s. But even Japan’s deficit never reached this 10% threshold.

In Japan, the effect seems to have been the gradual abandonment of small business finance, and the resulting starvation of the most critical factor in economic growth – entrepreneurship.

The small-business sector creates most of the new jobs in the U.S. economy. But in a challenging environment, it’s easy to see why this sector gets overlooked. Without political connections or large contracts to hand out, the small-business sector ends up being last in line in the financing queue when the economy faces strong headwinds. Why should banks or other people lend to small businesses when the U.S. government bond market stands as such as huge, safe parking place for their cash?

Interest rates will also become an issue. With the inflationary pressures we expect to see from the overly expansive monetary policy we’ve described, long-term interest rates are likely going to rise anyway. As was the case in Japan’s decade-long malaise, these forces will combine to spark high default rates in the banking system, low or zero economic growth, and a general downward trend in the stock market.

All of this will make it tough for small businesses to obtain the cash they need to grow, meaning this key job-creation engine will have to sputter along.

It’s still early in the game, and there are many factors to consider, so the future economic picture remains a bit murky right now. But my guess is that the bubble in asset prices will be largely confined to commodities, that economic growth after this current initial burst will relapse, and that U.S. stocks will prove to be the same generally unattractive investment that they were in 1970s – the era of the so-called “Nifty Fifty.” If the stock market bubble gets even more exuberant from here, the relapse will be correspondingly more painful.

Profitable Pockets

Despite this dour backdrop, three things are worth remembering:

• First, all U.S. stocks are not created equal. Although I’m saying it’s time to short U.S. stocks, and I see tough times ahead for the key indices, there will always be individual stocks worth consideration, such as the “Alpha Bulldog” stocks I highlight in the Permanent Wealth Investor service.
• Second, the best way to play this looming downdraft – either as a direct profit opportunity or as a way of hedging your current portfolio – is through the use of what I like to call “Stage 3″ investments. An example of one such investment is long-dated “put” options on the Standard & Poor’s 500 Index, which trade on the Chicago Board Options Exchange. If you buy these options when they are way “out of the money” with a strike price far below the current price, in a real bear market (like that of 2007-09), you will see them really zoom up in value as the S&P drops down closer to the strike price, or possibly even falls below it.
• And third, understand that my pessimism about the U.S. market doesn’t apply to every other market around the world. While the monetary problems are more or less global, the budget-deficit problems are not. For instance, you might want to consider investments in Japan, where a recent election should spawn the kind of economic changes that will benefit savvy investors. Germany, too, looks to have avoided the contagion of “stimulitus,” which is why its economy is now viewed as one of the healthiest in Europe. Consider the iShares exchange-traded fund (ETF) entry for each of those two markets: The iShares MSCI Japan Index Fund (NYSE: EWJ) and the iShares MSCI Germany Index Fund (NYSE: EWG). They each warrant a look.

Source: The Two Reasons it’s Time to Short U.S. Stocks

It’s back to business. No more long lunches. No more afternoons painting windows. No more soirees in the evening.

We return to our lonely métier – chronicling the decline and fall of the US economy…and the Anglo-American empire too….

Two bits of news signal the scale of this trend. But first, here’s one two-bit piece of news: the Dow lost 185 points yesterday. Could this mark the beginning of the end for the rally? Yes, it could. Should you be out of US stocks? Yes, you should.

But let’s turn back to our ‘decline and fall’ chronicles…

From Florida, comes news of the first drop in population in 60 years. “Unemployment is soaring,” reports USA Today. “Florida is second to California on foreclosures.”

Yes, dear reader, there is trouble in the sand states…

Florida lost a net 58,000 people this year…for the first time since the 1940s.

Why would that be? We’ll take a guess. Florida is a state where people go to retire. It is where people go when they stop producing and begin consuming. The major industry in the state was housing…building houses for consumers!

But now, the turn has come. Fewer people have money to consume. And those who do are keeping their money in their pockets. We even saw a report in The Wall Street Journal that people are cutting their own hair to save money. They’re also staying put, rather than moving to Florida. So Florida needs fewer new houses…and fewer people to build them.

Second, from national income statistics comes a report that the typical US household has less discretionary spending than at any time in the last 50 years. Why? Americans have no money to spend because they already spent it! Now they’re paying the price. And it will take years – maybe 10 years, maybe longer – before they’ve paid down their debts to more comfortable levels. In the meantime, they are poorer than they’ve been since the Eisenhower years.

Keeping it simple: Our view is that there is a major transition underway. There will be no genuine recovery, not now…not never. That is not to say the world economy is doomed to perpetual darkness and misery. Not at all. What it’s doomed to is a long period of adjustment…with high unemployment, on-again, off-again recession, and desperate efforts by the feds to return to the good old days of the bubble years.

But there’s no going back. It was as if the economy was playing a game of Russian roulette…and then the pistol went off – the debt bubble blew up. Once the bullet left the chamber, the game was over. Recovery? Forget about it. The old economy isn’t going to bounce back; it’s dead.

Still, just because a thing is hopeless doesn’t make it unpopular. The feds are fighting the correction every step of the way. They’re propping up brain-dead companies…and keeping zombie banks going by feeding them the blood of taxpayers. It’s ghoulish…it’s a very scary movie!

Unfortunately, the ghouls vote! And everywhere the feds look there’s a campaign contributor or a lobbyist or a voter…and they all want the A-positive blood of taxpayers. They look to the feds for a transfusion in order to keep living in the style to which they’ve become accustomed…

Just what you’d expect, in other words. And with so much debt in the system, the feds are desperate to raise inflation levels. They must increase the CPI to persuade consumers to spend money rather than save it. Otherwise, the nation risks falling into a deflation trap – the very thing Ben Bernanke has pledged to avoid. So they’ll continue going down that road – towards inflation – until they finally get there. And they’ll keep pressing harder and harder on the monetary accelerator until they finally run into a tree. Again, just what you’d expect.

So, where’s the surprise? We’re on the road to destruction; that’s clear. But it may be a much longer road than most people expect.

Ambrose Evans-Pritchard in London’s Telegraph:

“‘The current financial crisis is unlike any others,’ says the Bank for International Settlements. Lasting damage has been done. The ‘cumulative output loss’ is likely to reach 20pc of GDP in the major economies.

“The message is the same at the International Monetary Fund. ‘The world is not in a run of the mill recession. The crisis has left deep scars. In advanced countries, the financial systems are partly dysfunctional,’ said Olivier Blanchard, the Fund’s chief economist.

“It has certainly alarmed US retail tycoon Howard Davidowitz. ‘As a country we are out of control, we’re in a death spiral,’ he said.

“Jeff Wenniger from Harris Private Bank says an army of baby-boomers have seen their old age plans shattered by the housing bust. Their nightmare is here. They will have to spend less, and save more. ‘Generational destruction of a society’s balance sheet will not rectify itself in a matter of months.’

“‘How about a quarter century?’”

Until tomorrow,

Bill Bonner

Source: Trouble in the Sand States

Super-investor Warren Buffet once said that his investment philosophy was to buy stocks when others were fearful, and to be fearful when others were buying. Right now isn’t the time to be fearful along with the herd; it’s time to stock up on stocks.

As I predicted earlier in the year, right now the market is zooming higher like there’s no tomorrow.

Let’s begin with this chart of the S&P 500, a good proxy for the broader U.S. stock market…

As you can see, shares of U.S. companies have been soaring. In fact, from a low of 667 on March 6 to a recent high of 1033, the market is up a mind-boggling 366 points.

Translation: U.S. stocks have improved a whopping 54.9% in just a matter of months.

The fact is the market made positive moves long before the economy was showing a ton of life. And if you don’t jump in early, you’re likely to miss the best moves.

And now, with the 960 level for the S&P 500 — the top of the resistance range — clearly out of the way, U.S. stocks are now setting their sights on the next big resistance level of 1313, set way back in August of last year.

Now, getting there won’t be a straight line: 300-plus point moves don’t usually happen like that. So there will likely be the occasional, healthy pullback along the way.

But there’s no doubt: From a technical perspective, the 1313 level on the S&P 500 is the next order of business.

And don’t forget: When we make it back to this level, we’re getting very close to the pre-recession highs of 1500-plus. While that’s by no means a done deal, there’s little doubt we’re headed in the right direction at a solid pace.

But it’s not just the market’s technical factors that have me jazzed. The fundamentals are on the right track, too…

Fundamentals Improving Big Time!

For a while now, I’ve said that the housing market got us into this mess and the housing market will get us out.

Well, the facts are in: Housing is beginning to show consistent signs of life.

Sales of existing single-family homes jumped 7.2% in July compared to the month earlier. That’s the largest increase since the National Association of Realtors began tracking data way back in 1999. Plus, it marked the fourth monthly increase in a row.

In other words, the improvement in the real estate market isn’t just a flash in the pan. It’s here to stay.

But that’s not all. Compared to July 2008, home sales were up a solid 5%. That’s the first year-over-year gain since November 2005. And that means the real estate market is showing significant legs, even when dealing with tough year-ago comparisons.

Another positive: The improvement in home sales is geographically broad-based. Take a look at this chart…

As you can see, home sales improved across the board during July. In fact, they’re up 13% in the Northeast, 11% in the Midwest and 7% in the South. Only the West region showed a small 2% decrease.

And it’s not just the real estate market that’s showing solid fundamental action. The broader economy is looking good, too. According to Federal Reserve Chairman Ben Bernanke…

“Fears of financial collapse have receded substantially… After contracting sharply over the past year, economic activity appears to be leveling out, both in the U.S. and abroad, and the prospects for a return to growth in the next year appear good.”

And he’s not alone. According a survey of economists by the Wall Street Journal, 28 of 45 respondents say the recession is already behind us, and 16 say it will end by December of this year.

I don’t know about you, but that’s a hugely bullish factor to me. But there’s more: GDP forecasts are also on the rise. Take a look…

As you can see, economists are calling for a big improvement in GDP over the next year. In fact, even though GDP contracted 6.4% and 1% in the first and second quarters of this year respectively, analysts are looking for improvements for next four consecutive quarters in the 2.1% to 2.8% range.

Bottom-line: Stock prices are zooming higher and are now cleared to take out levels not seen since August of last year. In addition, strong fundamental factors — including an improving real estate market, a huge call for an end to the recession and solid GDP projections — are adding solid foundation to more price surges. And no matter how you slice it, that’s positive for your portfolio.

Best wishes,
Wayne Burritt

Source: Stocks Are Set to Rocket in September

Investors can be excused if the word “October” is one that strikes fear into their hearts.

The trouble is, it’s actually September that deals investors the toughest monthly hands.

That’s September – as in the month that starts today (Tuesday).

After a rally that’s seen U.S. stocks surge 53% from their March lows (including 3.5% in August, alone), “investors are wondering if September will live up to its reputation as the month in which the S&P 500 posts its worst price performance and frequency of decline,” Sam Stovall, chief investment strategist at Standard & Poor’s Equity Research (NYSE: MHP), told MarketWatch.com yesterday (Monday).

Since 1929, September is actually the worst-performing months for stocks, with the S&P 500 suffering an average decline of 1.3% (compared to an average monthly advance of 0.5%), Stovall said.

The Dow Jones Industrial Average – the index that’s more closely followed by retail investors – tells a similar story. In fact, if you look at the Dow over the last 100, 50 and 20 years, September is the only month in which the average monthly performance has been negative, the Bespoke Investment Group concluded in a recent research report.

Over the past 100 years, the Dow has suffered an average decline of 0.96% in September, with a positive month 42% of the time. The average loss widened to 1.23% for the last 50 years and to 1.49% for the past 20.

Fall, in general, hasn’t been kind to investors: Of the 15 largest point declines in the Dow, six have come in October, four in September and two in November (See accompanying graphic).

Given that, investors “may have a reason to fear a setback in September,” Stovall told the news service. “We don’t know whether concerns over the upcoming [third-quarter] earnings reporting season will trigger this anticipated digestion of gains, or if further nervousness emanating from the Chinese stock market over the prospects of a slower-than-expected growth in GDP will cause U.S. equities to trim some of its recent advances, but September is as good a month as any in which to suffer a setback.

Stovall says that Standard & Poor’s investment committee believes that stocks are “are due for a period of consolidation” – Wall Street parlance for a potentially painful drop – before resuming their advance.

Not all Septembers are the same, however, Bespoke Investment’s recent shows. And this one could be particularly rocky.

When the Dow has a positive August, it does well in September more often than not. But when three specific market criteria are met, history shows that it’s best for investors to fasten their seatbelts, since they’re usually in for a rough September, Bespoke researchers found.

And – unfortunately – all three of those criteria have been met this year. Those three conditions are:

• The Dow is in positive territory year-to-date (+719.89 points, or 8.2%).
• The Dow is in positive territory during the past three months (+995.95 points, or 11.72%).
• The Dow is in positive territory in August (+324.67 points, or 3.54%).

Of the 17 times in the past when the Dow has boasted a positive return in all three of those time periods, the index has averaged a 1.73% decline for September, with positive returns for the month just three times. And those three months were each about 20 years apart.

Mark Arbeter, S&P’s chief technical strategist, told MarketWatch that the S&P could fall all the way down to 940 – an 8% decline from the close yesterday (Monday) – before continuing its advance to a fresh recovery high.

Indeed, S&P’s Stovall said that “while past performance is no guarantee of future results, history hints that September certainly has the reputation.”

Not everyone is so bearish, however.

Michael Darda, MKM Partners’ chief economist, this week told Barron’s that the stock market’s strong performance “perhaps [is] telling us that the idea of a painfully slow U.S. and global economic recovery is just plain wrong.”

And even if there is a pullback, it could be both shallow and temporary – because of the huge cache of cash on the sidelines. While it’s true that a record $327 billion in cash has flowed out of money-market mutual funds since March 11, that still leaves $3.58 trillion – down from the high of $3.92 trillion, but equal to 34% of the U.S. stock market’s total capitalization, Mizuho Securities Co. Ltd. Chief Investment Strategist Carmine Grigoli told Barron’s.

In 2002, when the last bull-market run began, money market cash equaled 29% of the stock market’s total capitalization. And it’s nearly double the 19% ratio that was present at the 2007 stock market peak, Grigoli told the closely watched Dow Jones (Nasdaq: NWSA) investment weekly.

And back then, the U.S. central bank wasn’t holding the benchmark Fed Funds rate at a historic low of roughly 0%.

Because cash earns almost nothing today, “as financial conditions improve and fear subsides, sideline cash is drawn into higher-risk instruments such as bonds and stocks,” Grigoli told Barron’s. That’s why we’re in “the early stages of a liquidity-driven bull market that could take stock prices substantially higher.”

After we navigate September, that is.

Source: Forget About October – September is the Worst Month for U.S. Stocks

At least stocks are doing well. The Dow rose another 36 points yesterday. In terms of time, it’s already beat the bounce of ’30… it’s in its 6 th month. In terms of stock prices, it’s still a laggard, however. US stocks are up about 45% from their low of 6,547 on the Dow. By that measure, the current reading of 9,398 falls a little short of the 50% increase registered 5 months after the ’29 low.

Yesterday’s news was a big disappointment for mainstream economists. It’s ‘back to the drawing board,’ says the Wall Street Journal.

The dumbbells were already celebrating the end of the recession. Just yesterday, we reported on a survey of 53 of them. They figured the stimulus was working and the recession was coming to an end.

Even the Fed seemed to think so. The Washington Post headline: “Fed views recession as near end.”

But here at the Daily Reckoning summer headquarters we were doing some more painting yesterday…

… which means, we were doing more reckoning…

We don’t know when the recession will end… but we’re dead sure that those 53 economists interviewed by Bloomberg… and those at the Fed too… don’t know either. Few of them seem to have any idea what is really going on.

And now comes news that the economy is not recovering as planned.

“Even with Cash for Clunkers retail sales fall,” reports the New York Times. Retail sales were expected to go up in July. Instead, they went down.

Bummer.

Economists also expected unemployment numbers to go down. Instead, they went up in July… and last week, 558,000 people filed for unemployment benefits – up from the week before. That brings the total to 6.7 million jobs lost since the downturn began in December ’07.

Oh… and what’s this? Foreclosures hit another record high in July… making the third new record in the last 5 months.

This is a “recovery that only a statistician could love,” says another Washington Post headline.

You can prove anything if you torture the numbers enough. But if you need a job… or need to sell your house… or refinance your mortgage – good luck to you!

And here… in the spirit of summer… of warmth and camaraderie… we would like to offer the above-mentioned economists a little help: Pssst… it ain’t a recession; it’s a depression.

Since 1945, the US economy – and much of the rest of the world economy – has been carried on the backs of American consumers. First, they spent money they earned during the war years. Then, they spent money they earned in the big boom of the ‘50s and ‘60s. And then they spent money they hadn’t earned at all. They borrowed from future earnings… increasing total US debt from just 120% of GDP in the ‘70s… to 370% of GDP in 2007.

In the last 15 years of that period, especially, each time the consumer showed a reluctance to continue spending, the feds rushed to give him more credit. And during the final 5 years – the Bubble Epoque – debt doubled.

Now, the consumer has dug in his heels. He’s not going a step further until he unloads his excess baggage of debt.

Once again, the feds are trying to stimulate him. The Fed’s key interest rate is practically at zero. The feds are pumping money into the economy as fast as they can. And they’ll give a fellow up to $4,500 if he’ll agree to kill his old car. The Cash for Clunkers programs seem cruel to us auto enthusiasts, but they have been popular, all over the world (more below.) But what good do they do?

Even with the stimulus spending… and the stimulating low interest rates… he’s still not willing to add debt. Of course, this is just what happened in Japan. The public sector spent; the private sector saved. Net result: an on-again, off-again recession that has lasted almost 20 years.

That’s a depression. It’s a point where the model no longer works. Look, how could the US economy recover? It’s a consumer-led economy, so the consumer would have to spend more money. But he’s not earning more money. He has no prospects of earning more – not with 10% unemployment and a punky economy. So, the only way he can spend more is by borrowing. Ergo, the only way the consumer economy can grow is by adding more consumer debt. Is that possible? Could the ratio of debt to GDP go to 400%… 500%… to the moon?

Well, we’ve weren’t born yesterday. We’ve been around long enough to know that almost anything is possible.

This morning’s news tells us that the federal deficit through July comes to $1.27 trillion. We didn’t think that was possible. And despite this inferno of new debt… the 10 year Treasury bond yields barely 3.6%. We never thought that was possible either.

So, anything could happen. But generally, government stimulus only works when it is not needed. That is, it only works when it goes in the same direction as the underlying trend… not against it. Just like you can make a sailboat go faster by unfurling the sails, you can speed up an expansion by offering more and easier credit.

But now, the underlying trend has reversed. It’s no longer a credit expansion; it’s a credit contraction. The consumer has had his fill of debt. He’s cutting back on his spending and paying off debt. That’s what the July figures show. That’s been the history of entire downturn. That’s why it’s a depression, not a recession. It’s a major change of direction that will take years to accomplish. Now, stimulus is not only useless – since it is against the major trend – its counterproductive. It delays and contradicts the adjustments that need to be made.

But wait. We know what you’re thinking – that the Cash for Clunkers program is a success, because it encourages consumers to buy. See. Sometimes central planning really works, right? Yes, and if you look no further than the auto sales figures for proof, who can argue? Alas, a centrally planned economy is a perverse thing… where every positive statistic has the crumpled up bodies of tortured numbers buried beneath it. Take away the ‘free money’ from the feds and there’s nothing left. No real increase in demand… just a temporary demand based on a temporary and unsustainable stimulus.

Encouraging people to buy too much was what caused the problem in the first place. Encouraging them to buy more now is not a solution, it’s just a continuation of the same flawed policy of stimulating consumer demand… a policy that has been in place for decades.

But now the wind is blowing in the other direction. The government may not like it, but they can’t stop it.

***

Vandal Economics

“In keeping with the requirement that old engines be
destroyed, mechanics across the country poured sodium
silicate into crankcases and revved engines, causing mass
car death. “It just don’t make sense,” said a
used-car-parts salesman in Dayton, Ohio. In Glenview,
Illinois, mechanics watched a blue 1994 Chevy Lumina van
wheeze and choke for five minutes before stopping. “That’s
a good American GM product,” said service manager Mark
Rolla, “that won’t die.”

Harpers Weekly

Let’s open up the hood and take a better look. Does ‘Cash for Clunkers’ really work, we ask? In answer, we guffaw. Then, we invite dead economists to guffaw with us.

Richard von Stigl, among others, pointed out in 1923 that there is a big gap between real economics and the vulgar economics that drives policy decisions. On the one hand, serious observers study what happens in a pure, natural economy and draw their truths from its crystal streams. On the other, the meddlers distort the economic world so much that the observations of the old economists hardly matter. Downstream from the meddlers’ camp the water is not even fit to drink.

In theory as well as in fact, the planners never know what they are doing:

“The… knowledge of the circumstances of which we must make use never exists in concentrated or integrated form,” began Friedrich Hayek in 1945, “but solely as the dispersed bits of incomplete and frequently contradictory knowledge which all the separate individuals possess.”

A “good” is a good only insofar as it is good to the person who wants it. The public servant – as able and self-less as he may be – has to guess. History and theory tell us what happens; he usually guesses wrong. Only the individual knows what he wants and how to get it. He compares one good against others – using prices to guide him to where he gets the most good for his money. But when the government steps in with its subsidies, it effectively contaminates the stream of price information. Now, the consumer, with no clean signal to guide him, makes mistakes. He may be lured to buy a new car. The central planners may be pleased. They see the effect they desired – more auto sales. But what don’t they see? We invite Frederic Bastiat for an opinion (1850):

“Between a good and a bad economist this constitutes the whole difference – the one takes account of the visible effect; the other takes account both of the effects which are seen, and also of those which it is necessary to foresee. Now this difference is enormous, for it almost always happens that when the immediate consequence is favorable, the ultimate consequences are fatal, and the converse.”

But who listens to Bastiat or Hayek? Ten countries have taken up ‘cash for clunkers’ programs. In Britain the government puts up 2000 pounds to grease the deal… with a total of 300 million earmarked for the program. In America, the ‘cash for clunkers’ program was extended last week, giving buyers a bonus of $3,500 or $4,500 when they turn in an old vehicle. In France, buyers get 1,000 euros toward the purchase of a new car.

Everywhere, the program is hailed as a success. It is widely thought not only to boost auto sales, but to help revive the economy, reduce pollution, cut oil imports and even lower highway deaths. We haven’t heard that buying a new car contributes to weight loss but we haven’t seen the TV news. Even ‘free market capitalists’ such as Larry Kudlow say they like it:

“The cash-for-clunkers rebate program is working. … And the price tag of the program is a mere $2 billion compared with the trillions of dollars Washington has been wasting. So, for once in our lives, Washington spending is giving us a good bang for the buck.”

Bastiat knew better. He described a scene where a boy had broken a shop window. The store’s owner was annoyed, until a foolish economist pointed out that the broken window was a blessing in disguise. It gave work to the glaziers and glass makers. The glaziers then could buy other things… and thus did the whole economy enjoy a bounty from this single act of vandalism.

But wait; Bastiat wanted to know: if you could improve the lot of mankind by breaking windows, why not smash every window in Paris? And if you could improve the lot of mankind circa 2009 by crushing cars, why crush them all? And knock down London and New York too. Think of the boom that would accompany the rebuilding!

Obviously, it doesn’t work that way. Replacing broken windows, or crushed cars, takes resources away from some other uses. This unseen effect is actually greater than the seen effect – the improved market for new cars. Lured by phony price information, buyers send phony signals to the rest of the economy. The automakers produce more cars than they need. Steel, which might have gone to refrigerators is used for car doors. Oil, which might have been used to generate electricity, is used to stamp out fenders. Savings, that might have been invested in new industries, go to prop up an old one.

Kudlow allows himself a peek at the unseen consequences: “… yes, it’s quite possible that government rebates today will steal car sales from next year. But let’s cross that bridge next year… ” Then, he even wonders, briefly, at the obvious foolishness of it… almost as though he were a serious thinker: ‘Well, why not just spend another $100 billion and give consumers checks for everything?’ Or, ‘Why not spend another trillion?’ Well, I don’t want to go there… ”

No one wants to go there. The old economists shake their heads: ‘it’s a fraud,’ they say. The rest of them don’t give a damn.

Source: An Unsustainable Stimulus

Source: Investment News Briefs Thursday, August 13, 2009

Microsoft finds itself in an unusual position of weakness as it struggles to play catch up. The word on the street was that they are throwing themselves at trying to edge Google off its position of strength in the ad market.

This morning we may have heard the “response” from Google. Google is going to be offering it’s own operating system called Chrome. This is the core strength of Microsoft, and going after it is a direct attack from Google.

While much is being made – and will continue to be for a while – of this new software competing with Google, the reality is that Microsoft has been competing with Google for a while now in terms of online applications. It just removed the “beta” tags from its online software of gmail and suite.

Apple (Nasdaq: AAPL) has 50,000 apps on its iPhone app store – this space has been cluttered for some time now.

The question is whether Google’s timing of Chrome is specifically meant to disrupt the roll out of  Windows 7 slated for later this year. By pulling customers away from what looks to be Microsoft’s next big act, Google will be obviously competing toe to toe with the software titan in Redmond.

Any missteps could come back to haunt either company.

Symbols mentioned in this article: MSFT, GOOG and AAPL.

Source: Google Takes MSFT Head on