Fin/Inv

I finally had some time to update my BAA-TYX spread chart this afternoon and, like many of my other indicators, the results are not very inspiring for any remaining bears:

As you can see we had a promising upswing during the drop but since the ramp up any loss of appetite for corporate junk bonds has quickly faded. Risk is still in and bearish sentiment is out.

For the noobs: Bonds are generally classified into two groups - “investment grade” bonds and “junk” bonds. Investment grade bonds include those assigned to the top four quality categories by either Standard & Poor’s (AAA, AA, A, BBB) or Moody’s (Aaa, Aa, A, Baa).

The term “junk” is reserved for all bonds with Standard & Poor’s ratings below BBB and/or Moody’s ratings below Baa. Investment grade bonds are generally legal for purchase by banks; junk bonds are not.

The specific definitions assigned to junk bond ratings by the services help define the magnitude of the risk associated with them. Because Standard & Poor’s definitions are somewhat more comprehensive, they are quoted here:

BB, B, CCC, CC, C: Debt rated BB, B, CCC, CC, and C is regarded, on balance, as predominantly speculative with respect to capacity to pay interest and repay principal in accordance with the terms of the obligation. BB indicates the lowest degree of speculation and C the highest degree of speculation. While such debt will likely have some quality and protective characteristics, these are outweighed by large uncertainties or major risk exposures to adverse conditions.

BB: Debt rated BB has less near-term vulnerability to default than other speculative issues. However, it faces major ongoing uncertainties or exposure to adverse business, financial, or economic conditions which could lead to inadequate capacity to meet timely interest and principal payments.

B: Debt rated B has a greater vulnerability to default but currently has the capacity to meet interest payments and principal repayments. Adverse business, financial, or economic conditions will likely impair capacity or willingness to pay interest and repay principal.

Because a B rating is the single most common rating found in a junk bond portfolio, Moody’s definition of its B rating follows:

Bonds which are rated B generally lack characteristics of the desirable investment. Assurance of interest and principal payments or of maintenance of other terms of the contract over any long period of time may be small.

To resume with Standard & Poor’s:

CCC: Debt rated CCC has a currently identifiable vulnerability to default, and is dependent upon favorable business, financial, and economic conditions to meet timely payment of interest and repayment of principal. In the event of adverse business, financial, or economic conditions, it is not likely to have the capacity to pay interest and repay principal.

D: Debt rated D is in payment default.

I guess I should explain how this affects us equities/options traders.The BAA-TYX chart measures the yield spread between bonds rated one step above junk versus the yield of the supposedly most reliable and safe bond there is, the U.S. 30-year treasury bond. In the past it has been observed that a narrowing of the spread often precedes a rise in equities and inversely that a widening of the spread may be a sign of trouble ahead. Is a big drop in equities always preceded by a widening of the BAA-TYX spread? Well - sometimes it is - but if you parse through this chart you’ll also notice that it doesn’t always pan out this way and that it sometimes lags behind a little. Still, it’s something we want to be on the lookout for in case it does occur.

What does it all mean? What it means is that QE sponsored bullishness continued unmitigated and in full blast. Bond traders are usually a lot smarter than equity traders (let’s face it - most of us are small timers without much of a clue) and I do not see any indication that this trend is about to change any time soon. The BAA-TYX spread keeps narrowing further and further and it’s a visual representation of how quantitative easing is attempting to re-inflate our credit bubble just one last time.

Let’s have one for the road, shall we? Tomorrow we all dine in hell.

Cheers,

Mole

I know - two posts in one day - almost feels like the good ole’ days (when the bears were banking coin). Anyway, I was looking at my VIX chart and suddenly had an epiphany*:

See, if you want to understand how the market works you need to look behind the scenes - and once you look at that you must try to look at what’s underneath. From there you simply forget everything you’ve seen and flip a coin.

Now seriously - look at the chart above. It’s a left/correlation chart between the SPX and the VIX for the past two years. What I noticed is that the VIX seems to become more ‘volatile’ during trend change periods. For instance: Mr. VIX basically pushed straight up during the meat of Primary {1} and then started to flail around sideways right before we got that last leg to the downside. Inversely we’ve seen a straight downward pattern for over six months which then stalled late last year. Since then we have been fluctuating between the 20 and 30 mark, only briefly dipping below 20.

Now also look at that potential fractal right before the ‘oh shit moment’ in August 2008. Mmmmh - does that pattern look familiar to you?

Yes we might get more upside before the pain stops but it seems to me that LONG TERM equities are screwed royally. BTW, did I ever mention to you rats to think long term? Right - I think I might have forgotten…

Enjoy your weekend - and don’t fret about the past two weeks. Think ‘Revenge of the Nerds’… or if you’re the macho type - think Sparta - whatever floats your boat.

Before you run off - here’ s a little supri-iiiise! More evil tees in the works - and more mediums this time. Who would have thought you rats all hit the gym? That’s the spirit - my mean lean army of rat warriors ready to take on the trading establishment.

UPDATE: I just heard that the tees are now live - you guys can place orders as of right now - just click on the image or simply go here. Remember that I don’t make a penny on those - it’s your way of supporting the spirit of Evil Speculator. BTW, there are more colors - poke around.

UPDATE 3:50pm EDT: Hindyomen just brought this to our attention:

Remember three weeks ago when I posted about Jeff Kohler’s warning that there was a bullish McClellan divergence? Well, we’re now on the opposite side of that coin. Plus if you imagine a channel from the top left to where we are now it is reasonable to assume a turning point is coming soon.

Cheers,

Mole

* Look it up

Charting is a bit like playing chess. Every technical analyst commands a particular repertoire of technical patterns, instruments, momentum indicators, resistance/support lines, trend biases, trading tools, etc. In the end we all somehow try to anticipate what will happen next - or at least attempt to consider various scenarios of what could happen at what stage if x happens or y will not. From there you plan your next move - and you better anticipate how the market will react to it. If you get married to a particular idea it’s checkmate in three moves or less. Which happens when you fall in love with a particular wave count and refuse to consider other scenarios.

Good analysts know that in many cases they will be wrong and if they somehow manage to survive for more than a few years the lesson learned is not how often you’re right but what you do when you turn out to be wrong (which will happen regularly - get used to it).

When looking at the current chart in the context of all my complementary tools I have very little confidence in proposing what’s next. Frankly - at this stage it seems we are stuck in complete limbo - or what I call ‘end of second wave limbo’. Let me explain:

As you can see there are various ways of how we could count this pain in the ass of a tape. Maybe we completed Minor 2 yesterday (blue) or will do so after a push into 1,128 (light blue). We all know what should come next and it would make any put holders very happy. However, life and especially trading is usually not that easy. If we push higher from here it’s also very resasonable to count the advance as a motive, which would suggest that we are completing Minute {i} of Minor A (green). This would be followed by Minor B, the first half of which would look to the bears like the onset of Minor 3 to the downside. Which would be tantamount to a bear trap clusterfuck of death star like proportions. Not a pretty picture.

I hate second waves - especially in the past year or so - because more often than not they have turned into A waves which were followed by long and painful short covering C waves a few weeks later. Even if you bulked up at the very top (like yours truly) you still suffered from theta burn by the time you figured out you were on the wrong side of the trade. As I said - not a pretty picture.

So, what to do?

Play it long term. You can’t win this one. News do not matter. Good economic news might actually tank this market while bad news might rally it. Too cynical for you? I really can’t blame you - but read this first. The magic word is quantitative easing (i.e. money for nothing and chicks for free) and it’s what has kept this turd of a market melting up and now holding up in the face of a tumbling Euro (and rallying Dollar).

TA does not matter either. I can post all the wave counts I want - it won’t really help you negotiate the mind fucks they’ll throw at you in between. Come on - how many postings and opinions and comments have you digested in the past few months? Did any of them lead to a successful trade? Rarely - and you know one when you see one as the setup is often too sweet to pass up.

Play it long term. You can’t win this one. They will fake you out if you play the small moves. It’s quite simple: Either we’re wrong with Primary {3} or we’re right. If we’re right we’ll bank a shit load of coin as we are among a small minority. Yes, doesn’t feel like it here, but we all exist in our respective monkey spheres. Trust me - 99% of all market participants think the bull market is back - we are crazy to think otherwise. Or are we?

Play it long term - especially if you trade options and hope for P3. If we’re wrong - well, we’ll know soon enough. It might take a few more weeks to get out of second wave limbo but we will. One way or the other. Once we get verification it’ll be too late to jump into the game as things will move rapidly and you won’t be able to get positioned. The pain you are going through right now is the price of admission - deal with it.

Play it long term.

Cheers,

Mole

P.S.: Did I mention to play it long term?

P.P.S.: OR - play it very short term. Ever heard of Geronimo? No? Your loss…

Obama finds that the tides don’t listen to his beautiful speaking voice.  Foreclosures are being forecast to reach 3 mm in 2010 vs 282 mm in 2009 - remembering that banks are doing whatever they can NOT to foreclose and have to mark to market.  .Gov assistance programs are ending.  Debt loads remain high, and unemployment continues to take a toll. Delinquencies are rising sharply. Meanwhile, Moody’s says that the economy will die if .gov measures are withdrawn too quickly (read “at all” into that). I’m getting awfully tired of all these apocryptic warnings. Can’t “they” see the economic wasteland that is already all around us?

Meanwhile, the AIG hearings are showing that apparently no one was in charge even though Financial Armageddon was the expected outcome. Further, the mysterious NY FED was the source of an email lamenting that they would be unable to keep things secret from Congress due to the sheer number of fingers in the pie. TIck. Tock. Tick. Tock.

EQUITY

Asia was red. Europe is GREEN *(except for Switzerland - how’s that CHF doing? Looks stronger. We have a correlation!) .  The DAX is putting in a floor with apparent overhead resistance at 5600.  All sectors are green except Telecom. This suggests an up day initially for the SPX. The green is between 1% and 2%, so not too shabby.

This is the last trading day of the month, but portfolio window-dressing is already done. Today could be a low volume tug-of-war, it seems. Volumes on the ES have been accelerating since the start of the year and are up around 3.0 mm per day (24 hour less lock up).  SPX volumes remain subdued.

Yesterday, the SPX put a pin down through the 1086 floor - and closed blow it.  TD Pressure says that today should be an up day as it crosses back above the oversold signal line. I’m more interested in the 5 DMA and how it has pushed SPX down. IMO, for an up day to hold and mean something, SPX would need to close above the 5 DMA - which right now is at 1092.55. The “Since AUg 17″ trend line is overhead at 1104ish, and the 50 DMA is still tracking flat at around 1114 - 1114.50 (our upper resistance level from eye-balling the chart).

ES gentle wound its way down until around 1 AM and has since, gently, retraced its way back up to the highs of the session. It looks like a “normal” overnight market with sellers dominating earlier, and buyers coming back in later - but no reindeer games. In this type of market, cyclic TA seems to work well, and we have a bullish cross on the 9 and 34 pMA on the 5 min ES chart. TD pressure has indicated a low risk buy at these levels, with pre-cautionary stop around 1079. I notice that this is just below the 34 pMA and a TD support level at 1080ish. If 1079 is penetrated decisively, then price exhaustion would become active down to 1074.50.  Given the bullish cross, and TD pressure - that is a big IF. Pivots:

• R2: 1115 = would put SPX above the 1114 ceiling. Not impossible, but not likely, IMO.
• R1: 1097 = Certainly would put SPX above the 5 DMA. Looks like it’s in the area of a lot of “peaking” activity over the last 5 trading days.
• Neutral: 1085.75 = Put a stop to the rally into the close yesterday. Looks like ES wants to make it a base camp for an assault on R1. Not there yet though - and there is good resistance at this level. This is also above a lower trend line on the 4hr ES chart, beginning Aug 18 (With a touch Nov 2nd and 3rd, a near touch Oct 2nd, Sep 2nd).  So far that trend line is holding, unlike the one on the daily chart.
• S1: 1068 = Site of the turnaround of the dip from late Nomember. Was also resistance back in the second half of September.
• S2: 1056.50 = The gates to the abyss?

FX

Not much to say here. DXY is moving up, CAD is neutral, JPY, EUR, GBP are mildly weaker. Financial leaders in Europe are still telling us that a strong USD is in the best interests of everyone (who wants toilet paper in their wallet), and that Greece is not an issue. That’s twice they’ve denied it. Third time, and……. I’d worry more about California’s debt.

NEWS

1. Bernanke hearing gets past cloture. Does the icy pain of betrayal by one’s elected officials ever grow numb?
2. The PBOC is worried about inflation - now that they have let it out of the cage, it refuse to behave and they are finding it difficult to “manage the economy”. Who knew?
3. Bankers are bitter at the absence of their annual wine-tasting in Davos and plot long sober hours on how to bring .gov back to heel.
4. US GDP is expected to be driven by factory output, even as commodities are expected to fall.
5. Greek bond yields come back in showing an improvement in confidence that there will be no bailout.
6. The Gates-es do some more good and pledge $10 bb for vaccines for the poorest nations. Future consumers have to come from somewhere, he said cynically.

DATA

Here is the European data from this AM:

http://www.forexfactory.com/

Today is GDP and all the attendant sub-data at 8:30AM EST. 4.7% is expected vs 2.2% prior. Do you know why the saying is ” Buy the rumour, Sell the news”? It’s because traders /gamblers take a position based on their expectations of what the data point will show. When the data comes out, they close their position for a gain or loss. There is a built-in bias to the upside on the saying as well.

Note that Personal consumption is expected to be down to 1.8% from 2.8% prior (and yet GDP is supposed to double? - sure looks like a lot of inventory building is expected).

We also have these two little sleeper items:

• 08:15 FRB Vice Chair Kohn on bank interest rate exposure
• 10:30 Fed agency purchase (Oct 18, 2016 to Jul 15, 2032)

I got an email from the FED saying that they bought $12 bb of MBS in the last week, $12.5 bb gross - which suggests pre-payments of about $0.5 bb in the week. Not yet at the levels expected by the zero hedge article - but something nonetheless. I have seen about $2 bb difference between net and gross in previous months.

On the trading side, I see ES is leveling off its move upward. The 9 pMA is turning down - and is close enough to the 34 pMA to cross over in a bearish cross. However, it looks like flat slow waves into the data. Nothing left now but the white knuckles and grinding teeth of those betting on the numbers. The TA shows more downside support than overhead resistance, all in all, on the 5 min ES chart. It sure looks like a consolidation before a move up. Swim with the current if you’re gambling.  Watch out for the volatility in this news. I’m sitting on my hands until afterwards.

HERE IS A LINK TO MOLE’s POST FROM LAST NIGHT:

http://evilspeculator.com/?p=14397

I’m back in Los Angeles - happily so I might add. Don’t get me wrong, I love San Francisco and I had a lot of fun but - what can I say - I’m a Southern California boy

So, someone today (either gmak or Michael) posted the following chart this afternoon:

Geronimo’s Come Back

Geronimo’s most recent 20 trades, 17 winners and 3 losers.

Now, I haven’t verified these numbers and they might be off. Why haven’t I bothered? Because I frankly don’t care if anyone subscribes at this point. Because geronimo didn’t come back - it never left! This thing has been printing coin for months and if you look at the last six months track record it’s a very consistent winner. And perhaps it’s best if only a handful of people trade geronimo - it’s good to keep a low profile if you’re sitting on a winning strategy.

Quite frankly - I wasn’t even paying attention - I just kept watching it win over and over again. For some reason Eric is MIA and I personally have not kept track - especially during my travels. However, do you guys want to know what’s really funny?

What’s really funny is that we had dozens of subscribers for about three months after we launched geronimo. Then we had one ten day stretch sometime in August where I believe we had 4 or 5 stop outs (with wins in between). Guess what - a week later we had lost about one third of our subscribers. Admittedly we also suffered from technical difficulties a few times as we were haunted by an empty alert problem. However, we fixed it a week later and let everyone know (even the expired subs) - but they didn’t come back.

In the weeks after that geronimo quietly continued to win and bank coin while for some reason more and more subs kept dropping off. Two weeks ago I checked and we had a whopping THREE subscribers left - apparently only a few die-hards had stuck with it and and kept trading the system, no matter what. And that was before I ever even saw this chart. Yes, I kept seeing the signals and traded them as I always do when I was around, but I frankly wasn’t keeping track - after all I’m used to scalping geronimo for months now.

Moral of the Story:

But the lesson to be learned here, my dear stainless steel rats, is that there is a reason why 95% of retail traders lose most of their assets within their first 12 months of trading. Another 4% blows up within the next five years, and there’s about 1% (and maybe less) that actually banks coin consistently.

So, what is the big secret, oh Evil Oracle of Mole?

Three reasons - and actually two of them are related:

1. They don’t have a system with an edge or trade based on their ’superior instinct’.
2. They have a system that might have an edge, but are unable to follow it.
3. They believe you have to be right a majority of the time in order to make money trading the markets.

Number three is something gmak talked about this morning - it’s a long discussion and it’s something we have been trying to drive home for over 18 months now (mostly without much success - you can’t fight human nature). One and two are simply related to discipline. Most people who try their luck in the market are either too lazy (or too stupid) to put in the work necessary to develop or at least copy a working system. And if they actually do find a system (or follow someone else’s) a majority of wanna-be-traders are not disciplined enough to follow even a system with a long term track record.

This is not meant to kick dirt in the faces of the folks who gave up after a few weeks of trying geronimo (despite the fact that we encouraged everyone to think long term). The point here is to learn a lesson, folks - discipline and persistence is a lot more important than intelligence, luck, or even the best technical analysis.

Mole out - see you rats tomorrow.

In times of crisis, leaders often look for an enemy to distract the great unwashed from the growing problems. The President of the US has decided that it should be the Legislature. Bernanke, it seems, has been lobbying senators to keep his job.  The great contradiction yesterday was Geithner saying he had nothing to do with the AIG decision, and a later witness (I forget the name) saying that he signed off on all the AIG transactions.

In the meantime, it’s official: The FED has declared that we are in a recovery. It must be. Ford was profitable in accounting-world. More importantly, this means that lquidity backstops and MBS purchases shoud be on the way out. In my opinion, the risk market has only risen due to that “rising tide”.

China tells the world that there is NO inflation in its country. Clearly, their Central Bank is cloned from Greenspan and the FED who cannot see a bubble when it’s coming out their noses. It seems in Greece that on top of death and taxes, the only other certainty is bribes. Businesses are making decisions to avoid or minimize the amount of payoffs they need to make to do business there. Irony of irones, a judge in Ireland tells a debtor, “But you will appreciate that when parties enter a legal arrangement, if someone loans you money, you have to pay it back.”  German unemployment increase was less than expected. Consumer confidence remains at its previous levels (low, if there are any doubts).

It’s just another day watching the hands of time tell lies. Welcome to the broken clock.

EQUITY

The world is green. Only Canada and Latam are showing red on the Wheel of Fortune. Even the PIIGS are getting a bid this AM. Obama may not be much - but he sure can give a speech! The DAX gapped up at the open, but has been selling off since and almost closed the gap. It looks like a bearish flag being put in.  The current level, around 5660 looks to have been support all th way back to September. It must be the DAX equivalent of SPX = 1086. Industrials, Health Care, and Utilities are the only RED. Materials and Financials are leading.

SPX put a pin through 1086 yesterday, which seems to have lit a fire under the buttocks. It went on a tear upward, to be stopped at the 5 DMA. So far it is looking like a small gap up at the open, but the lying Durable goods number comes out this AM, along with jobless claims. You can be sure that there are a number of gamblers with money on one side or the other - and the low volumes make the swings particularly dangerous.

Today, the “Since Aug 17″ trend line is overhead at around SPX = 1103. The 50 DMA is overhead at the visual resistance point of SPX = 1114. SPX = 1086 has held again (For the 6th time, more or less, since going above on November 9th).

If you look back to SPX daily in 2003 - 2004, you will see that after the ramp off of the bottom, there was a period of sideways range-bound activity from around January 2004 until October 2004, with the TA indicating on each down leg that it migh head lower. My expectation is for similar action for the next few months until liqididty begins to be taken out of the market. One of the reasons is that I believe that the big money has to do distribution - and what better way than to bring in the SHORTS and sell to their panic covering?

One final note on the big picture: On a weekly basis, the trend lines have been clearly broken. TD has a technical support line at 1069.30. If the trend line is to be re-tested (and they don’t have to be before a drop), then SPX = 1121 could be a possibility.

ES rose overnight on Obama’s eloquence, and began a slow sell-off when the silver spoon turned back at midnight. TD has a technical support level (and it was the base for the overnight rise) at ES = 1096. The resistance level is at ES = 1102 (SPX = 1106ish, I believe).  Looks like range-bound trading until 8:30AM EST, to me.

• R2: 1107.50 = Also the potential target for any momentum, since TD has a price exhaustion level there on the 5 min chart.
• R1: 1101 = Moving above this and retesting from above would activate the 1107.50 price exhaustion level and make it an active target.
• Neutral: 1089.75 = Site of some noise into the close yesterday. Looks like it was resistance and support both over the last week or so.
• S1: 1083.25 = ES analog to SPX = 1086, more or less. Definitely not the Maginot line.
• S2: 1072 = Looks like this was the area for a lonely pin at the end of November. It was also resistance on the way up in the second half of September. If SPX = 1086 is breached at some point in the future, I believe that this would be where the bulls would come in to force short covering. (remember Jan - Oct 2004!).

FX

Looks like DXY is going to get a bit of a rest after avoiding the double top.  The 50 DMA at 76.82 looks like a solid longer-term support level, and TD technical support is there as well. The EUR is resisting falling below 1.40 - money is on there being some option bets around that level.  On the 30 min chart, DXY found some support at the pivot at 78.63 - but it hasn’t been able to hold above the last high at 78.814. Lower support is at the pivot at DXY = 78.41.

CAD and GBP are stronger. EUR is flat (more or less), JPY is weaker. Yet the DXY is up. Is it the mightly CHF?  It is weakening. Are those the BIS footprints at the crime scene?

NEWS

Economic recovery is underway in the USA. There is no inflation in China. Russia says that it doesn’t expect country issues in Europe to have an effect on the Euro. Japan says that it won’t suffer a double dip in the first calendar quarter. I can hold my breath for an hour.

Sales of floating-rate corporate bonds are falling off, suggesting that there is less of a worry by investors about inflation. The market seems to believe that rates are going to stay low for a while. Don’t they understand that the FED has been buying Treasuries and that when liquidity is withdrawn, rates will ramp?

Brace for more useless spending as Obama is making jobs his top priority (what was it before?). Nokia shares surge 16% - let’s party like it’s 1999.

DATA

8:30AM EST = Durable goods (remember the fudging last time) at 20% expected versus the adjustment to -0.7% prior.  If I were going to fudge, I would make a statistical adjustment because not many would notice the downward movement that would make the next period positive. Watch out for low-flying reindeer games.

Also, Jobless claims and continuing claims - which has become a bit of a snore-er. 450K expected vs 482K previous. Expect a thrilling appearance by the Birth /Deaths model that attempts to simulate small business activity.

ES is coming up to the top of its overnight range. I like the idea of swing trading between 1102 and 1096.  I would put a stop just above ES = 1103, and look to come back in short around 1107.50;

If we get down to 1096, depending on TA at the time, a trade going long with a stop below 1095 looks like a decent risk /reward trade - with upside around 1101. BTW, the 9 pMA has crossed the 34 pMA on the 5 min chart indicating a bullish cross - even as ES bumps against the pivot at 1101 with TD technical resistance just above at 1102.

I actually meant to post this an hour ago but then received and important phone call. My apologies but right now I’m being pulled in ten different directions. However, I expect things to go back to normal again starting February - so please bear with me.

What I’m seeing right now points towards an inflection point between Soylent Green and Soylent Orange. Since I snapped this chart we’ve pushed up a few more handles but participation is a bit mixed - I’m not ruling out either until I see some follow through in the final hour today.

Highlighted on the chart is the level of pain both bears and bulls have been exposed to in the past three months. It’s been one big whipsaw of hell and it’s wearing everyone out. But let’s also consider the good news here. We bears have been bitching about those ‘damn dip buyers’ swarming in on every drop. Okay, put yourself on the other side of the equation. How about those ‘damn rip sellers’ that have made upside progress an exercise tantamount to clawing your way through a leech infested swamp filled with alligators? It’s always important to see both sides of the equation and believe me - if you’re a retail bull right now you’re not very happy either. The only market participants smiling all the way to the bank since early November are the market makers - boy, did those guys have some fun with all of us

I want to remind everyone to continue being focused on the long term. Obviously we retail traders can neither win the ramp & camp nor the drop & stop games (the latter being my own invention - copyright!!!). And we frankly should not be focused on the short term right now anyway  - which is not only a pain in the ass to trade but is also very time intensive and if you get it wrong once or twice chances are you lose everything you banked previously.

At the danger of sounding like a broken record: Look at this whole thing like a big chess game. Evaluate your options and consider various moves. Project ahead - and consider that the boyz will throw at us truck loads of red herrings, deflections, and misdirections before we see this thing swirl down the collective toilet. Bank on that - and then project out even further. Now you arrive at an Einstein point in time that is probably out at least 9 to 12 months - which will probably be the time needed for all of the tape propping and QE sponsored monkey games to taper out and this turd of a market to collapse under its own morbidly obese weight.

Quick glance at our Dollar odds - these are the short RL odds I posted yesterday. We are now near the 100% RL mark I picked - maybe I was not conservative enough given that I expected a third wave to be in the works. The next one up is 79.24 - if it pushes into that I expect to see at least a quick one day reversal. Would I trade that? Hell no - as I pointed out yesterday, the ole’ greenback is on a run now and carry traders are running around screaming with their hair on fire - deservedly so I might add

Okay, everyone now say out loud:

“Pai’-in”

Gotta love that Cockney accent… if you want to get laid here on the West Coast you better start practicing.

Be smart - shop Evil-Mart

Cheers,

Mole

Apparently something funny happened on the way to the Fed discount window this morning:

Apparently some genius (bless your soul whoever you are) fat fingered the CCI numbers over at Bloomberg. Frankly based on the reports I’m seeing everyone is still confused as to what was originally reported and what the numbers really are - not that anyone on Wall Street really cares. Take this for what it’s worth, but IMNSHO the day the economy actually shows signs of real recovery is when you will see equities tank hard and long (yes, ladies - expect no less).

In any case - what does the chart above show us lowly rats? First up I see a nice solid and clean -2.0 OPX surprise signal to the downside. Not bad, not bad - but nothing to get too excited about - it’s only a good start. What’s much more important to me is the gap down followed by eight consecutive red five minute bars. If you think that’s entertaining then you will have a fun time in 2010. What this shows, my dear ladies and leeches, is how fragile this market really is. A fast drop like that is exactly what happens when there is nobody left with short positions in the market. Nobody left to take profits on the way down. It sucks if you want to get out of the market and there’s no bid - except the Fed of course - the bid of last resort. One sided markets eventually break under their own weight and what we saw this morning is a delicious little appetizer of what’s to come later this year.

Will the big drop happen today or tomorrow? Probably not - these things flail about for a while to shake out over eager weak hands before a trend change finally establishes itself. If you were short last night - congrats - you just banked some royal coin. Take profits now and wait for a snap back which will come - eventually - most likely Monday.

It would not be unreasonable to assume that Mole will relinquish his weekend duties at the local strip bar and will instead  be parsing for short victims a good part of his weekend. Think long term, rats - think long term.

12:52pm EDT: Surprise!!! And I’m not talking about the market

Get them here while they’re hot. BTW, just for the record - I don’t make a penny on those. Decided to have -273 produce them and retain all profits to keep the price low - I know how cheap you damn rats are

In other news - call holders desperately looking for anyone offering a bid. Fed spike monkeys on extended lunch break.

I dedicate this vid to piers over at -273 for putting together those awesome Evil T-s. Move over Pistols - those shirts are more punk than Sid Vicious.

1:33pm EDT: First price goes to Tim L. for buying the very first Evil T. Second consolation price goes to Chris P. Hope you guy wear it with price

By Michael Davey

It’s been a decent week for me, and like any red-blooded trader I’m absolutely dying to book profits. Take meat off the table, protect the gains and party over the weekend like it’s 1999.

Can’t do it. Tie me to the mast. At least until Monday…

Yes, had we not had disappointing jobs data, which kept this rally briefly checked (I’d have sold into a bang-up open had it gone the other way), it would be different. Instead the indices are stable-boring, while underneath the surface growth is quietly driving higher. Growth stocks are leading again (not unusual in January), as they have all week; the Chinese names listed in the US especially.

And then there’s Monday…

The biggest rally days since the March bottom have occurred on Mondays. Nine out of the last ten Monday’s have been up-days (that I have confirmed) and I am looking at un-confirmed data that 16 out of the previous 18 Monday’s were winners.

It gets wilder. I don’t have time to confirm all of the following (blame TransworldDepravity if any of it turns out to be inaccurate ;), but here it is anyway…

Since the March 9th, the Dow has had 30 “up” Mondays (or Tuesdays after a Monday holiday) out of a possible 43. That’s equal to 70 percent. And 16 of the past 18 Mondays being “up” (I just mentioned) equals 89 percent. Then incredibly, 80 percent of all the point-gains since March 9th came on those 30 Monday up-days.

Read that last line again. It’s truly amazing; the stuff conspiracy theories thrive upon;
It must be wrong; I better go check this out and report back

Add this to Mole’s point yesterday about the ISEE and I’m going to speculate the obvious:

Monday we’ll see a strong tape, we’ll see the ISEE hit a 240 trigger and Stupid Lucky here will  bank sick profits and call it a day. The fact that the growth is surging today and the majors are quiet is a big factor, on top of the Monday data, since this is the type of tape I’m used to seeing a day ahead of a big, capping rally.

Monday then I can exit most of this (hedge-off the remainder only after the market begins downward) and begin to relax; focus again on Maverick’s, which may see 30′ surf by mid-week (Jaws in Hawaii might see 40′+ by Monday; this, according to buoy data which is starting to make waves).

Don’t think I’m not going to mention that. If you like your swells big, well, big swells are looming.

I’m shopping for helmet cams as we speak (tough to do when sitting on one’s hands) and planning to emulate Niagara Falls over a barrel; jamming my jetski right into the bowl by Big Wednesday next week.

Good wkend - Beast out!

• Here comes Spain: Spanish banks start to unload property portfolios (WSJ) Some brilliant insight: "Accumulating properties also stopped a sharp drop in prices, avoiding the painful write-downs banks are required to book when the value of their assets falls." The FHA will not be reading this article
• How uou like your strong euro now Europe? After two years of crashing banking systems and economic recession, the euro zone enters 2010 with a full-blown debt crisis (WSJ)
• Treasuries set for worst year since 1978 as U.S. steps up sales (Bloomberg)
• First Brazil now Russia: Finance Minister Alexei Kudrin says Russian stocks "too expensive", nobody cares (Bloomberg). In the meantime Templeton's Mark Mobius, who after a 104% rise is still down relative to 2007 (56% decline in 2008) says "If you compare Russian valuations now with other major countries, it’s not overpriced. There are still opportunities there" One wonders who is pitching their book
• E-mails inside AIG reveal executives struggling with growing crisis (WaPo)
• Just in case you thought the "recovery" was for real, GMAC to demand $3-$4 billion more from the Obama endless bailout fund (Bloomberg)
• More debt supply on deck: $130 billion in Build America Bonds to be sold quickly as congress is set to change subsidy rules (Bloomberg)
• Geely bid for Volvo makes Goldman-backed boss disregard Toyota (Bloomberg)
• Paris plus Texas equals an American dream of striking oil in France (TimesOnline)
• Fidelity and Vanguard lead list of worst performing mutual funds of the decade (Bloomberg)
• Keeping the Yemen story on the front page: look for [WMDs/nukes/the great Kindle channel stuffer] to be found there soon to quite soon (Bloomberg, WaPo, NYT)

Submitted by James Bianco of Bianco Research

•    The Wall Street Journal - Fed Proposes Tool to Drain Extra Cash
The Federal Reserve on Monday proposed selling interest-bearing term deposits to banks, a move the U.S. central bank would make when it decides to drain some of the liquidity it pumped into the economy during the financial crisis. The new facility is intended to help ensure that the Fed can implement an exit strategy before a banking system awash with Fed money triggers inflation. Fed Chairman Ben Bernanke has described term deposits as “roughly analogous to the certificates of deposit that banks offer to their customers.” Under the plan, the Fed would issue the term deposits to banks, potentially at several maturities up to one year. That would encourage banks to park reserves at the Fed rather than lending them out, taking money out of the lending stream.The central bank said the proposal “has no implications for monetary policy decisions in the near term.” “The Federal Reserve has addressed the financial market turmoil of the past two years in part by greatly expanding its balance sheet and by supplying an unprecedented volume of reserves to the banking system,” it said. “Term deposits could be part of the Federal Reserve’s tool kit to drain reserves, if necessary, and thus support the implementation of monetary policy.” Michael Feroli, an economist at J.P. Morgan Chase, said “it’s another step forward in the exit-strategy infrastructure, but it’s been well flagged in advance, so it’s not a surprise.” When Fed officials decide to tighten credit, they would likely use the term-deposits program ahead of — or in conjunction with — adjusting their traditional policy lever, the target for the federal funds interest rate at which banks lend to each other overnight. The Fed also said Monday that its balance sheet rose slightly to $2.2 trillion in the week ending Dec. 23. The Fed’s total portfolio of loans and securities has more than doubled since the beginning of the financial crisis. As part of its efforts to fight the downturn, the central bank is buying $1.25 trillion in mortgage-backed securities, a program it says will end in March. The Fed now holds $910.43 billion in mortgage-backed securities, it said Monday.

•    Bloomberg.com - Fed Proposes Term-Deposit Program to Drain Reserves
The Federal Reserve today proposed a program to sell term deposits to banks to help mop up some of the $1 trillion in excess reserves in the U.S. banking system.  The plan, subject to a 30-day comment period, “has no implications for monetary policy decisions in the near term,” the central bank said in a statement released in Washington. Fed Chairman Ben S. Bernanke is preparing tools and strategies to shrink or neutralize the inflationary impact from the biggest monetary expansion in U.S. history. Central bankers are also conducting tests of reverse repurchase agreements and discussing the possibility of asset sales. Term deposits may help the central bank “assert operational control over the federal funds rate” once officials decide to lift the overnight bank lending rate from the current range of zero to 0.25 percent, said Lou Crandall, chief economist at Wrightson ICAP LLC in Jersey City, New Jersey. Excess cash “would be locked up” rather than put downward pressure on the federal funds rate, he said.The Fed won’t begin raising interest rates until the third quarter of 2010, according to the median estimate of 62 economists surveyed by Bloomberg News in the first week of December.

•    The Financial Times - Fed to offer term deposits to banks
The US Federal Reserve plans to offer term deposits to banks as part of its “exit strategy” from the exceptionally loose monetary policy used to fight the recession. In a consultation paper released on Monday the Fed said it planned to change its rules so that it could pay interest on money locked up at the central bank for a defined period. The Fed added that the well-flagged rule change - designed to allow it more influence over the $1,100bn in excess reserves held by banks - was part of “prudent planning. . . and has no implications for monetary policy decisions in the near term”. It is one of a number of measures that has been outlined over the past few months by Ben Bernanke, chairman of the Fed, as an option to drain liquidity from the financial system in a manner that protects the economic recovery while heading off the threat of inflation.

•    The Federal Reserve - Notice of proposed rulemaking; request for public comment.
The Board is requesting public comment on proposed amendments to Regulation D, Reserve Requirements of Depository Institutions, to authorize the establishment of term deposits. Term deposits are intended to facilitate the conduct of monetary policy by providing a tool for managing the aggregate quantity of reserve balances. Institutions eligible to receive earnings on their balances in accounts at Federal Reserve Banks (”eligible institutions”) could hold term deposits and receive earnings at a rate that would not exceed the general level of short-term interest rates. Term deposits would be separate and distinct from those maintained in an institution’s master account at a Reserve Bank (”master account”) as well as from those maintained in an excess balance account. Term deposits would not satisfy required reserve balances or contractual clearing balances and would not be available to clear payments or to cover daylight or overnight overdrafts. The proposal also would make minor amendments to the posting rules for intraday debits and credits to master accounts as set forth in the Board’s Policy on Payment System Risk to address transactions associated with term deposits.

Comment

We believe the proposal of this new tool signals the Federal Reserve is still flailing around trying to look busy so everyone is assured they have a plan.  The fact is they have no plan and are still throwing everything on the wall to see what sticks. From the November 4 FOMC minutes:

Participants expressed a range of views about how the Committee might use its various tools in combination to foster most effectively its dual objectives of maximum employment and price stability. As part of the Committee’s strategy for eventual exit from the period of extraordinary policy accommodation, several participants thought that asset sales could be a useful tool to reduce the size of the Federal Reserve’s balance sheet and lower the level of reserve balances, either prior to or concurrently with increasing the policy rate. In their view, such sales would help reinforce the effectiveness of paying interest on excess reserves as an instrument for firming policy at the appropriate time and would help quicken the restoration of a balance sheet composition in which Treasury securities were the predominant asset. Other participants had reservations about asset sales–especially in advance of a decision to raise policy interest rates–and noted that such sales might elicit sharp increases in longer-term interest rates that could undermine attainment of the Committee’s goals. Furthermore, they believed that other reserve management tools such as reverse RPs and term deposits would likely be sufficient to implement an appropriate exit strategy and that assets could be allowed to run off over time, reflecting prepayments and the maturation of issues. Participants agreed to continue to evaluate various potential policy-implementation tools and the possible combinations and sequences in which they might be used. They also agreed that it would be important to develop communication approaches for clearly explaining to the public the use of these tools and the Committee’s exit strategy more broadly.

The Federal Reserve first hinted at term deposits almost two months ago, although exactly what they were talking about was left vague until now.

Remember that the Federal Reserve has to withdraw over a trillion dollars of excess liquidity.  The easiest way to do this is to sell hundreds of billions of MBS, Treasuries and agencies.   As the bold highlighted passage above implies, they are scared to death of doing this, so they propose complicated schemes to withdraw liquidity like reverse repos and now term deposits.

We have argued that these schemes will not work.  They cannot be done in the sizes necessary or enough to even matter.  The Federal Reserve could possibly drain tens of billions of dollars via these schemes, but collectively that will amount to a rounding error when the goal is to withdraw over a trillion in excess reserves.

The Federal Reserve does not want to admit defeat, so they continue pursuing these strategies that will not make a difference.  We believe they also do it to “look busy” as they are taking measurements and notes as to how to withdraw all the liquidity they have pumped in.  They think this will give the market comfort that someone is on the case and that inflation expectations will not get out of control.  The market is not buying this.  Inflation expectations, s measured by TIPS inflation breakeven rates, are going vertical.

Reinvestment Risk

As to term deposits, the Federal Reserve is proposing an illiquid short term instrument for banks to invest in.  Banks would buy these instruments and “lock up” the excess reserves they now have.  This would have the same effect as draining excess reverses.  The maturities of these instruments would be as long as one year.

It is unclear if there will be a secondary market for these instruments, and if so, how liquid it will be.
Without a secondary market, buyers of these instruments face huge reinvestment risk.  The future course of short term interest rates is arguably to the most uncertain it has been in decades.  Will the Federal Reserve stay near zero until 2012 or will they be forced to raise rates in the first half of 2010?  Given all this uncertainty, who wants to lock up money in something that cannot be sold before maturity?  This is especially true given the Federal Reserve’s statement that the “maximum-allowable rate for each auction of term deposits would be no higher than the general level of short- term interest rates.”

The general level of short-term interest rates is set on known instruments that have generations of history and active secondary markets.  If the Federal Reserve wants to introduce a new, and wholly unknown instrument with an uncertain secondary market and offer no interest rate premium, then we cannot see how this will work beyond a token amount after some arm twisting to get them sold.  The Federal Reserve will have to offer a premium for uncertainty and illiquidy to make this fly in any major way, something they said they will not do.

Complicated Is Simple

The Federal Reserve owns 80% of AIG.  With each passing day it looks like the Federal Reserve is adopting AIG Financial Product’s business practices.  That is, when faced with a financial problem, they create complicated tools (like CDS).  When critics says these new products will not work, tell them they do not know what they are talking about and create even more complicated tools to dazzle everyone.  Once the tools are so complicated that no one understands them, you will be hailed as an expert with no peer.  You might even be named TIME’s Person of the Year.

It appears that even after thoroughly dominating the US legislative, judicial and executive branches, the long tentacles of the squid have been no better than the Mongolian hordes at overcoming the Chinese Wall (which is ironic seeking how easy it is to ignore the same construct internally between the firm's prop and flow traders...and yes, we will be posting our response to Goldman shortly, we have not forgotten). In the meantime, half a world away, a small Chinese power generator, Shenzhen Nanshan Power, is blatantly refusing to honor contracts with Goldman Subsidiary J. Aron for $80 million in derivative losses, and it appears that China itself has decided to stand behind the small company.

Reuters reports:

Shenzhen Nanshan Power (000037.SZ) (200037.SZ) said in a statement that it received several notices from J. Aron & Company, a trading subsidiary of Goldman Sachs (GS.N), for at least $79.96 million as compensation for terminating oil option contracts.

"We will not accept the demand by J. Aron for all the losses and related interests," said Nanshan, in line with the stance it took last December.

"We will try our best to negotiate with J. Aron and resolve the dispute peacefully...but the possibility of using a lawsuit can not be ruled out when talks fail," it added.

"J. Aron told us in one notice that if we do not pay the money, they will reserve the right to launch a lawsuit and will not send us any further notice."

The State Assets Supervision and Administration Commission said in September that it would back state-owned companies in any legal action against the foreign banks that sold them oil derivatives, which resulted in losses when oil prices dived late last year. [ID:nPEK14474]

A Beijing-based Goldman Sachs corporate communication official declined to comment.

Not sure what Hank Paulson's former firm would comment: alas the Chinese communist party still has to be filled with Goldman alumni. That being said, this is precisely the track that Goldman has been focusing on for the past few years. At this point, the firm realizes all too well that dominating power politics in China in the near futures is far more critical than complete control over D.C., as there is little the world's most important company can do domestically in the context of taxpayer capital transfer without a full fledged revolution.

h/t Sean

Two months ago Bloomberg's Jonathan Weil brought up the very relevant topic of fair value divergences on bank balance sheets courtesy of SFAS 107 and lax accounting firm standards (some more lax than others). Zero Hedge immediately followed up on this theme and presented a comparative analysis of various bank asset shortfalls, speculating that certain accounting firms are doing their best to do an Arthur Andersen redux for Generation Bailout. On October 15 we said: "Just what about the economic environment has given Citi auditors KPMG the flawed idea that the bank's loan can be easily offloaded with virtually no discount? And just how much managerial whispering has gone into this particular decision. If one assumes a comparable deterioration for the Citi loan book as for the other big 4 firms, and extrapolates the 2.8% getting worse by the average 1.5% decline, one would end up with a 4.2% Book-to-FV deterioration. On $602 billion of loan at Q2, this implies a major $25 billion haircut. Yet this much more realistic number is completely ignored courtesy of some very flexible interpretation of fair value accounting rules at KPMG. Maybe Citi and its accountants should take a hint from Regions Financial CEO Dowd Ritter who carries the FV of his $90.9 billion loan book value at a 25% discount." Today, finally, after a two month delay, these two articles seem to have finally made the inbox of the financial gurus at the Wall Street Journal, which, in an article named "Accounting for the bank's value gaps," says: "can investors count on consistency when it comes to bank accounting? As many banks struggle with piles of bad loans, it appears some auditors are being stricter than others when assessing their true value." Way to be on top of that ball WSJ/Mike Rapaport. Nonetheless, we are happy that this very critical topic, is finally starting to get the due and proper, if largely delayed and uncredited, attention it deserves.

Rapaport says:

Among the top-25 U.S.-owned commercial banks, those five Ernst and Deloitte clients accounted for five of the six biggest gaps between fair value and cost as of Sept. 30. The average gap among Ernst and Deloitte clients in the 25-bank group was about 6%; among clients of PriceWaterhouseCoopers and KPMG, it was about 2%.

Those differences can affect how investors view a bank's loan portfolio, and could have a concrete effect on regulatory capital in the future. The Financial Accounting Standards Board is considering changes in banks' accounting for loans and may require them to carry loans on the balance sheet at fair value instead of cost.

If that happened, the current fair-value declines could reduce shareholder equity and regulatory capital—in some cases, to levels regulators would find troublesome. At Regions, the $16.9 billion gap between its loans' fair value and carrying value would wipe out its $13 billion in Tier 1 capital using a fair-value balance-sheet standard. Huntington, Key and M&I would see Tier 1 capital slashed to low levels. SunTrust would see a major Tier 1 reduction also.

Rapaport even provides a fancy graphic, which is eerily reminiscent to the one posted on ZH 10 weeks ago.

WSJ:

ZH:

On the other hand you have Pimco (see prior post) claiming that investors can't go wrong by throwing their money at banks and their thoroughly mismarked balance sheets (and facing massive debt rollover risk: if rates really skyrocket as MS expects, we wish banks the best of luck as they face a maturity crunch. Has it occurred to anyone that banks are hording cash simply to be able to repay debt as it matures instead of refinancing? We will have quite a bit more to say on this topic very shortly). In the meantime, we lament the complete ignorance by the investing public of anything that is based on fundamentals (the government will bail them out after all), with only momentum and mass melt-up hysteria determining investing decisions.

True, the decade is not really over, but no one called 1930 the "last year of the 20's," and given the reflective mood that seems to grip all of Western society whenever a year ending in "9" draws to a close, well, we thought we'd better embrace the trend now so that when some idiot with a pair of glow-in-the-dark "2010" glasses with holes in the zeros for his eyes tries to convince us to watch Roy Scheider over and over again in a celebratory, all-day, marathon screening of "2010," well, we can say we gave at the blog.

Instead, and in conjunction with your many suggestions, we took the opportunity to go back over Zero Hedge's posts and see what moved you, with an eye towards getting a sense of what Zero Hedge wants to read.  The results were quite interesting.  We thought readers would find it engaging both as a sort of "year in review" post, and, perhaps, in finding old material missed the first time around (or before the discovery of Zero Hedge).

Though this is by no means a comprehensive list, and we have omitted a number of "big hit count" posts that may have repeated the subject matter of those listed here, or otherwise be dull (what weighty relevance could our T-Shirt post have?) the list below represents a good sampling of some of the most popular articles, reproduced here in (very rough) ascending order of popularity:

One thing we learned very quickly is that, as often as not, title is a strong determiner of post popularity on Zero Hedge. "Tiny Mauritius Tells US To Shove Its Dollar, Buys 2 Metric Tons Of Gold From IMF At $1,115 An Ounce" was one such.  The news that a small island was buying gold en masse hit all the hot buttons:  Gold.  Banana republics. The dollar as a reserve currency.  (The swimsuit picture might have helped too).

Obviously, the FDIC has been a frequent target of our curiosity.  Along with increasingly obvious signs of an impending nervous breakdown in Sheila Bair's on-camera appearance, the recent dip of the Insurance Fund into red ink prompted "FDIC Discloses Deposit Insurance Fund Is Now Negative," which, while unsurprising to those of us who have been watching for some time, was a good reminder that when you base insurance rates on something other than real actuarial data (like say, the impact those rates might have on a bank's bottom line) you get bankrupt insurance [companies|funds].  Of course, since the FDIC can "literally never run out of money," none of that really matters.  Right?

One thing leads to another, so it's not surprising that "Peter Costa: 'The US Government Will Be Totally Bankrupt In A Year And A Half'" ends up right next to Sheila in the popularity list.  Government spending is, of course, an important topic to Zero Hedge readers.  (Also, you seem to like videos from CNBC.  We aren't sure what to make of this).

We were amused to no end on discovering that a CNBC video re-post was just below "CNBC Viewership Plunges 50% In October" on the popularity list.  To be fair, Zero Hedge has relentlessly hounded the bag of schnitzel that is CNBC on the ratings issue.  This particular post prompted an angry call from a fairly senior executive in CNBC's public relations arm to our never-complaining but often beleaguered (and uncompensated) Executive Vice President of Answering the Hot-line wherein the CNBC exec berated our hero for not calling him directly for comment before printing and accusing Zero Hedge of being a shill for the Fox network.  When asked if the figures discussed in the post were inaccurate CNBC exec reportedly paused before intoning: "Well, that's not the point, is it? You are comparing against our biggest ratings ever at the beginning of the crash!"  Yes.  And?

Huge selloffs often result in the dusting off of some version of "The 'Money On The Sidelines' Fallacy."  As a bit of silver lining lore, it is looking pretty tarnished.  That didn't stop our examination of it from being one of the top posts of the Summer.

A constant and early debate at Zero Hedge was the viability of a philosophy that included a wealth of Deep-dive analysis as a mainstay of our editorial strategy.  Would an audience entertain repeated and highly technical postings day after day and keep coming back for more?  Or would we drive away the interest if we did not dumb down the content.  As "deep-dive" goes, and begging the audiences pardon for the shameless self reference, my occasional pairings with Geoffrey Batt tend to peg the Zero Hedge complexity meter into the red with a combination of legal and financial wonkism.  "Is The Fed Facing Margin Calls From European Banks?" was no exception.  A hybridized subject matter including AIG, the circumventing of banking regulation, margin calls and backstopping by the Federal reserve combined to propel what was otherwise a highly technical post to one of the top 25 in Zero Hedge history, despite it being less than a month old.  Apparently, you Zero Hedge readers don't need "dumbing down" to remain interested.

It would be entirely impossible to catalogue a list of popular (or influential) posts at Zero Hedge without including "Is A Case Of Quant Trading Sabotage About To Destroy Goldman Sachs?" in a prominent spot.  Again, a combination of some classic Zero Hedge hot buttons (Goldman Sachs possibly influencing a young and impressionable U.S. Attorney, High Frequency Trading and the term "market manipulation") conspired to stress our servers.

Gold is a consistently popular theme at Zero Hedge so, in last month's runup, it wasn't hard to make some predictions a la "Is Gold Set To Hit $1,200 Within 24 Hours?"  Alas, we missed our call by 10 days.

Direct intervention in the equity markets by the Federal Reserve is a big "no-no."  But who cares when easy credit from the Fed can be used by primary dealers to go on a equity buying spree? We explored the answer to that question in "An Overview Of The Fed's Intervention In Equity Markets Via The Primary Dealer Credit Facility."  It was another highly technical (and yet highly popular) posting.  Kudos to you, oh, Zero Hedge reader of great complexity thirst.

We loves us some Janet Tavakoli.  So do you apparently, as the widespread interest in "Janet Tavakoli On Why Meltdown Risk Now Is Greater Than It Was In 2007" aptly demonstrated.  But then, who can fail to enjoy a firebrand like Tavakoli when she prompts the likes of Goldman Sachs to distraction?

One measure of Zero Hedge's success is the almost daunting stature of the many collaborators and guest posters our pages attract.  Articles with the likes of David Rosenberg as collaborators are, as one would suspect, intensely popular.  "The End Of The End Of The Recession" was no exception.

Need we insult you by explaining the popularity of "A Zero Hedge Petition: Break Debt Habit, Freeze The Debt Ceiling"?

It probably isn't a surprise that an article about phantom Treasury purchasers would be among Zero Hedge's top posts of all time.  That an article less than a week old would top many others with months of clicking under the belts already is, however, impressive.  Witness the massive click fest that was "Sprott Calls The Fed "A Ponzi Scheme" As Half A Trillion In Treasury Purchasers Are Unaccounted For".

The difference between real and nominal returns is oft ignored when the mainstream media engages in economic analysis based on equity prices.  Hence, our "DOW 10,000!!!! Oh Wait, Make That 7,537" got quite a lot of attention.  Never to be left out of the fun, the mainstream press has seemingly adopted the theme (10 weeks later).  We aren't holding our breath for attribution.

The Swiss Franc was redeemable in gold up until the year 2000.  Whatever else they are, the Swiss are stability obsessed.  Unsurprising, then, that "From Switzerland With No Love - Wegelin Bank Says Goodbye," a review of Wegelin's decision to abandon investment in the United States, drew so many Zero Hedge readers in.

As you might imagine, we hear a number of theories on why the Dollar is in a secular decline.  Still, our own analysis "Here Is Why The Dollar Is Now Effectively Worthless," used the apparently winning combination of QE and reserve analysis to wonder how anyone could ascribe a positive value to the fiat currency any longer.  Like it or not, you apparently enjoyed the discussion, as this post sailed effortlessly into our top ten of all time.

Closely behind was "Thousands Of Rusting Ship Hulls Are A Fitting Tribute To The Speculative Market Bubble," a bit of analysis that seems to have prompted a gaggle of writers worldwide to take a keen interest in satellite photos of idle shipping and GPS tracking sites for the world's mercantile fleet.  Of course, the obligatory flood of copy-cat analysis by more mainstream outlets followed hard upon.

My personal pick for best Zero Hedge post of all time "How The Federal Reserve Bailed Out The World" is also in the top five. I cannot imagine a forum in which this sort of analysis would ever find a public airing, or a place where readers could obtain a deeper understanding of the global interplay between central banks than is exemplified in this post.  Again, the fact that readers had a voracious appetite for the piece is a reminder than depth is not anathema to readership.

There is no way that, after a mere three days (and over the holidays no less),  "Brace For Impact: In 2010, Demand For US Fixed Income Has To Increase Elevenfold... Or Else" should be in the top four.  It is a deep, highly complex and analysis laden post.  True, there are colorful graphs, but even repeated readings by CNBC's color addled anchors could not explain the massive readership that hit this post on the afternoon of Christmas Day while the Christmas Ham (or non-denominational family dinner) was cooking in the other room.  Just, wow.

"Goldman Sachs Responds To Zero Hedge."  Yeah, so that was kind of popular.  Modest prevents us from further comment.

Arguments for the secrecy of the Federal Reserve, and pleadings for its continued independence, are always a big draw.  Still, we were surprised by the absolutely massive response to "Racketeering 101: Bailed Out Banks Threaten Systemic Collapse If Fed Discloses Information."  Massive enough, in fact, to make it the second most popular post on Zero Hedge.  Ever.

Number one "Shadowstats' John Williams: Prepare For The Hyperinflationary Great Depression" probably bears no further comment.

It has been a dauntingly popular year.  We look forward to the next one.  Join us? (Or die).

For some reason Zero Hedge is prone to take a great deal of heat (both directly radiated and reflected) whenever we opine on the (rather obvious to us) prospect that interest rates might actually (quelle surprise) rise in this environment.  Today, rather than engage in "we told you so" gloating, or endure the repetitive pleadings of commentators that this or that Treasury auction was really a success if you just look a little deeper at the figures, we'll just quote Bloomberg quoting other fixed income observers on today's auction of two years, in an article "ambiguously" titled "U.S. 2-Year Yields Highest Since October After $44 Billion Sale."

Treasury two-year note yields reached the highest levels since October as an investor class that includes foreign central banks bought the least of the debt in five months at today’s record-tying $44 billion auction.

 

Indirect bidders purchased 34.8 percent of the notes, the lowest amount since July, and below the average for the past 10 sales of 45 percent. Treasuries of all maturities have fallen 3.6 percent this year, according to Bank of America Merrill Lynch indexes. That would be the worst performance since at least 1978, when Merrill began collecting the data.

We aren't really sure how this will be spun into a "good thing,"™ but we are sure that someone will find a way.  Back to you, CNBC.

• Morgan Stanley sees the 10 year at 5.5% in 2010, Goldman Sachs at 3.25% - someone's prop desk is going to get spanked (Bloomberg)
• Tanker freight rates to drop 25% as 26-mile long line of idled tankers runs out of fumes (Bloomberg)
• Deflationary side effects: Japan Finance Minister admitted to hospital (Bloomberg)
• Ferguson - The decade the world tilted east (FT)
• Summers - The man who blew up Harvard's portfolio, has set his sight on the US next (WSJ)
• Buffett doing the patriotic thing and firing 21,000 employees of companies that did not get taxpayer bailouts (Bloomberg)
• Everyone confused how to spin a possible (but not certain) 1% holiday retail bounce into fabulous news after last year's retail rout (NYT)
• Mortgage anxieties mean Fannie-Freddie limbo as Fed pulls back (Bloomberg)
• Yuan forwards retreat after Wen rejects appreciation calls (Bloomberg)
• Isn't this man in jail? Conrad Black discusses the dismal decade. He sure has his reasons (NationalPost)
• Bear Stearns parties on as banks scrap events (Bloomberg)
• Internet sales tax scofflaws cheat state (LA Times)
• Is NYMag becoming a blog? The Wasserstein holding tries to boost Grant's subscription sales (NYMag)

One of the key observations of 2009 has been that Primary Dealers, courtesy of their access to the Primary Dealer Credit Facility, and, of course, to the Discount Window, are the critical cog in the Fed's plan to push markets ever higher. In a fashion, the banks that make up the PD community are the designated proxies of the Federal Reserve, allowing it to execute its trading strategy when its own traders at 33 Liberty are having a Starbucks break. As the PDs can pledge any worthless asset to the Fed, for which they get a dollar equivalent of 100 cents on the dollar, the PDs can leverage whatever toxic residuals they have on their balance sheet massively without even using explicit leverage, merely thanks to the Fed's lax standards in accepting practically any collateral. We have had occasional glimpses into what "assets" make up the tri-party repo system that is the backbone of the US financial system, but absent a full blown evaluation and transparency of the Federal Reserve, only the Fed (and specifically its New York branch) and Jamie Dimon really know the state of affairs when it comes to pledge collateral. However, there is some information that we can glean on the broader sense of risk within the Primary Dealer community, which is possible courtesy of the NY Fed's disclosure of the PD's transactions and net holdings by various asset classes. Our focus in this post are the Primary Dealers' transactions and holdings in US Treasuries.

The first chart below summarizes the weekly volume of all treasury transactions. After peaking at about $600 billion weekly, the 6 month transaction Moving Average declined by nearly $200 billion after the collapse of Lehman Brothers. And even as the market has gradually revived, the 6MMA is still about $100 billion below the past 3 year's average. Note the spike in Treasury transactions in the September 15, 2008 week: the $811 billion traded that week was the third highest weekly total ever. In the year since then, the peak has been far lower at $550 billion. It appears that the reduced volume in stock transactions is being mirrored by Primary Dealers in their bond purchases and sales.

A more granular read of the data, with a stratification by various Treasury maturities, indicates that there has been a material shift in the trading of Treasuries with a 3 - 6 year maturity interval in favor of T-Bills, where trading has nearly doubled from the long-term average.

When one looks at net holdings of US Treasuries within the Primary Dealer Community one can notice that since the market peak in 2007, when PDs held a net short position of almost ($200) billion, dealers have built up an almost $200 billion buffer, with the most recent net holdings standing at just over $10 billion. In early June, this number stood at almost $100 billion, and has since declined by about $90 billion.

Digging deeper, one can see that PDs have been accumulating the biggest positions in Bills (essentially as a cash replacement) and also in Coupons with a 6-11 year maturity. Could this be the preferred sweet spot for the PD community, or their clients? The one Bond class that is least desirable is anything with a maturity under 3 years.

Indeed, the Net holding differential between the Sub-3 year Maturity and the 6-11 Year Maturity has recently blown out to a record high. Can you spell steep yield curve? This is how the Primary Dealers are taking advantage of free money graphically. The chart below subtracts the net (lately mostly short) position in sub 3 PD holdings from 6-11 Year Net holdings. The steepness of the holdings curve is only matched by the steepness of the actual bond yield curve.

PD T-Bill holdings indicate that this security class is still seen as a simple cash replacement. Oddly, the fact that PDs still have such historically high Bill holdings indicates that all is far from clear, at least at seen by the PD community. An odd observation: T-Bills hit a record on June 3, when over $90 billion in Net T-Bills was being held on bank balance sheets. Since then this amount dropped to flat by November and has since surged again. Whether this is merely end of year window dressing we should know in a few weeks when the January 1st results come out.

The most obvious observation is that PDs are doing nothing unexpected: they are loading up on the curve, by shorting the near-end and purchasing the far-end. The only question is whether and to what degree they do this for themselves as opposed their clients. And a read of PD T-Bill holdings, especially in the context of TIC data, highlights that there is still either some major liquidity concerns permeating both the International and Primary Dealer community, or just a very rampant case of window dressing as asset managers at both banks and funds get risky-asset buyer's remorse and try to make it seem that they are actually somewhat prudent. Of course, should the Fed be unable to find the much needed $2 trillion in buyers for various US fixed income securities, the "window dressing" approach will seem sadly ironic, as numerous hedge funds implode if indeed there is a massive rush from risky to "risk-free" assets.

Just occasionally, we feel as if we might be a little too harsh with Barney Frank.  He has, after all, been something of a singular lightning rod for many of the more adverse consequences of the housing boom.  Without question he has taken a disproportionate share of the heat generated by increasing scrutiny of Government Sponsored Entities like Fannie and Freddie.  True, he was involved directly in crafting provisions of the Troubled Asset Relief Program.  Indeed, as he chairs the House Committee on Financial Services, he is uniquely exposed to all things "credit crisis" and most things "bailout."  Yes, his loose alliance with figures like, say, Maxine Waters, tends to draw sporadic sniper fire from the trenches (well, and sustained grazing fire from the MG42 nests).  And, obviously, some of the more publicly scrutinized aspects of his personal life have aligned social conservatives against the Congressman.  The combined effect of these disparate circumstances gives us pause in those moments when we begin to form our critiques of the Distinguished Gentleman from Massachusetts.  Then we come to our senses.

With the exception of the last item on our list, Frank has richly earned the ire, skepticism, dismay and disgust that has begun to plague him.  The disproportionate housing bust radiation to which he has been exposed is actually directly in line with the disproportionate level of grandstanding, aloof and arrogant presumption Mr. Frank has exhibited over all matters housing for the last two decades.  His shameless use of the "minority" and "redlining" rationales to enable his personal (and taxpayer funded) socio-regulatory experiments and expand his personal empire of finance policy micromanagement power makes his re-purposing of TARP language to support politically connected (and inept) banking ventures is the worst kind of cronyism.  His continual leveraging of his Committee chair responsibilities to expand risk and limit scrutiny over the GSEs make it easy to mistake him for the most egregious deregulators in the Republican party.  The latest news today prompts us again to assert that it is simply time for Frank to go.

In the heat of the credit crisis and as TARP was being hurriedly drafted, Frank injected language to carve in eligibility for OneUnited, a middling Boston bank facing near imminent and ignominious failure.  Some $12 million in bailout funds (a pittance in the larger scheme of things) eventually made its way to OneUnited.  In itself, this raises eyebrows.  Then again, perhaps one can dismiss as somewhat noble the efforts of a Congressman to carve out special interest exceptions for businesses in his home state.  That is, until you dig a little deeper.

OneUnited got in trouble in the first place by being heavily invested in, you might have guessed it, Fannie and Freddie.  So large were its holdings in the GSEs that when they were pressed into receivership, OneUnited's reserves sunk below limits.  Frank originally claimed his intent in giving OneUnited special attention was to preserve one of the few (and largest) minority owned banks in the country.  Forgetting for a moment questions surrounding the desirability of permitting politically popular classes preferential treatment in the disbursement of crisis aid, OneUnited exposes deeper flaws in neo-Keynesian bailout theory.  Funds disbursed at the whim of politicians tend, quelle surprise, to be allocated on political criteria.  So when Frank intervenes directly, one is prompted to look for connections.  It's a short look.

Unsurprisingly, one finds that Maxine Waters, who shares a number of legislative duties and frequent camera and mic time with Frank, has a former OneUnited director and recent (if not current) OneUnited stockholder for a husband.  Waters is presently entangled in a House Ethics Committee investigation into allegations that she broke ethics rules to help broker a deal for the bank.  Would it surprise you to know that, though based in Massachusetts, BankUnited does most of its lending in Maxine's home state of California?  Probably not if you've been reading Zero Hedge for any length of time.

How is it that a Boston bank ends up lending mostly to the multi-thousand miles distant home state of its politically connected former director and stockholder and is also mostly (and eventually disastrously) invested in the pet projects of one of its most senior legislative regulators that also happens to be a close colleague of that stockholders wife?  One might ask the question "Were any of OneUnited's major investments commercially motivated?"  But wait, there's more.

OneUnited is one of a subset of banks to enjoy non-cumulative dividend terms on the securities bought by the government with bailout funds.  We are certain that you will be shocked to learn that the bank (despite showing a profit so far in 2009) hasn't actually been paying these dividends, and that in not paying them they are automatically forgiven.  It will be seen that OneUnited has, in effect, an interest free loan from the taxpayers.  According to Congressman Frank, Congressman Frank is shocked and dismayed to learn this (though his personal involvement in crafting the terms of OneUnited's bespoke bailout causes one to wonder how he missed the import of non-cumulative dividends).

The most dismaying part of our work here at Zero Hedge is often the self-realization that narratives like these simply no longer surprise us.  Neither do reports like the one recently issued by Ran Duchin and Denis Sosyura which concludes, unsurprisingly, that connections to finance committee legislators and the Federal Reserve boards are a fairly reliable predictor for a bank's likelihood of sucking down TARP funds.

Expect much more of the same.

Being an evil Mole has its responsibilities - one of is a strict adherence to being politically incorrect and thus to insist on wishing everyone unfortunate enough to know me personally a Very Merry Christmas. Let me take this opportunity to extend the very same to all my intrepid stainless steel rats. But unlike all those other schmucks who insist on sending you those sanctimonious holiday wishes printed on glossy recycled cardboard toilet paper I for one don’t show up empty handed:

That’s right, this is Mole’s Christmas present for all Evil Speculator addicts and it’s called Rammstein (you know it was coming). It’s a little token of appreciation that will be available free for a few months to anyone who ever signed up as a member in the past. More about this below.

The performance data you see above has been back tested and then forward tested for about a month now - admittedly, that’s not too long. But I have to say that Rammstein kept on printing coin through the most tiresome and annoying tape I had the displeasure of enduring - the past two months, which were outright nasty even by 2009 standards. Will it continue to produce like this? Probably not - but what I know right now is that it performs very well in insidious sideways and gapping tape - which is surprising really.

So, the right mindset to look at Rammstein is ‘insurance for 2010′. Why? Because if we actually ever get to Primary wave {3} I believe that Rammstein will start having trouble and that evil.rat and resident.evil will spike up and run off into the sunset. Why do I believe that? Glad you asked. Because Rammstein started to work very well right in June - before that it was running sideways more or less with a slight trend up. Evil.rat and resident.evil both performed magnificently right until June and then started to slowly drift down - not horribly so, but both had difficulties in the last few months. There appears to be a distinct inverse correlation in respect to the timing.

So what happened around June - you might ask? I looked around and finally the scales dropped off my eyes as I realized what might be happening here. Mr. VIX dropped below the 30 mark around that time frame - that’s what. So, my current take is that Rammstein works well in nasty Fed manipulated tape and that evil.rat and resident.evil will make a Rocky Balboa style come back should we dip into Primary {3}.

The approach of giving it away for few months is based on lessons learned with evil.rat and resident.evil. Quite frankly, I want you guys to bank some coin before you start paying for the service. If it then starts failing us at least you’ve made some money beforehand and perhaps it’ll also give you the mental fortitude to sit out a bad month or so, should thathappen. Rammstein also needs to prove itself to you guys, obviously curve fitting could deceive us here, although the last five weeks give me hope that this is not the case.

If you start banking coin with Rammstein in the interim and you feel like giving something back you can always sign up for a month or two of Zero goodness - after all it’s only 49 bucks. Should Rammstein perform well into March then I would probably consider making it subscription only but at that point I think nobody would complain about having to pay up. Well, at least most of you - someone always complains for sure

So, that’s it - if you are interested in receiving the signal then you can sign up right now on your membership page. If you ever signed up as a subscriber in the past just log into your membership page and then select Rammstein from the the drop down on the right side of the page:

That’s it - the membership is free but won’t extend automatically, so in a month from now you’ll have to do the same thing again.

A few pointers:

• There will be no support during the free period - nada, nichts, niente, zilch, none. However, the alerts will be very similar to what you’ve experienced with evil.rat and resident.evil, so if you were ever a sub here you know the drill.
• Alerts will be email only and SMS alerts through my gateway will not be enabled (obviously). But you can of course receive SMS alerts through the gmail filter as explained on the evil.rat and resident.evil pages.
• There will be a Rammstein page that will be updated frequently - but probably not before the middle of January.
• The stop is currently around 40 ticks, but that might change once I start optimizing it a little more. There is actually a trailing stop that moves after a trade pushes a few ticks into the green. I still have to add the notifications for that.
• There is no ‘target’ - the strategy stays in a trade until it either gets stopped out, runs into an inverse signal, or the day ends.
• Yes, there are long and short trades.
• The performance data shown above is based on one single contract and no pyramiding. I leave all that fancy stuff up to you.
• The signal will be live starting next Monday - if you sign up before that you will start receiving email alerts, assuming the strategy triggers. Of course you can subscribe anytime whenever you feel like.
• Rammstein exits at the end of the day, just like any other strategy I have developed. No holding of overnight positions - I don’t enjoy playing Russian roulette (however, I do enjoy strip poker with hot Russian ladies - you know where to find me).

That’s all I can think of right now. I propose you sign up and then just watch the signal for a while. Once you think that you developed a good feel for it - or perhaps you paper traded it for a bit - then put a small amount of real coin on it and see what happens. Again, I suggest you play it safe and use this as insurance against possibly more nasty sideways tape that might extend into next year.

As you know - I don’t have a crystal ball and as traders we have no control over how much money we can make on a given day. The tape either moves in favor of our trading strategies or it doesn’t. But what we can control is risk and thus the amount of money we lose. And that’s where the rubber meets the road in that it is the difference between hobby traders and the pros. For the experienced trader learns that nobody knows the future and that the game is all about edge, probability, money management, and most of all controlling your risk exposure.

I hope that Rammstein will help you assess you risk in that it might allow you to offset losses in non-bearish and non-bullish tape - meaning, the same kind of crap we’ve seen in the past few months. That is daytime sideways action preceded by nasty overnight directional surprises. Not the tape most retail traders can make money in - but perhaps Rammstein will give us an edge in such a climate.

Actually I hope that Rammstein will fail in the end as this will most likely mean that Primary {3} is upon us and we get long drops to the downside. If that happens we’ll know soon enough - but if the Feds manage to stretch this thing out for another few months or perhaps even throughout 2010 then at least we might have something to work with. I for one like to be prepared - that’s why I’m still standing today.

Wishing you a very merry Christmas and if you don’t hear from me next week - a happy, healthy, and prosperous new year. I hope 2010 will be a good one for all of us and I am looking forward to seeing you all again here in early January. In the meantime I’ll be a bit quiet here but gmak and Michael might put up a post here and there.

And finally a very politically correct Happy Holidays to all hedonists, infidels,  atheists, and misfits out there

Cheers,

Mole

In the annals of bailout history, commitments don't get a lot more slippery than this.

U.A.E. Minister of Economy Sultan bin Saeed al-Mansouri said further federal government support for Dubai should be “studied” properly. “Each issue has to be studied in a proper manner, evaluated and based on that an answer will be provided at the federal level or the local level,” al-Mansouri told reporters in Abu Dhabi today when asked whether the federal government will extend more financial support to Dubai.

Well, at least the "case-by-case basis" statement made by Abu Dhabi earlier in the month is being applied consistently.  Less consistent, of course, have been Dubai's mercurial positions with respect to their creditor intentions.  There will be a standstill.  There won't.  Debt will default.  It won't.  Restructuring is out of the question.  It will be orderly.  The uninitiated might view this kind of committed commitment to the noncommittal as a sign of inexperience or confusion.  This would be to badly misunderstand the nature and of opacity in Dubai.  After all, this is the city that managed to run up a $7.5 billion accounts payable account with the likes of Mitsubishi Heavy Industries, with some of the past due amounts going back years even as foreign developers are forced to flee the jurisdiction rather than face prosecution by Dubai courts and jail time over defaults often brought on, ironically, by the government of Dubai's refusal to pay them.  How long might one expect developers to stay around pursuing their claims against the government in such circumstances, one wonders.  It will be seen that the surreal is most often the product of exacting design in Dubai.

This appearance of chaos would also, it seems, be the product of intelligent design. Most likely, and decidedly hidden behind the scenes, a delicate dance of brinkmanship is being played out between the forces of public panic, in the form of Dubai's ability to threaten very public and very messy defaults and the disclosures of actual financial condition that tend to accompany such things, thereby throttling the credit ratings of the entire region for some time to come, and increasingly scarce (and expensive) bailout capital, in the form of whatever lies behind the deeply opaque balance sheets of Abu Dabhi's sovereign wealth fund.

One can easily picture Dubai officials poised in the antechamber to the press briefing room and its microphone bristling podium, reaching for the door handle, looking over their shoulder at the cluster of increasingly worried looking Abu Dabhi officials.  "We'll do it.  The press is right there.  We'll freeze it all!"  Ok.  Ok.  Come back.  Sit down.  Let's reason this out together.  No need to be dramatic.  Crisis averted.  For now.  Bloomberg reports:

Dubai World will present a standstill offer to banks in early January as the state-owned company aims to restructure $22 billion of debt, said three bankers who attended a presentation on the matter yesterday.

Another day in the debt desert paradise.

My apologies for the lack and brevity of posts in the past two weeks but on top of X-Mas preparations I am also trying to get ready for CES in early January where my second company will introduce a very exciting entertainment based consumer product. So I’m basically burning the candle on both ends and unfortunately I am forced to cut down on my posts. Which does not seem to matter that much anyway as traffic has slowly diminished in the past 10 days or so - and the tape is admittedly annoying at best.

Last night I however managed to take an hour to update my BAA-TYX chart - again, this is something I have to do manually and it takes a while as I’m inputting three different data sets into various spread sheets which produce the plot above. The effort is however very much worth the time as it gives us an insight into the appetite for risk among market participants. And that seems to be growing as we are now have clearly dipped below the 2% mark and are at 1.9% on the 10-day MA.

For the noobs: Bonds are generally classified into two groups - “investment grade” bonds and “junk” bonds. Investment grade bonds include those assigned to the top four quality categories by either Standard & Poor’s (AAA, AA, A, BBB) or Moody’s (Aaa, Aa, A, Baa).

The term “junk” is reserved for all bonds with Standard & Poor’s ratings below BBB and/or Moody’s ratings below Baa. Investment grade bonds are generally legal for purchase by banks; junk bonds are not.

The specific definitions assigned to junk bond ratings by the services help define the magnitude of the risk associated with them. Because Standard & Poor’s definitions are somewhat more comprehensive, they are quoted here:

BB, B, CCC, CC, C: Debt rated BB, B, CCC, CC, and C is regarded, on balance, as predominantly speculative with respect to capacity to pay interest and repay principal in accordance with the terms of the obligation. BB indicates the lowest degree of speculation and C the highest degree of speculation. While such debt will likely have some quality and protective characteristics, these are outweighed by large uncertainties or major risk exposures to adverse conditions.

BB: Debt rated BB has less near-term vulnerability to default than other speculative issues. However, it faces major ongoing uncertainties or exposure to adverse business, financial, or economic conditions which could lead to inadequate capacity to meet timely interest and principal payments.

B: Debt rated B has a greater vulnerability to default but currently has the capacity to meet interest payments and principal repayments. Adverse business, financial, or economic conditions will likely impair capacity or willingness to pay interest and repay principal.

Because a B rating is the single most common rating found in a junk bond portfolio, Moody’s definition of its B rating follows:

Bonds which are rated B generally lack characteristics of the desirable investment. Assurance of interest and principal payments or of maintenance of other terms of the contract over any long period of time may be small.

To resume with Standard & Poor’s:

CCC: Debt rated CCC has a currently identifiable vulnerability to default, and is dependent upon favorable business, financial, and economic conditions to meet timely payment of interest and repayment of principal. In the event of adverse business, financial, or economic conditions, it is not likely to have the capacity to pay interest and repay principal.

D: Debt rated D is in payment default.

So, how does that fit into the big picture? The BAA-TYX chart measures the yield spread between bonds rated one step above junk versus the yield of the supposedly most reliable and safe bond there is, the U.S. 30-year treasury bond. In the past it has been observed that a narrowing of the spread often precedes a rise in equities and inversely that a widening of the spread may be a sign of trouble ahead. Is a big drop in equities always preceded by a widening of the BAA-TYX spread? Well - sometimes it is - but if you parse through this chart you’ll also notice that it doesn’t always pan out this way and that it sometimes lags behind a little. Still, it’s something we want to be on the lookout for in case it does occur. On the up side I have never observed a extensive narrowing of the spread that was followed by a prolonged drop in equities (Intermediate degree or higher) - and inversely I don’t recall a significant widening of the spread that was followed by a prolonged bullish cycle.

What’s notable right now, today, is that we are now approaching lows not seen since the very top of the 2007 peak, at which time the BAA-TYX spread was actually still narrowing. We did not observe a widening of the spread until about after Minor 1 of Intermediate (1) of Primary {1} of cycle wave c. Which means the very first drop followed by a snap back.

So, if you count yourself a ‘lazy bear’ that has learned various lessons from trying to call a top throughout 2009, then this is the indicator you might want to keep in mind. Because as it looks right now - we most likely won’t see a widening of this spread until a ‘reset’ forces investors to re-evaluate their risk appetite and to move their cash into safer assets.

Nothing new in regards to the wave count - we have been pushing up to complete this expanding triangle, just as I thought we would. 1030 most likely awaits - especially considering this:

The Zero Lite has been flat to begin with, although the prior spikes look large bear in mind that they are mostly within the 1.0 range. On the bearish side we never dropped below 0.25, thus this tape is clearly bullish and either nobody is daring to short this tape or has left for the holidays. Also notice that we’ve gone completely flatline today, which is symptomatic of pre-X-Mas action. Do yourself a favor and take the next week or two off - come back in early January and reassess where we stand then.

That’s pretty much all I have for now. On the Dollar front I am still waiting for a reversal at the 78.42 retracement level. The high of today? 78.45 - not bad at all. Many thanks again to 2sweeties over at retracementlevels.com for donating this wonderful tool to us on an exclusive basis.

House Cleaning Items:

I’m going to be very sporadic in my postings for the remainder of 2009 - there will probably only one more before Christmas and then perhaps one before the end of the year. In the interim I might put a comment cleaner here and there unless gmak or Michael decide to put up something they just can’t wait to share with you rats

Starting January 6th I’m going to be at CES until the 10th, thus there will be no posts during that time frame either. Sorry guys - this will be an important time for me and I hope that I won’t miss out on any exciting tape.

Cheers,

Mole

Submitted by Nic Lenoir of ICAP

The breakdown in correlations has many traders confused, and the light volumes are not really making trends easier to spot. However, this is something we had warned about and we have been monitoring on several occasions using the 90- or 120-day correlation between gold and stocks. Our assessment was that the correlation would at best go to 0, and in case of severe market movement possibly inverse and go down around -0.80 after 9 months when commodities and equities traded in perfect harmony. Traders have been pointing out that with EURUSD where it is trading right now we "should" (assuming the same market dynamics that have ruled markets since March 09 are still in place) have SPX under 1,000. The question is what now? Let's look at markets individually, which is always the approach we favor given that correlations are as good as they last.

For one thing as long as the S&P futures are stuck between 1,085 and 1,115/1,119 we have little to get overly excited about. The story of the S&P future is one of exacerbated and shameless bearish divergence, and lately we might add acute boredom. By any technical or historic measure we are still expecting a sharp correction lower in equities, but we won't try to front-run the market as we have wasted a lot of exhaustion of short-term indicators in a narrow range, and the Dax has broken out to the upside. The only certainty is that when the market breaks out, whether it's up or down, the move will be sharp. If we manage to stay in that range until next week we would consider January or February 1,100 straddles as the realized vol of the move coming up should far surpass what the Vix is pricing as it continues to drop.

Different story for foreign exchange markets and Gold where markets are trending impressively. Gold is testing a key support here as can be seen on the daily chart, and we have divergence of momentum indicators on a 3-hour and hourly scale. However a clean break here along with new lows in RSI on the hourly chart would indicate we have more to go and we will go challenge 1,026 or even 992. Again I would like to point out that at this point breaking 992 would invalidate that we remain in a bull market. So if we fail to close above 1,092 we are bound to go challenge the key trend support. Conversely a hold here would open the way for a retracement to 1,142 or 1,171. Note however that even if we bounce here it is unclear the market will resume right away its bullish trend as the recent sell-off has the structure of an impulse, which is not a satisfactory pattern for a correction.

EURUSD is clearly not done selling off either. We are in wave 3 lower, and the sub-count of the 3rd wave detailed on the hourly chart shows we are most likely still within sub-wave 3/. Given that the 200-dma is at 1.4194 and daily RSI is at 32 it is possible that we bounce here for a coupel days, but the resistance is now 1.4666 and if we bounce there we still have potential to go down to 1.4080 as part of the current impulse. In short, the downtrend is intact for now and there are no reasons to assume we will not keep going. Fairlue is thought to be around 1.20/1.25, and given the woes of the weaker economies in Europe and the backlog of unreported credit losses of German banks, we could well go trade below fair value for a change at some point in the second half of 2010.

Finally US treasuries remain under pressure today. The next support zone for the 10Y future is 115/115-25, and in the medium term we target a re-test of the key support and neckline of a massive H&S at 113-25. A break there would probably spell a lot of trouble.

Good luck trading,

Nic   

• Eurostar may struggle to move passengers by Christmas (Bloomberg)
• Lithuania let CIA use secret prison for interrogation (Bloomberg)
• A rising euro poses a threat to parts of block (WSJ)
• FBI probes hacker attack on Citigroup (WSJ, AP)
• Dubai stock markets to merge amid debt woe (WSJ)
• Are S&P 500 growth projections realistic (Seeking Alpha)
• Did deregulation cause the crash (The Claremont Institute)
• UK economy remains in recession (BBC)
• S&P - Nikkei spread collapses; Nikkei at 3 month high (Bloomberg)
• WTO backs ruling to loosen China media imports (MarketWatch)
• Eight things for markets to watch out for in 2010 (Bloomberg)
• Storm on big weekend raises worries for banks (NYT)
• Socialism creeps in as America sleeps (Investors.com)