Bill Cara’s Blog for Aug 24, 2010 [See post-close report]

Good morning.

I'm here but there is nothing to report.

We've seen cycles where equities swan dive on the rocks twice in the last decade. My question to everyone is can bonds, especially TLT, do the same?

TLT has surged 21.06% to $106.06 from $87.61 since April 6. Is it possible for this etf to plunge over a few days or weeks? Or, is it a safe harbor for the coming fall/winter storm?

KGC - Kinross Gold initiated with an Outperform at Wedbush. Target $18

Watching SLV pop. Short Squeeze or bottom?

Fear is finally entering the market. See $VIX and Bonds. The Yen is favored presently over the USD but it will begin to participate if the equity sell-off continues.

davefairtex -

"Perhaps its the impending COMEX default?"

Gold and silver options expiration on August 26th ...

Cheers.

[8/23/2010 10:23:06 AM] Bill Cara: equities are linked to Dollar now

so if the dollar does fall off a cliff would stocks rise?

http://www.hussmanfunds.com/wmc/wmc100823.htm

In contrast, quantitative easing can be expected to create a remarkably
different situation. The Fed's purchase of Treasury securities and creation of base money is occurring in an environment where fiscal deficits are already out of control, while two-thirds of the Fed's balance sheet already represents Fannie and Freddie Mac securities that need to be bailed out by the Treasury. This makes it enormously difficult to reverse the Fed's transactions - because the Fed is not simply determining whether a given stock of government liabilities will take the form of Treasury bonds or currency. It is instead effectively printing new money to finance ongoing spending for fiscal deficits and the bailout of the GSEs. At the same time, the fact that it is operating in a weak economy and a near-term deflationary environment means that nominal interest rates are being pressed down at the same time that long-term inflationary prospects are escalating.

As a side note, von Mises also cautioned against the misconception that destroying the value of a currency would have a sustainable benefit for the economy, writing "If the depreciation is desired in order to 'stimulate production' and to make exportation easier and importation more difficult in relation to other countries, then it must be borne in mind that the 'beneficial effects' on trade of the depreciation of money only last so long as the depreciation has not affected all commodities and services. Once the adjustment is completed, then these 'beneficial effects' disappear. If it is desired to retain them permanently, continual resort must be had to fresh diminutions of the purchasing power of money."

back and forth like a fiery salsa gold is twirling around,
moving upto 1233 as we speak, gold stocks moving well especially in spite of a weak market.

for the canadians:

check the XFN and the XEG which track the financials and the gas/oil sector respectively, i note both are breaking down on reasonable volume towards their recent lows and on a 3 year chart you can see the proverbial cliff they appear to be about to fall off of.

it may be too obvious to actually happen, yet i cant help but think things are looking ripe for intervention, more than anything the powers that be dont want to see another stock market plunge, even if it has little material affect to most citizen, the psychology of plunges is what they fear, even after the 2008 dump it was all people could talk about. even employment stats and home prices crashing dont generate the kinds of rhetoric and journalistic fluttering that market crashes do.

look out.

Watching SLV for a short opportunity.

Bill,

I love it when the CNBC bottom of the screen asks us to "vote" on the market direction. My vote in November is the one I'm looking forward to.

Look at the chart of USG today. USG is a pure play on new construction. Even though it was an exsisting sales. That crappy number should of tanked the stock and it did for a minute. Then the mother of all squezzes occured and the purest play in housing on housings worst day in months is some how up 3% today. I love this stuff.
Bob

QEII may be the source of the gold and silver reaction.

http://us.mc632.mail.yahoo.com/mc/welcome?.gx=1&.t...

USG is likely near a bottom - Pivot is 12.07 based on yesterday's prices and support at 11.66 & 11.44. I own some and was also amazed at today's price action. I think they cater more to new construction rather than existing homes.
http://finviz.com/publish/082410/USGc1dl1222.png

Buffet owns lots of it with option to buy more shares from a long time though he has not increased (or decreased) his ownership of it in the past year or two.

PIMCO's Bill Gross releases Sept Investment Outlook: Mr. Gross Goes to Washington

- Americans now know that housing prices dont always go up, and that they can in fact go down by 30-50% in a few short years. Having grown accustomed to a housing market aided and abetted by Uncle Sam, the habit cannot be broken by going cold turkey into the camp of private lending. Private mortgage lenders will demand extraordinary down payments, impeccable credit histories and significantly higher yields than what markets grew used to over the past several decades.
- Reiterates proposal to resolve Fannie Mae (FNMA) and Freddie Mac (FHLMC) and the evolution of housing finance in the United States. I proposed a solution that recognized the necessity, not the desirability, of using government involvement, which would take the form of rolling FNMA, FHLMC, and other housing agencies into one giant agency call it GNMA or the Government National Mortgage Association for lack of a more perfect acronym and guaranteeing a majority of existing and future originations. Taxpayers would be protected through tight regulation, adequate down payments, and an insurance fund bolstered by a 5075 basis point fee attached to each and every mortgage.

I agree that 18-19 has shown strong resistance for SLV but at the same time opportunity for downside also seems fairly limited as 17 has been pretty solid support since March. If short, I'd be concerned with the potential that it finally gaps up near 18.75-19 and runs up in my face.

I lack short-term conviction (next 15 days) of a significant move for SLV one way or another but I remain confident that the long-term trend is still up, which makes shorting it risky business in my book.

Johnny, thank you for a precise detailed answer re: your reasoning on shorting SLV.
The only point I would adjust would be I see SLV does not spend much time above 18.50.
As Billy Sundance said there is a lot of support for SLV at 17.
SLV is forming a definite wedge. Weekly bollinger Bands are narrowing. RSI, Stochs, MACD all rather neutral.
Guess we will have to wait to see a clear oversold or over bought signal.
Looks like your SLV short set up is a good one to watch Johnny.
Gracias, Bear E

could not resist buying a fairly small pos of AKS in the 12.40 area and selling this months calls (sept12.5) against it for $.72 I will try most anything if its chart is oversold and there is a reasonable chance of over a 5% monthly return. This is a tough market. also bgt some Oct 102 SPY puts and sold this Fri 103s against that position to play time erosion w/an ultimate tgt in the 950's for the SPX?????? best of trading (or positioning) to everyone out there........thanks for everything bill......

$VIX is an index of volatility that according to wiki: "represents one measure of the market's expectation of volatility over the next 30 day period"

VXX is an index that according to Yahoo "seeks to replicate, net of expenses, the S&P 500 VIX Short-Term Futures Total Return Index. The index offers exposure to a daily rolling long position in the first and second month VIX futures contracts and reflects the implied volatility of the S&P 500 index at various points along the volatility forward curve. The index futures roll continuously throughout each month from the first month VIX futures contract into the second month VIX futures contract."

It sounds to me that the discrepancy you are noting is because the VXX is not actually indexed to $VIX. Each index is calculating volatility in a different time frame. To add to that, VXX uses multiple futures contracts which I belive will subject it (like UNG) to the contango or backwardation (whatever the case may be) which can compound over time.

And speaking further about Fox media - last night Jon Stewart had an incredibly funny and perfectly executed set of skits around Fox News and their "follow the money trail" detective story about who is funding the "Terror Mosque" in NYC. According to Fox, a particular company called The Kingdom Foundation, run by an (unnamed by Fox) person, coughed up the $100M needed for construction. Allegedly, this foundation has also provided money to "extremist madrassas all over the world."

Turns out that providing the name of this guy and some relevant pictures of him adds some spice to the story. I won't spoil it if you haven't seen it...

http://www.thedailyshow.com/watch/mon-august-23-20...

I'm glad George brought this up. Thanks for contributing to my education. I was having difficulty understanding why the VIX/VXX correlation was so far apart at times...

One thing that strikes me as being strange about the recent decline in equities is that it is not supported by the increase in the high-yield bond spreads, which, according to markit, are still in a pattern of making lower highs and lower lows (the CDX.NA.HY series). So maybe we'll have another experience like in July 2009, when everyone was bearish on the market and that bearishness was supported by the H&S pattern on S&P, but that pattern got resolved with an amazing market advance.

"A donation of any size would really help and be much appreciated!"

I stand ready to give them my $0.02 worth ;-)

"to monitor the corporations that are increasingly attempting to use their great wealth to distort our public policy, to stand up to Fox News and its billionaire boss, we really need your help."

The media should expose those who use their position or great wealth to influence public policy and expose all inaccuracies.

Reasonably close correlation with Nikkei and the Dow. Some have said that there is presently about a 1000 point tether. Attached is a 5 day comparison. Day 5 just beginning for ^N225 and the chart was from 8:10 pm EST.

I read the enclosed article with dismay once I realized it was a "sounding board" for a "virulent" (my words) diatribe. The first clue was their comments on "right-wing ideologues like John Roberts" I looked up this org on activistcash.com and found the following. I am including it in the interest of equal time for the opposition. The Center for Media & Democracy (CMD) is a counterculture public relations effort disguised as an independent media organization. CMD isn’t really a center it would be more accurate to call it a partnership, since it is essentially a two-person operation.
Sheldon Rampton and John Stauber operate, as do most self-anointed progressive watchdogs, from the presumption that any communication issued from a corporate headquarters must be viewed with a jaundiced eye. In their own quarterly PR Watch newsletter, they recently referred to corporate PR as a propaganda industry, misleading citizens and manipulating minds in the service of special interests. Ironically, Rampton and Stauber have elected to dip into the deep pockets of multi-million-dollar foundations with special interest agendas of their own.

Thanks for the link- that was very entertaining! The important point is that one needs to remain skeptical of ALL of the media. It's the same charade that sustains our vampire squid bipartisan political system. Democrats vs Republicans while the real owners of this country win whoever is in office. While deluding people into believing they have a "choice" and it's just a matter of electing the right candidate.

FOX news is the bad guy now, but their political opposite MSNBC is no hero either...

In case you missed it, check out this propaganda piece from MSNBC. Apalling, truly. Are they trying to create racial tension?

http://www.youtube.com/watch?v=UYKQJ4-N7LI

compare with...

http://www.youtube.com/watch?v=7syx26QtQIM&feature...

And when Boobus Americanus isn't distracted enough by this crap, he can hear about the latest NFL draft, watch Real Golddiggers of Orange County, or any of the other crap spewing from the idiot box.

KC

An interesting take on the development of our Stockholm syndrome:

http://wallstreetpit.com/41701-and-other-nonsense-...

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2

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http://dailypaul.com/node/142979

S&P -0.90 / -0.09%
Level 1,048.90
Fair Value 1,050.21
Difference -1.31
Nasdaq -3.25 / -0.18%
Level 1,770.50
Fair Value 1,775.05
Difference -4.55
Dow -16.00 / -0.16%
Level 10,007.00

H&S formed on IWM and DJIA. XLF at critical support levels. UPS/FDX testing support levels.

sorry Bill, is WSJ giving me the bum job? A 6am glance says red still, with the Shanghai Composite -2.03%. The Shanghai Stock Exchange website confirms

Europe is another matter though. BMW Credit Agricole up, Fiat Renault Societe Generale red. mixed bag. Traders bidding up the strongest?

Given that FOX is no more than a marketer for whoever is playing the message, it might be worth watching how marketers work, for those who've yet to see the PBS documentaries:

http://www.pbs.org/wgbh/pages/frontline/shows/cool/

http://www.pbs.org/wgbh/pages/frontline/shows/pers...

Ron Sen wrote,

"The quintessential sui generis promoter of whatever is good for Bill Gross"

Ron,
It appears that Tim Geithner views Gross the same as you do. See Gross gripe that he got "little" support for his ideas in Washington. I am shocked, PLEASANTLY.

http://www.cnbc.com/id/38845255

ALOHA!!

Over at the Cunning Realist there is a new article entitled "RAPP SESSION"(dated Aug 24). Apparently the US TREASURY is so concerned about its "image" that it has decided to conduct these informal meetings with a select group of "bloggers". Imagine if you will that one day Bill Cara got an invite from Tim Geithner to sit down at a table and discuss, lets say, financial reform. Well, that is exactly what is happening at the US TREASURY now. They are seeking input for their policies from prominent bloggers that they select as the most important. You will recognize some of the bloggers like the guy from NAKED CAPITALISM and one from SEEKING ALPHA, but there are a few that I never heard of, like Tyler Cowen from "Marginal Revolution".

In this link you will read Steve Walden of "Interfluidity", another one I have never heard of, as he describes the US Treasury meeting with Tim Geithner and five other Treasury officials, Here is the link ...

LINK: http://www.interfluidity.com/v2/933.html

It is a lengthy read and they cover many stock market and derivative issues from the US Treasury view point and the bloggers present their views. They also discuss "macro-economics" and stimulus and the general direction of the US economy and various remedies.

What I find almost horrific is that none of these participants, both on the US Treasury side of the table and the blogger side have absolutely no actual BUSINESS EXPERIENCE to draw on. Here we have a "table" full of stock and derivative traders and ex-politicians and ex-bankers discussing how to get the US economy going in the "right" direction. It is no different than Obama holding a JOBS SUMMIT and not inviting anyone from the SMALL BUSINESS sector. Obama and his Economic Advisers invite ivy league professors and Fortune 500 CEOs and union bosses, but no small business. This is exactly the same. Somehow in America we have gotten off track. We have come to view the economy and the stock market as one and the same. I will tell you that in my business, which is one that is very small, I have never bought fertilizer stocks like POT to spray on my plants. Much like the stock market never worries about my orchid production. You cannot possibly think that solving derivatives clearinghouse issues will create jobs. Or that if the DOW trades at 11,000 we will have full employment. Or if the real estate market moves back to 2006 levels the US Treasury will be debt free. Here at the link I provided these people sit around a table, that was actually owned by FDR, to determine "macro-economics", yet none of them have ever owned or had to operate in the real world small business sector manufacturing an actual product that consumers need for their daily and longer term survival. Its like a bunch of economists sitting around FDRs TABLE debating inflation and deflation in a fiat currency world, in an environment of total currency destruction, the monetary hell Karl Marx brags of when he correctly predicted the demise of Capitalism. We're debating the symptoms of the last 4% of the US Dollar's purchasing power. WHOPPEEEEE !!!! Boy, do I feel confident! Instead we should be debating what day we eliminate the US FED and US INCOME TAXES. In reality America has been bankrupt ever since FDR confiscated US citizens gold.

In the very lap of our Founding Fathers House we have a bunch of "non-producers"(aka: paper shufflers)of the blogosphere meeting up with a bunch of "non-producers" of the political and banking realm to discuss financial and economic policy, which in real terms amounts to INTERVENTION. How best should we INTERVENE in the lives of our citizens and free markets? This is something our Founding Fathers never dreamed the US Treasury would ever sink to. Our Treasury sinks to faux-capitalist endeavors like owning GM shares and intervening in everything from healthcare to derivatives. The US Treasury should be concerned with only one matter and that is the US Constitutional mandate of providing a sound monetary system backed by Congressional fiscal responsibility. That's something America has not seen since the days of Andrew Jackson in 1836. OH MY GOD!!! WHAT A FOREIGN CONCEPT!!! I MUST BE ONE OF THOSE OUTLANDISH TIN HAT GOLD BUGS!!! The problem with America is that the US government and its Treasury has grown so large that they actually think they can INTERVENE on our behalf and guarantee all of us ever lasting "happiness"! They tell us that all we have to do is just keep voting for them! And so we have every chance we get ...

In reality John Lounsbury of Seeking Alpha,one of the participants, may be a brilliant trading strategist but has he ever built a school or produced a single I-Pod? He can advise you all day about trading AAPL and Steve Jobs brilliance but he has no idea how to even begin to set up a plastic injection mold and die cast system or even follow a circuit board schematic. I would be surprised if he could show me the symbol for a transformer on an electrical plan. He knows all the stock market symbols but maybe very few symbols of real production. Those real bricks and mortar production lines where you wallow in the trenches of the dirt and sweat of real employment, not just the BLS number or the cost to produce number on a quarterly financial report. Those numbers do not even give the slightest hint as to the real life human beings who toil 9 to 5 hidden from stock market charts and TA. We trade prices, but inevitably we will be reduced to trading monetary confetti.

So your reply to me may be ... "Yeah, but injection molding is not his expertise!" Then I would have to answer ... "Then what exactly is a table full of stock market traders doing at the US Treasury?"

Off we go then into the "Fantasy Land" of job creation via stock markets and derivatives. So purposefully disconnected is the US Treasury that they don't even know what "real money" is worth. I will give you a clue Mr. Geithner it is a little higher than $42.22 an ounce now!

Here are some of the challenges and remedies that were spoken of in that meeting ...

Abstractly, I think some of them(US Treasury officials) should be replaced and perhaps disgraced. But having chatted so cordially, I’m far less likely to take up pitchforks against them.

Officials began by talking up the buzz of activity occasioned at Treasury by the Dodd-Frank Act — putting together the Financial Stability Oversight Council, “standing up” the CFPB — with the happy implication that good and important things were happening. We peppered them with skeptical questions.

I was pleased that, thanks to both Tyler Cowen and Yves Smith, we had a solid discussion of derivative clearinghouses. I am a big fan of standardized derivative exchanges and clearinghouses, and trade on them frequently.

Even if most HAMP applicants ultimately default, the program prevented an outbreak of foreclosures exactly when the system could have handled it least.

A senior Treasury official gave the proposal a sympathetic hearing, but opined that exchanging a government claim against a homeowner for a bank’s claim against a homeowner in order to solidify bank balance sheets was not the best use of limited budgetary and policy implementation capacity. (For a change, I agreed with the Treasury official on this one.)

In a nutshell, he proposed insisting, by regulatory fiat, that future GSE’s borrowing costs be kept at a level appropriate to a private firm with no Federal backstop, implicit or otherwise.

The spurt of GDP growth due to post-panic inventory restocking was always going to end. But a sovereign debt crisis in Europe strong enough to shake confidence and financial markets in the US was not expected.

They understood that the core problem preventing business expansion isn’t access to capital but absence of demand. But I got the sense that, as they see things, they are boxed-in on that front, paralyzed and hoping for the best. When someone asked about monetary policy, an official said he really couldn’t comment on behalf of the Fed, but then proceeded to comment anyway, that in a very sharp downtown the Fed would have (presumably unconventional) ways to intervene, but that we were probably near the limits of what the central bank would do on the economy’s current path.

My suggestion was that Treasury should take the lead from Congress and propose a “two-year guaranteed income program”. If I were writing a proposal, I’d offer a lot of detail and caveats, but during a short meeting with scarce air-time, that was the sound-bite I came up with. As regular readers know, I think the government ought to be transferring equal sums of money to all adult US citizens irrespective of tax or employment status. That’s a form of stimulus that seems fair on face, that doesn’t pick winners and losers or skew the direction of the economy, and is plainly not corrupt.

Amid the talk about flagging demand, blogger John Lounsbury had the courage to “drop a stink bomb”, as he put it. He said that in his view, the United States needed to move from a consumption to a production oriented economy, and that we ought to use the tax system to get there, increasing taxes on consumption and reducing taxes on capital.

Its all what I call PRICE FIXING 101 ... All at the expense of OPM(Other Peoples Money) and OPF(Other Peoples Future).

There was much more "discussion" going on but I just picked as much as I could read without bloody hurling! All in all remedies could be boiled down to more market regulation and more "new" taxes. Hummmmmm??? How innovative! These people define the Austrian Economic words "misallocation" and "malinvestment". They have been brainwashed into believing that politicians and their endless regulations and taxation actually benefit the economy and business. At the US Treasury hard working American citizens have been reduced to the label of "taxpayers", servants to government largess and intervention. WE THE TAXPAYERS ... Treasury believes that a fraudulent bank balance sheet is more important than the value of our money or jobs. In the real world of small business, which is the largest employer of Americans, it makes us, small business owners who are the real risk takers, scared to death to invest, so we do indeed invest the least amount of capital as possible in order to just "survive". That's all we small business owners are reduced to here in America ... surviving government intervention. We have no FREEDOM because Capitalism has long ago died off thanks to political and banking INTERVENTION. We have no sound money in America so therefore we have no sound economy or stock market. We will never have any long term stability of any kind so long as our money is unstable. HELLO!!!! It really is that friggin' simple! So I ask ... HEY, MR GEITHNER WHERE IS THAT DEBATE?