Gold Climbs the Bull Market Wall of Worry

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Joblessness still dogs the economy, which needs 125,000 jobs monthly just to keep up with population growth. As we await September’s statistics we wonder if they’ll be as bad as August’s loss of 54,000 jobs? This unfortunate situation has been going on for more than three years; 22 million Americans do not have jobs and some 10,000 million additional are forced to work part-time, some 34 hours a week. Having real unemployment at 22-5/8% makes recovery very difficult. That figures is U-6 less the bogus birth/death ratio. It’s not surprising that credit card and mortgage debt go unpaid as default and foreclosure accelerate. These conditions are certainly a drag on sales. As those sales falter businesses lay off more workers, which exacerbates the problem.

In actuality today’s conditions are much worse already than in the 1930s, due to today’s social underpinnings, such as welfare, food stamps, government hiring and unemployment insurance. That said, spending by the administration and the Federal Reserve over and above the social safety net, has been almost totally lavished upon the financial sector and transnational conglomerates.

Those who call for another WPA do not understand the history of the 1930s. In 1939 unemployment was 17.2% and in 1940 it was 16.4%, down from a high of some 25%. That to us means after increasing government spending by 45% from 1935 to 1940 only marginal gains in employment were made by these policies and had not a war been created, who knows where unemployment would have been in 1942. All we hear are the same old tired nostrums of Keynesian fascist economics and they do not work.

There is little political will to change this because 95% of the House and Senate have been purchased by Wall Street, banking, insurance, Pharma and the transnational conglomerates. That is why little constr uctive is accomplished. The interest behind the scenes control just about everything and that is why almost all incumbents have to be defeated in November.

From a political viewpoint the Republicans would probably do the same thing the Democrats are doing, because the same interests pay them. Due to the system it is easy for Republicans to display indifference. The Democrats wanted the job so let them deal with it. Doing what is being done about unemployment certainly isn’t working. We can well understand why Democrats are jumping ship like so many rats.

The business community says little or nothing as they discharge millions of workers to improve earnings, so their stocks will rise and they can profit from their options and bonuses.

The suffering and pain of millions of discharged workers continues, as the safety net keeps them out of the streets. Wars and occupations continue, as deficits and debt climb and reve nues fall.

There is little incentive for big business to create jobs. Regulations and legal roadblocks are becoming a major impediment to expansion and hiring. Investors won’t invest in a hostile environment. Capital gains are much lower in other countries and tax credits spur production and innovation. Everything simply costs more in America for a variety of reasons. Business wants subsidies like those being offered elsewhere. It is also called corporate welfare. Such as keeping $1.6 trillion offshore so taxes do not have to be paid in the US. This subsidy is to offset subsidies offered in other countries. Like in the manipulation of currencies for advantage, which has been going on for years without a peep from government, because the end result was the purchase of US Treasuries and Agencies and lower prices on imported goods to keep inflation down. The excises of business are endless. The answer to subsidies and currency manipulation is tariffs on go ods and services. That will bring this beggar-they-neighbor policy to an end. Copying what other countries are doing isn’t the answer. We do not want to build bigger and better crime syndicates.

Business does have some legitimate complaints and among them is the cost of protection from lawsuits from the government concerning discrimination, safety and the environment. No country in the world has the outrageous regulations the US business community is subjected too.

The administration’s policies have done nothing to increase employment and to restore economic growth. In fact their policies are just an extension of the policies of the previous administration. After two stimulus packages over the last four years nothing has been learned. They simply do not work and are continued to be used because the bureaucrats and the Fed do not know what else they can do. Corporatist fascism reigns under both political parties, and that is why alm ost all incumbents have to be voted out of office in November. They are supposed to be working for the voters, not special interest groups. These crooks are destroying America as unemployment rises, living standards fall and the rich get richer.

We live in a corporatist fascist world when the Treasury Secretary tells us losses from the TARP program are only going to be $50 billion that you get to pay for in bailing out bankrupt banking, Wall Street and transnational conglomerates. Of course, government never tells the truth. What we do know is that the losses will be more than $50 billion and these parties will live another day to gouge and steal from you again in the future. If you let them, they will eventually enslave you. They will also bring you the biggest depression in history.

On a somewhat different note we find no recovery in sight, and we believe as usual that the “experts” will again be proven wrong. Were it not for a 30% increase in auto production, related to the GM IPO, the numbers would have been much different. This does not bode well for the fourth quarter, because of lower orders and backlogs. Sales growth will be 0.7% to 0.9%. This could set the stage for a fair to poor fourth quarter, the action of which will make the first quarter dodgy at best.

The experts are looking for a 14% gain in S&P, down from 36% last year. This looks like deceleration to us. How many workers will have to be laid off to reach these goals? That would put GDP growth at 1-1/2% at best and some of that growth, perhaps ½% to 1%, could well be a hangover from the stimulus package. Not very encouraging. As you can see, the Fed’s waiting to use QE2 is having its effects. It also shows you the economy cannot prevail without $2.5 trillion in stimulus. This stage is not positive for corporate profits.

Next year without radical stimulus there is no chance for 6% GDP growth, rather the result might be 1-1/2% down to ½%. If stimulus is thrown in you might get lucky and see 3% again. With the stimulus you will also get 5-1/2% inflation, which in real terms will be 14% plus. How much more can corporate America cut expenses and labor? We do not know, but after three years of doing so it is not going to be easy.

Residential and commercial real estate is again headed lower. July was weak and it usually is one of the best months of the year. Medium home prices fell in August 0.6%, off for four of the past five months and at a 7-month low. No one really knows what inventory figures really are due to a lender shadow inventory. Officially it is 11.6-months, four months is normal, and it could easily be 18 months, if not more. During the coming year home prices will fall another 10 to 20 percent. Those numbers will be exacerbated by subprime and ALT-A loans recently written by agencies to keep housing afloat.

Readers had better pray that many incumbents are defeated in November, because if they are not, the economy will head straight down hill. America cannot stand another two years of dreadful government. The Republicans had best take the House and perhaps the Senate. The shift should be to the conservative side, which will produce a lame duck presidency, and efforts to reverse the monstrosity we’ve seen over the past two years.

One of the phenomenon’s of the bond market is that the shift out of stocks over the past year has been almost totally into short-term bills yielding less than 1%. Official inflation is 1.6% and our figure is 7%. What can investors be thinking of? Even mutual funds are about 25% in bonds. Of course, this is unusual, especially with a falling dollar. When will the bond bubble break, and when will interest rates rise? We do not know but we do not want to be there. We want to be where it is safe. Where gains have been almost 20% a year for nine years in a row.

That brings us to gold, which is climbing a bull market wall of worry. Almost the entire media and most economists, analysts and newsletter writers are negative on gold. They have been that way for a long time and, of course, very wrong. That has cost their readers billions of dollars in lost opportunities. As we write gold is $1,339 with no top in sight. That is in spite of massive naked short selling, of some 45 to 1, on the LBMA, the Comex and in the shares. There is no question that major losses are being taken by the commercials and the shorts and the US government, which has been ramrodding the scam for the last many years. We do not want to forget silver trading at $22.72 in a complete technical breakout. It doesn’t get any better than this for the long side. We, in spite of enormous success, are plagued by bubblist who daily predicts the collapse of gold and silver. Louise Yamada, probably the world’s best technic ian says gold won’t be in a bubble until it reaches $5,200 an ounce. At current rates of inflation, real inflation puts gold at plus $7,700 an ounce. We do not know where that puts silver, but we do know it will be at much higher prices. Wall Street and the establishment do not get it. They are losing the battle for our minds and souls because of talk radio and the Internet. Contrary to their beliefs we are going to win this battle for our freedom, not only in America, but worldwide. The battle has been engaged and the enemy is fighting rear-guard actions. There will come a time when they can escape and everyone will realize the truth.

Last week saw the Dow fall 0.3%, S&P 0.2%, the Nasdaq 100 rose 1.3% and the Russell 2000 rose 1.2%. Cyclicals were unchanged; transports fell 0.1%, consumers rose 0.2% and utilities rose 0.1%. Banks fell 0.5%, as broker/dealers were unchanged. High tech rose 0.5%; the semis rose 0.6% and the Internets fell 0.7%. Biote chs lost 0.8%. Gold bullion rose $23.00. The HUI gained 1.9% and the USDX fell 1.6% to 78.08.

Two-year T-bill yields fell 4 bps to 0.40%; the 10-year notes fell 9 bps to 2.51% and the 10-year German bund fell 6 bps to 2.28%.

Freddie Mac’s 30-year fixed rate mortgage was 4.37%, the 15’s were unchanged at 3.82%, one year ARMs rose 6 bps to 3.46% and the 30-year jumbos fell 3 bps to 5.30%.

Fed credit rose $1.2 billion to $2.2 trillion, up 4.1% annualized and 7.9% YOY. Foreign holdings of Treasury and Agency debt surged $16.1 billion to another record of $3.230 trillion. Custody holdings for foreign central banks rose $274 billion YTD, up 12.4% annualized and 13.1% YOY.

M2 narrow money supply rose $7.9 billion to $8.712 trillion.

Total money market fund assets gained $1.8 billion to $2.805 trillion. YTD they fell $488 billion and YOY by 18.2%.

Total commerc ial paper lost $27.2 billion to $1.091 trillion; that is off 9% annualized.

The 2010 deficit for the government increased at 11% of GDP, or $1,651,794,027,380. That net debt is $13.562 trillion.

New orders received by U.S. factories fell by 0.5 percent in August, resuming a downtrend as demand for transportation equipment fell sharply, according to a Commerce Department report on Monday.

Total orders fell to a seasonally adjusted $408.9 billion after an upwardly revised 0.5 percent increase in July and a 0.6 percent fall in June. Economists surveyed by Reuters had forecast a decline of 0.4 percent in August.

The August decline in factory orders was due mainly to a 10.2 percent decline in the volatile transportation equipment segment, in which motor vehicle-related orders were off 3.6 percent and non-defense aircraft down 40.2 percent. Excluding the transport segment, factory o rders rose 0.9 percent.

Orders for machinery rose 5.2 percent in August, while orders for computers and electronic products rose 3.7 percent.

August Factory Orders (0.5%) vs. consensus (0.5%) 
* Jul figure revised to +0.5% from +0.1%

Pending sales of previously owned U.S. homes rose more than expected in August to a four-month high, indicating the housing market was regaining some stability after recent steep declines.

The National Association of Realtors said its Pending Home Sales Index, based on contracts signed in August, increased 4.3 percent to 82.3 from July.

It was the second straight month of gains in the index, which leads existing home sales by a month or two. July contracts were revised down to show a 4.5 percent increase instead of the previously reported 5.2 percent rise.

Economists polled by Reuters forecast the index rising 3.0 in Aug ust from July. Compared to the August last year, pending home sales were down 20.1 percent.

Home sales and building activity are stabilizing after a downward spiral following the end in April of a popular tax credit for homebuyers. But high unemployment and a glut of homes on the market imply recovery will be very weak.

Emerging-market borrowers are on course to sell more bonds than ever this year after yields hit record lows and developing economies rebounded faster from the credit crisis than advanced nations.  Governments and companies in developing countries borrowed $196 billion from July to September, the most for any quarter.

Deal making staged a comeback in the third quarter, with a jump in multibillion-dollar takeovers putting this year on pace to surpass 2009.  The quarter was the busiest in two years, with $562.6 billion of announced transactions. With almost $3 trillion of cash in their coffers, comp anies drove a 59% increase in takeovers from a year ago. The jump in deals in the third quarter brings total announced takeovers to $1.48 trillion in the first nine months of 2010, compared with $1.76 trillion in all of 2009.

Speculative-grade companies are borrowing to finance dividend payments to their private-equity owners at the fastest rate since before the credit crisis, taking advantage of investor demand for high relative yields.  Banks arranged or started marketing $8.77 billion of high- risk, high-yield loans slated for shareholder payouts this quarter, bringing 2010’s total to $17.1 billion, more than five times the amount of the past two years combined.

Investors are demanding the highest risk premiums to buy leveraged loans as companies borrow at the fastest pace since the beginning of the credit crisis. Banks arranged $249.6 billion of leveraged loans during the first nine months of this year, more than 2.5 times the 2009 amount and the most since 2007.

Homes in the foreclosure process sold at an average 26% discount in the second quarter as almost one-fourth of all U.S. transactions involved properties in some stage of mortgage distress, according to RealtyTrac Inc.

The president of the Federal Reserve Bank of New York all but called for the Fed to resume large-scale purchases of long-term government bonds, solidifying a growing conviction on Wall Street that the central bank will do just that, starting in November.   ‘Viewed through the lens of the Federal Reserve’s dual mandate â€" the pursuit of the highest level of employment consistent with price stability, the current situation is wholly unsatisfactory,’ the president, William C. Dudley, said in a speech to the Society of American Business Editors and Writers.

The SEC, in trying to blame the Flash Crash on a single non-extraordinary institutional order, is once again demonstrating its ineptness, ignorance and obeisance to Street insiders.

Despite evidence in its own report that HFT volume was a multiple of the institutional order and unusually large ‘quote stuffing’ created a gap in NYSE reporting that HFT could exploit, the SEC downplays the culpability of HFT and other computer-related trading abuses.

If a single, ordinary institutional futures order caused the Flash Crash, the stock market and related futures markets structure and efficacy are seriously flawed and remedial measures should be applied ASAP. Of course this won’t happen because the SEC’s Flash Crash conclusion is bogus. And if it weren’t bogus, Street elites would prevent any serious restructuring that would impair their profits.

The 75,000 contracts represented 1.3% of the total E-Mini volume of 5.7 million contracts on May 6 and les s than 9% of the volume during the time period in which the orders were executed. The prevailing market sentiment was evident well before these orders were placed, and the orders, as well as the manner in which they were entered, were both legitimate and consistent with market practices.

These hedging orders were entered in relatively small quantities and in a manner designed to dynamically adapt to market liquidity by participating in a target percentage of 9% of the volume executed in the market. As a result of the significant volumes traded in the market, the hedge was completed in approximately twenty minutes, with more than half of the participant's volume executed as the market rallied not as the market declined.

 

Additionally, the most precipitous period of market decline in the E-Mini S&P 500 futures on May 6 occurred during the 3½ minute period immediately preceding the market bottom that was established at 13:45:28. During that period, the participant hedging its portfolio represented less than 5% of the total volume of sales in the market.

HFT caused the crash. The unnecessary parasites that live off real order flow generated a multiplier effect that created a death spiral to the downside. But if the SEC were to admit or charge HFT as the culprit, then action would have to be taken. And if action against HFT were taken those billions of dollars of bribes to Congress to allow a few financial entities to bilk investors would have gone to waste.

It appears that the SEC either didn’t read its own report or it has a reading comprehension problem.

From the SEC report via the WSJ: “HFTs began to quickly buy and then resell contracts to each other generating a ‘hot-potato’ volume effect as the same positions were passed rapidly back and forth,: the report says. At one point, HFTs trader more than 27,000 contracts in just 14 seconds a huge amount.

In addition to several firms pulling out of the market, those remaining "escalated their aggressive selling" during the downdraft…

While focusing on the role of Waddell and high-frequency traders, the report went easier on stock exchanges, which the SEC regulates.

Data Wonks Debut Dizzying Diagram of Flash Crash

At 2:42 the Dow Jones Industrial Average was already down a hefty 400 points and sinking fast, having lost about 100 points in six minutes. But from there, the stock market went into a free fall.

According to Nanex’s analysis, at 2:42, 43 seconds and 600 milliseconds, something unusual happened: there was a massive surge of orders that were, for the most part, immediately cancelled…What’s key about this surge of quotes is tha t they hit what Mr. Hunsader refers to as the “saturation point” - essentially the upper band of what that exchange computer systems can likely handle before getting clogged up.

Then, just 400 milliseconds later, there’s another wave of selling, this time, with sellers hitting existing bids in the marketplace. (That’s the second leg up in the chart)

At 14:42:44:075 some $125 million worth of June 2010 CME eMini futures contracts were sold followed 25 milliseconds later by the immediate sale of over $100 Million of exchange traded funds, including the SPDR S&P 500, SPDR Dow Jones Industrial Average, the PowerShares QQQ.

At that point, Mr. Hunsader says, the NYSE stock exchange’s computer feed bogged down...And that, Mr. Hunsader says, presents one of the biggest mysteries surrounding the Flash Crash was it the same person, persons (or robots) that caused all three bursts? And if so, were they intent on destabilizing the market, or even causing some kind of break? ”I bet you would find a match,” Mr. Hunsader says. “If I were in the SEC’s shoes and had to investigate something, it would be that.”

Despite the almost 2,200% increase in reserves since September 2008, bank loans are down $140.2B and M2 is up only 11.4%. And Dr. Yardeni holds Fed officials accountable for the QE folly.

 

Fed officials are clueless about how quantitative easing is supposed to impact the economy. They aren’t even sure if it has any effect on the economy. The Fed study cited here confirms this known unknown. The Bank of Japan tried quantitative easing to revive their economy and avert deflation, but it didn’t work.

Bernanke knew back in 1988 that quantitative easing doesn’t work [Bernanke & Blinder research]. Yet, in rec ent years, he has been one of the biggest proponents of the notion that if all else fails to revive economic growth and avert deflation, QE will work.

The Fed balance sheet contracted $8.534B for the week ended last Wednesday due to a decline of $13.334B of MBS. The Fed only monetized $65624B of Treasuries… So, the Fed was not in QE mode in the most recent reporting week. Perhaps this is why B-Dud is stridently calling for more juice for his Street goombahs and more risk for US taxpayers. http://www.federalreserve.gov/releases/h41/Current/

The federal government is keeping up its effort to stimulate the economy, while the economy is keeping up its resistance to those efforts. The latest effort to prod spending comes in a bill that, among other things, increases the federal guarantee for small dealer floorplan loans from the Small Business A dministration from $2 million to $5 million.

http://www.autoblog.com/2010/09/28/report-bill-aimed-at-giving-auto-dealers-more-credit-is-signed/

Gretchen Morgenson: Count on Sequels to TARP

THE government is pulling a sheet over TARP…With the program’s expiration on Sunday, we can expect to hear lots of claims from the folks at the Treasury that it was a great success. Such assertions would be no surprise from a political class justifiably concerned about possible taxpayer unhappiness, the continuing economic turmoil and the midterm elections. But if we have learned anything during this crisis, it is that the proclamations emanating from the Washington spin machine must be taken with an extra-hefty grain of salt.

Remember this: Financial backstop is just another term for a taxpayer bailout… According to the Bank for International Settlements, the entire derivatives market had a gross credit exposure of $3.5 trillion at the end of 2009. Obviously, even a small fraction of that amount could represent a sizable call on the taxpayers if a clearinghouse hit the skids.

According to U.S. Internal Revenue Service data, 2,840 households reporting at least $1 million in income on their tax returns that year also collected a total of $18.6 million in jobless aid. They included 806 taxpayers with incomes over $2 million and 17 with incomes in excess of $10 million. In all, multimillionaires reported receiving $5.2 million in jobless benefits.

http://www.bloomberg.com/news/2010-10-01/almost-3-000-millionaires-claimed-jobless-benefits-in -2008-irs-data-show.html

Personal income increased more than expected in August (0.5% vs. 0.3% exp) due to government transfer payments. Personal income was flat in both July and August without the transfer payments.

 

John Williams notes that GDI (Gross Domestic Income) declined to 1.3% in Q2 from 2.3% in Q1.

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