We have Moved

Our new address is twistedmarkets.blogspot.com.

Random Banter

it is amazing really what has occurred since I took a break a week ago. We have lost two brokerage houses in LEH and MER and AIG is basically gone - since the government now owns about 80% of the company, I basically feel it is gone (more on that in a later). We have seen crude oil get toppled with it trading down towards the $90 level today. Gold has found a home below the $800 level and the US dollar has had mighty problems with the $80 level. The Euro has collapsed through a 6 year trendline and the Japanese Yen is now one of the strongest, if not the strongest, currency in the world.

What does all of this mean? It means that things are in massive flux. Markets everywhere are locking up and liquidity is drying up faster than one can take a breath. I guess when you essentially eliminate three brokerage houses from the marketplace in the past 18 months, this kind of thing will happen (MER is in flux and with any bank/brokerage marriages, transitions will disrupt things). this continued illiquidity essentially makes many companies insolvent. The amazing thing is that AIG has tons of assets but since they have CDS exposure, they are being taken down hard. GE is being hit hard to the downside because people are speculating about their well being given GE capital's large contribution to revenues.

this is one big story about "what if." Pure speculation and survival of the fittest. the problem is this: what happens if there is nothing left in the end? Here are a few other thoughts on the markets.

• This AIG thing is disturbing to me. I heard someone on CNBC say that this move by the Fed, to essentially take a 80% ownership in a world wide insurer, was in the name of market stability. Essentially if AIG failed, then many things would have toppled over as a result. But to take ownership in the company? Lets just add another trillion to the balance sheet of the Fed. They have a leverage ration of 20:1 now.
  
• Amazing how the dollar is taking this. Between the conservatorship of Fannie/Freddie and this, the government is becoming one very big hedge fund with tons of liabilities and very little equity. If there is a run on the dollar, it could be the end game for our economy. This is an enormous game of risk being played by the folks in treasury.
• Speaking of treasuries and interest rates, Fed Funds futures were forecasting a cut going into the meeting today. What happened? the Fed thankfully did not cut rates as a cut was not needed. that supported the dollar. the problem with this little AIG thing is that rates here are about to shoot higher and people will start selling our assets as a result of tehse purchases. I would love to be optimistic but I don't trust anything the White House is doing these days.
  
• Crude's fall from grace has been quite quiet. nobody is talking about it. Amazing how the black gold has fallen from $148 to $90 earlier today and the top headline is AIG. Perhaps the fact that gasoline and heating oil have not fallen aggressively could be the reason.
• Interesting technical bounce today off the bottom end of a trading range I am using for the S&P. If this holds into the end of the week, we could now see a bounce back towards the top of this range which sits near the 1300 level. In addition, there was a double top of the range last year. If this is not like the 2001/2002 period, then this could be perhaps the lows of this bear market. I am not using that assumption but it is worth thinking about.

I am a bit busy with things but will be back to normal over the next week.

Weekly Equity Market Outlook

Event risk is something that drives me crazy. There is very little one can do to plan for the unforeseeable. There is very little one can do if it goes against them. For example, years ago I was trading and got caught on the wrong side of a Fed rate cut, done during the day and not know. Conversely, when September 11th occurred, I was fortunate enough not to get hurt. When we went to war with Iraq and the bombs rained down, the following three months were difficult as the marketplace tried to gauge whether or not the war was helpful. Lastly, this credit mess, with another chapter today from the US Treasury, Fannie and Freddie, has distorted patterns and created trading conditions are erratic at best and treacherous to say the least.

So essentially here we go again. I was contemplating my possible positioning for this week on Friday as I hard the rumors about this takeover (though to be honest, I had heard a new rumor each Friday over the past month). I dismissed them and dealt with the facts at hand. First, my trend model had turned down as a result of the bloody trade. Second, my long term model supports were taken out at 1250 leaving me wondering how quickly it would take to get to 1070 on the charts. Lastly, I was debating on whether the low for the market would be midweek or at the end of the week. Now that this news comes out about Fannie and Freddie, I am left to wonder - what is going to happen?

Short Term
I am unsure of the short term. The market could look at this Treasury move in both a positive and negative light. Ultimately, I think the best place to look to see if the market likes this plan is the homebuilders (via the HGX) and the banks (BKX). At the moment, both are in upward trends over the intermediate term. An opening higher could be an indication by the market that things were done correctly at the treasury and the conditions will continue to improve in the credit space (and buy extension, real estate). If both of these indexes take a hit, this will continue the selling in stocks. It will also hit the dollar as well (another discussion). if the dollar, housing and financials are coming down, the trend will continue lower. That might make buying later this week risky. At the same time, if it is around 1200, it sets up the bulls for their retest of the lows of this bear market. Thus, short term I will watch what the S&P's do on the open tonight and what the banks and homebuilders do tomorrow.

Intermediate Term
The trend at the moment on the intermediate term chart says this: Things are weak. the trend models are both pointing lower and overall power models argue that the bears control. On the surface, this bailout by treasury removes some uncertainty but now the focus has shifted to the economy anyhow. Housing prices are still falling and unemployment is rising. Sentiment stinks and we have an election coming. This seems like too many variables that make it difficult to change things in favor of the bulls. In terms of the key levels, with 1275 gone, I argue that we are looking for a move down towards the 1175 area before the market bounces again.

In terms of the leaders following the bounce, the Russell and NDX 100, things do not look so promising there either. It appears that 690 will be once in place for the Russell 2000 as the market reversed hard below its major trend indicator. As for the NDX, it is right at support around 1750. A break there argues for a move down another 100 points. This would imply a break of the previous lows. Thus if the bulls have hope for a general market bounce, the NDX has to hold the 1750 level.

Long Term
The Bull/Bear model still points to a bear market. Things have been improving a bit over the past month but nothing major. Credit conditions may improve on the back of the treasury's move but the other variables are not exactly screaming Buy! The break of 1250 on the long term chart in the S&P now argues for the 1150 level next. Of course this is a monthly model which means that there is still time to climb back into the somewhat bullish area of town. The failure by the NDX over the past month argues for a much larger smoking down towards the 1550 level which is past the intermediate term possibilities. Overall, conditions look weak.

So in summary, this week will be interesting. If the banks and the builders bounce higher, we could be looking at much better conditions going forward. The NDX needs to joint his market though and given the selling in that sector, it might be difficult. I maintain my bearish bias on things going forward.

Looking at the Candidates: Barak Obama Part II

This is part II of a series of posts regarding Barak Obama's economic plan. The introduction can be found here and Part I can be found here. In this note, I will focus on trade and manufacturing plans.

In reviewing the plans of for Trade and manufacturing, I found some interesting and not so interesting ideas. The most interesting to me is the idea focused around creating an alternative energy leadership position in the world. I think it was GE Energy's CEO who said that we the ability to create the most wind power in the world here in the United States. Personally, living in the northeast end of this country, I might agree given the weather this summer. The plan is to provide incentives to the industry (a fund in this case) that forces innovation in the alternative's universe. While forcing anything in a free market economy is normally useless, I think this might actually have some potential (as the government forced ethanol and that industry has grown).

On the other side of this trade and manufacturing ledger that I cannot agree with is renegotiating NAFTA. I think it is very important to have low to no trade barriers with our closest economic friends. Canada and Mexico are not the US but they provide means for the US to become more efficient. Overtime that will change and jobs will flow from one country to the other. In the meantime, the US takes the brunt of the job loss. Longer term, I think it makes the US stronger and creates better conditions of living as a result for its citizens. Also, going back on an agreement is not something we should be in the habit of doing. Lastly, Canada has enormous amounts of oil and energy products - by having an economic agreement with them, those flows will not be disrupted. they are an ally (along with Mexico). We should treat them both like such.

Before looking at the rest of the plan, lets look at the key points that Obama argues on the trade side (already mentioned NAFTA).

• Fight for Fair Trade into Foreign Markets
• Improve Transition assistance
• Penalize companies that send jobs overseas and reward those that keep them in the US

On the first point, Fair Trade into foreign markets, I cannot agree more on it. however, this is a global issue and our government has been fighting this issue for over 20 years. Maybe he can open up some countries with his diplomatic sway but I don't hold out much hope for this. As long as we are at war in Iraq, our global diplomacy power is less or weakened and that will slow down everything else.

Improving transition assistance is important. John McCain said last night that transition assistance in this country is based on the 1950's model of an economy. Perhaps. In any event, I think some sort of government/non government joint effort should be put forth here. While I am not too up to speed on this issue, the free market has a remarkable record of creating jobs. As a result, some sort of joint operation in this regard should be employed on the job and education side to get people back into the workforce as quickly as possible.

I touched on the last topic in Part I in regards to the tax side. As I said then, it is a ridiculous measure to employ. We live in an global economy. Our companies must take advantage of that. if they don't, they disappear and innovation is crushed. Giving gifts to those companies who are not globally sales oriented to start with (the second part of the note above) is just a waste of money. Why give Joe and Mary's Supermart a tax break for hiring local people?

In terms of the manufacturing side of the ledger here, Obama indicates the following

• Invest in next generation manufacturing and job creators
• Double funding for the manufacturing extension partnership
• Invest in a clean energy economy creating 5 million green jobs
• Create new job training for clean technologies
• Boost the renewable industry and create new jobs.

This is all about clean energy buildup (away from big oil) and new jobs. It appears he believes that funding on this side of the ledger will be the best way to lead the US into the rest of this century. While I agree this industry is growing, does it really need government interference? On one hand, more money into the industry may encourage much more innovation as the costs to alternative fuels are still higher than that of the established ones in crude and natural gas. On the other hand, if the industry is expecting government handouts, innovation will be slowed. I guess it is a catch 22. The idea is a good one. How to implement it on the other hand is a difficult one.

As for the manufacturing ideas, protecting an industry that really ebbs and flows with the US dollar, is something that is not wise. My guess is that they Dem's will call for a stronger dollar - this in turn will make our manufacturing industries less competitive. Giving incentives to this industry to keep jobs and invest in new technologies is admirable. however, if everyone can make the same widget, ultimately cost becomes an issue. Furthermore, you can bet that if the US companies are employing a very low cost manufacturing process, the international markets will find it too. thus, marginally, this plan is like swimming up a raging river - you get nowhere.

All told, Obama's plans are ambitious to some degree. It argues for moving tax incentives from one industry to another which is ok. creating new one and not eliminating old incentives is not ok because it implies more government involvement in the free market. this historically is a negative and I believe it will continue to be an negative. Let the private sector benefit where the inventive is needed and take it away from the sector that does not need it anymore. As for the other measures mentioned, NAFTA should be enhanced and improved - not renegotiated. Job training is very important and I would make this a top 3 issue. if everyone can be trained quicker for a new job, then the loss of one or two key sectors is not that big of a deal as we can just retrain those who suffered and get them back on their quicker.

Looking at the Candidates: Barak Obama Part I

Earlier in the week, I introduced my miniseries on the candidates of this years election and their primary economic plan to help the economy going forward. I figured i would start with Barak Obama only because this plan is now out there thanks to the Democratic Convention. the republicans are speaking this week as well but since the dems went first, I shall post some comments on Obama's plan first...then McCains.

So on Sunday I started by writing about this two main problems with America: The Rich are not paying enough in taxes and wages are stagnantt. Today I will attempt to give a view on the subsets of these "problems" if you will. The first is the middle class tax situation. Now, I don't claim to be in the middle class though I live very much like one (as I feel like I could lose all my money at any time in this market and thus I don't spend it). Anyhow, Obama indicated in his plan the following issues around the middle class tax situation.

• He will provide a $1000 tax credit for families that will "restore fairness to the tax code." The "making work pay" program will in turn eliminate taxes for 10 million people or about 2.5% of the population (assuming 250 million people).
• He will eliminate taxes on seniors who make less than $50,000 per year. this will immediately knock 7 million people off the tax rolls saving them on average $1400. Furthermore, 27million seniors will not even has to files taxes.
• He will simplify the tax filing process for most Americans so it takes less than 5 minutes to do your taxes. This supposedly will save $2 billion in filing fees.

Ok. so now the analysis. First, in looking at this plan, he pulls essentially 17 million people out of the tax paying pool or roughly 3% give or take. Interestingly, this small percentage accounts for a much even smaller amount of total taxes paid. Furthermore, they are statistically insignificant as it comes to paying down the finances of the US Government. In turn, he will attempt to raise the capital gains tax from the current 15% to the 20% level (not mentioned by the way) and basically tax the richer individuals in this country for taking risk.

Now, as I mentioned in my opening missive, I wonder about the usefulness of going after your biggest tax payers and making them contribute more. this plan mentioned above essentially is all fluff and no substance. If your goal is to penalize risk takers, just come out and say it! of course, this is politics so that will not happen.

In addition to these tax polices, there are also a few other tax situations mentioned in his plan.

• End Tax breaks for companies that send employees overseas.
  
• Reward those companies that hire more Americans with tax breaks.
• Provide a tax break for small business and start ups.
• Enact a windfall profit tax on energy companies that creates $1000 per year for middle class families.
  

These are all admirable positions to take. Personally I like them but I also do not like the practicality of them. By telling companies that they cannot send individuals overseas or you will get penalized for it, you are also indicating then that globalization will cost you - that is a very big negative in my opinion. Globalization is here. Embrace it. do not fight it or we will become like every protectionist state that fell over the past 300 years.

As for the second two, I don't think tax breaks should be given to companies that hire Americans. That is absurd. Companies are going to naturally hire an American. Why given them money to do so! As for the tax break on small business, I think that is admirable and a good policy. However, the taxes that small business faces is the problem - reforming that end of the code, and the double counting of taxes on employees (company pays taxes, the employee pays taxes of the same amount) needs to be fixed. Otherwise, this tax break, while short term useful, long term inadequate.

Finally, I ask, if the energy companies start losing money, will the government create an windfall profit taxes on say the consumer who is benefiting from the falling energy prices? This is a stupid policy that should be tossed out with the trash. it is dangerous to capital formation and will push companies overseas and create less jobs domestically. I just don't see the benefit. yet again, if I were a hard core liberal who does not understand a darn thing about the economy, this would make perfect sense. I am not though.

Roll Over

As I reviewed my charts tonight, something struck me, leaving me with a big black eye. It was the stock market which plunged today from the near 1300 level to the 1277 level on the close. From a chart perspective, many of the supports that have been mentioned in the past have held. However, my trend model, which measure the best time to go long and short stocks, is turning over. This "roll over" and not in AT&T terms, is not good. Essentially it argues that the rally is over and the bear is about to reassert itself. While there are still three days to go in this week, which means that the chart could reverse back up if the markets find some footing to the upside, I am not on alert and holding off on any further purchases to my portfolio.

I will be back this week with my weekly piece on the equity markets. I figured I would share this potential "roll over" with you before then.

HO Could dictate Direction this Fall

As we proceed into the winter season, as far as refiners are concerned, the focus will shift from the unleaded gasoline inventories to the residual fuel or heating oil inventories. When the winter is expected to be a warm one, sort of like what we saw the last few years, HO demand is less than the norm and prices for this product generally lag the price of the crude barrel (crack spread favors crude). When the winter is expected to be a cold one, refiners prepare for the rise in demand of this product. So when things are expected to be warm, lower demand is expected....cold, higher demand is expected. Simple, right?

Well, what happens when the expected does not occur? Two things. First, when the cold sweeps through and is unexpected, more heating oil is used driving inventories lower till the refiners bring the level back into line where supply and demand meet. This drives the price higher, rather quickly. Over the past few years with the warmer than expected winter, the price of heat has been leveling off before the winter really picks up. Basically, the months of October and November have determined the action for the rest of the winter for the price in heating oil.

So here is where the real fun begins. I use two weather models in my forecasts for the winter. I don't actually trade off them directly but I use them to better understand why people are buying and selling on the weather during different times of the year. For example, my reports had Gustav coming into the US at about a cat 1 or 2 whereas the market was looking for much larger and greater damage. That did not occur - crude and natural gas dived! Now, if I had only sold short every crude and natural gas contract on the exchange!!! Anyhow I did partake on the dive (as I mentioned in my crude call a few weeks ago making a quick $4).

Ok, moving on to the winter. Basically, my two models are indicating a colder than normal winter. There does not seem to be a consensus on the weather this winter online though most services require some sort of payment so getting the whole story is somewhat difficult. Anyway, one of my sources indicates temps around 3 to 5 degrees higher than normal for October/November. Interestingly, my trading models have heating oil perhaps finding support around that time period. Furthermore, in terms of residual fuel inventory levels for this time of the year, the level currently resides at its lowest level since 2005. Essentially refiners are not moving into this market aggressively basically with the mindset perhaps that we are not seeing a cold winter coming (on top of cascading prices right now not helping things either).

This all comes together and sets the market up for a surprise. Essentially if we get colder than expected weather temps, demand will be higher for heat. This will put stress on the already low inventory levels and push upward prices perhaps putting a floor on crude prices through the winter. Interestingly, year over year inventory levels for natural gas are also the lowest since 2005 at this time of the year - another market perhaps not looking for a colder winter (though electricity demand is playing a roll here....8% lower y/y from what I have read last). A cold weather demand push would give both of these products higher demand and thus higher prices.

Easy vs Tight Policy

What has been interesting about this dollar rally has been what the waves have done in destroying the rallies in the other majors. For example, from the double top in the Euro around 1.60 and the double bottom in the USD around 71.70, several currencies have been pummelled lower. The Aussie dollar, suffering from overtight policy, has been crippled by almost 20% from the highs. This is a currency we are talking about by the way and not a tech stock. The British Pound, another currency suffering from overtight policy, also has taken a beating lower, falling almost 14% lower. Lastly, the Euro has backed off by about 10% - it too also suffering from overtight policy.

On the other side of the ledger, the Canadian Dollar, which has been tracking crude somewhat closely, is trading decently for the most part as the Bank of Canada (BOC) has been maintaining policy somewhat easy relative to its fundamentals. The Bank of Japan, the current proud member of a government in disarray but also featuring an easy policy mandate, has seen the Yen hold up well globally. Lastly, the good old greenback, the one that every bear has come to hate and blame for the current blow ups globally, also features ultraeasy policy.

So essentially what the currency market is doing is giving those currencies with easy policy mandates the benefit of the doubt going forward that essentially these currencies will be hiking rates in the coming future thanks to stable inflation pictures and rising growth. Those currencies that have tight policies will only feature rising growth if the policy is loosened. Till that point, the selling will follow which makes the Euro extremely interesting over the next six months.

The European Central Banks' current overnight rate, 4.25%, is restrictive in my opinion using a combination of models that have the core rate of inflation, growth, market inflation and market growth. I could explain these in more depth but that might take many pages so lets just summarize. Generally speaking, when growth is rising and policy is easy, the understanding in the marketplace is that the local central bank will have to hike rates. This will drive up overnight interest rates and support the given currency - sort of what we saw with the euro for the pats few years or even the Aussie the past few years.

At the moment, the Eurozone features shrinking growth, moderating core inflation, moderating market inflation (just watch the CRB for a good correlation there) and moderating growth (bull or bear model I often site is involved here). Going forward from here, the forecasts for European economy are for lower growth, moderating core inflation (last flash estimate dropped) and I believe that the market inflation picture will continue to moderate and on the growth side, I maintain we remain in a bear market so I don't expect that to rise anytime soon. All of this while the ECB is about 50bps too tight at the moment - meaning rates should be 3.75% vs the 4.25% used. The longer this persists, the more likely that the Eurozone variables, growth and inflation, will continue to fall and this will make conditions even tighter.

As we saw with the US economy following the breakdown in the dollar earlier in the decade, it took ultraeasy policy just to reverse the downward pressure that the strong dollar and tight policy, combined with a bursting equity bubble, to change the trend (and even that did not work as well). Back in 2000, the Federal Reserve was tight by almost 100bps when the stock market began its decent following the rallies in August 2000. The day the ECB hiked a few months ago began or increased the volatility throughout the marketplace. It also punched the EU economy in the gut and here we are today.

So what does this have to do with the Euro? Well, as it probably has been well chronicled, the Euro has fallen hard over the past month. Like my crude has support at 111.50 level call a few weeks ago (once that level broke today, crude collapsed), the Euro now has a similar setup showing on the chart. As the long term chart here shows, is sitting on a trendline that has held support since 2002. A break of this trendline very well confirms the breakout in the dollar to the upside. The dollar index has already climbed past its long term downward drawn trendline - now if the Euro breaks through, currency trading over the next 4-6 years might be much different. This could also create interesting changes to the US economy (that will be covered in another piece sometime).

Bottom line is simple here. If the month of September continues to be a month where the dollar is supported, the Euro could be on its way towards the 1.35 level and then the 1.20 level. If the ECB responds by cutting rates in the next few months or at least signals that such might occur, I think the 1.35 level will hold. Otherwise, I would argue that the 1.20 level is coming over the next few years. the longer the ECB holds out, the longer it will take to fix the damage.

Looking at the Candidates: Barack Obama

This year's presidential election is an important one for the nation. The country is suffering from erratic growth patterns (growth in some areas and contraction in others) and generally holds the white house to blame for it. Further, there is a war, or two, going on overseas and it appears the current conflict in George is steaming towards another. There is a global housing crisis in play though domestically it feels like the worst housing bust ever. There is a problem with rising prices and falling real wages (though rising nominally). Overall, at first glance, things suck to put it bluntly. At least this is the message that the democrats and Barak Obama are arguing.

(Before I continue, just for disclosure purposes, I am a registered democrat).

Over the next few months, I will attempt to break down the policies of the candidates for the oval office. I figure now is a good time to start with the democrats as they just finished their convention and the policies, or the proposals, are now "out there" for everyone to analyze. Next week the republicans will have their chance to spread their ideas and following that period, the proposals will be out more formerly which will allow for a more thorough analysis.

Initial Thoughts on Obama's Plan
Obama starts his economic plan with an expert from a speech he made in 2007. He endorses the free market as building block to our nation. He argues that everyone is involved in the process and should benefit from it. However, if you continue on with this plan, reading down the rest of the page, every policy discussed goes after the free market. It argues for the government to bend over backwards for everyone. It depends on a good deal of money. Overall, it is essentially a plan to socialize the free market. Is this necessarily a bad thing?

Well, everyone should care for each other some vicinity - to have compassion for those who are having problems. I myself are healthy. However, many people are not. Does that mean I go out and donate my life to medicine? No but it does argue that if I have a few extra dollars or some extra time, I should volunteer it to an organization or to an individual. One thing that the free market does not create is compassion as the free market is pure capitalism. Pure capitalism is survival of the fittest. Unfortunately, not everyone can survive and that is the environment that we currently reside in. Obama's plan is to move the pure capitalist environment towards the social side. Is he saying to cross it? It does not appear that way.

In his opening missive, he argues that the problem is two fold: First the rich are not paying enough. Second, wages are stagnant. In regards to the former, that is an debate that has been going on forever. One could argue that the system allowed for the rich to get rich and some of those "riches" so to speak should be plowed back into system for the benefit of others. On the other hand, if one works hard and achieves riches, why should he be penalized? In regards to the latter problem, on wages, this is not something the government should be involved in. Sure, the minimum wage should exist but beyond that, stay away. The government, through the Fed, should push price pressure lower so real wages are positive. Rising wages are a good thing. however, given the current environment, rising wages are not helpful. Knocking down inflation should be the goal.

Over the next few days and weeks, I will break down Obama's plan. It involves several topics including

• Middle Class Tax Relief
• International Trade
• Job Creation
• Small Business
• Labor
• Home Ownership issues
• Credit and bankruptcy issues
• Work Family balance

Each of the issues will probably be discussed by the candidates so when I present John McCain's plan, I will probably run the same list. Just a different perspective on the issue. So with that said, I shall start with Taxes and the issues behind it in my first post later today (or tomorrow depending on my time).

Vacation

Well folks. My 2 week vacation has started. I shall be on and off the blog for the next few weeks (though I will still be trading). I will come back in September refreshed and ready to go. Talk, or should I say, write, to you then..... - TC.

Is Housing Affordable?

The NAR Affordability Index has been knocked in the past for not representing the housing market correctly. It tends to overstate the health of the consumer and understate the weakness. It takes into account Median single family homes values, median income and current mortgage rates manipulating the data so it gives a the payment percent of income and a qualifying income (which is explained here). The data does not appear to take into account rising local tax rates. Further, I am not sure if it takes an average interest rate for a weighted average interest rate. The difference, in today's world particularly, is somewhat major given the state of the credit markets.

In looking at the data over the past year, the price of existing homes and the mortgage rate have been decently correlated with both rising and falling together in most cases. For the June data, the price of an existing home moved up about 6k to 213k. The mortgage rate jumped more aggressively to the upside to 6.28. From what I can gather of the rate markets over the past month, this 6.28 has been about the level for conforming rates, via FNMA generics. However, prices of sales in July and August for that matter, have declined somewhat aggressively. Essentially, prices have fallen but the credit markets have not followed. This is somewhat of a worrisome trend and could derail my housing thoughts from this morning.

In terms of the bigger picture, the housing affordability index, when combining the idea that only people with income can buy a home, has actually been strengthening at a greater pace over the past year. Payments as a percent of the median price fell under 20% earlier this year. If you take into account those who can make the payments, this argues that the market may actually be stronger than these numbers indicate. This means that the general stress that housing payments became, are now unwinding. If this stress unwinds, when combined with lower gasoline prices (and perhaps heating bills as Natural gas gets clubbed), could create some growth in consumer spending come the fall. Further, if there is less stress in the payments, then that raises the probability that many of these written down CDO's or other mortgages debts, starts to find a pulse. This could lead to write ups in the coming future.

Now, I need to do some more search on this idea but I figured I would share it as it seems like perhaps things are improving as stresses unwind in the economy - this contrary to the popular belief on the economic bears side of the ledger.

Weekly Equity Market Outlook

An interesting week came to an end on Friday with a low volume rally into the close. As I mentioned yesterday in my notes, the persistent bid that showed up at the 1265 level earlier in the week was sitting at the 1285 level on Friday. Some may call this the plunge petrol. Others may call it a lack of selling strength. With the volumes very low and tapering off as the week went on, one could argue that the shorts, who probably had a decent past three months, decided to pack it in and go on vacation. August after all is the month that most in the financial world goes on vacation. It is also one of those types of months where what happened at the beginning tends to unwind at the end. Last year we dived into the midmonth only to finish down marginally by the end - interestingly, we are seeing the same thing this year as well.

Short Term
Over the short term, I am on the offensive side of the ball. I was tripped into long positions in both the S&P and the NDX. The forward trends look like this rally could continue into the end of the week though overall it is very slow moving. At this rate of speed, by my calculations, the high of the run would be somewhere in the 1308 level going into month end. That would coincide with a high of sorts as well. In addition, that would be about 6 to 7 weeks from the low in July which some have argued would be the length of the bounce. What hurts the rally case is again the low volume of the mini contracts which has tapered off to the point that the 9 day average of volume is the lowest since the beginning off May.

Intermediate Term
The Intermediate term models are still pointing to the upside though it is tapering off. There is also a divergence as well which indicate that the rally is long in the tooth. This sort of goes hand and hand with my idea of moderating trends in the marketplace. If you combine this with my believe that the rally had potential to go towards the 1325 level, then perhaps the outlook now is towards the 1325 level through September before we head lower. In terms of the leaders from last week, the NDX and the Russell, weakness has arrived it appears. The NDX got over the resistance levels mentioned but has stalled around 1965. This is not necessarily a negative to the rally but a failure here and a move back toward 1900 could become a problem for the bulls. In terms of the Russell, it too has stalled but the upward trend remains intact. So overall, the intermediate term looks like these indexes could march towards the resistance levels before a return lower and a resumption of the bear.

Long Term
The 1350 level, combined with my bull/bear model still argues for a bear market focus. On the long term chart, the S&P is forming a nice reversal pattern but in order to confirm it, we would need a rally in September. Do I see that coming at this point? Not quite sure. A few things would have to kick in. First, the Russell would have to climb further and not stall out. The Crude market would have to collapse further and earnings would have to pick up. Do you see any of that occurring? Perhaps the idea of crude falling further is possible and the Rally in the Russell continues but earnings are just awful at this point and if crude falls lower, the one positive earnings contribution from the energy sector will be less. But, one thing working on the long term chart is the continued strength in the NDX. A rally from here over the 2000 level, could create an interesting impulsive move higher towards 2500 level. A 25% rally in the NDX would translate into sizable moves in the other indexes and it would be safe to say that the bear might be removed by then.

So in summary, I remain bullish over the short term, intermediate term and partially hopeful over the long term. The bear market remains but it is clearly showing cracks. Continued improvements in the credit markets and a stabilization in the housing market could make things very interesting for the fall.

What are the Homebuilders Telling Us?

It's no secret that the housing market is weak. Sales are coming but at greatly reduced prices. Builders continue to put up the "million dollar castles" in cities nearby which has confused me. Financing is tough these days though available at much higher rates. Crude prices are lower but the price of unleaded has not completely unraveled....at least not yet. The unemployment rate has been moving higher and job creation is basically nil with my own models showing that job creation at its weakest since June of 2003. Lastly, the realtor's of today look like the stock brokers of the bubble era - they went along for the ride and now don't know what to do when the "ride" blows out a tire. So with all of these negatives in play, why are we seeing the homebuilders rally?

Now this is no ordinary rally. There have been squeezes in the past but those squeezes were isolated and not accompanied by other securities - in this current case, the greenback. The bears have been out on the dollar but more so of late on the housing market. The reasoning behind such has merit but the homebuilders have continued to climb. One of my trader friends, who has been doing this for 30 years, often says that at market lows, the next leaders are born. We saw that in 2002 when the basic materials were the first off the lows. We saw that in the late 90's with the tech's accelerating to the upside. Could 2008's low candidates, the financials and the homebuilders in this case, be the next leadership? Could they be telling us that perhaps credit conditions are now in place for housing to stop falling?

That is a strong leap in some cases. One could say that the homebuilders and the financials were so beaten up that a bounce was inevitable. For the financials, I don't necessarily doubt that and in using the BKX, they really have not reclaimed levels of last year. The homebuilders on the other hand, using the HGX, have reclaimed a trading range and have bottomed in a similar location to the lows of 2003. If they are truly moving up, and have seen the lows, this could market stability. The last true time that housing had stability was in 2005. The market probably was much more than stable at that point but in this case, I argue steady to rising prices. 2006/07 were periods of flat to down though the statistics won't bear that out. 2008 has been "tough" for the lack of a better word. Thus, stability has not existed for 3 years now going into year four, which is only four months away.

A while back, in trying to understand the real estate market, I did analysis of the new home sales data to the existing home sales data for the period during the late 80's into the 90's. Now I cannot find it anywhere but I do remember a few things from the research. First, the new home sales data bounced first followed by existing home sales data about 2 years later. This makes sense in many ways in that the new homes went into the existing pile and took a few years to work off in terms of inventory. Meanwhile, homebuilding just was not strong during this period and overall inventory levels came down. Comparing that to the current period, homebuilders have been steadily cutting back on building and playing defense if you will. If the homebuilders index is correct, perhaps we are now at that point where the new homes sales data stabilizes while the existing takes a few years to work off the slack? So what we have here is one index telling us perhpas what is going to happen down the road.

Now there are a few things that actually support a rally. First, the Fed is maintaining an easy monetary policy stance - I estimate about 195bps at this point which is well off the lows of the Greenspan times during 2003 but still pretty easy when inflation and commodities are rising. In addition, long rates are not terribly high and only those with good credit are getting loans. Now one may look at this as a problem - I see it as a way to stabilize the market. If those who have good credit and 20% down to buy a home are the owners, the probabilities of foreclosing on these folk is much lower. If the foreclosures slow to a crawl, then the focus remains on the existing inventory which means that the price that it sells for, will be not at firesale prices but rather something comparable to the given area.

Another factor to consider is the dollar. Now I am not advocating that the dollar low is in. One can never call a low in a currency in my opinion for the long term. However, I am bullish on the dollar now and could see it trading another 3-5% high from here. That means that dollar assets might be in vogue which could attract international flows into US domestic assets. If those assets include credit instruments, then the credit markets will stabilize which also creates better loan conditions for the banks and more buyers for the real estate market.

So what am I saying? I argue that the homebuidlers have bottomed. But, I don't know if the actual housing market is going to rise anytime soon. The CME Housing futures have stabilized over the past few months but they are not particularly liquid so using them perhaps is not a strong support for the real estate market. My own models show that we are in the third wave down for housing right now (we had three rising ones in the earlier part of the decade). We have bounced each time for this level but the previous two times were not accompanied by the homebuilders. Thus, we have the CME futures, the homebuilders and my own indicator all at extremes or turning. The market is making a bet and that bet is that real estate is stabilizing. Question is....is it a good bet?

Bits and Pieces

What an interesting market today. The buyers who were hanging around the 1265 level yesterday were doing the same today around 1285. It was a persistent bid though if you look at the volume numbers, the sellers really were not that aggressive today. Market conditions, as I will talk about later this weekend, were not exactly bullish - new highs jumped a bit but new lows did not sink enough. There were other stories in the marketplace that I found of interest which could explain the lack of interest in the equity markets as these stories were all ex-stocks if you will.

• The Lehman takeover news was an interesting tid bit. S&P futures immediately jumped on the news but that exuberance was unwound as the day went on. I am not sure if this company is taken out or not but there is some big betting going on in the marketplace if they will actually still exist by the end of September.
• GSE's sinking was not the story today - at least not on the preferred side. Essentially the market is pricing back in the fact that these subordinate securities will be worth something. Interestingly, generally speaking, when subordinate debt does not get paid, the company is most like bankrupt. So does that mean that the Preferred will not bet paid if FNMA and FRE go into bankruptcy? Oh, didn't the government say that could not happen?
  
• Speaking of bankruptcy, it appears that anyone who is in financial trouble is putting out there hand to the US Treasury - today's client is the US automakers who could be asking for as much as $40billion. I don't think that is going to be supportive for the dollar. AT the same time, do you really think the treasury will give out a handout to an industry that is riddled with high costs and low margins?
• As for the dollar, nice reversal today followed by the nasty reversal yesterday. I think too many people jumped on the dollar express and yesterday they all reversed. Today they all covered. The COT data showed the highest net long position since 2005. The fact that the greenback recovered today supports the continued rise higher. The homies are also holding gains and climbing.
• On the trading front, I have been cutting back positions in my portfolio. I just don't find the current environment exciting. Perhaps a big move by the S&P over the 1300 level could stir the pot a bit. That is what I am playing for as I am holding some S&P and NDX exposure to the upside.

Well, that is about it. Have a good night.

Perspective

Perspective is everything in the "business." In my six years working in financial services, I came across many who really did not have an idea of what was coming - a perspective if you will. One thing that I always had was a perspective of the environment. When I worked as an consultant on the sports management side, I always needed to be properly prepared and offer an outlook for the industry and what types of advertising and promotion would work. So today as I write this, after reviewing and updating some trading models, I am left with a different perspective so to speak. In short, I see tops and bottoms on the charts but within my trading models, thanks to a new function that I did not have before, I perhaps was too "quick" to jump the gun on various markets.

Now one could say I am being pushed around by the environment. That is possible but unlikely. I mentioned over the weekend that the dollar recovery hinged on the housing stocks. They have stalled and the dollar has weakened somewhat. I mentioned last night that crude was probably going to continue to bounce higher and the 111.50 level would provide adequate support for the bulls. Today, it finished up over the resistance point of 120. What I am offering here is an analysis of two different perspectives - one via my trading models from the computer and the other via the charts.

Now both share some commonality. I use the ADX formula on the chart and within my trading model. The trading model though changes the ADX formula a bit creating a different twist on things. Both have aspects of contrarian and momentum trading. The charts are about momentum and waiting for a turn or a double bottom whereas the trading models via the computer look for extreme points within an upward rising trend. Now if this all sounds like gibberish, then I apologize. So I will move on and explain my issues.

First, I have been openly bullish on the dollar since the beginning of time - time being the begging or launch of this website a month ago. My reasoning was simple: The DXY had found good support at 71.70 and was oversold while doing so. It bounced higher breaking through several resistance levels in the process. Other indicators on the chart started to turn. Meanwhile, the Euro has a double top sitting around 1.60 and it was extremely overbought. Add to this some policy issues with the ECB and I thought it was ripe for a beating (also the GBP though I did not envision the decline being this much). I also had bearish readings for crude and gold as well.

So with that in mind, after putting together some stronger trading models tonight, via my computer (and programming magic), I discovered some interesting things. First, the "trend" if you will for the Euro, GBP and Yen still argues for strength (ie dollar weakness). While there were numbers that indicated trading against that trend was a good idea, they have disappeared...ever since the Euro hit its lows last week. Now, this is not to say that the Euro is very strong - it is actually at its weakest point since 2006 in terms of trend strength. This is to say that I may have been a bit premature in terms of being overly bullish on the dollar. As for crude and the gold market, the call last night on crude was partially based on this model, combined with the charts. Gold, it was so beat up that it had to bounce - it too though is exhibiting and extremely strong upward trend.

In the end, I now have two perspectives. Which one does one ride? Well, I believe they can both be used. So lets give a quick rundown of each going into the weekend.

Dollar
The Dollar Index has found resistance the last few days as the credit issues rise to the surface again and the homebuilders back off. Meanwhile the Euro has found some support and is moving higher. I still argue that the chart holds some more significance here and the rally peters out around 1.50 at best or sometime early next week. The weakness in the pound, on both the chart and within my trading models, also argues for strength in the dollar. Thus while the trends of both the GBP and the Euro point up, I argue that the trends are weak and long in the tooth. I remain bullish on the dollar

Gold
Gold is somewhat interesting. I argued a few weeks ago that a break of 850 would lead to a nasty decline lower. Sure enough, the yellow metal collapsed as everyone was looking at the same level (and the stops rained down). Now it has climbed back and is attempting to get something going. I am inclined again to believe that the primary trend is due to correct further and gold is as well. Now, here comes a divergence in opinion. Gold's uptrend is very powerful and I would be very surprised now if we saw the 600 level, like I mentioned a few weeks ago. Short term the sellers could reemerge as the yellow metal, with further strength tomorrow, will be overbought.

Crude
I argued Crude's case yesterday so there is very little reason to rehash. I will say though that after the sizable bounce, I am less bullish now. $122 is a major resistance point now and it looks like that a turn lower could come sometime next week. AT the same time, the crude barrel is oversold - very much so as a matter of fact. I would guess that the market bides time heading into the hurricane month but a move back to the highs now, cannot be ruled out. I myself will be playing the long side heading into the next month but again there might be some short term top in place next week where I then would start looking short again.

Well, that's it for now. I will have some new models coming in a few days covering the soybean market as well as the silver market. Have a good night.

Support for Crude?

Wednesday was an interesting day in the crude pits. First, the market opened substantially higher and crude moved straight up till the 9mm build of crude was announced by the DOE at 10:35am. Then it proceeded to have a $4 reversal over the course of the morning - then it rallied into the close. In between, there were many stories being thrown out there but one that I should have noticed had to do with the idea of support. Support, as most know, is a point where the buyers are stronger than the sellers and prevent sellers from taking the price lower. On the weekly chart of the crude contract, 111.50 is that level. As you can see from the chart, there is a double bottom there. Furthermore, this is occurring while crude is deeply oversold. Result: Perhaps a solid bounce higher...and not the plunge I was looking for.

At the same time, there are a few things working against crude. First, the aforementioned dollar versus gold model has turned into the favor of the dollar. Over the past 20 years, when this has occurred, crude has underperformed and in most cases, backed off toward the lows. Now that is not to say that crude moves down to the $30 barrel level. It does indicate though that the road higher will be difficult and paved with bearish stories. One of those bearish stories, could be the energy report from the morning.

I say "Could be" because this report had a little of everything in it. First, the headline build in crude was largely driven by imports though as one energy analyst I read indicated that the four week average of imports was somewhat inline with the figure today, making the "imports" excuse somewhat mum. On the bullish side, the gasoline and heating oil inventory levels were reported stronger than expected for the bulls. Distillates is getting quite a demand push as overseas demand for it is driving down the levels of inventory we have on hand. Gasoline demand was actually lower again this week but in terms of year over year figures, sort of inline.

My rule of thumb with these inventory reports is to focus on the product that is the primary at the time of the report. In this case, it is gasoline though in a week or two, the focus on heating oil will be the story. Till then, the gasoline story is the one to run with on inventory day. AT the moment, the bulls might say that inventory levels have sunk over the past four weeks. That is true but if you delve into the details and review a few other anecdotal news stories, you would find that refiners are not building inventory - they are just not refining as much. I guess that happens when you practically lose money on each barrel of crude you refine! So essentially the crack spread is effecting the inventory levels. A more advantageous spread and the supply will start cranking!

Another interesting support for crude sits with the oil stocks. Now, I am not saying go out and buy yourself an XOM or CVX. I am saying that they are starting to show some relative strength and in the past this has served as an leading indicator for higher crude prices. These indexes I speak of though are not quite strong enough yet to buy. This could be just one oversold bounce being set up for another drubbing to the downside.

So here is the story going forward. Short term indicators are rolling over. My gold vs dollar model favors the dollar at the moment which is again bearish for crude. At the same time, my short term model is oversold and thus selling down here might not be the best bet still the market unwinds some of the pressure. The weekly model shows some support at 111.50 so as long as that level is held, this market should find some level of buying. The weekly bounce, if holds, would push for the $120 level. Longer term models still argue for lower prices. Add to this the breakdown in the USO through the 95 level and my previous forecast of lower levels is still in play. Thus, longer term I remain bearish on crude. Short term, I am looking for a bounce towards the $120 level. From there, we could resume the decline.

A Little Sports Talk

When I launched this site, I had every intention of talking about the business side of sports as well as the financial markets. They don't really intertwine too much but since the business end of things is being evaluated, I figured that both could coexist on the site. Also, a disclaimer: I am a big Boston sports fan and have been since the day I was born. So if my Red Sox talk or my Patriots Banter gets to become too much, then feel free to comment saying such. Will I listen? Probably not but feel free anyhow.

So today as I am listening to WEEI.com through my computer, the buzz and banter, to steal that from Minyanville, was about the sox and the wildcard. First of all, when did we write off the sox and the division? I know the devil dogs have a 4.5 game lead but lets face it...most in Boston have seen that lead before evaporate! The Devil Dogs are indeed a formidable force - they sport the best home record in Baseball and their team pitching stats are near the best in the AL. However, there hitting is mediocre at best and with the losses of Longoria and Crawford occurring this week, that mediocre offense just fell down further. The pitching can only take them so far!

So outside of this conversation, there was a mention that attendance in Tampa for the D-dogs was finally rising. When I heard this, I said, Finally? Maybe it is Tropicana field or maybe it is the Florida market but they just do not want to support a baseball team down there. The attendance figures for the Marlins (they have won 2 titles by the way in the past 11 years) are pitiful. The Rays attendance figures are somewhere in the 18k per game - for a first place team! Now maybe nobody believes in the story. Maybe the pundits are correct and the Rays will fold. That is to assume though that the Sox move up - and based on their ball playing of the past few weeks, that is no guarantee!

A site that may be proving the pundits wrong is CoolStandings.com. They run millions of simulations on each team for the remainder of the season and determine the probability of a given team winning the division, the wild card or the pct chance that each team in the division will make the playoffs. At the moment, they give a 69.5% chance that the Rays will win the division and a 23% chance they will win the wild card. The former is the second best in the AL (Angels are an almost certain lock at 99%) and the latter is the second best (to the sox at 44%). Now with such stats, the obvious does not always happen. At the same time, one could argue that the Rays would have to really screw up to lose the division down the stretch.

At the same time, their schedule in September looks deadly. They have a ton of games on the road against the American League East. The week of Sept 5th through 14th provides them with road games against Toronto, Boston and New York. Since this team is a major home team type of player, this little stretch of games could destroy the fortunes of the Rays. Conversely, a move through this level and they could sell out the remaining amount of their games in 2008.

So will the Rays hold on? Well I am going with Coolstandings and the high probability of success to win the division. I just don't think the Sox will turn it on in time (somewhat listless).

Random Thoughts

What an interesting day in the markets. The S&P rallies near the open and then does an about face for about 30 points before turning higher into the end of the day. The twins of the US Government, Fannie and Freddie, took another beating today. The homebuilders, which I indicated were a very key variable for the dollar, also saw some intense selling. I was looking for a correction coming into today though I did not realize we would see an full fledged whoppin. As those FRE's and FNM's collapsed, I started to feel panic again. Perhaps this is a good sign. Of course, when I felt that panic, I just got up....took a deep breath and waited for things to calm....all better!

Anyhow, this market had a bunch of interesting things going on today.

• The dollar and homies correlation held strong today. The Euro found some support as the selling looks like it might slow for the rest of this normal vacation time of the year. I used to call August an mean reversion type month: Essentially nothing happened so the given index return to the mean or if something happened, by the end of the month, the index returned to where it started.
  
• Some people are getting a bit perplexed by the movement in rates. Today did not really support my risk coming off the table idea but it continues to catch the eyes of stock traders.
• Gold bounced but I continue to remain bearish...grain markets were very strong today in the face of buyers right off the bat. This reminds me of the commodity trade when the bulls came in on Monday, purchased the markets and let them run for the rest of the week. Old habits die fast.
• Since when does Barrons' become the mouthpiece of the government - via the FRE and FNM news today. If true, does this mean Paulson does not support these two companies in their current form, as he indicated a month ago?
• Anybody know if Barrons track record is any good?
• Hearing that the window is closed again to preferreds. Tell that to the major banks that did them last week.
• 1275 is kind if important on the S&P. Keep an eye out for it.
• 117.50 remains a roadblock for crude. I still like my call for lower prices.

Have a good night.

Weekly Equity Market Outlook

Well, the dog days of summer are officially here. Historically, the last few weeks of August have been dreadful periods to trade. In fact, for the whole month of August I typically take a step back unless I have high probability signals in play. This month, August of 2008, only sports one signal I am using and as of today, it has not occurred (though something like it has been popping up over the last few weeks). So from there, I am basically on alert for the unpredictable. I will way that this market move resembles the one in 2000 when the market went to the highs and then got piledrived lower into the fall. Essentially it appeared then that the shorts had given in and markets moved higher. Then the economy soured and the election problems began. Repeat?

Short Term
Over the short term, I am playing defense. My trends still argue for a long side trade in the NDX 100 though on Friday, an extreme signal came out and I covered. As for the S&P, nothing is going on here. A mild reveral signal came up on Friday but the probability of success for it is slightly more than flipping a coin - thus does not hold a significant enough value to actually short the market. If I were to hazard a guess, I would imagine that we correct a bit in the early part of the week. The 1280/1285 level looks like good support and based off the strength in the NDX and the RUT, I would imagine any correction will find support. Thus, I maintain a marginally bullish stance with pallet dry at the moment.

Intermediate Term
This is like a tale of two cities. On the strong side, we have the NDX 100 and the Russell 2000 - both good leading indicators for future growth. On the opposite side sits the very slow moving Russell 1000 and the dragging Dow. The S&P sits in the middle and is slowly improving (Slowly being the operative word). In regards to the leadership, we are seeing expanding participation which is supportive for the dips. Further money flows have reversed and argue for a bullish stance on the NDX (The RUT is getting there). The concern I have is with the Dow which has stalled. Like the Russell 1000, the index formed a doji this past week while the leaders formed stronger looking candle formation. Essentially the market is saying that we'll pay up for growth but not value at this point. I guess we'll find out who is correct as this rick aversion spread trade plays out. Overall, I maintain a positive stance on the equity markets.

Long Term
Long term models still argue for a bear market in place. At what point does the bear reassess itself? Well it could be this month. Generally speaking the best sales I have ever had have occurred when the market is a bit exuberant. At the moment, that is not the case. In fact, pessimism is pretty strong. But as well all know, this market can shift its emotions quickly and exuberance, with continued gains by the NDX 100, could show up in now time. As for the formations on the charts, they all look solid except again for the Russell 1000. It is dragging and threatening to fall backward towards the breakout point. AT the same time, the NDX and RUT both argue for much larger moves so in this case it is 2-1. Thus I maintain a bullish stance within the bear market.

Questioning My Dollar Premise

Each weekend, I will take a look at the various indicators I follow from the many different financial markets and ask, "what is the market telling me?" Over the past month, with this massive dollar bounce, biggest in several year, I have been under the assumption that the selling had dried up and a low had been put in. In fact, there was a double bottom of sorts on the charts, which in my world, is bullish. However, as I was reviewing some things this weekend, I left with a quandary of sorts. That quandary involves three variables: The Dollar, Gold and the 2 year note.

Now each of these has been on the move for one reason or another during 2008. If you look at the charts, the dollar and the 2 year seemed to have bottomed around the same time. Gold simultaneously topped within the same time frame. The moves of these three securities held in place till last month when the 2 year note reversed course from the 2.75% level. Meanwhile, gold and the dollar have continued their negative correlative moves. From a macro point of view, I believed the move in the dollar was based on overnight policy - essentially that the ECB and BOE were way too tight with policy and their next move was down, while the Fed was too easy with policy and would have to tighten next. This is a sound argument generally for any currency pair. However, the move in the 2 year has me rethinking this premise.

Why? Well, if the market is indicating that lower overnight policy is coming, then the dollar trade, based on overnight rates, is no better than the UK or the EU's. In fact, their overnight rates are higher on a fair value basis. Generally, when all three are moving in the same direction, the one with the highest fair value combined with rising growth, has the most strength. Currently, the one with the strongest growth is the US but the highest fair value belongs to the ECB. If the US is now expected to possibly keep policy steady for sometime, the Euro might actually draw support. That assumes though that the premise, of overnight policy, is the guiding light for the dollar. I am starting to believe that it might not be. Here is a list of other things also occurring in this environment.

• The spread in the 2 year note price and libor 1 month futures is tightening. This generally argues for a fall in risk within the financial system. As the chart shows, libor has stabilzed.
  
• The NDX 100 is leading the S&P 500 from a momentum standpoint. When such is occurring, in a rising time frame, generally speaking the growth in the local economy is picking up.
• The Bank Index (BKX) has been the crux of the financial market problems over the past year and still remains substantially below its August levels. If all were great in the world and risk was leaving the system, these banks would be rallying back more aggressively.
• The Philly Homebuilder Index (HGX) has staged its most impressive reversal in several years to the upside.
• The CRB downtrend looks like it has legs on the long term chart down towards the 350 level or another 8%.
• Falling copper prices has in the past been a good leading indicator for growth. The price has been pretty much range bound since the beginning of 2006 so growth globally probably leveled out at that point. Right now it looks like it is heading lower towards the 300 level or another 8%.

So there are the variables. What stocks out the most to me? Well, the British Pound had a very high correlation with its housing market throughout this decade. When its market began to have troubles, right after the latest hiking campaign by the BOE, the pound began to crumble from 210. As the problems have worsened, so has the pound.

Interestingly, the US's major problem has been the credit markets and what housing has done to those credit markets. Many analysts have said, once the housing market stabilizes, the credit markets will stabilize. Using the libor vs 2 year note read, the two are coming together and the standard deviation of libor seems to have fallen arguing for abating risks. The homebuilders are in major rally mode and it looks like it has legs for another 20%. Rising trends in the homebuilders do not occur generally against weak real estate markets.

So there perhaps sits the support point for the moves. Risk is abating in the housing market and the homebuilders are moving up. What appears to have driven the dollar down over the past year has been risk to the system. The move in gold shows that the capital flight from the US is over. The move in the 2year and treasury curve along with the collapse in the cRB appears to signal that inflation is abating. Lower inflation and stabilizing credit...at this point has translated into a higher dollar. Sustainable? No. But for the short term, should continue to move the dollar higher.

The Wheat Debate

I have always found the grain markets as a "great futures market." When I say that, I am talking about the people who operate within it, the price discovery that goes on and the knowledge that many of these traders have. Now, price discovery might be too nice but the other two factors put these guys/gals near the top of their profession. Each time I have traded these markets, the broker on the floor has been more than willing to give me a little insight on the insanity that has been occurring. That insanity has included a wheat price spike in March and a corn/soybean price spike in July. These limit up and limit down moves have created enough heartburn that has caused a limit up move in zantac to cure it. Thankfully, I have not been on the wrong side of a limit up move (or limit down move for that matter). Call it luck or whatever it might be).

Anyhow, I was discussing the grain market futures with a trader at the board and something struck me funny in the conversation. Iran has been a big buyer of our wheat this year (vs little or no buying last year). Yet, we sit there and argue with them about the nuclear ambitions. This tells me that perhaps we are not that serious about Iran and nuclear weapons - either that or the farmer in this country controls the decision making. Anyhow, aside from this, in our conversation, two things outside of this Iran news, had me go back to my drawing board. First is the effect of a strong dollar and second is the Baltic dry index.

Let's start with the dollar. Historically, when the dollar has been overly strong, the grain markets here have been somewhat weaker than other commodities as globally our markets are just not as cheap as others who have weaker currencies. Over the past few weeks, there has been some very large buying of the wheat market. As I mentioned, Iran has purchased a sizable amount this year and Egypt was rumored to be in the market last week (There was also talk that the Ukraine was buying but the US was left out). So it appears at this point that US wheat seems to be competitive at the moment, regardless of the strong dollar. Across the pit though, this is not the case. The soybean market collapsed today (products included) as demand is actually falling in their market. Rumors were floating around overnight that China had defaulted on a shipment out in the far east (that is from my friend). This cause some oil futures overseas (palm oil) to sink aggressively and this spilled into our market. The strong dollar is not effecting things here but global demand is.

Global demand in this case can be best represented by the Baltic dry index which is having issues at the moment (its cascading). The index is now approaching a trend line drawn from the lows in 2006 and has moved below a major moving average I use. The last time this occurred in January, the index reversed course and had a strong half year till its most recent decline. First, if the rumors of China's demise are starting to become more than rumors and the house of cards is about to fall, then what does that do for global commodities. Back to the original argument - what does that do for wheat?

Well, if we have a rising dollar and global demand is falling, our grains become much more expensive relative to other nations. This is deflationary in many ways and given the massive amount of money that has poured into the grain markets here in the US over the past few years (via futures, actual purchases of land, farms, etc), the effect could be tremendous to the downside. You saw limit down moves today in the beans - this could become more widespread if the Baltic dry starts to fall more aggressively. Rising dollar, falling demand - not helpful for US grains.

From the technical side, two things are working against the grain markets. First, there has been two major rallies this year with the corn/bean market and the wheat market. Both have been sold into heavily and as a result of the limit down moves today on the beans side, the charts are almost in line with each other (as you can see). Wheat has had a bounce of late on the back of the foreign purchases but given the weakness in the bean and corn side, I have to believe wheat starts to feel the pinch as well. Further supporting this case is the downward trend in the DBA (Grains ETF). It has rallied back to the 65 week MA but did not close above it today which makes it ripe for a reversal next week with another sell off to follow.

So my outlook on the grains is this: I remain bearish on commodities in general. As for the grains, the DJ AIG grains index failed a few months back at the 1995 lows. If it has taken the 91 level convincingly, we could have been on the verge of a major rally push up another 20%. This would have been bullish for the whole grains complex - conversely, I think this would have really hurt the dollar. Now with this failure, one could make a case that the short side of the trade is in and downward prices are what to look for going forward. Thus, I am bearish on the wheat and grains as a whole.