David Banister

The SP 500 had a very interesting Fibonacci Intersection as I call it here at TheMarketTrendForecast.com on July 1st.  At the 1011 pivot low, the index re-traced a Fibonacci 38% of the 2010 highs from the 2009 lows and bottomed out.  In addition, the 1011 pivot was a 38%  upward re-tracement of the 2007 highs to the 2009 lows.  How is it that markets can be considered “random” when in fact they often pivot at clearly defined Fibonacci price points?

Let’s look at the April 2010 highs of 1221 on the same SP 500 index.  Did you know that was an exact 61.8% Fibonacci re-tracement of the 2007 highs to the 2009 lows?  Were you aware that back in late February 2009, I wrote an article on 321Gold.Com predicting a move to about 1200 on the SP 500, when we were 710 at the time?  Did I have a crystal ball or something ephemeral to work with? No, in fact that was an educated guess for a 61% fibonacci rally off a 5 wave decline into March 2009 is all.  Even more fascinating is my work showing that at 666, the SP 500 in fact stopped at an exact 61.8% Fibonacci re-tracement of the 1974 lows to the 2000 highs!  All of the top and bottom rally points in the past 90 days have been Fibonacci pivots.

The market is certainly not random in our views at TMTF, and we strive to pinpoint tops and bottoms using a combination of Elliott Wave theory and Fibonacci cycles, as well as time periods that often coincide.  What is the market doing now after this rally off the July 1st lows?  I think the major pivot point to watch is 1131 on the SP 500 and our subscribers know exactly why.  Perhaps today you will consider subscribing and avoid wondering what is happening at all these major pivot points?  Recent pivots that we outlined were 1011, 1040, 1130, 1121 and more on the SP 500 index for our subscribers.

Below I outline a 3-3-5 Elliott Wave Pattern that is often part of a “Corrective Wave” movement.  If we can overlay Fibonacci pivots along with reliable patterns, it can help our subscribers avoid pitfalls and take advantage of opportunities in the markets.  Gold recently exhibited clear patterns at a late June 2010 top we forecasted.  The drop to 1155 was a “rally pivot” we told our readers, and the move up would likely take us as high as $1,212 an ounce before the next major move.

The Market Ticker

I put “Fraud” in quotation marks because, legally, it’s not – even though it should be:

By acquiring about a quarter of home-loan bonds with government-backed guarantees to bolster housing prices and the U.S. economy, the Fed helped make some securities so hard to find that Wall Street has been unable to complete an unprecedented amount of trades. Failures to deliver or receive mortgage debt totaled $1.34 trillion in the week ended July 21, compared with a weekly average of $150 billion in the five years through 2009, according to Fed data.

Note that the total amount of Fannie and Freddie paper outstanding is about $5 trillion – so we’ve got what – about a quarter of it that’s currently subject to a fail-to-deliver?

Gee, that’s nice.  Isn’t that kinda like a naked short?  Selling that which you don’t own, eh?

Now the bond dealers will tell you that this sort of thing is “normal’ and “happens all the time.”  And they’re right, after a fashion – kinda.

When traders don’t deliver bonds to their counterparties, they don’t receive cash they could be earning interest on. With the federal funds target rate in a range of zero to 0.25 percent since December 2008, the amount of foregone earnings is almost nothing.

Yeah, the bigger issue isn’t there.  The bigger issue is this:

“What they’re doing is after-the-fact saying, ‘We bought more than existed, so we’re going to try to alleviate those problems,’” said Scott Buchta, head of investment strategy at New York-based Braver Stern Securities LLC.

Let me restate that in English: Someone sold us more than existed – that is, they naked shorted the bonds to us.

Now naked shorting is supposed to be illegal.  Especially when it’s intentional naked shorting – not an “accident.”

One can hardly argue that 25% of the float being sold naked short is an “accident.”  Rather, it sure looks like an intentional act of selling that which you do not own and cannot (reasonably) acquire, fueled by the fact that failing to deliver is, at present, “reasonably cheap.”

But it’s only reasonably cheap because we have this special class of people in NY that can sell things they don’t have, with no reasonable expectation of being able to deliver within the agreed terms.  In the “real world” of commerce such an act is called “fraud” when practiced intentionally and on a grand scale.

Oh sure, occasionally every businessman sells something he is unable to deliver on the original agreed terms.  We accept this, and while there is occasionally some sort of penalty or sanction, it’s part of business.  You say you’re going to deliver 10,000 Widgets on June 1st, and come June 1st you only have 9,500, because you were a bit too optimistic in terms of how quickly you could manufacture them.  Perhaps you pay a penalty for that, perhaps not, but it’s not an intentional act.

That argument – that it’s all an “accident” – is darn hard to sustain when the amount of product that is sold short without the ability to deliver is some twenty five percent of the total float outstanding.

Where are the cops?

The Market Ticker

Heh heh heh….

Snippets this time, since I’m vacation….

The economic expansion that began in the middle of last year is proceeding at a moderate pace, supported by stimulative monetary and fiscal policies. Although fiscal policy and inventory restocking will likely be providing less impetus to the recovery than they have in recent quarters, rising demand from households and businesses should help sustain growth. In particular, real consumer spending appears to have expanded at about a 2-1/2 percent annual rate in the first half of this year, with purchases of durable goods increasing especially rapidly. However, the housing market remains weak, with the overhang of vacant or foreclosed houses weighing on home prices and construction.

Uh huh. Note the word appears. In political circles this is known as a “weasel word”, and gives the speaker an out if the claim turns out to be pure nonsense down the road (and it will.)

The most-important part of this paragraph, however, is the fact that it recognizes that the government has stepped in and replaced 11% of final demand with borrowed money.

Inflation has remained low. The price index for personal consumption expenditures appears to have risen at an annual rate of less than 1 percent in the first half of the year. Although overall inflation has fluctuated, partly reflecting changes in energy prices, by a number of measures underlying inflation has trended down over the past two years. The slack in labor and product markets has damped wage and price pressures, and rapid increases in productivity have further reduced producers’ unit labor costs.

Note the direct contradiction with the above paragraph (does Ben really think we’re dumb enough not to notice?)

Specifically, slack labor markets and increased output demands per unit of compensated labor means consumer income, that which should be driving spending, is trending downward.

Never mind the “machinations” of the “inflation” statistics. Since Ben uses the government’s cooked numbers, he can always point to them and say “See! See! They said it was less than one percent!” without ever taking responsibility for relying on knowingly bad data.

One factor underlying the Committee’s somewhat weaker outlook is that financial conditions–though much improved since the depth of the financial crisis–have become less supportive of economic growth in recent months. Notably, concerns about the ability of Greece and a number of other euro-area countries to manage their sizable budget deficits and high levels of public debt spurred a broad-based withdrawal from risk-taking in global financial markets in the spring, resulting in lower stock prices and wider risk spreads in the United States.

Damn those “investors” who got gang-raped twice in the last decade and are refusing to take another one for the “team” – that is, Dimon, Blankfein, myself and, of course, Obama.

Like financial conditions generally, the state of the U.S. banking system has also improved significantly since the worst of the crisis. Loss rates on most types of loans seem to be peaking, and, in the aggregate, bank capital ratios have risen to new highs. However, many banks continue to have a large volume of troubled loans on their books, and bank lending standards remain tight.

“This box contains AAA credits!”

“Why does it smell like dogcrap?“

“It really IS AAA credits! Honest! Here, I’ll pledge it as collateral for this $1 billion loan I want!”

“Go to hell.“

Yeap.

Small businesses, which depend importantly on bank credit, have been particularly hard hit. At the Federal Reserve, we have been working to facilitate the flow of funds to creditworthy small businesses.

God forbid that a business would choose to finance off operating cash flow instead of bank loans! Why that would make them more competitive, reduce their operating expenses and reduce or even eliminate fixed costs like interest, which in turn would make it possible for them to respond to changing economic conditions without going bankrupt. (It would also, incidentally, mean that banks couldn’t suck the life out of said businesses.) Surplus capital = bad, bank loans = good. In the eyes of Ben, anyway (the average small businessman would be advised to do the EXACT OPPOSITE of what Bernanke counsels, I will add.)

In addition to the very low federal funds rate, the FOMC has provided monetary policy stimulus through large-scale purchases of longer-term Treasury debt, federal agency debt, and agency mortgage-backed securities (MBS). A range of evidence suggests that these purchases helped improve conditions in mortgage markets and other private credit markets and put downward pressure on longer-term private borrowing rates and spreads.

The hell it does:

Compared with the period just before the financial crisis, the System’s portfolio of domestic securities has increased from about $800 billion to $2 trillion and has shifted from consisting of 100 percent Treasury securities to having almost two-thirds of its investments in agency-related securities.

Never mind that under Section 14, which is the part of the Federal Reserve Act governing purchases, it is rather inescapable that these agency purchases were unlawful. (Yes, I know about your cite and claim of a CFR position for Section 13 – but that section deals with loans, not purchases. Nice try Ben.)

The FOMC plans to return the System’s portfolio to a more normal size and composition over the longer term, and the Committee has been discussing alternative approaches to accomplish that objective.

The Fed owns ~20% of the portfolios of two bankrupt GSEs, Fannie and Freddie, both of which would have utterly collapsed absent over $100 billion in cash infusions. The embedded losses in those notes still exist. Good luck unloading them – this will be fun to watch.

Within the Federal Reserve, we have already taken steps to strengthen our analysis and supervision of the financial system and systemically important financial firms in ways consistent with the new legislation. In particular, making full use of the Federal Reserve’s broad expertise in economics, financial markets, payment systems, and bank supervision, we have significantly changed our supervisory framework to improve our consolidated supervision of large, complex bank holding companies, and we are enhancing the tools we use to monitor the financial sector and to identify potential systemic risks.

You mean like all the prudent supervisory authority you wielded before the meltdown? And all the whistles that you did not blow for those institutions where you had no formal authority?

Was that stupidity or willful blindness Bernanke?

Finally, from The WSJ:

Mr. Bernanke said the recent large federal budget deficits are appropriate, considering the weak economy. He said additional fiscal support from Washington could help, given weak private spending, but acknowledged concerns that markets might react adversely if the nation’s deficit is not brought under control.

“The best approach, in my view, is to maintain some fiscal support for the economy in the near term, but to combine that with serious attention to addressing what are very significant fiscal issues for the United States in the medium term,” Mr. Bernanke said. “I don’t think it’s either/or. I think you need to really do both. If the debt continues to accumulate and becomes unsustainable … then the only way that can end is through a crisis or some other very bad outcome.”

Remember, it was Bernanke that originally counseled all this “stimulus” and “fiscal measure” in the first place. Now he says “well, if you withdraw it you’re fooked, but if you can’t in the medium term you’re also fooked.”

Again, can you identify from the below graph when, since 2003, the government has been able to “withdraw” any sort of fiscal stimulus, and for extra credit, please identify the number of years that defines “medium term.”

Thanks in advance Ben.

PS: That last sentence is such a bland way of implying outcomes like the collapse of government funding models occasioning an immediate 60% reductions in government spendable funds. That in turn implies the immediate and unavoidable collapse of all transfer payments, including Medicare, Medicaid, Social Security and other welfare programs, and that strongly implies outcomes like riots, looting, burning of cities, zombies in the streets, etc.

Short form of all of the above: He knows.

On a monthly basis, retail sales decreased 0.5% from May to June (seasonally adjusted, after revisions), and sales were up 4.8% from June 2009.

Click on graph for larger image in new window.

This graph shows retail sales since 1992.

This is monthly retail sales, seasonally adjusted (total and ex-gasoline).

Retail sales are up 7.3% from the bottom, but still off 5.2% from the pre-recession peak.

The second graph shows the year-over-year change in retail sales (ex-gasoline) since 1993.

Retail sales ex-gasoline increased by 4.5% on a YoY basis (4.8% for all retail sales). The year-over-year comparisons are easy now since retail sales collapsed in late 2008.

Here is the Census Bureau report:

The U.S. Census Bureau announced today that advance estimates of U.S. retail and food services sales for June, adjusted for seasonal variation and holiday and trading-day differences, but not for price changes, were $360.2 billion, a decrease of 0.5 percent (±0.5%)* from the previous month, but 4.8 percent (±0.7%) above June 2009. Total sales for the April through June 2010 period were up 6.8 percent (±0.3%) from the same period a year ago. The April to May 2010 percent change was revised from -1.2 percent (±0.5%) to -1.1 percent (±0.2%).

Retail sales have declined for two consecutive months. This is another weak report, and the decline in sales was worse than expected.