Given the recent upsurge in government intervention in the economy (and financial markets), as well as the collusion between banks and government in response to the financial crisis (AIG CDS undwinds, NY Fed's Goldman shares ahead of BHC announcement, etc. etc.), following "smart money" has now come to mean following those in-the-know of future government actions, or at least those with high predictability or involvement.

Back in June 2008, the Treasury's Exchange Stabilization Fund's Euro reserves dropped dramatically, to the tune of about 6 billion Euros, as reported by the Treasury's weekly releases on international reserve positions. This large supply of Euros presumably was used to finance demand for dollar derivatives, allowing the Treasury to pull a large of USD out of the market. Indeed, the ESF's actions correlate very well with the collapse of the commodity bubble and the beginning of the Dollar bull, as is evident in the image below, courtesy of Now and Futures:

Confused about the market? Caught short this summer? Confused when to lock in recent gains after seeing your IRA get cut in half? Why not follow the big boys who were right both on the way down and back up?

Charles Nenner, former Goldman Sachs market timing analyst, uses cycles, technical analysis, and a macro approach to time myriad markets. He called for a 2007 market top at around Dow 14,300. In 2008, he warned of a 30%+ decline in equities and in February of this year, he called for a large rally to take us to S&P 1000.

Co-written by Qasim Khan & Tyler DeBoer

Since March lows, the S&P 500 is up over 51%, while myriad media outlets have propagated the idea of the return of economic growth to the United States and the end of its recession. Political figures and pundits offering observations of "green shoots" and sentiments of optimism and recovery are intertwined in this new bull market hysteria sweeping the financial world. Meanwhile, troubled banks and insurers who just months ago were saved from complete implosion by the taxpayer have been reporting record earnings and record compensation to go with them.

A look at the 2-year chart of the S&P 500 shows that the market is headed toward a triple influx of resistance, which could provide major supply in volume entering this highly illiquid market:

1. Trendline resistance from the primary bear market’s trendline and secondary Aug 07-Oct 08 market support-turned-resistance (orange line).
2. Trendline resistance from the upper-bound trendline for the bear market rally, as defined by a rising wedge.
3. Horizontal price resistance around 1010 (which is also the 38.2% Fibonacci retracement level from Oct 07 highs to Mar 09 lows, to add confluence).

The S&P 500 ETF (SPY) chart shows three major resistances:

a. long-term downtrend line extending from May of 200
b. horizontal resistance/June highs
c. underside of channel support defining current bear rally off March lows.

After several weeks in California, I am back in Michigan and ready to post again.

The head and shoulders pattern I called for almost a month ago seems to be developing and on the verge of completing. Earnings season is coming up so look for big moves. Banks won’t have an extra $1-2B on their trading profits for Q2 from AIG like they did in Q1, so it will be interesting to see how that affects earnings in financials. There were a large number of equity offerings and the banks that underwrote all of those issuances (mainly Goldman and Merrill) are sure to see some good I-banking profits from that (although, again, these are unsustainable in nature– the market can’t stage a 40% rally to sell equity into every quarter). Also, as Meredith Whitney pointed out yesterday to send markets surging, Goldman Sachs (GS) may be set for huge earnings, as lack of trading competition (Bear, Lehman, etc gone), issuance underwriting, and lack of government intervention in its operations (paid back TARP) lead to big revenues offsetting asset depreciation.

Co-written by Qasim Khan

Part One:

On March 10, a Citigroup (C) memo from CEO Vikram Pandit “leaked” and its content– about Citi’s “capital strength and earnings power”– sparked a massive rally in financials that carried over six weeks.

The S&P 500 is now up 31.0% off of its March 6 lows around 666. Europe's Dow Jones Stoxx 600 Index has broken even YTD. But since the announcement of the Public-Private Investment Program (PPIP) on March 23, the equity market's rally has been defined by a rising channel on low volume. There have been no high-volume breakouts, the uptrend's channel's slope is very low, and the market has trended approximately sideways since April 9.

Readers may notice I mentioned the possibility of a rally to Dow 9000 back around the PPIP announcement. I mentioned this because if the Fed and Treasury were intent on printing our way out of this starting as soon as possible, their combined price-inflating powers would be unstoppable. There is no check or balance to the Federal Reserve and there has never been an audit of its balance sheet.

The Federal Open Market Committee announced yesterday that it would keep target rates unchanged at 0-0.25bp, yet made no mention of additional quantitative easing:

Release Date: April 29, 2009

Since March 6, the SPDR S&P 500 Index ETF (SPY) is up 28%, driven by the recent surge in financial stocks, quantified by the 80% rally in the SPDR Financials Index ETF (XLF). The rally has left bulls calling bottoms and reverting to familiar long-on-margin methods from bygone bull markets, while leaving bears whipsawed, short squeezed, and scratching their heads.

Yet the state of the economy doesn't justify a sustainable turnaround in equities. Commercial mortgage backed security delinquencies are not only increasing, but still accelerating, as the commercial real estate market heads for implosion. The unemployment rate (as estimated by Shadow Stats by reversing absurd Clinton administration revisions to unemployment data calculations) is at 19.8% and still rising. Taxes are rising to finance massive state and local budget deficits in the midst of underfunded public pension funds and increasing municipal credit risk. The Eastern European crisis is just beginning. The United States Budget Deficit for the first fiscal half year was a staggering $1 trillion. With toxic depreciating assets collateralizing the massive deficit spending and the Fed printing trillions to mop up the damage, gold should be skyrocketing if lending and spending has returned and the economy has turned around. But it isn't.

I had previously been very bearish on equities, calling for Dow 7500 to be the level to short into. Sure enough, last Thursday the market started rolling over at that level on good volume and my trade thesis for a mini-crash looked good. The rally had all the characteristics of a bear bounce-- bounce from highly oversold conditions, descending volume rallying, lack of confirmation in credit spreads, BS news to qualify it.

Then Treasury Secretary Timothy Geithner announced the Public-Private Investment Program, which expanded the bank rescue to include the sub-AAA and legacy toxic assets everyone was looking to the government for help with. Bernanke and the Federal Reserve announced on March 18 that it would purchase $1.25 trillion in securities, $300 billion of which are long-term Treasury bonds. This quantitative easing was the first step in the United States government's insistence to throw everything it can at the market. Now, the PPIP allows banks to divest their toxic assets to PPIFs. The PPIF is given 14:1 leverage, financed of course by the US taxpayer through (eventually Fed-monetized) FDIC guaranteed loans providing 6:1 debt/equity and the Treasury providing half of the equity. The loans are non-recourse so it's a game of heads PPIF wins, tails taxpayer loses. The toxic assets are purchased at bank book-marked prices, which are ridiculously overvalued relative to market prices, but since the loans are non-recourse, the banks get to divest their toxic assets at a huge premium, the PPIFs are exposed to a very small part of the pricing differential, and the taxpayer has to pay for the depreciation of these toxic assets.

According to a recent WSJ article, Goldman Sachs (GS) received $6 billion in American Insurance Group (AIG) bailout money last quarter. This news confirmed what many had suspected—the rescue from systemic risk justification for the AIG hedge fund bailout was really just simply an AIG counterparty bailout.

This makes Goldman appear a lot weaker than previously perceived. So much for being a frontrunner to be among the first financials to repay TARP loans. Goldman is still overleveraged at 23x tangible equity. Its inherent dire straits are being misrepresented by shady transactions to surreptitiously boost its capital.

The historic credit crisis the world is facing has halved the value of equities around the world, sliced commodities more than 60% from of their highs, and cut real estate values by more than 40%. However, gold is nearing all-time highs. The relative strength of gold has been attributed to it historic “flight to safety” aspect, but in a financial environment characterized by deleveraging, defaults, price deflation, and commodity collapse, precious metals seem on the surface to be inferior to the premier reserve currency, the US Dollar. As explained in my article, “Profiting from Bernanke's Super-Fed & Obama's Newer Deal,” however, the United States government and Federal Reserve, in coordination with the rest of the world's central banks and governments, are taking a highly interventionist approach to the crisis, which will lead to rampant inflation and currency debasement in coming years.

The Fed has printed and temporarily sequestered trillions of dollars to debt inflate and to use inflation-usurped taxpayer and foreign lender wealth to bail out financials and appropriate economic stimuli. The rest of the world, tied to the $13 trillion Ponzi scheme known as the United States Treasury, is unable to engage in an exodus from its massive dollar and treasury holdings, which funnels much of its wealth to the United States government through debt inflation. Foreign creditor nations must also engage in quantitative easing to spark their domestic economies. China, for example, announced a $586 billion economic stimulus last year, but only a quarter of it is to be financed by government expenditures. Much of the rest will occur through printing, as it cannot finance it entirely by selling its huge treasury holdings without collapsing its own economy.

Real estate investment trusts (REITs) are leveraged-financed property investments that pervade the commercial real estate market. With the real estate bubble financed by Greenspan's artificially easy credit policies, these REITs witnessed surging revenues as property values soared. With the collapse of the housing bubble, property values are in free-fall, but unlike residential real estate, commercial real estate hasn't witnessed mass defaults yet.

Unlike residential real estate, the collateralized debt obligations (CDOs) pervasive in commercial real estate are isolated to a handful of REITs. Mall operators, retailers, and other commercial properties are developed and run by a select few investment trusts, differing from residential housing, which has millions of mortgage bundles across America, many of them already defaulting. This prevents immediate defaults but also centralizes the pain, because as one REIT faces defaults, the others soon follow.

The historic wealth destruction of 2008 was obviously deflationary. Defaults strip away wealth. Institutions respond by selling assets to raise capital. Widespread deleveraging leads to supply expansion in assets and contraction in money and credit (i.e. deflation).

Nevertheless, the response has been unprecedented in its own merit. Government debt held by the public was $5.51 trillion when September began; by the end of 2008, it had risen to $6.37 trillion. The more than $1 trillion expansion in Treasury borrowing surely partially serves to offset the $438 billion budget deficit. But what about the additional half a trillion dollars?

With the massive monetary expansion experienced in recent months and the promise for unprecedented levels of money and credit supply increase in coming months, the United States Federal Reserve looks on paper to be sending America straight into hyperinflation. Germany's post-World War I Weimar Republic, post-World War II Hungary, 2001 Argentina, and present day Zimbabwe are all analogous examples of massive debt monetization, which all led to hyperinflationary disaster. Never before has the entire world's economy been linked to one nation's, however, as is the case today with the United States.

In a case of economic mutually assured destruction, foreign creditor nations and their central banks can't afford to spark a run on the US Dollar, because it would kill their own export-based economies, as well as devalue their debt repayments and foreign exchange reserves. But the United States has been financing consumption through debt for decades and has resorted to monetary expansion to finance its debt and deficit spending, which is only going to increase with Barack Obama's infrastructure and social programs. The Troubled Assets Relief Program (TARP) itself amounts to $700B, all of which will essentially be "printed." Foreign demand for US debt is all but gone, as creditor nations are now attempting to unwind their USD positions. Huge creditor nations like China and Iran were net sellers of US Treasuries in recent months, attesting to the weakening of the American debt bubble. So where's all this excess liquidity go?

The collapse of the commodity bubble beginning late this summer erased inflationary worries from the minds of many. Crude at $145/bbl, natural gas at $24/MMBtu, and gold at $1,000/oz were characteristic of the artificially inflated prices of this commodity boom, which began in 2002.

The secular bull in commodities was caused by perceptions of massive demand in emerging markets, particularly the BRIC nations - Brazil, Russia, India, and China - which were growing at unprecedented rates. As they became increasingly wealthy and industrialized, these economies represented growing new demand for energy, food and production inputs.

The United States does not rely on industry for growth. Its economic backbone is money. America finances the globe's corporations and emerging markets, its dollar is the world's preeminent reserve currency, and its citizens' puchasing power allows for the monstrous consumption that accounts for over 60% of the world's largest GDP.

It is sad, then, that this nation faces a liquidity crisis out of all possible economic scenarios. The United States economy is based on international reliance for its financing, and a global credit crunch greatly diminishes that leverage.

The subprime mortgage crisis has been the defining market catalyst for the last 9 months. It has affected the global economy, slowing GDP growth as credit tightens and businesses struggle for capital. It has forced central banks to lower interest rates, weakening currencies with already-existing inflationary risks stemming from a commodity price surge. But most directly, it has hit the very companies that caused them—the financials.

New Jersey-based financial holding company Oritani Financial (ORIT) has somehow stayed afloat through this torrent of financial stock sell-offs, and appears poised to go much higher. Its performance over the past five months has been very impressive, with a relative strength of 91 against the S&P 500, in the wake of a financial meltdown.