Synchronized markets become difficult trading environments. If you correctly gauge the direction, gains will come your way. However, if you are wrong, losses quickly mount. I much prefer situations where certain stocks are weak and others strong because they allow us to hedge our positions and profit from the basis between items as opposed to the direction of prices.

Unfortunately, the current environment is marred by mass weakness and impending doom. I study hundreds of charts each day and they are all painting a similar picture-stock prices have moved off their recent highs and now rest at levels where any future weakness will propel prices lower. Consider two of our recent short sales recommended in my weekly newsletter EPIC Insights, Visa (V) and Potash (POT). We shorted V when the long-standing uptrend (black line) was broken on increasing volume (blue arrow). Since then, a persistent downtrend (red line) has brought the stock to support (blue line). Were this support to fail, prices would quickly drop to the low $50s and raise the possibility that the January low could be retested.

Any reasonably intelligent person understands that if the demand for a product increases then (all things being equal, as the economist would say) its price will rise. The same holds in the case of borrowing, except for congressional Democrats. These people seem to think that economics laws are a vicious Republican plot.

Poll figures are now showing that the American public is growing alarmed by the Democrats' utterly reckless fiscal policy. Unfortunately, few people understand just how grave the danger really is. In less than five months Obama increased the national debt by more than $800 million and lumbered the economy with a $1.8 trillion deficit that looks like growing even bigger. (I still get silly emails from Obama cultists who were evidently screaming into their computer monitors: "Bush did!" Pathetic doesn't begin to describe these people). In 2003 Thomas Laubach, the US Federal Reserve’s senior economist, produced New Evidence on the Interest Rate Effects of Budget Deficits and Debt, a paper containing calculations for long-term interest rates based on historical evidence. He concluded that

Russia’s Kemerovo region has notified ArcelorMittal (MT) that it will seize two of the world’s largest steel maker’s mines if production levels do not increase, the Siberian region’s government said in a statement, Reuters reported. “If your team is not able to stabilize production at these facilities, then we propose that you hand them over without compensation.”

Looks like GM (GMGMQ.PK) shares, now shares for Motors Liquidation Company, just won't quit, even after management said that the shares will go to zero. We wrote about this previously, and did a bit of investigation into the message boards. Despite the likely scenario that equity holders won't have anything to claim, the shares have actually rallied strongly from their $0.27 lows, given they were at $1.16 last friday. Very peculiar, and basically being written about as foolishness across the board, but buyers have made money.

Is there any logical argument, or is this just penny-stock froth? Even if one were to view the shares as options as an outlier scenario whereby equity holders are actually left with something after creditors have their way, to me even if this were 1 in 100, the odds wouldn't make sense. If we assume $10 is where they go, should some sort of value be left for them (this is just a number thrown out there, they were back here in September 2008), then the price would be fair for about a 10% (10% chance for ~10x gain) probability. But 10% seems pretty high for what looks like doomed shares given the amount of creditors which come before them and management basically saying the shares will not recover any underlying remaining value.

The weekend brought to light a couple of new developments, neither of which bode well for the economy, and by extension, the market.

The first, which will have the most visible impact on John/Jane Doe, is in relation to California's financial woes and their issuance of IOUs. While certainly rare enough (fortunately), the issuance of IOUs by a state in lieu of payments isn't without prescedence. California did the same thing back in '94. What has changed between then and now, is the response of banks to the issuance. Back in 1994, the banks all accepted the IOUs as legal tender, so once the public got over the initial shock, they quickly found that they could deposit the scrip into their accounts and write checks for their rent/mortgage payments, utility bill, etc. So the only effect, actually, was possibly a step, or two, added to the mechanics of the transaction, from the banks' point of view.

Singapore looks set to emerge out of recession on the back of stronger manufacturing numbers. Meanwhile stronger manufacturing numbers (growth) have been coming out of some other Asian nations such as China, India, and South Korea. While some in the US argue whether stimulus is having any effect on the economy... perhaps global stimulus is at least buoying Asia.

Singapore’s economy probably expanded for the first time in five quarters as a rebound in manufacturing helped the Southeast Asian nation emerge from its worst recession since independence in 1965....

This article is based on our Premium Update posted on July 11th, 2009

In the recent two Premium Updates I briefly discussed inflation and its effect on gold prices. I showed a chart indicating the massive increase in the amount of money that had been recently pumped into the system. I’ve looked deeper this past week into the issue of inflation researching what some of the smartest people have to say on the subject. There are those, like billionaire investor Warren Buffet, who believe that inflation is inevitable:

Nearly every day finds another article about solar technology and startups and their progress. $1/Watt used to be the Promised Land of production cost - and certainly a huge advance over the $300/Watt costs of the early 80s - yet First Solar (FSLR) has reportedly beat that mark. And Charlie Gay of Applied Solar has reportedly said, "The Moore's Law for solar is that as time goes by, things get thinner and still absorb light." Heady talk, indeed.

The progress, competitiveness, and challenge in solar technology is eerily similar to two high tech markets of the past 20 years: multi-chip modules (MCM) and optoelectronics. They all share the following similarities:

I can’t find any useful IT investment research information on Google’s (GOOG) Chrome operating system from the source. The only meaningful thing Google has said publicly that I can find is via a blog post on July 7 that says:

“…announcing a new project that's a natural extension of Google Chrome — the Google Chrome Operating System. It's our attempt to re-think what operating systems should be.”

Great article highlights the problem with GDP in an easily digestible way. I think misunderstanding and misuse of GDP as a measure of economic health is a major cause of wasteful stimulus spending; basically the concept that any activity is good activity. It also, I think, makes people fear recessions more than they should. Maybe sometimes we should just let GDP contract, if it actually means that the economy is just burning off wasteful activities, rather than supporting value-destructive activities and actually promoting more destructive economic activity via government sponsored easy money.

Anyhow, the following sums up one of the key errors with GDP quite nicely. Remember GDP measures activity, not necessarily long term value-producing activity.

Tim Geithner is not making sense. From Reuters (Geithner: Too soon to decide on more stimulus):

U.S. Treasury Secretary Timothy Geithner said it was too soon to decide whether the U.S. economy would need the help of a second round of government stimulus to recover from recession. "I don't think that's a judgment we need to make now, can't really make it now prudently, responsibly," Geithner said in a taped interview with CNN that will air on Sunday. According to a transcript provided by CNN, Geithner said the "biggest thrust" of the $787 billion package of spending and tax cuts signed into law earlier this year would take effect in the second half of the year...

More on the Baltic Dry Index, the index of spot rates for dry bulk commodity shipping (iron ore, coal, grains). After rallying substantially earlier this year, the BDI has pulled back substantially from 4,000 levels now to below 3,000. We had pointed out the threats to the BDI, and highlighted Transport Trackers' call that BDI speculation at 4,000+ was a bad bet to be making. Well, we can further highlight the over-supply problem for dry bulk shipping, from the massive orderbook racked up during the recent bulk shipping boom.

Dry bulk bulls argue that economic hardship will lead to massive orderbook cancellations, but Transport Trackers points out that even pretty aggressive ship cancellation assumptions are unlikely to change the fact that the oversupply problem is set to get worse before it gets better. Take a look at this chart from their recent piece: Note the supply growth rates for 2009-2010 and note that demand growth has fallen well below recent levels. So you have peak supply growth hitting far from peak demand growth. How can you expect anything towards peak dry bulk shipping rates? Note that BDI 4,000 is still a very strong rate vs. where it has been, shown here.

China has announced its plans to construct a number of 10 GW wind power bases, in a bid to further boost the development of the country's renewable energy industry.

Zhang Guobao, administrator of the Chinese National Energy Administration, said: “China has worked out the strategy of building large (wind power) bases and integrating them into the mainstream power grid in order to speed up the pace of wind power development in the country.”

As I've written, THQ's (THQI) got a major hit on its hands with UFC Undisputed: 2009, its first game based upon the Ultimate Fighting Championship mixed-martial arts brand.

We're now getting an even bigger taste of just what this franchise can do.

From Felix Salmon (Why I’m unconvinced by calls for a second stimulus package):

Let me try to hazard an answer to that. Start with the guiding assumption, as stated by Larry Summers when the stimulus bill was going through Congress, that the risks of spending too much paled in comparison with the risks of spending too little. And because the effects of government spending on GDP and unemployment are hard to predict with any accuracy, there was a strong case that a monster $800 billion stimulus bill was in many ways the prudent course of action.

“If you want to know what God thinks of money, just look at the people he gave it to.” Dorothy Parker.

Weekly percentage performance for the major indices
Based on last Friday’s official settlement...

Perhaps its the after effects of an unusually deep Sunday night sleep, or maybe it's the knowledge that it's going to be a big week (what with option expiry and everything), but Macro Man's brain still feels slightly groggy so far this morning.

In a way, he feels like Odysseus, tempted by the siren song of a weak opening in stocks. While his brain is screaming "sell! sell! sell!" like Randolph and Mortimer Duke, thus far Macro Man has lashed himself to the mast-head of responsible risk management, trading the noise until the opening price action resolves itself into signal.

Prices of Treasury coupon securities have surged in overnight trading and the 10 year note yield has hit a new cycle low. Weak equity markets and concerns regarding the strength of any global recovery have motivated trading.

The yield on the 2 year note is 3 basis points lower at 0.87 percent. The yield on the 3 year note has declined 5 basis points to 1.35 percent. The yield on the 5 year note at 2.16 percent is 5 basis points lower. The yield on the 7 year note has declined 4 basis points to 2.85 percent. The yield on the 10 year note has slumped 5 basis points to 3.26 percent. The yield on the Long Bond edged lower by 3 basis points to 4.17 percent.

Despite the buying activity during the final hour of trading, the markets still ended lower than Friday’s closing mark. The BSE-Sensex ended the day lower by around 100 points, while the NSE-Nifty closed lower by about 30 points. The BSE-Midcap and BSE-Smallcap indices ended the day lower by about 2.8% and 3.4% respectively. Today, buying activity was witnessed in select IT and banking stocks. On the other hand, stocks from the metal, realty and power sectors led the pack of losers. At the time of writing, the overall decline to advance ratio stood at 3.4 to 1 on the BSE.

Most of the other Asian markets ended the day on a weak note today. The European indices are currently trading in the red as well. Rupee was trading at 49.2 against the US dollar at the time of writing.

It is clear that the market has been driven almost exclusively by policy. The market typically prices in economic situations six months ahead of time. This kind of makes sense as known policy gives an indication of what might happen six months out.

Today the market is declining partly in response to declining odds of further stimulus; and is also waiting for the markets to give an indication to earnings expectations which will help provide a reality check on expectations. What is forgotten for now is that the stimulus was always intended as a two year plan; so there is still juice left in it. Furthermore, with the deficit is where it is, the chances of further stimulus were already low.

Yesterday morning I was talking to my 13 year old son Josh. He's currently obsessed with the TV show Friday Night Lights. He's going back and watching all the old seasons. I asked him how he is doing that, expecting to hear "bit torrent". But instead he said "Netflix Watch Instantly". I was so happy to hear that and asked him why. He said, "bit torrent takes too long."

And then this morning, I came across this story in The Guardian which talks about a collapse in illegal sharing and a commensurate increase in legal streaming. The story says 26% of 14 to 18 year olds shared music illegally last month compared to 42% in December of 2007. The story also says 65% of teens stream music regularly.

For regular observers of Japanese politics (which does not include yours truly), this will be something of a non event. In fact, it has been brewing for more than a while given the rising unpopularity of the ruling LDP and its stifled leadership (a wobbly minister at a G7 meeting springs to mind). However, it is still significant, I think, that the troubled PM Aso and his equally troubled party, the LDP have decided, in all probability, to throw in the towel.

Now, one would imagine, begins a political war over economic policies, consumption taxes, pension systems etc. The economic effects of this may be important once we get an indication of what the opposing parties have in store. Clearly, the Aso and the LDP in general look set to suffer a crunching defeat come August, but I won't even dare to venture a formal prediction. According to Reuters (see below), markets appear dissapointed that the elections would not come sooner, but then again; August sounds pretty soon to me.

We have all heard it: food stocks are defensive in nature so that when things are dreadful, they shouldn’t get beat up as bad, and when things are good, they don’t participate with the same rigor on the upside as other stocks. But in this market, it just hasn’t worked out that way. In fact, when the market dived earlier in the year, food stocks actually had poorer relative strength than other sectors, but then when the market bounced back, the food sector’s relative strength was superior. The moral of the story: Sometimes you just have to throw out all the rules and trade by the “seat of your pants” utilizing your own gut instincts as your guide.

Disclosure: Long all equites included in the BFF Index.

Overall, the dollar strengthened across the board during the Asian session, in-line with S&P futures movement. However, after the London open and after the futures market bounced from the 865.00 area, the major pairs started trading mixed. As such, the euro and the swissy showed some resilience to the dollar’s strength, while the pound and the aussie were the worst performers of the session.

At the same time, the yen strengthened against every other major currency as the forex market as practiced risk-aversion. Judging from the behavior of the S&P futures during the overnight session, the market is very likely to remain risk free.

The last few months of trading showed a very weak U.K. economy, something that has been reflected directly in the pound’s value.

Currently, the U.K. economy faces one of the strongest contractions on record while the government runs a massive deficit that is forecast to reach 12% of the economy in the next few quarters, by far the biggest among the developed economies. Even the BoE’s quantitative easing plan has not work as planned, since even if the bank bought roughly 20% of the entire Gilt market, the current yields are still above the ones when the QE program was announced.

European markets are trading in the green, even though the major regional indexes gapped and then moved lower. At the same time, U.S. futures recovered some of the declines posted earlier in the day.

European markets opened below the break-even line, having both the German Dax and the U.K. FTSE posting declines from the first few minutes of trading. This made the two indexes break below the support areas of the prior few days, and reached the lowest value since late April.

It seems NAB is employing the same mark to fantasy accounting treatments as US banks. According to law firm Maurice Blackburn, NAB (NABZY.PK) failed to disclose the true value of its exposure to toxic CDOs.

[click images to enlarge]

<< Continued from part 1

Generation X – Assuming Command

We yearn for civic character but satisfy ourselves with symbolic gestures and celebrity circuses. We perceive no greatness in our leaders, a new meanness in ourselves. Small wonder that each new election brings a new jolt, its aftermath a new disappointment. Not long ago, America was more than the sum of its parts. Now, it is less. Around World War II, we were proud as a people but modest as individuals. Fewer than two people in ten said yes when asked, Are you a very important person? Today, more than six in ten say yes. Where we once thought ourselves collectively strong, we now regard ourselves as individually entitled. Yet even while we exalt our own personal growth, we realize that millions of self-actualized persons don’t add up to an actualized society.