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Currency Traders Rally Financials But Stocks Manifest Bearish

Financial market report for September 10, 2010

The FX currency traders took the major currencies, DBV, and the developing currencies, CEW, higher against the Yen, rallying the European Financial, EUFN, and the banks, KBE. Australia, EWA, closed up 1.4% on a strong AUD/JPY, that is a strong FXA:FXY.

But the world stocks, ACWI, and the S&P failed to rally significantly, and closed manifesting a lollipop hanging man candlestick, suggesting that an Elliott Wave 2 up has been completed, and an Elliott Wave 3 Down is ready to commence. This would actually be an Elliott Wave 3 of 3 of 3 Down, the severest of all waves. It is the one that builds wealth on the way up; and for all practical purposes extinguishes all wealth on the way down.

Chart of the world shares, ACWI

Chart of the S&P, SPY

The emerging markets currency carry trade, CEW:FXY, appears ready to fall lower causing disinvestment from stocks.

And the developed currencies carry trade, DBC:FXY, appears even more so.

The EURJPY, that is the euro yen carry trade, traded at 106.625; and was reported by Action Forex at 106.444 

The Euro, FXE, is seen in Action Forex chart report holding onto a ledge of support in a massive head and shoulders pattern at 127.455.

Yahoo Finance reports a close of the Euro at 126.59; and the Yen, FXY, at 118.11; the five-day chart of the two is shown below:

A sell off of carry trades would cause a rise in the US Dollar, $USD, which closed today at 82.63.   

Many stocks, and commodities manifested bearishly. For example Tin, JJT, rose 1.1% manifesting a dark cloud cover.

Some investors sought safehaven today in Telecom, TTH, and Utilities, XLU.

Other investors sought safehaven in the emerging markets: FRN, ECH, IDX, THD, EWM, DGS,  EPU,BRF, GXG, EMFN as seen in this Finviz Screener

India Earning and India outperform the World Shares and the emerging markets. India Earnings, EPI, and India, INP, are outperforming the Vanguard emerging markets, VWO, World Shares, ACWI, and the Frontier Markets, FRN, as seen in the chart of VWO, ACWI, FRN, EPI and INP

Charts suggest that it is getting near time for those short Treasuries with TMV and TBT to take profit.

Charts suggest that one should go short stocks, VT, at this time; which also includes junk bonds, JNK, as these have risen on carry trade investing.

The chart of FAGIX suggests that its time to sell out of this distressed securities mutual fund, which has also risen on yen carry trade investing. This fund contains investments similar to the ones accepted in by the US Federal Reserve under its Quantative Easing, that is QE, TARP facility, to rescue the banks, where it traded out 1.2 Trillion in US Securities, which now reside in Excess Reserves at the Fed.

The 30-10 yield curve, $TYX:$TNX, began flattening on August 11, 2010, on the Federal Reserve Chairmans announcement of August 10, 2010 of the purchase of mortgage-backed securities. Then on August 27, 2010, the Federal Reserve Chairman stated the possibility of an even larger purchase of debt; this caused the bond rally in US Treasuries, TLT, that began April 6, 2010 to fail, sending bond prices lower and interest rates higher.

Some migh say ystemic risk is quite high. I say we are at the point of maximum systemic risk. Liquidity evaporation could happen quite easily, resulting in a liquidity crisis, where there may not be enough buyers to meet sellers demand; that is why I am invested in gold bullion, $GOLD.

Tomorrow is 9-11-2010; for those interested in short selling I provide a listing of stocks and ETFs to sell short for a debt deflationary bear market; perhaps tomorrow will be a Financial 911.

A number of indicators manifesting bearishly. For example, small cap growth, RZG, turned lower while almost all other ETFs gained. The usually volatile Russell 2000, IWM, did not follow the lead of the Financials, XLF; the former rose only 0.06% while the latter rose 1.26%.  Real estate, IYR, manifested a massive bearish engulfing candlestick and fell 0.75%. Semiconductors, XSD, fell 0.4% lower. The chart of the junior gold mining shares, GDXJ, relative to gold, GLD, manifested bearish engulfing from a spectacular rise, suggesting that this is the opportune time to go short GDXJ as these mining stocks may detach from the price of gold and fall lower with stocks, GDXJ:GLD

Squatting, that is thhe entitlement to living payment free in a property, that came by FASB 157, will be coming to an end soon.

Banks have been moving on lower priced homes while letting the higher priced homes sit without action because there is much greater loss stored in higher priced homes, that the banks do not want to take as a loss to their income statement.

Furthermore the banks operate as a cartel and do not want to suffer the wrath of their peers by foreclosing in the higher priced neighborhoods.
Dr. Housing Bubble relates this means that mega defaulters in places like Culver City, CA, are sitting in homes without making payments, while subprime defaulters in places like Englewood-Chicago, IL, have been foreclosed on long ago. Now the latter neighborhood is a blighted and vacant wasteland. Welcome to the “banking industry matrix and desert of the real”.

Yet September 1, 2010, was a watershed date in investment, economic and housing history, as the banking and real estate industry’s “extend and pretend” policy, which came from the FASB 157 entitlement to mark real estate “at the manager’s best estimate”, rather than “mark to market”, was impaired, as the United States 30-10 Yield Curve, $TYX:TNX, broke down to the point where bonds of all types, BND, fell parabolically lower in value.

As banks, KBE, fall lower in value through short selling and through increasing credit default swaps; and as their 1.2 Trillion in Excess Reserves at the Federal Reserve looses value with a flattening 30-10 yield curve, $TYX:$TNX, the FASB 157 entitlement will exponentially loose value and become like an expired option.

As a result of flattening sovereign debt yield curve, and ongoing yen carry trade disinvestment, real estate investments,  FIO,  PSR,  REZ,  values will plummet and banks will transition of necessity, from being mortgage and lending institutions, to property leasing institutions.

Irvine Renter writes of a truth we need to be reminded of: ”The foreclosure inventory described above as 2 million homes is the visible inventory, loan owners that have received a foreclosure notice. The shadow inventory is several million more. The bottom line is that delinquencies are far exceeding foreclosures. At some point, foreclosures must exceed delinquencies, and the foreclosures must be pushed through the system. We have many, many more foreclosures to come.”

The push for foreclosures started September 1, 2010 with a flattening yield curve and a fall lower in Banks, KBE, on September 7, 2010, as EuroIntelligence relates that the Wall Street Journal reported that the European Financial Institutions, EUFN, stress tests were essentially a fraud. This revelation sent bond spreads to new records, the latest ten year spreads: Ireland 372 bp, Greece 9 44 bp, Portugal 355 bp, all up substantially yesterday, in the case of Portugal and Ireland to new record levels.

Squatting, that is the entitlement to living payment free in a property, that came by the way of FASB 157, will soon be coming to an end as banks pressed for cash flow will actively and continually foreclose and lease properties.

In today’s news

I … Speaking at the Council on Foreign Relations, Hillary Rodham Clinton announced the dawn of “A New American Moment,” in which the United States will lead the world in effective and enduring multilateral cooperation.  Building on President Obama’s National Security Strategy, she dedicated the United States to building a “new global architecture,” by bolstering traditional alliances, integrating emerging powers, strengthening regional organizations, renovating global institutions, and promoting universal values to address “the weight of new threats.” provides the transcript of the September 8, 2010, discussion between US Secretary of State, Hillary Rodham Clinton, and Richard N. Haass, Council on Foreign Relations President,  which addresses global governance.

II … Joe Nelson of the San Bernardino and Inland Empire Sun reports that a city and Federal conflict might result in closure of a model EB-5 immigration employment center.

For the second time, U.S. Citizenship and Immigration Services has threatened to terminate the Victorville Regional Center, which the city fears could jeopardize hundreds of jobs at Southern California Logistics Airport.

In a notice of its intent to terminate dated Aug. 10, U.S. Citizenship and Immigration Services, or USCIS, determined that most of the jobs being generated at the designated regional center, including jobs at the Dr Pepper Snapple and Plastipak factories, could not be directly attributed to a neighboring $30 million wastewater treatment plant, which began operations in July.

In an economic analysis submitted to USCIS in late June, Keith Metzler, chief executive officer for the regional center, indicated that money from foreign investors would be used to construct the wastewater plant. He said 12 jobs would be created at the wastewater plant once it was completed, and it would treat 900,000 gallons of industrial wastewater daily from the Dr Pepper Snapple plant.

In addition, Metzler said construction of the wastewater plant would create more than 400 jobs at the bottling plant and more than 1,200 jobs within the regional center itself.

But USCIS is disagreeing with Metzler’s analysis. “It is of note that neither the Dr Pepper Snapple plant nor the Plastipak plant appear to have a relationship with the wastewater treatment plant other than being parties to agreements to be consumers of the services of the wastewater treatment plant,” according to the USCIS letter.

USCIS gave Metzler until Sept. 27 to provide documentary evidence showing how the wastewater treatment plant factors into the creation of jobs at the regional center.

Metzler shot his response off to USCIS last week. He attached more than 70 pages of support letters and other documents validating the legitimacy of the regional center and the role the wastewater treatment plant plays in it.

The documents included letters of support from the senior vice president of engineering at Dr Pepper Snapple and the vice president of operations at Plastipak. Both confirmed that their companies’ decision to locate to SCLA was on condition that the wastewater plant be built and that the plant serve their factories. “Had it not been for the commitment by the city of Victorville and its redevelopment agency to build the (wastewater treatment plant), the jobs generated by (Dr Pepper Snapple) and Plastipak would not currently exist,” Metzler said in his letter.

USCIS is the federal agency that oversees a foreign investor program called EB-5, which allows wealthy foreign investors to invest in American infrastructure and capital improvement projects that create at least 10 jobs in exchange for green cards.

Victorville was given approval by USCIS last June as a regional center, allowing the city to participate in the EB-5 program. Newport Beach energy magnate William Buck Johns, who has a vested interest in power plant projects at SCLA, partnered with the city and has been aggressively recruiting investors from Asia, South Africa and Mexico in the the last year in an effort to secure the $25 million needed to cover the construction cost of the wastewater treatment plant.

So far, 28 investors have agreed to invest and 19 applications have been processed through USCIS. Loans totaling $9.5 million have been made to the Southern California Logistics Airport Authority, Johns said.

In May, USCIS sent the city its first notice of its intent to terminate the regional center, saying that four capital improvement projects being promoted to foreign investors appeared defunct. The federal agency gave the city two months to prove that the projects, including an electrical power plant, intermodal rail improvements and infrastructure improvements at SCLA, were still viable.
The soured economy has delayed those projects indefinitely, and Metzler requested in his latest letter to USCIS that the power plant, intermodal rail improvements and infrastructure improvements be removed from consideration for the regional center.

He said when he can provide documented evidence including updated business plans and economic analyses showing the projects to be viable, he will request the regional center plan be amended to include those projects again.

The latest roadblock by USCIS could wield a more severe blow to the regional center. “The notice directly jeopardizes the ability of the (wastewater treatment plant) to sustain jobs created as it prohibits the ability of the (wastewater treatment plant) to refinance its construction debt,” Metzler said in his 14-page response letter to USCIS.

USCIS is also questioning how the $25 million being collected for the wastewater plant’s construction will result in the creation of 500 jobs, as would be expected if 50 investors each invested $500,000, and each investment is expected to create a minimum of 10 jobs.

Metzler said in his letter that an economic model prepared by local economist John Husing identifies 432 permanent jobs traced directly to the wastewater plant. Of those jobs, 210 currently exist at Dr Pepper Snapple, 70 at Plastipak and 12 at the wastewater treatment plant. Despite the setbacks, Johns and other city officials who have kept up on the regional center issue are nothing but optimistic. “We’re expecting our green light from USCIS any day now,” Johns said Wednesday.
Johns said other companies planning a move to SCLA will be using the wastewater treatment plant as well. The Victorville Federal Prison is also a customer.

The regional center is still marketing the EB-5 program to foreign investors, but Johns said it is vital that the matter be cleared up with the federal government in order for things to move forward.
“It’s just a clear misunderstanding by the USCIS. We’re well within the bounds of the program, and this is one of the more successful EB-5 programs in the country,” Johns said.

Victorville Councilman Mike Rothschild said he couldn’t make any sense of the federal agency’s repeated inquiries challenging the validity of his city’s regional center. “It doesn’t make any sense to me. We wouldn’t have built it without a customer base being there,” Rothschild said. “When they (USCIS) sit there and look at everything, they’re going to realize this is the exact way an EB-5 program should be working.”

Disclosure: I am invested in gold bullion