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  • Risk Aversion Rules as the Bear Growls 0 comments
    May 6, 2010 5:00 AM | about stocks: TLT, GLD, DUG, DIA
    The US Treasury 10-Year yield pokes below 3.5% on Wednesday. Gold remains poised as “currency of last resort” as the euro flirts with 1.28. Crude oil could have a weekly key reversal this week. The Dow is close to confirming 11,258 as a cycle high. Freddie Mac taps taxpayers again as expected. Financial Reform gets watered down.
     
    The weekly chart for the 10-Year yield clearly shows a return to “risk aversion” with the trend below my semiannual pivot at 3.675. Note how the 200-week simple moving average provided support around the 4% level. The 10-Year yield tested 3.488 versus my quarterly resistance at 3.467.      
     
    Courtesy of Thomson / Reuters
     
    The weekly chart for Comex Gold shows that all we need is a weekly close above my semiannual pivot at $1186.5 for the “currency of last resort” to pop towards monthly resistances at $1217.3 and $1270.1.
     
    Courtesy of Thomson / Reuters
     
    The weekly chart for the euro shows that the euro can trade down to my quarterly support is 1.2450 on the concerns that Greece debt concerns can spread to the other PIIGS countries. This is what gives gold a stronger bid.
     
    Courtesy of Thomson / Reuters
     
    The weekly chart for Nymex Crude Oil shows risk to my annual support at $77.05. Note a potential weekly key reversal, and keep an eye on the 200-week simple moving average at $76.82.  
     
     
    Courtesy of Thomson / Reuters
     
    Weekly Dow:The Dow ended last week below its 200-week simple moving average at 11,134, after testing the 61.8% Fibonacci Retracement of the October 2007 to March 2009 low at 11,246 with the April 26th high at 11,258. MOJO remains extremely overbought. A weekly close below the 5-week modified moving average at 10,877 shifts the weekly chart profile to neutral. My annual and semiannual resistances are 11,235 and 11,442. I still predict Dow 8,500 before Dow 11,500.
     
    Courtesy of Thomson / Reuters
     
    Freddie Mac needs another $10.6 billion from taxpayers - On Wednesday I reviewed my top 10 predictions for 2010 and the first one was Fannie Mae and Freddie Mac will continue to drain taxpayer money as the Treasury provides unlimited lines of credit through 2012.” The total cost to date was $125.9 billion, and now its $136.5 with Freddie Mac’s fresh need and with Fannie Mae expected to report their quarterly results soon.
     
    Freddie Mac reported an $8 billion loss in its first quarter 2010 earnings report after the close on Wednesday. Under new Conservatorship rules set last Christmas Eve all losses through 2012 will be covered dollar for dollar by tax payers. The loss was $10.6 billion, which comes directly from the US Treasury. The Freddie Mac tab now rises to $61.3 billion and counting. Freddie Mac agrees with me that the housing market “remains fragile with historically high delinquency and foreclosure levels” and high unemployment.
     
    A forgotten part of Financial Reform is what to do with Fannie and Freddie, and this will become a problem over the next two years as its open checkbook gets tapped again and again. Now is the time to act, but the Obama Administration argues that it is still too early to draft what to do with the GSEs.
     
    “Too Big to Fail” proposed solution lacks the guts for true reform. What makes the Senate think that the FDIC has the wherewithal to manage an “orderly liquidation” of a financial institution deemed “too big to fail”? In my judgment it is next to impossible to unwind a complex financial institution when other institutions are either in the same boat, or hanging around as vultures. Instead of establishing an $50 to $90 billion “Wall Street” greed tax the FDIC will have an equivalent line of credit with the US Treasury, which would wind up like owning Fannie Mae and Freddie Mac.  
     
    We would be better off with a pre-emptive break-up of the “too big to fail” banks to limit that too heavy concentrations of assets in the banking system, or American deposits. We will begin this new dangerous chapter of “The Great Credit Crunch” with “too big to fail” banks even bigger.
     
    Of equal importance is regulating the over-the-counter derivatives market when no one really knows how big it is. I have now seen estimates that this pool of tangled webbed contracts totals $450 trillion around the world. The time bombs are ticking, and the structures that cannot be marked to market are too difficult to exist, and should be unwound. To let them go unregulated is thus setting more and more time bombs that can go off overnight from all four corners of the globe. One possibility is to have the “too big to fail” institutions spin off their derivative businesses. Credit Default Swaps, which bets on the likelihood that a borrower will default on its debts, should be banned. This market along and naked short sales were catalysts that helped cascade the banking system two years ago.
     
    That’s today’s Four in Four. Have a great day.
     
    Richard Suttmeier
    Chief Market Strategist
    (800) 381-5576
     
    As Chief Market Strategist at ValuEngine Inc, my research is published regularly on the website www.ValuEngine.com. I have daily, weekly, monthly, and quarterly newsletters available that track a variety of equity and other data parameters as well as my most up-to-date analysis of world markets. My newest products include a weekly ETF newsletter as well as the ValuTrader Model Portfolio newsletter. I hope that you will go to www.ValuEngine.com and review some of the sample issues of my research.
     
    “I Hold No Positions in the Stocks I Cover.”


    Disclosure: No Positions
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