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Tuesday, 15 November 2010

QE2 has had a very strange effect on the markets.  One might have expected stocks to rally, gold to rally, tbonds to rally, commodities to rally.  This hasn't happened.  The US Dollar is trying to bottom.  TBond yields are rallying (prices falling).  This was not supposed to happen.  What this shows us, probably, is that, without a continuing Euro crisis (soverign debt variety), US TBonds will become junk bonds, or, at least, yields will rise, no matter what the Fed does.  Demand for US treasuries is more dependent upon what happens in Europe than what happens in Washington, for the moment.

The Dollar needed to stabilize a bit.  A real rally in the Dollar means stocks markets, fueled by commodity gains, will collapse.  The Fed does not want this -- and its anti-Dollar policy is steeped in this understanding.  A rising stock market is supposed to fuel optimism and spending and lead to economic growth in the global market.  A stronger US Dollar will derail this plan.  Of course, the weak Dollar exports inflation to foreign countries as 'easily borrowed US Dollars' flees America and tries to find foriegn markets where currency appreciation is NOT undercutting equitiy gains.  Perhaps it is too much of a good thing already.  China is forthy.  Brazil, Thailand, many other emerging economies are now worried that the inflation has gone too far.

Is the market in interest rate instruments taking over, casting the Fed's manipulation aside?  The Fed has dedicated itself to low interest rates for many years now.  QE2 was supposed to continue this dedication.  But yields are rising and telling Mr. Bernanke that his power to control the world through his threats and good intentions is ending.  Higher rates are a sign of exactly what Alan Greespan was telling the world two days ago.

It seems that Greenspan can't help but speak the truth now, suddenly.

From the Reuters story:

Greenspan, who spoke on NBC's "Meet the Press," said he believed "something equivalent" to what Bowles and Simpson recommended (austerity measures to cut the deficit) would eventually be approved by Congress.

"The only question is, is it before or after a bond market crisis? Because there's no alternative," he said.

He said the deficit, which hit $1.3 trillion this year, may begin to frighten the bond market, which could undermine the recovery and push the economy back into recession.

"The big, serious problem is whether or not the outlook for the longer-term deficit spooks the bond market to a point where long-term interest and mortgage rates move up very sharply," said Greenspan. "If that happens, that will cause the double dip."

Greenspan caused a stir last week when he said in a Financial Times column that Washington was pursuing a policy of weakening the dollar, prompting Treasury Secretary Timothy Geithner to insist that the United States would never deliberately weaken its currency.

QE2 was supposed to be great news for gold.  But gold has stutter-stepped a bit, forming what looks like a trading top (at least a trading top in GLD).

The New Maestro, Bernanke, it seems, is running out of magic to control the financial markets through the sheer weight of his wheelbarrow filled with monopoly money.  An overvalued currency does not look or feel like Monopoly money; but a currency devalued in a panicky method does, indeed, begin to look and feel like fake money.

Just when we thought it was safe to go out and buy another home -- John Paulson says it is (the genius who made billions on the housing bubble collapse, and who now is losing billions by buying housing too early and who now NEEDS us to go out and buy houses to keep his investment from losing more money).

From the AP:

Foreclosure mess could threaten banks, reportForeclosure documents scandal could threaten big banks, hurt US homeowner program, report says ap
Marcy Gordon, AP Business Writer, On Tuesday November 16, 2010, 12:29 am EST

WASHINGTON (NYSE:AP) -- The disarray stemming from flawed foreclosure documents could threaten major banks with billions of dollars in losses, deepen the disruption in the housing market and hurt the government's effort to keep people in their homes, according to a new report from a congressional watchdog.

Revelations that several big mortgage issuers sped through thousands of home foreclosures without properly checking paperwork already has raised alarm in Washington. If the irregularities are widespread, the consequences could be severe, the Congressional Oversight Panel said in a report issued Tuesday. The full impact is still is unclear, the report cautions.

Employees or contractors of several major banks have testified in court cases that they signed, and in some cases backdated, thousands of certifying documents for home seizures. Financial firms that service a total $6.4 trillion in mortgages are involved, according to the new report. Big banks including Bank of America Corp., JPMorgan Chase & Co. and Ally Financial Inc.'s GMAC Mortgage have suspended foreclosures at some point because of flawed documents.

Federal and state regulators, including the Federal Reserve and attorneys general in all 50 states, are investigating whether mortgage companies cut corners on their own procedures when they moved to foreclose on people's homes.

"Clear and uncontested property rights are the foundation of the housing market," the report says. "If these rights fall into question, that foundation could collapse."

It lays out the possible scenarios: Borrowers may not be able to ascertain if they're sending their mortgage payments to the right party. Judges may block all foreclosures. Prospective buyers and sellers could be in left in limbo.

For major banks, if they discovered that they still owned millions of bad mortgage loans they assumed had been sold, the losses could reach billions.

"Serious threats remain that have the potential to damage financial stability," Sen. Ted Kaufman, D-Del., the watchdog panel's chairman, said in a conference call with reporters on Monday. "This is an incredibly complex problem. . It could turn out to be nothing. It could turn out to be a big deal."

It is probably a BIG DEAL.  Also, the idea of 'flawed paperwork' just skims the surface.  We should probably understand this 'mess' as a combination of flawed paperwork and FRAUD, with the emphasis being on the FRAUD side of the equation.  Also, let's not pretend this is a foreclosure issue only -- if the paperwork was flawed (indeed, 'illegal') for those who could not pay their mortgages, does it not make sense to assume the same 'flawed paperwork' exists for those continued to pay their morgages on time?  We are sitting on a dragon, touching its head, and assuming the head is the pimple we must pop, instead of a pimple on top of a larger beast.  The deeper we go, the more that is legally and morally wrong we will find.

Night-Cycles are about uncovering crimes, blunders and corruption in the seemingly placid contrivances of the Day-Cycles.  So, be prepared.  More trouble is coming.


We now have four divisions of our Top and Bottom Watch List.  Issues topping and bottoming, in terms of our M4 Accumulation indicator.  And issues giving buy and shortsell signals using the same.  We have very simple criteria for buying and for short-selling.  To buy, issue must be at the M4 Accum bottom extreme, -10, or ticking up from that extreme, at -9; AND they must have long-term and intermedicate-term trends positive.  Sell when M4 Accum hits +10, the positive extreme, or when M4 Accum is greater than zero and turns down.  Shortsell when M4 Accum is at the positive extreme +10, or ticking down from the positive extreme, +9, and the long-term and intermediate-term trends are negative.

We include a few charts below of issues we think especially interesting.

Black Line: M4 Accumulation: primary momentum indicator.
Red Line: M5 3 Test Momentum Indicator: leading momentum indicator, showing future direction of trend.
Orange Line: M5 3 Test Average (Moving Average of M5 3 Test Momentum Indicator).
Black Line: M4 Sum Plus Spike: +1 to zero: positive; -1 to zero: negative.  Two consecutive days at +1 generally are bullish; two consecutive days at -1 are bearish.
Red Line: Intermediate-Term Trend.
Brown Line: M2F ALT: overbought +80; oversold-20.
Red Line: Short-Term Trend.

Issue Close T1D M4 Sum Plus Issue Name  
CRL_D 32.57 0.082 -1 Charles River Labs Intl
DGZ_D 15.89 -0.025 -1 Short Gold ETF Daily
FXP_D 27.97 -0.198 -1 Short FTSEChina Index ETF Daily
REW_D 17.2 -0.148 1 Short Technology ETW Daily
BOTTOM BUY        
Issue Close T1D M4 Sum Plus Issue Name  
^DRG_D 302.88 0.313 -1 Pharmaceutical Index
BMY_D 26.32 0.034 -1 Bristol Meyers
ENZN_D 10.74 0.009 -1 Enzon Pharmaceutical
FMCC.OB_D 0.358 0.001 -1 Freddie Mac Daily
MMM_D 86.2 0.101 -1 3-M Daily  
MRK_D 34.54 0.022 -1 Merk Pharmaceuticals Daily
PEP_D 64.42 0.045 -1 Pepsi Daily  
TEVA_D 50.95 0.05 -1 Teva Pharmaceutical Daily
TOP WATCH        
Issue Close T1D M4 Sum Plus Issue Name  
AFG_D 31.1 0.037 -1 American Financial Group
AKAM_D 47.21 0.121 -1 Akamai  
AMZN_D 158.9 0.518 -1 Amazon  
BBY_D 43.188 0.223 1 Best Buy Daily
BYD_D 9.17 0.064 1 Boyd Gaming
DBB_D 22.77 0.052 -1 Base Metals ETF
DE_D 76.48 0.234 1 John Deere  
ENP_D 20.13 0.03 1 Encore Energy Partners
EPP_D 46.66 0.099 1 Asia (No Japan) ETF
GAZ_D 8.2 0.054 1 Natural Gas ETF
JJU_D 31.9 0.084 1 Aluminum ETF
MSFT_D 26.2 0.033 1 Microsoft Daily
RGR_D 15.49 0.058 1 Sturm Ruger
RSX_D 34.72 0.059 1 Russian Index ETF
SCCO_D 43.7 0.27 1 Southern Copper
SNP_D 96.84 0.186 1 China Petrol & Chemical Co
TMX_D 15.33 0.016 1 Telmex Daily
UAL_D 27.47 0.142 -1 United Continental Holdings
UNH_D 35.47 0.08 -1 United Healthcare Daily
VALE_D 32.38 0.095 1 VALE S.A.  
XRU_D 32.44 -0.018 -1 Russian Ruble ETF
Issue Close T1D M4 Sum Plus Issue Name  
XRU_D 32.44 -0.018 -1 Russian Ruble ETF


So, is this the real thing?  An inverse China play suggests the Chinese markets will be coming down.  This is the first time since early-August that we have had such a suggestion (based on M4 Accum).  China is apparently serious about inflation problems.  They have taken steps to reign-in their housing markets; now they have shut off ALL housing loans for the rest of this year (from their Big Four banks).  This may or may not mean much.  China is a planned economy.  Each year, as quotas are reached, loans taper off at the end of the year.  But they have never moved to close down all mortgage loans in November before.  They have also raised the down-payment requirement for home loans; and they have inched up restrictions on banks to try to stabilize speculation.

South Korea today raised interest rates.  Asia is overheating.  Higher rates will slow economic growth -- of course, higher rates will also strengthen local currencies, something more countries are trying to revers

REW, Short Technology ETW: TRADING BOTTOM.
Another 'bottoming' issue is an inverse ETW of technology stocks.  This chart has not issued a bottom reading also since early August, at which time REW rallied and the NDX (Nasdaq Index) sank 6% before recovering.  What this is saying is that tech stocks are heading into a correction, how large the correction will be can't really be predicted, and must be experienced.

Of the issues giving M4Accumulation Buy Signals, MMM looks like the best bet.  Note, an issue can sit on an M4Accumulation bottom for some time.  It may not advance at all until it begins to tick up.  Short-term MMM is overbought (M2F Alt, brown line, Bottom Pane) -- so be in no hurry to buy this one.  When M2F Alt finished its pullback, if both the long-term and intermediate-term trend are still positive, MMM should begin to advance.

MRK, Merck Pharma: BUY SIGNAL.
MRK is also giving an M4 Accumulation buy signal.  It is less attractive than MMM at the moment.  There has been a more dangerous pullback in the short-term trend, Bottom Pane, red line -- pulling back toward support and, at the moment, threatening support.  It is possible for MRK to lose more ground here, although it is still above recent support (around 34 in August).  We like this stock but not as much as MMM.

PEIX, Pacific Ethanol: BUY SIGNAL.
Speculators might find PEIX attractive.  We think there is a chance for this one to touch 1.25 in the next two months.  We would also be inclined to sell it if it fell through current support -- and would suggest using a fairly tight stop-

AKAM, Akami: TOP
Akami is the worst-looking stock in out Top-Watch list.  It is in a free-fall, with short-term support coming up at 42.91.  This may not hold.  A decline to the next support level, 38.95, would be a sustantial decline.

More information on the CGTS systems can be found at:

Clark's Gate Timing System
Hanoi, Vietnam
84 4 221 92210

Disclosure: Nothing to disclose