TSX is Looking Very Bearish

I’m bearish on the Toronto Stock Exchange (TSX) as of today’s close and will be looking to short it via Canadian ishares (EWC). Precious metals are weighing this index down significantly and I think it’s getting close to having a big price decline.

Looking at the daily we have a lot of room to drop to reach the lower trend line and you can easily spot the distribution that is going on within the index. A break below support shown on the 60 minute chart below would confirm this analysis and would warrant increasing your short exposure. If you view the long term chart below you’ll see a strong trendline going back to the 0p’ bottom that should be closely as we’re just about to test it.

I’ll be opening a position in EWC on intraday strength, somewhere around the $32.50 area.

Here is a link to my long term chart view of TSX

Moody's: Downgrade of U.S. Debt Possible, Rating Implications of US Debt Limit & Long-Term Budget Negotiations

Moody's Investors Service said today that if there is no progress on increasing the statutory debt limit in coming weeks, it expects to place the US government's rating under review for possible downgrade, due to the very small but rising risk of a short-lived default. If the debt limit is raised and default avoided, the Aaa rating will be maintained. However, the rating outlook will depend on the outcome of negotiations on deficit reduction. A credible agreement on substantial deficit reduction would support a continued stable outlook; lack of such an agreement could prompt Moody's to change its outlook to negative on the Aaa rating.

Although Moody's fully expected political wrangling prior to an increase in the statutory debt limit, the degree of entrenchment into conflicting positions has exceeded expectations. The heightened polarization over the debt limit has increased the odds of a short-lived default. If this situation remains unchanged in coming weeks, Moody's will place the rating under review.

Moody's had previously indicated that its stable outlook on the Aaa rating was based on the assumption that meaningful progress would be made within the next eighteen months in adopting measures to reverse the country's upward debt trajectory. The debt limit negotiations represent a real near-term opportunity for agreement on a plan for fiscal consolidation.

If this current opportunity passes, Moody's believes that the likelihood of anything significant being accomplished before the next presidential election is reduced, in part because the two parties each hopes to capture both a congressional majority and the presidency in the 2012 election, after which the winning party could achieve its own agenda. Therefore, failure to reach an agreement as part of the current negotiations would increase the likelihood of a negative outlook in the near term, because the upward debt trajectory would still be in place. At present, this appears the most likely outcome, in Moody's opinion.

However, if the debt limit is raised for a short period to allow continued negotiations on a long-term deal, Moody's might delay any rating action on the rating outlook pending the outcome of those negotiations, assuming that the negotiations appeared likely to accomplish a substantive change in the debt trajectory.

These developments have the following rating implications.

1) The likelihood that Moody's will place the US government's rating on review for downgrade due to the risk of a short-lived default has increased. Since the risk of continuing stalemate has grown, if progress in negotiations is not evident by the middle of July, such a rating action is likely. The Secretary of the Treasury has indicated that the government will have to drastically reduce expenditure sometime around August 2 if the debt limit is not raised; the initiation of a rating review would precede this date.

2) If a debt-ceiling-related default were to occur, Moody's would likely downgrade the rating shortly thereafter. The extent of and length of time before a downgrade would depend on how factors surrounding the default affect the government's fundamental creditworthiness, including (a) the speed at which the default were cured, (b) an assessment of the effect of the default on long-term Treasury borrowing costs, and (c) measures put in place to prevent a recurrence. However, a rating in the Aa range would be the most likely outcome. Any loss to bondholders would likely be minimal or non-existent, as Moody's anticipates that a default would be cured quickly.

3) If default is avoided, the Aaa rating would likely be affirmed after any review. Whether the outlook on the rating would be stable or negative would depend upon whether the outcome of the negotiations included meaningful progress toward substantial and credible long-term deficit reduction. Such reduction would imply stabilization within a few years and ultimately a decline in the government's debt ratios, including the ratio of debt to GDP.

WILL THE VIX BREAK OUT?

All eyes on the VIX and the S&P 500 to see if we are in for a very ugly summer.  Today might have seemed like a strong rough patch, but in reality we have yet to see a complete meltdown or pervasive protection buying.  The VIX is actually just hitting its May upside barrier for the fourth time this month:

Fourth time is the charm?

In trying to assess the situation there is one very interesting dichotomy occurring in the US markets.  Interest rates continue to fall lower while the equity market has remained stubbornly high.  If you look at the 10 year treasury rate versus the S&P 500 price index you can see fairly strong correlation over the last 11 years:

Which is right?

The 10 year treasury at a sub 3% yield does not seem as if we should be overly exuberant.  That said, the current earnings on the S&P 500 suggests an earnings yield (earnings over price) of about 6.5%.  This suggests that you would have to cut earnings in half for the earnings yield on the S&P 500 to be equal to the S&P 500.  Would you rather own a basket of stocks that are currently earning a yield that is twice that of a 10 year treasury or would you like to lock in that the treasury rate for 10 years with no potential for upside and put your money at risk to upside inflation?

I could see a correction setting us back to 1200 on the S&P 500, but at this time I would view it as a buying opportunity and chance to have some fun with volatility.

3 Stocks With Heavy Short Interest: AN, FSLR, AMR

It was an ugly day for equities on Wednesday, with the Dow off 279.65 points. The fact is that the economy is slowing down, as real estate prices continue to drop and the European debt crisis deepens. At the same time, the Federal Reserve’s stimulus program – called QE2 – will end this month and Congress is in disarray with the budget.

Well, all this is great news for short sellers. You see, these investors make money when share prices drop. In fact, short positions are actually disclosed to the public, giving us a glimpse of companies that may be in trouble. So what are some of the most heavily shorted?

Here’s a look:

AutoNation (NYSE: AN). The short interest is 13.28 million shares, which represents about 20.1% of the float (which is the total number of tradable shares). AutoNation, which is largest auto dealership operator, has actually seen strong gains with the stock price up a sizzling 75.7% over the past year.

But if the US economy is faltering, can AutoNation keep up the momentum? After all, car purchases are easily deferred. What’s more, the company has large amounts of revenue that come from California and Florida, which continue to have lagging economies.

Finally, AutoNation is feeling the impact of Japan’s earthquake and tsunami. The result has been production slowdowns and component shortages.

First Solar (NASDAQ: FSLR). The company has 17.5% of its shares short, which represents 36.30% of the float. This maker of modules for the solar industry is a favorite target of famed short seller, Jim Chanos (he manages the multi-billion dollar Kynikos hedge fund). His recent report on the stock was entitled:  “Solar + Wind = Hot Air.”

But in light of persistently high oil prices, isn’t solar a good alternative? Well, according to Chanos, it is simply not cost-effective. If you strip away the government supports, the industry would crumble.

And there is much pressure to cutback on the subsidies. Already, there have been moves in Germany and Italy. Also, it’s a good bet that there’ll be reduced spending in the US because of budgetary constraints.

Interestingly enough, First Solar’s team may also be concerned about the company’s prospects. They have been dumping large amounts of shares. At the same time, several executives have departed.

AMR (NYSE:AMR). There are 60.99 million shares that are short, which comes to about 21% of the float. True, the company has taken strikes to streamline its operations (the 2008 recession was brutal) but issues remain.

First, the price of fuel is a drag. It adds unpredictability to earnings, which always makes things tough on Wall Street. For example, AMR has suffered from losses in the two past quarters. Keep in mind that AMR has a fairly old fleet, which adds to the overall costs.

There may even be higher wage costs. Consider that the workforce is highly unionized — and is in the process of protracted negotiations.

S&P 500 Falls to 100 Day Moving Average

Finally the lows of last week at 1311-1312ish have been broken, and the S&P 500 now sits right at its 100 day moving average.  This was the level that held in mid March, other than 1 session which if memory serves was in reaction to the Japan situation.

Generally these key supports don't break on the first test.  Again, I expect the news flow tomorrow morning to be the big driver - up or down.  Coin flip at this moment which way it goes, but short of such market moving news the trend is not good.

Comex Silver Bullion Default on Sharp 38% Drop in Inventories

Spot gold and silver prices rose slightly again this morning after hitting a one-month high yesterday as equity markets internationally came under selling pressure. The Moody's downgrade of Greece and worryingly poor US economic data again pushed investors to seek the safe haven of bullion. Gold reached new record nominal highs in sterling yesterday (£945.62/oz) as the pound fell on concerns about the UK economy.

Silver Prices and Rates

Markets await key U.S. data on non-farm payrolls on Friday, while ongoing concerns over Greek sovereign debt and contagion in the Eurozone also affected market sentiment and supported the precious metals.

COMEX Silver Bullion Registered Inventories – January 1996 to May 31st 2011

Friday's U.S. payrolls is likely to show that the world's largest economy is weakening and may be on the verge of a double dip which will likely lead to further safe haven demand.

Seeing as the extent of the recovery was always exaggerated, this is not a surprise to us.

The supply situation in the silver market gets more interesting by the day.

Registered COMEX silver inventories have fallen to multiyear lows at 29,631,268 ounces. In the last 5 days they fell from 32,132,903 ounces to Tuesday’s holdings of 29,631,268 ounces. As can be seen in the table below registered silver inventories fell every single day last week leading to a sharp fall of 8.4% in 5 days.

Registered metals are those metals which meet the standards for delivery under the silver futures contracts and for which a receipt from an Exchange-approved depository or warehouse has been issued. Eligible metals are those which meet the delivery standards as stated in the rules for which no receipt from an Exchange-approved warehouse has been issued.

This is a long term trend that has been seen since the early 1990s when total COMEX silver stockpiles were over 101.45 million ounces.

However, the scale of the drop in inventories since early 2008 is significant and the trend has accelerated in recent weeks.

Registered silver inventories are down a sharp 38.5% in just two weeks – from 41,044,280 to 29,631,268.

COMEX Silver Bullion Registered Inventories – June 2009 to May 31st 2011

The record nominal highs near $50/oz, seen 31 years ago and again at the end of April, are likely to be seen again sooner rather than later due to the increasingly delicate supply demand balance.

The scale of current investment demand and industrial demand, especially from China and the rest of Asia, is such that it is important to keep monitoring COMEX warehouse stocks.

The Hunt Brothers were one of a few dozen billionaires in the world in the late 1970s when they attempted to corner the market. Today there are thousands of billionaires in the world, any number of whom could again attempt to corner the silver market.

Also, today unlike in the 1970s, there are sovereign wealth funds and hundreds of hedge funds with access to billions in capital.

COMEX Silver Bullion Stockpiles – 05/31/11

The possibility of an attempted cornering of the silver market through buying and taking delivery of physical bullion remains real. However it would be very difficult to corner the silver market due to the very small nature of the silver bullion market.

A COMEX default remains a risk as does a massive short squeeze which could see silver surge as it did in the 1970s and again recently leading to silver targeting the inflation adjusted record high of $140/oz.

As ever price predictions from gurus should be take with a pinch of salt and diversification remains of paramount importance. 

Lumber Prices: Leading Indicator for Private Nonfarm Payrolls?

In the chart below we take a look at the relationship between lumber prices and private nonfarm payrolls.   Clearly they tend to move together on a monthly basis.  One of the transmission mechanisms of monetary policy is the impact of interest rate changes on the  construction sector, which has historically been a leader of past economic recoveries.

This is clearly not the case in the current balance sheet growth recession, so we are not as confident in the lumber price/nonfarm payroll relationship.   Nevertheless,  lumber futures have been under heavy pressure since the end of March,  down over 30 percent,  no doubt, partially the result of the double dip in housing prices.    It will interesting to see how, or if, the correction in lumber shows up in the private nonfarm payroll number tomorrow.
~~~

10 Reasons Why The “Economic Recovery” Is a Fraud

Americans have been continually deceived about the true state of the financial system

Paul Joseph Watson
Prison Planet.com
Thursday, June 2, 2011

Yesterday’s so-called “horror” show for the US economy with the release of new data illustrating how the economic “recovery” has all but ground to a halt was met with feigned astonishment and shock by the establishment media, and yet for the past two years the public has been continually deceived about the true state of the financial system.

All the hot air about an “economic recovery” has served to hide the fact that the United States is slipping back into a double-dip recession, if not a second “great depression,” as market strategist Peter Yastrow told CNBC yesterday.

1) In 2009, when the media claimed the economic “recovery” had begun, oil prices averaged $54 dollars a barrel. In the 24 months since, the cost has doubled. Americans are paying more and more to fill up at the pump with Goldman Sachs predicting that gas will hit $5 dollars a gallon by summer. This figure was already reached in Washington DC two months ago. Far from representing a “recovery” this is in fact another crippling expense that many Americans people simply cannot afford.

2) The housing market has shown no “recovery” whatsoever. The collapse in US house prices “is now greater than that suffered during the Great Depression.” Prices have plunged by 33 per cent since 2007. Home ownership is at its lowest level for 20 years.

3) The collapse in home ownership has flooded the rental market, leading to massive inflation “pushing up the cost of leases across the nation’s 38 million rented residences,” reports Bloomberg. Far from enjoying a “recovery,” US citizens lucky enough not to be stuck in underwater mortgages are instead paying through the nose for rental inflation that represents a huge chunk of the overall consumer price index.

4) Food price inflation is also savaging Americans who are being browbeaten by the word “recovery” while the cost of their groceries soars to unaffordable levels, forcing them to buy cheap unhealthy GMO crap or simply go hungry. Food prices in the US are climbing at the fastest rate since the 1970′s.

5) While Americans were being told to jump on the “recovery” bandwagon and spend more money to reinvigorate the economy, their median incomes were plummeting. Americans are getting poorer. According to the U.S. Census Bureau, median household income in the United States fell from $51,726 in 2008 to $50,221 in 2009 and has been flat since, even as the cost of living continues to rise.

6) While the Federal Reserve points to GDP growth as evidence of recovery, citing figures of $700 million in growth from 2008-2011, the government had to borrow and spend $5.1 trillion just to attain that level. “The Federal government borrowed and spent $5.1 trillion over the past four years to generate a cumulative $700 billion increase in the nation’s GDP. That means we’ve borrowed and spent $7.28 for every $1 of nominal “growth” in GDP,” writes Charles Hugh Smith.

7) While the establishment media and the government pretends that US unemployment numbers are on the decline, the real unemployment figure stands at over 22 per cent. An even more alarming figure shows that fewer than 46 per cent of Americans actually have jobs, with employment rates in California and Arizona hovering around 37 per cent.

8) Along with almost all paper currencies, the dollar has drastically declined in comparison to commodities like gold and silver since the so-called “recovery” began in 2009. At the bottom of the economic slump in the middle of 2009, the greenback was hovering around the $950 dollar an ounce level – it is now well above $1500 and only soaring higher. A weakening dollar reduces Americans’ buying power and makes them pay more for staple necessities like food and fuel as the cost of living skyrockets.

9) Far from staging a “recovery,” US consumer confidence is now lower than during all the financial crises or tragedies of the last several decades. From the crash of ’87, to Enron, to 9/11, to the collapse of Lehman Brothers in 2008, Americans have never been so pessimistic about the economy.

10) Of course, the only people enjoying a financial “recovery” are the Wall Street bankers and the financial terrorists who pulled the plug on the economy in the first place. Since its 2009 low of 7062, the Dow Jones Industrial Average has gained by almost 6,000 points. This means little to the average American that can barely afford to put food on the table, never mind invest in the stock market.

Goldman Sachs Hit With Subpoena From Manhattan DA: Will Wall St. Fat Cats Face Jail For '08 Crisis?

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Investment banking giant Goldman Sachs is facing a criminal probe for its role in the credit collapse of 2008.

Julia Xanthos/News

Manhattan District Attorney Cy Vance Jr.

 Manhattan District Attorney Cy Vance has a fat new target: Wall Street titan Goldman Sachs, which got hit with a subpoena into its actions right before the 2008 credit collapse.

The subpoena stems from a scathing 639-page Senate report accusing Goldman of deliberately selling toxic mortgage-backed securities to unsuspecting clients, knowing the housing market was about to crash.

Vance's office would not comment, but a law enforcement source confirmed a Bloomberg News report about the subpoena.

Nearly three years after the bottom fell out of the housing market, sending the economy spinning into the worst recession since the 1930s, not one Wall Street fat cat has gone to jail - even as evidence mounts that many knew their complicated mortgage-related deals were garbage.

Critics complain that the rich bankers who torched the economy are being treated as "too big to jail."

But there has been a growing move to go after the big banks that survived the crisis - especially the 142-year-old Goldman Sachs.

Last year, the SEC accused Goldman of defrauding investors of more than $1 billion by talking up complex subprime mortgage-related securities that it knew were toxic, then betting against those funds and profiting when they tanked.

Goldman settled that case for $550 million.

A Goldman spokesman said the firm would cooperate fully with Vance's investigation.

It is the Manhattan DA's first big foray into white-collar crime, which was the bread and butter of his venerable predecessor, Robert Morgenthau.

Vance has had some high-profile losses, including last month's decision by a Manhattan jury to acquit two cops charged with rape.