Friday, July 1, 2011

Bond Drop Means Rally in TBT Inverse ETF Upside down ETF gets bullish as bonds fall

The recent surge in equities has brought a sharp drop in bonds. Savvy traders can use that to find an opportunity in the options market.

Of the bevy of bond exchange-traded funds I usually stick with the most liquid of the bunch — theiShares Barclays 20+ Year Treasury (NYSE: TLT) and the ProShares UltraShort 20+ Year Treasury (NYSE: TBT).

Over the past three days the TLT has declined 3.5%. While a fall of this magnitude may not seem like much by stock standards it’s actually a decent sized move in bond land. Since the TBT is a leveraged inverse ETF it has simultaneously staged a notable advance bringing it back above its 50-day moving average (see chart below). If TBT is able to hold above this key level and continue the reversal into an intermediate uptrend, traders may consider entering short put plays. This generates premium income if TBT continues steady or higher and the options expire worthless.

Selling puts seems to be a good fit for the TBT for the following reasons:

1. Given the cheaper price tag of this ETF the margin requirement for short puts is quite low.

2. TBT offers strike prices in $1 increments offering traders numerous strike prices to choose from.

3. Options on TBT are super liquid with most out-of-the-money puts boasting bid/ask spreads a few pennies wide.

July options have insufficient extrinsic value to make short puts worthwhile so I’d suggest sticking with the August cycle. I’ll be stalking the TBT Aug 33 or 32 Puts in the coming weeks.

Source: MachTrader

Iceland Declares Independence from International Banks

Iceland is free. And it will remain so, so long as her people wish to remain autonomous of the foreign domination of her would-be masters — in this case, international bankers.

On April 9, the fiercely independent people of island-nation defeated a referendum that would have bailed out the UK and the Netherlands who had covered the deposits of British and Dutch investors who had lost funds in Icesave bank in 2008.

At the time of the bank’s failure, Iceland refused to cover the losses. But the UK and Netherlands nonetheless have demanded that Iceland repay them for the “loan” as a condition for admission into the European Union.

In response, the Icelandic people have told Europe to go pound sand. The final vote was 103,207 to 69,462, or 58.9 percent to 39.7 percent. “Taxpayers should not be responsible for paying the debts of a private institution,” said Sigriur Andersen, a spokeswoman for the Advice group that opposed the bailout.

A similar referendum in 2009 on the issue, although with harsher terms, found 93.2 percent of the Icelandic electorate rejecting a proposal to guarantee the deposits of foreign investors who had funds in the Icelandic bank. The referendum was invoked when President Olafur Ragnur Grimmson vetoed legislation the Althingi, Iceland’s parliament, had passed to pay back the British and Dutch.

Under the terms of the agreement, Iceland would have had to pay £2.35 billion to the UK, and €1.32 billion to the Netherlands by 2046 at a 3 percent interest rate. Its rejection for the second time by Iceland is a testament to its people, who feel they should bear no responsibility for the losses of foreigners endured in the financial crisis.

That opposition to bailouts led to Iceland’s decision to allow the bank to fail in 2008. Not that the taxpayers there could have afforded to. As noted by Bloomberg News, at the time the crisis hit in 2008, “the banks had debts equal to 10 times Iceland’s $12 billion GDP.”

“These were private banks and we didn’t pump money into them in order to keep them going; the state did not shoulder the responsibility of the failed private banks,” Iceland President Olafur Grimsson told Bloomberg Television.

The voters’ rejection came despite threats to isolate Iceland from funding in international financial institutions. Iceland’s national debt has already been downgraded by credit rating agencies, and now those same agencies have promised to do so once again as punishment for defying the will of international bankers.

This is just the latest in the long drama since 2008 of global institutions refusing to take losses in the financial crisis. Threats of a global economic depression and claims of being “too big to fail” have equated to a loaded gun to the heads of representative governments in the U.S. and Europe. Iceland is of particular interest because it did not bail out its banks like Ireland did, or foreign ones like the U.S. did.

If that fervor catches on amongst taxpayers worldwide, as it has in Iceland and with the tea party movement in America, the banks would have something to fear; that is, the inability to draw from limitless amounts of funding from gullible government officials and central banks. It appears that the root cause is government guarantees, whether explicit or implicit, on risk-taking by the banks.

Ultimately, such guarantees are not necessary to maintain full employment or even prop up an economy with growth, they are simply designed to allow these international institutions to overleverage and increase their profit margins in good times — and to avoid catastrophic losses in bad times.

The lesson here is instructive across the pond, but it is a chilling one. If the U.S. — or any sovereign for that matter — attempts to restructure their debts, or to force private investors to take a haircut on their own foolish gambles, these international institutions have promised the equivalent of economic war in response. However, the alternative is for representative governments to sacrifice their independence to a cadre of faceless bankers who share no allegiance to any nation.

It is the conflict that has already defined the beginning of the 21st Century. The question is whether free peoples will choose to remain free, as Iceland has, or to submit.

Possible Bottom as Key Sectors Breaking Out

The past month we have seen stocks pick up momentum to the down side after an already very weak month prior (May – Sell in May and go away). This second wave of high volume selling in June was enough to spook the masses out of the market shifting the sentiment from bullish to bearish. But just recently we are starting to see big money accumulate stocks down at these oversold prices, which has me thinking we just may be headed higher sooner than later.

During market reversals we typically see the more sensitive stocks move first, which are the small cap and tech stocks. Then a couple days later we see the brand name stocks (big cap, energy and banking) follow. It’s these large sectors which provide the power in trends.

Taking a look at the graph below you can see on the far right both tech and small caps are leading the market higher and as of today the power sectors (energy and financials) started to move higher also. So if things play out I expect the SP500 which is a basket of the 500 largest companies to follow the small caps higher over the next 1-3 weeks. David Banister is finding stocks ready to explode during bull market advances which may just be starting…

If we take a look at the charts to see how each of these sectors have been performing you will notice that the small caps (IWM) and tech stocks (XLK) broke out one day before the energy and financials did. This is very typical to see and it also works for playing gold. I have seen gold stocks lead the price of gold bullion up to 7 days before gold bullion started to move. It’s these little golden nuggets of info which can not only save you money but make you even more when put to work.

Mid-Week Trading Conclusion:
In short, I feel the market has been forming a base for almost 3 weeks. Just last week we saw the big sectors (financials and energy) reach their key support levels from several months back and that should trigger a sizable bounce and with any luck the start of another leg higher in the market.

The Global Ponzi scheme is under collapse

Gerald Celente : it is off with their heads 2.0 , The Global Ponzi scheme is under collapse , and that's what we are seeing happening whether it is in Tunisia in Egypt whether it is in the UK whether it is in Greece watch out for Spain here comes Italy it is only going to get much worse there is no way out and the people are angry "when people lose everything and have nothing left to lose they lose it " and that what it is , the people know the score , you could sum up what killed capitalism in four simple words "TOO BIG TO FAIL" and that's what's going on the banks are failing and they want the people to bail them out

Governments Are The Primary Creators of Systemic Risk

The greatest lesson of the still young 21st century is proving to be that governments are the primary source of systemic risk to the economy, our standard of living, and our liberty.

The latest case in point is the European government debt crisis, with Greece once again running out of money and threatening to trigger yet another financial crisis. The government’s debt now totals more than 150% of its GDP, and continues to grow. Last year’s bailout by other European governments was supposed to give it the time needed to reduce its budget deficits so that next year Greece could roll over its maturing debts, as well as finance additional deficits at interest rates under 6%. However, the government’s austerity plan of tax increases and budget cuts has not reduced current or projected government deficits because the economy in 2010 contracted by 4.5% and the unemployment rate jumped to 15%.

The combination of a contracting economy and rising debt levels has driven the market yield on Greek two-year notes to near 25% and on its 10-year debt to around 15%. Since these loans are in euros, rates this high reflect the growing risk the people of Greece will not be able to make good on their collective debts. They also effectively shut the government out of the capital markets. Last week, S&P downgraded its rating on Greek debt to B from BB-, well into junk bond territory.

The downgrade reflects the increasing possibility that Greece will restructure its debt by forcing current debt holders to accept longer maturities, or do what demonstrators in the streets of Athens are demanding, which is to force its creditors to take a loss on their loans.

Normally, this would be a matter between a debtor and its creditors. However, European Central Bank (ECB) Executive Board Member Juergen Stark warns that the effects of restructuring “could overshadow the effects of the Lehman bankruptcy,” which is associated with the beginning of the 2008 financial crisis.

At the heart of that financial crisis were government policies including Federal Reserve efforts to manipulate the economy by keeping interest rates artificially low and a weak dollar policy that fueled the housing bubble, federal government rules and regulations that de facto required banks to make loans to high risk borrowers, and two government sponsored enterprises, Fannie Mae and Freddie Mac, who stood ready to purchase hundreds of billions of dollars of sub-prime mortgages if only Wall Street could figure out how to turn them into high grade bonds.

In the case of Greece, government actions and regulations also lie at the heart of what threatens to be a European financial crisis.

Greek social security funds hold nearly two-thirds of their liquid assets in government bonds. Thus, any default would undermine these funds’ ability to meet their obligations to pay promised health and pension benefits. Such an outcome understandably would create massive political unrest that could reduce government revenues and the government’s ability to make good on its debts.

This risk is amplified by special rules created by politicians that encourage banks to lend freely to governments.

Here’s how it works. Governments require banks to hold capital against the loans that they make, anticipating that in the normal course of business, some of the loans will not be repaid. The riskier the loan, the more capital that needs to be held in reserve.

However, under international rules negotiated by government representatives through the Bank for International Settlements (BIS), government loans fit into a special category that has a 0% risk requirement. That means European banks do not have to hold any reserves against loans they make to European governments. That’s right, politicians implicitly promised banks that governments would never default. And, given the opportunity to make “risk free” loans that require no capital commitment, bankers purchased mountains of government debt.

According to Reuters, Greek banks own nearly 60 billion euros ($84 billion) of Greek government debt, and would almost certainly need additional capital and potentially a government bailout in the event of a government default.

In addition, the European Central Bank has increased the risk of systemic failure by becoming one of Greece’s largest creditors. As reported by The New York Times, J. P. Morgan estimates that the ECB owns 40 billion euros of Greek debt. In addition, it has lent 91 billion euros to Greek banks, with much of that backed by Greek government bonds.

That means any Greek default would cost the ECB billions of euros in losses and potentially impact the value of the euro, disrupting European and international financial markets, and the conduct of European monetary policy.

In a television interview last Friday, ECB Vice President Lucas Papademos warned: “…the adverse consequences both on the banking system in Greece as well as on financial stability in the euro area as a whole can be far reaching and undesirable. So all in all, I think that Greek debt restructuring should not be on the agenda.”

One possible “far reaching and undesirable” consequence of such a disruption to European financial markets would be follow-on defaults by Ireland, Portugal, Spain and Italy. According to AEI Scholar Desmond Lachman, the combined debt of the first four countries alone is about $2 trillion, a large portion of which is held by European banks. As a consequence, a write-down of 30% of that debt could lead to a European financial crisis not unlike that which struck the US banks from subprime mortgages.

Thus, the systemic risk created by the political class has put the citizens of Europe on the hook for irresponsible levels of government spending. Wealth producers are faced with the lose-lose choices of bailing out governments, bailing out bankers who were induced into buying government debt, or suffering the economic consequences and losses associated with widespread bank failures.

The brewing European debt crisis demonstrates again that the greatest source of systemic risk is believing politicians when they promise government guarantees are costless, and that elite public servants are capable of protecting us from systemic risks in the first place. The lesson is that giving governments more power over the economy and financial system is itself a source of potentially catastrophic financial and economic instability.


Charles Kadlec,

2 Charts With the Key to the Next 6 Months: XLF, UUP

On the last day of the month and quarter two charts could contain the key to determining the direction of stocks and precious metals for the remainder of the year.

It was just yesterday when I commented that if the market was to pick up steam, the financial sector had to snap out of it—“That dog just don’t hunt.” The dog must have sniffed a big juicy bone because it bared its teeth and charged higher yesterday through the resistance at 15.24 on theFinancial Sector SPDR (NYSE:XLF) chart with a gap up. E

Even though the XLF has had reactive surges before, the chart shows that none of them was accompanied by a gap up (gaps down have been common) and none reversed from below the support line of its channel down pattern. So far, so good. The real test will come when the SPDR reaches the broad resistance at $15.40 to $15.80, and then there is that open gap that could close with a single day of selling and negate yesterday’s positive move. This is a key index to keep on the radar screen since it could tell us whether or not this week’s rally can be sustained.

The inverse relationship between the dollar (represented by the PowerShares DB US Dollar Index Bullish Fund (NYSE:UUP) and precious metals and stocks is an accepted proposition. But currently the question is what pattern is being formed in this chart — bullish or bearish for the dollar? Some technicians think it’s a consolidation within a downtrend, commonly called a “wedge.” But the June high has already been broken, negating the wedge theory, and if the index is able to close above the bearish resistance line, now at $21.50, the dollar could be headed for a dramatic trend reversal up with the implication that stocks and commodities could move down.

The Economics of Food Self-Sufficiency

One of our goals is to grow and raise our own food. Consequently, I write about gardening and food preservation quite a bit. From time to time I show you my pantry and give you a progress report on the status of my food stores. Currently, we're producing all our own vegetables, eggs, milk, cheese, and most of the fruit we consume. This year, we started growing some of our own grain: wheat and corn. In the future, we will focus on more types of grains and meat.

I still grocery shop, for things like coffee, cereals, meat, black olives, tuna fish, baking soda, chocolate, sweeteners, a few stock-up items. You'd think because of all we grow I'd be saving a lot, but actually, my food budget remains the same. Why? Because instead of buying people food, I now buy grains and pellets for the chickens and goats too. Add to that other supplies necessary for their well being, more seeds in the spring, and the rising cost of food (both human and animal), and I have to admit that my budgeted food spending hasn't changed a cent since we started working toward food self-sufficiency.

A question often arises amongst homesteaders regarding raising one's own food - is it worth it? Is it cost effective to grow and preserve all one's fruits and vegetables, and to raise one's own eggs, meat, or milk? Realistically, wouldn't it be cheaper to buy them?

I think the answer to that depends on several things. The temptation is to compare our actual cost with the price tags at the grocery store. Yet what is on grocery store shelves is commercially produced. The quality of food suffers because the ways and means of industrialized agriculture focus on quantity and profit, not quality and nutrition, nor on the well-being of their animals. Are my eggs, produced by free ranged chickens who eat bugs, worms, seeds, grains, fruits and vegetables, equal in quality and value to factory eggs, produced by chickens who are fed formulated pellets and never see light of day? Or, can I really compare my pure raw goat milk to ultra-pasteurized, rBGH grocery store milk? Then there are the added values of manure for the compost, increases in flock and herd, meat and/or sales from culling, plus the endless hours of delightful entertainment watching animal antics. Shouldn't these be factored into the value of producing one's own food?

More importantly is one's world view, one's mindset, because this ultimately determines how we set our priorities in life. I discussed this in detail in this post, "Mindset: Key to Successful Homesteading?". For our purposes here, we need to consider how mindset determines our motivation toward how we feed ourselves. Am I seeking to raise my own food to gain a financial benefit or a return on an investment? Or because I want to eat real food, to know where it comes from. Maybe I'm motivated by environmental concerns. Or it's simply for the love of doing it. Perhaps I do it because of concerns for the way our world food supply is being managed, and for the sense of purpose, security, and freedom food self-sufficiency affords.

In terms of food self-sufficiency, I honestly think money is a poor standard of value. If I look at my garden harvest and only see what it's worth in terms of money, I must realize that its value is unstable and changes as conditions fluctuate. Yet, I always need to eat. That doesn't change. It doesn't change if produce is worth 25 cents a pound, or if it's worth $5 a pound. I still need to eat.

For the homesteader, the questions about raising one's own food should be personal and ethical, not financial and economical. The questions we need to ask ourselves are: How do I want to nourish my body, my family? What kind of food do I want to eat? How do I want it grown? How do I want it produced? Do I want to contribute to the environmental problems created by modern agribusiness practices, or help heal them? What are my self-sufficiency goals and how does raising my own food help meet them? Whether or not the cost of raising one's own food is worth it, will depend upon one's answers.

For my husband and me, our ultimate goal is to decrease our need for money and our dependency on the consumer system. Raising our own food is an important step in meeting that goal. We are working toward raising all or most of our own animal feed, beginning by planting thewheat, the corn, and black oil sunflower seeds. We will look into other crops as well. We will research pasture improvement and what kinds of hay mixes will grow well in our part of the country. What we can grow will eventually determine the number of animals we can keep; we must strive for a need based balance. It will be a step by step process, but will enable our homestead to be more self-sustaining in the long run.

Is it worth it? There's obviously no one-size-fits-all answer, but it is something every homesteader needs to consider. For us, the answer is a resounding yes.

Marc Faber Still Likes Gold and Silver, But Says Next 3 Months May Be Rough

In the clip below, Mr. Faber says gold and silver may fall over the next 3 months, as the end of QE2 slows the flood of Fed liquidity. He “wouldn’t short” the metals, and is “accumulating gold”.

Offers fascinating perspective on Chinese reverse-merger stocks, and how the situation is similar to early industrial America where, “the foreigners got fleeced, constantly”.

He reiterates that QE3 will come, but not as early as some would like. The Fed needs markets to fall a bit first. Oil (consumers feel most), gold/silver (unofficial inflation gauges), stocks (EEK – My 401k is dropping, print!). Worth watching (shot last week):

I do wonder how low silver could go this year, before QE3 comes to the rescue fall/winter (best guess). In 2008 silver surpassed the $20 mark, only to be knocked back down to ~$9 by the credit crunch. Could silver retrace as much this time? I don’t think it’s all that likely, or I would’ve sold some physical.

Inflation is higher now, meaning the Fed will have a tougher time selling QE3. Will markets need to drop further, to compensate? Oil markets are buying the new deflation theme, thanks in part to that perfectly-timed strategic reserve release.

Then again, silver inventories are pitifully low at COMEX. Is a mass squeeze on naked shorts really possible? I don’t know. So many factors to consider.

Gasoline Taxes by State

Interesting map, showing what each state charges in taxes for gasoline, per gallon. My home state, New York, appears to have highest gasoline taxes in the Nation. For those of you (us) who favor a Pigou tax, this is somewhat sobering . . .


click for larger graphic


Corn, Soybean, Wheat Futures Plunge on Crop Report; Inflation, Interest Rate Outlook

Grain futures are sharply lower across the board as traders had positioned themselves for shortages because of Midwest flooding and increasing demand from emerging markets and China.

Instead, corn stocks were 11 percent bigger than analysts expected and a bumper crop could be on the way according to the report.

Please consider Grain markets plunge on US acres, stocks

The U.S. corn supply is far larger than thought and a bumper crop could be on the way, the Agriculture Department said on Thursday in a report that shocked traders and shoved grain markets sharply lower.

Farmers defied expectations by planting significantly more corn acres despite rain and floods, and sky-high prices curbed demand which left June 1 stockpiles 11 percent larger than traders had predicted.

The dramatic turnaround from fears of bare-bones supplies could signal comfortable supply levels for the coming year and ease fears about high world food prices.

"American producers stepped up," [USDA's] Vilsack told Reuters Insider.

At the Chicago Board of Trade, corn for July delivery was down 10 percent, or 72 cents per bushel, at $6.26 in morning trade, and deferred contracts were locked down the limit of 30 cents per bushel. The July contract is in its delivery period and trading without limits.

July wheat was down 8 percent, or 49 cents, to $5.92-1/4. July soybeans were down 1 percent, or 19 cents, to $13.15-1/4.

Red-hot demand from corn exporters, livestock feeders and processors had been expected to consume every bushel grown in 2010 and eat into reserves, but the higher stocks number was a sign that demand has been rationed.

"We planted more acres than the trade had thought earlier in the year because we sent the signal to plant," said analyst Don Roose of U.S. Commodities. "The other thing was, we did find a way to slow down usage."

The USDA said the corn stockpile was 3.67 billion bushels on June 1, and it pegged plantings at 92.28 million acres. With normal weather and yields, a record-large crop could be harvested.

The soybean stockpile was 4 percent larger than anticipated by analysts, although plantings were 2 percent smaller. The soybean crop would still be the third-largest on record, but supplies are expected to run tight for another year.

Wheat stocks were 4 percent larger than traders expected and plantings were down marginally.

The USDA reports imply that corn growers would harvest 13.5 billion bushels of corn, which would be a record, and 3.2 billion bushels of soybeans, which would be the third-largest on record. Both estimates are Reuters' calculations and assume normal weather conditions and yields.

A mammoth crop would fatten the corn stockpile to nearly 1 billion bushels, but soybeans would run tight through fall 2012.
Grain Futures

December corn was limit down 30 cents. However, front month contracts are in delivery warning period and there is no limit. Those playing front-month contracts on expectations of a lousy crop report were massacred.

Corn Daily Chart

Inflation Outlook

With crude prices falling and corn hammered, expect the next set of CPI figures to be tame.

Bear in mind I do not consider prices to be a valid measure of inflation. Oil rising because of peak oil has nothing to do with inflation. Nor does rising grain prices based on flooding. Nor does demand from China have anything to do with inflation in the US.

Thus, this plunge has nothing to do with inflation or deflation either.

Inflation and deflation are monetary phenomena. As far as inflation goes, these price movements are noise. However, for those who think price is what matters, prices are headed down.

Interest Rate Outlook

If oil and food prices continue to drop, ECB president Jean-Claude Trichet may change his tune on rate hikes. Of course Trichet will be out of the picture soon as his term expires in October.

In the US, the Bernanke Fed got another signal to keep rates excessively low.

Mike "Mish" Shedlock

Unemployment Claims: 12 Straight Weeks Above 400K

Editor’s Note: Bernanke may appear confused now, but he told us in 2009 not to expect many jobs in his great ‘recovery’. Click here to read my post about this at the time Ben told us exactly what would happen.

The number of Americans filing claims for unemployment benefits barely fell last week, a government report showed on Thursday, suggesting the labor market was struggling to regain momentum.

Initial claims for state unemployment benefits slipped just 1,000 to a seasonally adjusted 428,000, the Labor Department said. Economists polled by Reuters had forecast claims dropping to 420,000. The prior week’s figure was unrevised at 429,000.

It was the 12th straight week that claims have been above 400,000, a level that is usually associated with a stable labor market. Employment stumbled badly in May, with employers adding just 54,000 jobs—the fewest in eight months.

“Payroll growth is going to be more like last month’s rather than first three months of the year,” said Troy Davig, senior U.S. economist at Barclays Capital in New York.

Nonfarm payrolls are expected to have increased 90,000 this month, according to a Reuters survey, with the unemployment rate edging down to 9.0 percent. The employment report for June will be released on July 8.

A Labor Department official said one state was estimated, noting there was nothing unusual in the state-level details.

The continued elevation of claims could raise concerns that the economic soft patch in the first half of the year could linger. The economy has been slammed by bad weather, high gasoline prices and supply chain disruptions after the March earthquake in Japan.

However, many economists and the Federal Reserve believe activity will pick-up in the third quarter as these temporary factors ease.

The four-week moving average of unemployment claims, a better measure of underlying trends, nudged up 500 to 426,750.

The number of people still receiving benefits under regular state programs after an initial week of aid fell 12,000 to 3.70 million in the week ended June 18. So-called continuing claims covered the survey week for the employment report’s household survey, from which the unemployment rate is derived.

The number of people on emergency unemployment benefits climbed 1,471 to 3.30 million in the week ended June 11, the latest week for which data is available. A total of 7.51 million people were claiming unemployment benefits during that period under all programs, down 30,701 from the prior week.