Saturday, July 11, 2009

Stock Market Review - 7/10/2009

Larry, Moe, and Curly Run a Country!

Did you ever see the episode of The Three Stooges in which they were hired as plumbers? They keep trying to fix a leak in the basement until they find themselves entangled and trapped in their piping like a caged zoo animal. It's funny in their ignorance and stupidity. Only, they are actually actors going for a laugh in a comedy bit.

Our current set of leaders in America apparently didn't see this episode. Otherwise, they would recognize themselves. The fellow referred to as 'the smartest guy in the Senate', Barney Frank, apparently thinks it is a good idea to get in a time machine and go back to the past as Fannie and Freddie are now once again allowed to permit lending at 125% of the appraised value of homes. And, the amortization tables have been changed to allow for the principal to be more loaded up front so homeowners can pay their loans off faster. I know, I know. I didn't get my hourly dose of LSD like our lawmakers. If a home owner can't pay the current mortgage, what sense does it make to pile even more debt on the guy? Let's assign this incredibly stupid act to Curly.

We all know that the only reason the price of oil went up last year to $147 a barrel was the mean old 'speculators' took advantage of the system and drove the price higher so they could ring up profits. So now our government is screaming at the CFTC (Commodity Futures Trading Commission) to curb the speculators. Well, I have written about this in the past and lectured on it as well. The truth is simple. The CFTC regulates the commodities futures trading such that limits are placed on the contracts that investors are allowed to hold. So, the regulation is already in place. You can go to the CFTC website and read these limitations if you like. What's the problem? Well, you have to remember that banks usurped power from our previous president Dumya while he was searching for an English to English translation dictionary. Turns out that there is a special provision for 'entities' that need to trade futures contracts in order to hedge other portfolio positions. For instance, if you are manipulating and ripping off the world through the use of interest rate derivatives, you might want to counter those with some oil derivatives. You know - if interest rates rise, so does the dollar and down goes oil. All that is theory of course and now in the Federal Reserve dominated world, anything can happen. If you run up, oh, let's say a half a quadrillion in interest rate derivatives, you might want to think about risk control. This requires an enormous derivative position in oil. Up goes oil. Who would do such a thing? The banks. And yes, that includes our central bank. Now the Obamanistas want to further 'regulate' the futures market to put a lid on the speculators? First of all, don't these ignoramuses know there are regulations already in place? Don't they know that 'exceptions' have been made for the banks so they can operate outside of these regulations? I suspect this is some ridiculous babbling nonsense that is put out in the media for all the stupid viewers of the 'teevee' bobbleheads to report to make it sound like our government is protecting us. The truth is, they are sheering us of our wool while drawing the different cuts of meet on our flanks. We are being fed to the banks. Let's give this one to Larry.

Finally, our land of bailouts has become expensive necessitating the issuance of $3 trillion of Treasury notes this year alone. Don't worry. There is a lot more where that came from. So, when you increase the supply of anything the price generally drops. When the price of bonds drop, the attached yield rises pushing interest rates up. What was I just saying about interest rate derivatives? Excuse me. I didn't need to bother you with truth and intelligence while you were being sheered. Anyway, our Chinese landlords own three quarters of a trillion of this junk paper and they summoned the Geithner of Timmyness over to their place for a pow-wow. They didn't need to smoke a piece pipe since this lad was from the states and it has become apparent to the rest of the world that we are smoking something pretty powerful every day. How else do you explain our stupidity? Anyway, our landlords must have made it pretty clear that they would not stand by and watch their portfolio of Treasuries and currency get shredded by our printing press. Immediately, Geithner came home and presto! The dollar reversed its downtrend and began to strengthen. This pulled the yield on the 10-year Treasury bond down from 4% to 3.2% in a matter of two weeks. What makes this even more extraordinary is the Treasury issued $104 billion in paper (a new record) in the week before July 4 and another $80 billion or so the next week. Of course, all this extra supply would have and should have affected the yield by spiking it much higher. Not in Ben's world. He has a printing press and the magic of electronic dollar creation. The Federal Reserve absorbed a lot of the paper as did central banks of the world. When the Chinese make demands, the world snaps to attention. As such, the Federal Reserve will buy $300 billion in Treasuries buy September and stand ready to pitch in for $1.25 trillion in the end. This is a preposterous scheme to manipulate the direction of interest rates away from the true direction. Let's give this one to Moe.

This week, the markets struggled with this insanity leaving the Dow down to 8146. We are losing the 8200 line that Ben the printer has tried so gamely to defend. It will be a psychological blow to lose the 8000 level but that looks almost inevitable. America is broke at every level. The state of California is our most important state in terms of GNP contribution and they are currently handing out IOUs. The pundits will all of course give the central bank props for handling the economic mess at hand but all they have done is enrich themselves and their banking buddies by raping the productive members of the country of their soul. This is perhaps the most despicable act in the history of mankind. Yet, it continues as the Obamanistas are turning their pillage machine toward the 'rich' citizens to pay for some sort of medical insurance program that we can no more afford than GM could afford their retirement programs. The end result will be the same. Bankruptcy. I suspect the stock market will eventually price in American bankruptcy and stocks will trade for their real worth. Let's see. What did the old shares of GM finally trade for? What did you expect when you let the Three Stooges run the country?

The chart below is a look at the relationship between the S&P 500 and the Treasury bond ETF, IEF. As stated above, Ben has made everything artificial through manipulation and when he has to buy bonds, the stock market suffers. If the Chinese insist he support their bond portfolio, the chart indicates further trouble for the stock market. Unless of course, Ben can stand in the pits and buy market index futures all day. The problem is he is so busy buying Treasuries he can't be in both places at once. It is a depressing time to be an American. Brought down by banks and destroyed by our central bank. Get your guns ready to short the market. 

6yr weekly of IEF (blue) and SPX (red)
Chart courtesy StockCharts.com

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