Bush's Political Contortion and the Suicide Squeeze to come

Some commentary on the political contortion witnessed in Bush's speech last Thursday night. My rantings follow...

From Max Sawicky at MaxSpeak:The Era of Limited Government is Over

"However messy the use of money becomes in the hands of the Bushists, I maintain that this is a watershed moment for the limited-government movement. What we have in this Administration is an unwholesome mixture -- the term toxic soup comes to mind -- of Christian fundy prejudice (towards non-Christians, science, and the Enlightenment), Wilsonian jingoism, and blind anti-tax sentiment. Big, stupid government is all over your bedroom and your public schools, driving your kids further into debt, rattling an insubstantial sabre at a legion of emboldened international miscreants. These people will be the death of us all."


And Kash at Angry Bear: Redefining Conservative

"it is very striking to me that Bush is no longer simply increasing government spending because it is the path of least resistance (which is what the Bush spending increases of the past 4 years might have been); rather, Bush is now explicitly and publicly agreeing with one of the central presumptions of liberals and progressives, and publicly rejecting the central tenet of traditional Republicans, by saying that he believes that the government is not the problem, but rather is the solution. Barry Goldwater and Ronald Reagan must be turning over in their graves."

If you think Bush and the Republicans have spent alot of money to date on the Iraq war and otherwise, think again. Bush's recent political contortion in not without foundation or rationale.

The government is now the main source of jobs creation in this country, not the private sector and it is their mandate to spend, spend, spend.

The IRAQI war is our Arab war, much like the bloated debt ridden UK fighting the Turks in Arabia during WWI to keep its vested and future interests in their oil fields alive. Albeit, today we have no T.E. Lawrence of Arabia.

The US was the up and coming creditor power with cheap labor, thats when MADE IN THE USA was plastered on everything. Today we are in the position of the UK, while China is the new kid on the block, fortunately for US, the dynamics of the game have changed drastically.

You can credit the Fed and government with spending the money they don't have whilst refinancing past debt and borrowing new debt at a currently ridiculously low interest rate from willing umbilically attached foreigners who have a vested symbiotic interest in their future and ours.

This Machiavellian plan is fostered with transparency through manipulation of employment, CPI (inflation) and real GDP numbers and this "global forex arbitrage" will probably be Greenspans ultimate legacy.

With rising rates targeting the housing asset bubble, the employment transition for millions from what will be a shrinking housing, mortgage and financial sector (40% of GDP growth over the last four years) needs to be orderly.

The Federal government will be spending huge amounts of money (that they do not have) on the Katrina New Orleans FEMA bailout, PBGC pension plan bailout, IRAQI war and a myriad of programs to stem the tide on our shrinking jobs base.

The current accounts or trade deficit, will balance itself over time, as global economies slow, tens of millions of Chinese and other foreign workers will be transitioned to other sectors and internal projects as well by their governments.

These employment sector transitions are already planned for and well underway. This is one of the reasons the Chinese have widened their band on the dollar and are hoarding cash reserves.

They know whats coming, because they are reading from the same script as the rest of the players. Oil, gold, diamonds, precious metals, bonds, stocks, all assets will be deflated in sector rotation and only cash will be the true king.

For US, the $15 Trillion question is, how do we manage the budget deficit and national debt? The "suicide squeeze" thats how.

Europeans have been used to lower wages, 50% taxation off the top, (you never see it) and paying $2 more per gallon at the pump for years. Their governments throw them one bone, socialized medicine, and eventually thats the bone we will get too.

Lower wages, higher energy costs and alot more taxation in the form of property, sales, consumption, income and sin taxes are all on the way. The price we must pay the piper to dance is a drastically lowered standard of living in the next 5 to 10 years.

This is the "suicide squeeze" that the US public are going to get whether they like it or know it or not, and thats how the deficits will be managed. By 2015 you will look back and say, "Wow, I remember the GOOD OLD DAYS, the roaring 90's back at the turn of the Millenium, when we were partying like it was 1999"...

Market Soapbox 09/23/05 UPDATED

Resistance: DJIA 10750; SP500 1250; Nasdaq 2200; NDX 1625
Support: DJIA 10250 ; SP500 1200 ; Nasdaq 2050; NDX 1535

Today's SOOHEY PIG PIG award goes to the bit in mouth media as they now swing market sentiment based on which way the wind blows and how hard.

I have never seen the markets so sensitive to geopolitical issues, natural disasters and all kinds of supply demand hobgoblins. The media and intelligentsia have done an excellent job in promulgating all kinds of urban myths on a gullible and feeble minded public.

Monday a down day with AUTHORITY DJIA -94, Tues down with AUTHORITY DJIA -76, Wend, down with AUTHORITY DJIA -103 on higher volume. Thurs a bounce DJIA +44 This week & last DJIA -270.

Today, RUT & MID tried to give leadership, but it was sideways and down with ugly internals DJIA - 2.5. Rita downgraded to Category 3 causing energy -1.7% & crude oil -3.5% @ $64.19 to pull back.

XAU & XOI beat down like conga drums. Gold Bugs, Natural Gas, Commodities, Oil Services, Biotech , Semi Mfg, Software, Basic Materials, Financial, Real Estate & Energy got spanked. Airlines & Heathcare up.

European & Asian markets up. Dollar up vs. Yen & Euro , XAU & gold down, XOI & oil down, commodities & bonds down. Contra trend: Airlines up, Transports down

Bond prices down with the 10 year yield increasing to 4.25%. The gap between 5 & 10 year notes stands at 19 basis points. The 30 year fell raising its yield to 4.52, the gap between 10 & 30 now stands at 27 basis points.

Shares of Oracle were punished afterhours -4.6% and another 8.25% today on revenue growth issues. Revenue was below expectations and the bulk of the gains were due to Oracle's acquisition of PeopleSoft.

Alcoa advised that Q3 profit would be lower because of lower aluminum prices & Hurricane Rita, the shares were punished -7%.

So far YTD, 13 week T bill +55.05%; 5yr T Note +10.42%; 10yr T Note -1.04%; 30yr T Note -7.45%; $ vs Pound +7.44%; $ vs Euro +11.25%; $ vs Yen +8.89%; Materials -9%; Gold +7.28%; Oil +53.05%; Heating Oil +64.41%; Unleaded Gas +78.83%; Natural Gas +108.31%.

This week, on higher volume, DJIA plunged below all major DMA's, SP500, RUT, & MID all are resting on 90 DMA and testing its support. SOX, NDX & Nasdaq are at 11 week lows and waiting for a reason to cave in further.

I believe that the XAU should not go much above 115 and by the end of this year could be under 100, so sorry Gold Member, oh behave!!!.

The SOX will be range bound in Oct, Nov a decline below 450, then a rebound to 465 by year end.

And this may sound insane, but its possible, the XOI could pull back to 1000 or even the 975 range within the next 2 months, and though I can, I will not elaborate on how or why.

In any event, my sense is that we will see a broadbased longer lasting market decline next year rather than before this years end.

At any rate, further consolidation awaits as the indices have fallen through near term support and if the wind blows just a little harder, they will tumble off their 90 DMA's into a free fall towards DJIA 10000 - 10150 & SP500 1150 - 1180.

If you like buying on the dips, that may be a good point to start taking tiny nibbles... was that by Don Ho or B.Kliban??

We take it day by day and keep our eyes peeled to the sky, because it could be a name brand that pancakes us. Just my opinion, I could be wrong.

Derivatives Event Fallout II

From the NY Times:

Economists have thought that big up-and-down fluctuations in returns indicated risky investments, so many hedge fund investors have hoped to see a pattern of smooth and even returns.

In a paper to be published by the University of Chicago, Mr. Andrew Lo, working with his graduate students, has come to a disturbing conclusion: that smooth returns, far from proving that hedge funds are safe, may be a warning sign for the industry.

Mr. Lo shows in his paper, measuring the smoothness of returns gives economists a good way to estimate the level of relatively illiquid investments in the hedge fund world.

By Mr. Lo's measures, hedge fund investments are less liquid now than they have been in 20 years. His work shows that the same pattern of investing preceded the 1998 global hedge fund meltdown and the 1987 stock market crash.

In his paper, he shows that the catastrophic losses of 1998 were preceded by a noticeable series of months of mediocre performance. Mr. Lo argues that while a hedge fund crisis appears to be sudden and to be caused by unforeseen events, the breakdown is only the late stage of the problem.

His research indicates that the industry may have already entered a period of lower returns that signal a prelude to crisis. He points to a downturn in April that hit virtually every category of hedge fund pursuing every kind of strategy.

"The concern that I and others have is that we're approaching the perfect financial storm where all the arrows line up in one direction," Mr. Lo said. The more money that is invested in hedge funds, he said, "the bigger the storm will be."

Possible triggers? An oil-price increase to $100 a barrel, a level predicted by one Goldman Sachs analyst, could do it. Or , he said, a tightening of lending rules at Fannie Mae, the mortgage giant, could set off a "humongous unwinding" in credit markets.

Is a Hedge Fund Shakeout Coming Soon? This Insider Thinks So

Andrew Lo's Research Paper

Market Soapbox 09/22/05 UPDATED

Resistance: DJIA 10750; SP500 1250; Nasdaq 2200; NDX 1625
Support: DJIA 10250 ; SP500 1200 ; Nasdaq 2050; NDX 1535

Today's SOOHEY PIG PIG award goes to me for letting the pig have a quiet day in its poke.

Monday a down day with AUTHORITY DJIA -94, Tues down with AUTHORITY DJIA -76, Wend, a 2nd folow through day down with AUTHORITY DJIA -103 on higher volume. This week & last DJIA -311.

Today, a split tape up down wavy gravy day which did not mask the underlying deterioration of the markets as an underlying red tide with ugly internals resulted (52 week hi low and advance decline share volume were nasty) DJIA +44.

XAU, XOI, SOX and Utilities beat down. Reits, Gold Bugs, Semis, Biotech, Natural Gas, Commodities, Oil Services, Broadband & Energy got spanked. Retailers, Airlines & Pharma up.

European & Asian markets down. Dollar up vs. Yen & Euro , XAU & gold down, XOI down & oil down, commodities & bonds flat. Contra trend: Amex XAX went the opposite way - down.

Bond prices flat with the 10 year yield decreasing to 4.17%. The gap between 5 & 10 year notes stands at 19 basis points. the gap between 5 & 10 year notes stands at 20 basis points. The 30 year fell raising its yield to 4.46, the gap between 10 & 30 now stands at 29 basis points.

The jobless report check in at 432K vs est 450K an 8.5% Katrina induced increase. Leading indicators were down again -0.2%.

Homebuilders jumped 2.18% today, Oil up 1% yesterday, rising 1.2% today @ 67.50, then pulling back to 66.50. Natural Gas over 13 new all time high on Rita fears.

Rita downgraded to Category 4 late in the day caused energy to pull back & sparked a small rebound in the markets, Houston Galveston area is being evacuated, oil rigs are shutting down.

A potential Friday selloff and further consolidation awaits as the indices have fallen through near term support. On higher volume, DJIA plunged below all major DMA's in the last 2 days. SP500, RUT, & MID all are resting on 90 DMA and testing its support. SOX, NDX & Nasdaq are already at 11 week lows.

We take it day by day and keep our eyes peeled to the sky, because it could be a name brand that pancakes us. Just my opinion, I could be wrong.

BLS Non Farms Job "Creation" 2001 to Present

"There are three kinds of lies: Lies, damned lies and statistics." - Mark Twain

The non farm payrolls report is the most watched gauge of job creation in this country.

Of the 274,000 jobs the government reported as created in April 2005, a full 257,000 came from a formula for estimating theoretical jobs.

In other words, 94% of the reported new jobs may not even exist, and The Nattering Naybob is going to show you that they don't.

Furthermore, you will see from official BLS statistics that job creation levels over the last 4 years are almost ZERO.

According to the BLS statistics, from Jan 2001 through Jun 2005, seasonally adjusted non farm payrolls which includes all government and private sector jobs has increased from 132.454 million to 133.588 million.

This means that 1.134 million new jobs were created over the 54 month period. 1.134 Million does that sound good to you?

After further review, over the same time period...the government sector increased from 20.832 million to 21.760 million accounting for 928,000 of the new jobs...

and the private sector increased from 111.622 million to 111.828 million accounting for 206,000 of the new jobs...

This means that the private sector created an average of 3887 jobs each month while the government created an average of 17510 jobs each month, for a total of 21387 new jobs each month during the 4 1/2 year period.

If the 3887 private sector jobs per month did not SHOCK you, I am going to repeat the total of 21,387 new jobs per month.

Yes, these are the ACTUAL number of jobs reported from the BLS web site. How does 21,387 per month contrast with the April 2005 reported number of 274,000???

The reason for the discrepency, the BLS goes back every six months or so and recalculates the numbers to reflect ACTUAL employment. So remember the current June numbers are still estimated.

Interesting codicil: During the same period construction employment rose by 413,000 jobs for a 6% increase while over 2.825 Million manufacturing jobs were lost for a 16.5% decrease.

Using non seaonsonally adjusted figures and moving back to the latest recalculated official BLS figures six months ago in Jan 2005 yields an even more startling, eye opening and jaw dropping discovery, I hope your sitting down for this one.

The private sector - Jan 2005 - 108.875 million, Jan 2001 - 109.680 million, for a LOSS of 805,000 private sector jobs over the 4 years!!!!

The government sector - Jan 2005 - 21.620 million, Jan 2001 - 20.753 million, for an increase of 867,000 jobs. Seems the private sector couldn't fire people fast enough.

Total non farm payrolls Jan 2001 130.433 million - Jan 2005 130.495 million. This yields exactly 62,000 new jobs, for a whopping 1,291 jobs created monthly over the 4 year period. Yee-haw, shit howdy a whole 1291 new jobs per month!!! Now that's what I call getting jobbed.

Using seasonally adjusted numbers: Unemployed persons Jan 2001 - 6.017 million, Jan 2005 - 7.737 million, for an INCREASE of 1.720 million unemployed persons over the 4 year period.

In closing, we will put some delicious icing on this tasty shit cake known as JOBS "CREATION", the eligible workforce population 16 & older Jan 2001 - 213.888 million, Jan 2005 - 224.837 million, for an increase of 10.989 million persons over the four years.

Just to keep pace with workforce population growth at the current employment population ratio of 62.4% would have required the creation of 6.832 million jobs over the period, factoring in the 62,000 jobs actually created leaves us 6.770 million jobs short.

As the recalulated BLS figures clearly show over the period, actual job creation is no where near the non farms payroll report estimates which are widely reported, we have lost 16.5% of our manufacturing jobs and the bulk of woefully inadequate new job "creation" is in the government itself.

BLS Web Site

Derivatives Event Fallout

On 04/28/05 in High Yield Bond Market Timebomb we mused:

"There are rules which mandate that pension funds and insurance companies can only hold institutional grade debt.

As a result, when GM is downgraded, the market could be awash in GM debt as the institutions are required to divest, if they have not already."

On 05/10/05 in Yo' Junk Bond My Ride we mused on GM & Ford downgrades that could rock the financial world.

"Rumor has it that some funds may be struggling to meet margin calls. The complex trades made by many hedge funds mean that any troubles, risk drawing in the counter parties, particularly banks, with which they conducted the trades.

Most arbitrage bets are positioned for a widening or divergence of GM and GMAC...if Kerkorian is successful, GM is getting parted out.

Why? Kerkorian will sell the only thing GM and GMAC are good for, GMAC's non core assets. Such as the mortgage business, raising around $28 Billion, then GM will draw the finance unit in closer.

Therefore, we believe that GM and GMAC spreads would converge, rather than diverge.

What will the hedgsters, insurer's and banks involved do then? Can you say major trouble in the financial markets?"


In 06/10/05 Market Soapbox we commented on a rumour which we overheard.

A predicted early July meltdown of several hedge funds due to overexposure in CDO's and MBS may send severe ripples through the markets.

Be on the lookout for several large up days which will achieve a new peak, then its all downhill from there.

Looking back in retrospect, GM & Ford were downgraded, Kerkorian was sucessful in parting out GMAC and several major hedge funds melted down over this summer, $500 Million Bayou Group being the headline grabber.

The well-known Marin Capital hedge fund closed doors after big losses in convertible arbitrage and credit arbitrage; and Aman Capital also closed shop at the end of the mid-year. GLG’s Neutral Group, which has credit derivative investments similar to that of Marin Capital, lost $2.5 billion or 17.2% in the first half of the year. Cheyne Capital’s hedge fund lost 4.8% in May alone. The huge hedge fund Bailey Coates Cromwell Fund, after being named Hedge Fund of the Year for 2004, announced in early June that it would close down.

Should we be concerned?

About 20% of U.S. corporate and public pension plans were using hedge funds in 2002, up from 15% in 2001, according to a study that year by the Securities and Exchange Commission. Investment in Pension funds increased their investment in hedge funds by more than 450% to $72 billion from $13 billion in 1997, the SEC said.

Today over 8000 hedge funds control $1 Trillion with a notional value well above $15 Trillion, which is equivalent to our annual domestic GDP. With the markets recent schizophrenic behaviour one has to wonder if we are now witnessing the effects of the rumoured July meltdown. If the shoe fits...

Mish in his missive "Are we headed for a credit derivatives event?" gives some excellent coverage of the unwinding and potential dangers that have spawned from the finanicials markets reckless use of leveraged instruments. A must read.

Market Soapbox 09/21/05 UPDATED

Resistance: DJIA 10750; SP500 1250; Nasdaq 2200; NDX 1625
Support: DJIA 10250 ; SP500 1200 ; Nasdaq 2050; NDX 1535

Today's SOOHEY PIG PIG award goes to the bond market for even thinking that Uncle Al will pause because of Katrina or any other reason, get real, you are being punished for irrational exuberance.

Monday a down day with AUTHORITY DJIA -94, Tues down with AUTHORITY DJIA -76, Today, a 2nd folow through day down with AUTHORITY DJIA -103 on higher volume. This week & last DJIA -311.

Gold Bugs, Transports, XAU, XOI, Natural Gas, Oil, Oil Services, Energy, Commodities up nicely, everything else got pounded senseless in a broad based sell off.

Then thrown overboard into a red tide with extremely ugly internals (see advance decline share volume and 52 week hi low ratios).

European & Asian markets down. Dollar up vs. Yen & Euro , XAU & gold up, XOI & oil up, commodities & bonds up. Contra trend: Amex XAX went up while most indices were down.

Bond prices up +17 ticks with the 10 year yield decreasing to 4.17%, the gap between 5 & 10 year notes stands at 19 basis points. The 30 year jumped 34 ticks dropping its yield to 4.46, the gap between 10 & 30 now stands at 29 basis points.

EIA's weekly inventory report indicated gasoline and distillate supplies unexpectedly rose while crude oil inventories unexpectedly fell, thats the good news.

Oil up 1% @ 66.90 on Rita fears, Rita upgraded to Category 4, Houston Galveston area is being evacuated, oil rigs are shutting down.

DJIA plunged below 10400 today and has broken all major DMA's through 180 in the last 2 days. SP500, RUT, & MID crashed through 30, 50, 60 DMA yesterday, all are resting on 90 DMA late today.

SOX crashed 60 DMA today, NDX fell off of 60 DMA today, Nasdaq crashed through 90 DMA today, all on high volume.

There is liquidation of equities in a rush to "safety" in bonds the last 2 days,
I expect more downside as the indices have fallen through near term support and will test their 90 DMA's shortly.

DJIA @ 10378, Nasdaq @ 2106 (approaching 11 week low), SP500 @ 1210. If you have not already, get those Bermuda shorts and a parachute ready.

Should the SP crack 1210 & 1200, DJIA 10250 & Nasdaq 2050 things could get very ugly and there might be alot of people heading for the exits at the same time.

We take it day by day and keep our eyes peeled to the sky, because it could be a name brand that pancakes us. Just my opinion, I could be wrong.

Bond Market Leverage & Manipulation

From Peak Oil, The Myth, The Legend, The Fraud

In spite of the fact that Brent Crude now represents less than 0.4% of worldwide production, its "spot" price determines the price of 60% of global oil production.

Open contracts exceed annual production by a ratio of 3.41 to 1. Total annual barrels controlled by contracts exceed annual production by a ratio of 212 to 1.

Traders call futures contracts "paper oil": the contracts are a paper claim against oil, which is far in excess of the volume of oil produced and actually delivered at oil terminals on behalf of those contracts.

From the obvious mathematical ratios and pricing LEVERAGE represented above, it is readily apparent that OIL PRICES ARE MANIPULATED BY SPECULATORS, nothing more, nothing less.

We have the same thing going on in the bond markets today. From Brad DeLong, commenting on a Financial Times report in his missive Market Liquidity:

"There is now about eight times the number of outstanding futures contracts as bonds eligible and available to fulfill them."

"In June, some large holders of the June 10-year Treasury futures contract, including Pimco, demanded settlement -- taking delivery of actual bonds -- instead of, as usual, rolling their positions into the next contract. The scramble to find the necessary notes was made worse by the fact that one account, possibly the hedge fund Citadel, already held the bulk of the cheapest notes to deliver."

"The real problem is that the US economy is just too leveraged. Starting with the housing industry, the country is too dependent on derivatives markets to create the illusion that interest rate risk can be conjured away. The technical problems of the 10-year are just another early warning sign of this fundamental weakness."

More on the 'morrow regarding the derivatives markets.

Market Soapbox 09/20/05

Resistance: DJIA 10750; SP500 1250; Nasdaq 2200; NDX 1625
Support: DJIA 10250 ; SP500 1200 ; Nasdaq 2050; NDX 1535

Today's SOOHEY PIG PIG award goes to the Fed for claiming that inflation is tame. Ask anyone who is reality based and they will tell you it is not.

Monday a down day with AUTHORITY DJIA -94, today a follow through with AUTHORITY DJIA -76, the market was up early but plummeted upon the FOMC announcement.

The RUT, MID, Gold Bugs, Telecom, Oil, Pharma, Cyclical, Commodity and Heathcare sectors were beat down like drums in a blood bath with very ugly internals.

European & Asian markets up. Dollar up vs. Yen & Euro , XAU & gold down, XOI & oil down, commodities & bonds split. Contra trend: Amex XAX went down.

Yesterdays crude jump was the highest single day jump since 1990, todays FOMC meeting put a knife into the markets back as the Fed did what most expected, raise 25 basis points for the 11th straight time and keep moving at a measured pace.

Bond prices up with the 10 year yield decreasing to 4.24%. The gap between 5 & 10 year notes stands at 19 basis points.

A 1.3% decline in Aug. housing starts and a 2.2% decrease in Aug. building permits presages the beginning of the housing market slowdown.

Today the "Katrina" era of corporate warnings began, Tempur-pedic, Chemtura, Estee Lauder and Brunswick all gave warnings using what will be the mantra in the coming year for poor performance and mismanagement.

The market has taken a turn for the worse as even the energy sector and precious metal stocks were pummeled today.

I expect more downside as the indices cannot find support about their 50 DMA's and there is a lack of leadership. If you have not already, get those Bermuda shorts ready.

We take it day by day and keep our eyes peeled to the sky, because it could be a name brand that pancakes us. Just my opinion, I could be wrong.

Overstating Non Farms Payroll & Understating CPI, How This Works

From Stephen Churchs commentary on Consumer Cash Flow at Prudent Bear our rantings follow:

"The scenario analysis left open a tantalizing opportunity to manage the transition to a stable economy with lower annual debt financing. The rate of growth of personal consumption expenditures would need to decline significantly while the rate of growth of personal income stayed near its current level.

The only way that we can envision this would be a managed deflation transferring corporate profits to households through price reductions on goods and services. Though this would lower profits appreciably, it would also enable the economy to cut household debt financing needs to reasonable levels."

Our comments follow: By raising rates in a small and measured method and inverting the yield curve, the housing price bubble slowly leaks out over 3-4 years along with the GDP growth that it supported and the economy slows down. Whether the resulting employment sector transition is orderly remains to be seen.

But, the fact that we are in a recession and inflation is not tame are "masked" through the whole process by understating the actual rate of inflation in the CPI and overstating the actual employment numbers through the creation of hypothetical McJobs in the non farms jobs reports.

By understating CPI, nominal GDP is overstated. The nominal GDP less the real CPI probably yields a GDP of 1.5 to 2%. The other effect of the mis-statements helps to adjust imbalances in current accounts globally through Forex (currency & bond) arbitrage by dropping our "real" GDP to a level closer to most of our trading partners whose economy's are weaker.

Meanwhile, as the bubble slowly fizzles, due to the slowdown in the economy, the rate of growth of personal consumption expenditures slowly declines and the necessity for household debt financing is slowly reduced.

As the slowdown continues, the price of goods may initially increase and profit margins temporarily decrease while the rate of growth of personal income stays the same, allowing household debt financing needs to be cut to even more reasonable levels.

Later in the cycle, as rates continue to rise, dollar appreciation causes profit margins to rise as the cost of the inputs such as commodities and oil fall, this offsets the decline in profit margins seen at the start of the slowdown as well as some of the dollar denominated asset price deflation.

When taken over the whole period, the price of goods stays in line or actually drops after the initial inflationary increase. Higher interest rates also keep the foreigners buying our bonds and financial instruments for the duration.

The necessary "deflation in corporate profits" and "transfer to households" mentioned by Church is the scenario currently being played out. The transfer being a temporary and illusory one.

In the last 3 years corporate EPS growth rates forward looking have fallen from over 20% to around 7%. Meanwhile, real estate assets or the average household has appreciated substantially.

This transfer will be balanced or recouped through equity, bond and real estate asset deflation via leveraged and timed speculation in the markets and the masked inflation or debauchery of the currency over the cycle via Forex arbitrage.

Its like slipping everyone the Mickey-Finn, they wake up feeling groggy with a much lighter wallet, but seem to remember a good time being had by all. Did you really think everyone (read John Q. Public) would get to dance without paying the piper in some way?

Market Soapbox 09/19/05 UPDATED

Resistance: DJIA 10750; SP500 1250; Nasdaq 2200; NDX 1625
Support: DJIA 10250 ; SP500 1200 ; Nasdaq 2050; NDX 1535

Today's SOOHEY PIG PIG award goes to me, for letting the pig have a quiet day in its poke.

Last week a down week DJIA -38, today a down day with AUTHORITY DJIA -94 and -120 at one point as Fridays rally was given back.

Natural gas, oil services, energy, commodities & oil indexes up big. Everything else down in a sea of red which from the numbers looked like a blood bath.

European & Asian markets down. Dollar up vs. Yen & Euro , XAU down & gold up, XOI +2.5% & oil up, commodities & bonds up. Contra trend: Amex XAX went up, the dollar and gold continue to rise together.

Tropical storm Rita hype jacked crude oil up 7% $67.39, natural gas prices up 13% (to an all time high), unleaded up 14%, this and tomorrows FOMC meeting put a damper on any follow through rally from Friday.

Bond prices up with the 10 year yield decreasing to 4.25%. The gap between 5 & 10 year notes stands at 23 basis points.

An indecisive German election result had the Euro plunging against the dollar while gold shot above $470, gold futures hit a 17 year high.

Fridays rally was on higher volume, but todays lack of followthrough makes it a wash. We have what appears to be double tops forming on the SOX, RUT, MID & SP500, the DJIA looks like trips.

YTD the DJUA (utilities), XAU (gold & silver), OIH (oil services) & XOI (oil & gas) have gone through the roof.

XLV (healthcare) has been slowly grinding upwards since Oct 04. BBH (biotech) through the roof since 03/15, while PPH (pharma) has headed down since 04/15.

The DJ Mortgage Finance Index had a disasterous Q1 and since 06/22 has been in a nose dive along with the rest of the Mortgage Reits. The HGX (homebuilders) are tanking since 07/29.

The DJTA (transports) & RTH (retailers) & XLY (consumer discretionary) have gone in the tank since 07/29. RKH (regional banks) since 07/15, XLB (materials) since 03/04.

Remember, transports & retailers are a harbinger of what is to come in the industrials. Taken collectively with the other market sectors recent performance, the market is telling us something.

Excepting the deceiving bond market (more on this in a post tomorrow), the market is saying inflation, higher interest rates & possible recession to come.

Aug 29th through Sep 12th the market headed up in sympathy and we were overly optimistic. Last week, an about face with ugly internals, perhaps a dose of reality and what is to come.

Taking into consideration the YTD market signs and Katrinas fallout (see todays Neutron Bomb Katrina post), we could be headed down for the remainder of September & October.

We may not see significant upwards movement until the New Orleans rebuilding efforts are in full swing and the port is at 80% capacity later this year.

Only a pause by the Fed or further major pullback in oil could pull this market up by its boot straps. Given the Fed's targeting of the housing bubble and oils speculative herd, the chances are slim and none & Slim just left town.

We take it day by day and keep our eyes peeled to the sky, because it could be a name brand that pancakes us. Just my opinion, I could be wrong.

Neutron Bomb Katrina's Fallout

Hurricane Katrina was just like a neutron bomb being set off in New Orleans.

Its not the infrastructure damage or lack of oil refining capacity, but the lack of available labor as New Orleans is a ghost town, all the people are gone poof! and they aren't coming back for quite awhile.

To work a functional port, a refinery, a school etc. you need trained workers. The workers need a place to live, fuctional infrastructure and support services. New Orleans has little or none of the above and won't for some time to come.

Potential short positions on the indices should be examined at this point as the economic effects on the port of New Orleans will begin to rear its ugly head in the next 90 days, commencing with this months outbound harvest.

Potential calls on commodities such as grains, softs, pork, chicken and other materials, lumber, metals, etc. might also be in order as supply is going to be choked off by the logistics snafu and rebuilding demands, so prices will rise.

Sports Time

We have been observing developments in the sporting world and feel its time to take a break from the norm and share our observations.

Baseball

The World Series will probably be played between the St. Louis Cardinals and either the Chicago White Sox or Cleveland Indians.

Last year marked the beginning of the end times as the Red Sox finally won the World Series. For the second straight year, St. Louis will come out on the short end, as another long overdue team wins the series in seven games.

2004 Red Sox; 2005 White Sox or Indians; to complete the Trifecta, 2006; Cubs and it will truly be the end of days.


College Football

Last years mismatch in the BCS title game had the mighty SoCal Brainsurgeons, er I mean Trojans justly and finally in the title game. Unfortunately the computer matched them up with a team that simply did not belong in any major bowl game.

The resulting blow out by half time justified my giving 21 points to any Sooner fan I could find beforehand.

This will be another year of dealing with the Eastern media bias and strange non sensical computer algorithms in the BCS (Bullshit Championship Series).

Already Texas, who lost last year to Oklahoma has been installed at Number 2. Considering the Longhorns face the Crippled Sisters of the Elderly 12 times this year, it will be no wonder if they arrive in the final undefeated, and share the same fate as Oklahoma last year.

Unfortunately, Florida State & Florida will probably suffer losses by season end as they actually play some real football teams in the ACC & SEC.

Not to detract from the mighty Trojans who play in a tougher Pac-12 conference than any of the others, and they just keep rolling along at Number One.

The real BCS title game will probably be much like last years, the winner of the Cal vs. USC game. Although, UCLA may also have a say in the matter.


Pro Football

The new dynasty of the Patriots will be tested this year. Defensive coordinator Romeo Crennel and Offensive coordinator Charlie Weis both left for head coaching jobs.

Star linebacker and inspirational leader Teddy Bruschi is out for the season after suffering a stroke; and star linebacker Ted Johnson retired in the off season.

Carolina, Tampa Bay, Kansas City and Dallas could rebound after last years disappointments.

I expect Minnesota, Green Bay, Baltimore, Seattle & St. Louis to be disappointments.

Surprises will be Cincinnati, Buffalo, Kansas City, Chicago and Tampa Bay.


AFC Division Winners

New England
Pittburgh
Indianapois
Kansas City

AFC Wild Card Contenders

Cincinnati
Jacksonville
Buffalo
NY Jets

NFC Division Winners

Atlanta
Philadelphia
Chicago
Seattle

NFC Wild Card Contenders

Tampa Bay
Carolina
Dallas
NY Giants

Top 3 Super Bowl Contenders

New England
Indianapolis
Pittsburgh

Dark Horses

Kansas City
Tampa Bay
Atlanta

Philadelphia has too many problems with T.O. to repeat in the weaker NFC. Atlanta and Pittsburgh will have to play a tougher schedule and wont be able to sneak up on anyone this year.

If Indianapolis can find a defense and stop making mistakes against the Patriots this could be their year. If Kanasa City's offense wakes up again and finds a defense, look out.

In the NFC I like Atlanta, Tampa Bay or Carolina, but no one from the NFC will win the Super Bowl, the AFC will be dominant once again.

Ultimately, Belichick and that opportunistic defense are tough to beat, if the Pats stay true to form, its a three-peat and 4 out of the last 5.

If the Patriots stumble, Indianapolis and Peyton Manning finally get their moment.

Chinese Banking Fraud, Western Naivety & Greed - Part V

We have previously commented on the "puffery" and media hype coming out of and regarding the Chinese economic system.

Many dubious and suspect numbers get bandied about regarding Chinese GDP, corporate financial statements and the "banking" system.

This series taken from Bedlam Asset Management will point towards the potential importation of an international banking disaster from China.

Today, most leading western banks have agreed that they must be in China, seemingly irrespective of the price, because of its rapid growth. They cannot resist the lure of potentially 1.3 billion savers and borrowers.

They have swallowed in whole, the myth that the balance sheets of China's financial institutions have been cleaned up. Western banks are now shelving out considerable sums for the tiniest toehold in the China market.

Not surprisingly, one of the earliest players was Hong Kong's Hang Seng Bank. In 2003, together with the finance arm of the World Bank and the Government Investment Corporation of Singapore, it plonked down $324 million for a 24.9% stake in China's Industrial Bank.

Its parent, the better known HSBC, subsequently shelled out $1.75 billion for a 19.9% stake in the Bank of Communications. Both these two banks have an economic imperative and a level of knowledge of how to work in difficult Asian countries, which means they might even make a small return on capital, one day.

For almost all other major banks, there must be considerable doubt. Bank of America is paying $3 billion for a 9% stake in China Construction Bank; Dutch-based ING Groep bought a 19.9% stake in the Bank of Beijing for €166 million. Newbridge Capital of the US bought 18% in the Shenzhen Development Bank.

There is now hardly a major foreign bank not sniffing around Chinese banks and assets in one form or another. Those who have either been snoogling or have stated they are looking at major bank or asset deals include the Commonwealth Bank of Australia, Britain's Standard Chartered Bank, JP Morgan, Credit Agricole, Morgan Stanley, Bank of Nova Scotia and many, many more. It is a global herd.

The reasons given are almost identical; to quote Bank of America's chairman, 'It makes sense if you are looking to tap into economic growth'. Walter Wriston, former head of Citibank, won financial immortality with a similar comment - 'countries don't go bust'. Citibank almost folded two years later when Mexico suffered one of its perennial meltdowns.

A near-term reason may be more prosaic; fees. China is desperate to resolve its hideous domestic bad debt problem through the use of foreign capital. It can see no other way of solving its banking crisis except by importing more and more capital.

For these foreigners, there is the delicious personal prospect of huge fees and bonuses. The current flotation plans for myriad Chinese banks and insurance companies could produce, assuming all go ahead, underwriting and placement fees of over a billion dollars by the end of 2006.

Approximately half of this amount will drop straight into the hands of the executives who engineered these deals; by the time the solids hit the air conditioning, they will have long moved on - to retirement or other banks - because of their international expertise.

All these foreign banks can only buy minority stakes, not control, as Chinese law bars this. All claim to be playing the long game, that their expertise will help sharpen up the domestic banks, i.e. that they can break the thousand year old Guangxi system.

None to date have had a return on capital above its cost. Even more wonderful, they actually believe they know the true balance sheets of the banks they are buying.

1,500 years ago, the Chinese not only invented accounting, they then invented quadruple accounting; a true set for limited internal use, another for the government, one for the investors and then one for their wives.

We are suspicious that mustard-keen western MBAs, whose sights are fixed on 1.3 billion consumers and their near-term bonuses, rather than the $750 billion worth of bad debts in the system, can see through these multiple fictions.

Consumer Confidence, CPI, GDP & Current Account Balance

David Altig's Macroblog has three gems, the first being Consumer Sentiment Throws a Funeral, And Nobobdy Comes,

"If you're a central banker, however, the inflation expectations part of the Michigan survey does make you think twice. This comes from the survey newsletter:

Consumers expected an inflation rate of 4.6% during the year ahead in early September, a substantial jump from the 3.1% recorded in August, and the highest inflation rate expected since 1990."

the second being Where's The Inflation?

"there is no guarantee that focusing on core inflation will stabilize the cost-of-living over horizons that people may care about."

Our comments follow: Last week, mixed retail sales reports, 2 weeks ago a massive consumer credit downturn, this week downturns in Philly Fed and UMCC.

Taken together this data indicates an oil price shock latency which is starting to effect the economy.

Comments from a neighbor or the average American Joe: "just feeding 2 kids and 2 adults is costing over $150 a week with nothing special on the menu."

"Everything at the stores has gone up at least 10% and at $3 a gallon they are really bending us over and f__king us royally at the gas pumps."

Of course the current CPI was "in line" +0.5 and indicated "tame" core inflation +0.1 for the 4th straight month.

With oil spiking into the $60 - $70 range during this period, I find this absolutely IMPOSSIBLE and quite unbelievable.

Now add the fallout from Katrina, I am waiting to see if the next 2 CPI and PPI reports reflect appropriate levels of inflation being passed through the supply chain, core included.

Gold up to $455 sez someone thinks the Fed will pause. Or do they have less faith in equities and bonds going forward?

Me thinks, bond prices falling sez bond investors are waiting for higher rates, or they think no pause and further inflation going forward.

I believe the Fed keeps raising to target the asset bubbles sans pause, yield curve be dammed.

The third gem is A Little Of This, A Little Of That From The Forecasting Pros,

"The consensus forecast for average 10-year Treasury yields in 2006 is 4.9 percent. And yes, that increase is expected to bite the housing market..."

Our comments follow: Considering the housing bubble industries are probably responsible for 40% of the GDP growth in recent years, you could infer that a pullback in housing will result in a considerable reduction in GDP growth.

My guess 3 years+ is a slow and painful 1.5 to 2% shaved off of GDP. Whether the resulting realignment of labor is orderly remains to be seen.

An interesting codicil: Hypothetically speaking, by understating CPI inflation the current bond market is being fooled.

The real GDP growth rates are being artificially boosted since real GDP is nominal GDP less the understated rate of inflation.

If one were to adjust GDP for real inflation as opposed to the current CPI read and then factor in a future slowdown in housing along with the fallout from Katrina, we may be headed for zero or negative GDP.

Of course, if ZERO GDP is not advertised publicly, this begs a question:

Covertly putting our GDP under 1% or zero, where most of our European trading partners are, would this help a global realignment of current account balances vis a vis forex exchange? That is one of the ultimate goal's isn't it? Just a passing thought.