SmartChart/Cycle Update

Bias:

Monday 11-08-2010

 DI: BUY per the INTRADAY guidelines  Key numbers: Intraday Break Point: Buy above 1188 sell below 1188, special attention to 1178  Cycle: current reading is 938 Cycle Stage: buy, possible PEAK but divergences last longer than logic
 POMO: November 1, 4 and 8

Pre-market:
Premarket talks about those items that directly affect what we will be doing each day in the market. Premarket has NOTHING to do with macro economics.
Ok, I’ll quote a few comments from around the world on QE2 in a moment but I’ll first that they basically match mine from a prior letter. It is not my job to say if Ben is right or wrong but rather to understand just what it is he is doing. In this regard we have an opportunity once the initial run of optimism is over. His current program will run thru June of 2011 significantly delaying the pain of his actions. One pain that will be immediate is the decline in the dollar. We are already seeing a rise in crude oil because of it. You can expect $100.00 a barrel oil soon and $4 gasoline soon. Anyway a few thoughts from around the world:
If the markets are quiet about QE2 today, leaders in other countries are not. In fact, it’s drawing scathing reviews…  “As long as the world exercises no restraint in issuing global currencies such as the dollar -- and this is not easy -- then the occurrence of another crisis is inevitable,” says Xia Bin, an adviser to China’s central bank  Brazilian finance minister Guido Mantega -- who warned in September the United States was launching a “currency war” -- was more direct: “Everybody wants the U.S. economy to recover, but it does no good at all to just throw dollars from a helicopter” Germany’s finance minister Wolfgang Schäuble was the most blunt of all, saying QE2 won’t solve America’s problems, but it will “create extra problems for the world.”

“With all due respect,” Schäuble added, “U.S. policy is clueless." Just a wild guess here… but this doesn’t bode well for President Obama at the G20 summit

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next week. He might want to dial back on Treasury Secretary Tim Geithner’s scheme to have everyone limit their trade surpluses and deficits to 4% of GDP. On that subject, China just issued its first official comment: “We believe a discussion about a current account target misses the whole point,” says deputy foreign minister Cui Tiankai. “If you look at the global economy, there are many issues that merit more attention -- for example, the question of quantitative easing.” (Just an example, of course.) More choice words from Cui: “The artificial setting of a numerical target cannot but remind us of the days of planned economies.” Ouch. The summit is next Thursday and Friday in Seoul, Korea. Usually these gatherings are the stuff of mealy-mouthed joint communiqués and awkward photo ops. But for this one, we might want to grab the popcorn…

They don’t sound very happy do they? Well, Americans are not very happy either. No one screamed when Japan intervened in their currency. No one, besides me, screamed when China joined the WTO and cut their currency in HALF and then pegged it to the dollar. (thanks Clinton) Did anyone scream when France and Germany launched a currency war to gain RESERVE status and trade oil in Euro’s? China recently stated: “we will do what is in the interest of China”. OK

Perhaps the world should adopt what Geithner called for: “domestic demand” and stop asking the United States to support everyone because of their export requirements. “Problems for the rest of the world” came from Germany. The same people who are famous for “adapt or die” and they meant die. These are the people who said “let America pay for it” when it came to the twin towers…that was cold guys, real cold. Go ahead and complain, I’m sure we hear you. Folks we await the FED’s new schedule on Wednesday but from what I read the fed will be active each day. Don’t even think of trying to short this market. With 1.1 trillion this market could exceed any expectation and I will be taking advantage of it. We have a once in a life time opportunity and I won’t be getting much sleep between now and June. Those of you that are in the room know the tools and you should be very happy. james PS Ben to the world: We will worry about it later…

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All I can say is that today was the single biggest over reaction I’ve seen in the market in a few years. The promise of easy money was just to great and it seems the world jumped in with both feet and everyone else’s feet too. That’s fine until common sense kicks in and the floor realizes the stops go down to 1180. That fine until you realize the FED has not published their schedule of buying and wont’ until Nov 10th. That’s fine until you realize that we are now so overbought that we broke long standing records today and price is now in uncharted territory.

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Ok, so the party started but some level of common sense needs to kick in; reality as the fed only solved a few problems for the banks and did nothing for the rest of us. Technically tomorrow should see a slight uptick and then a doji. A pullback, a serious pullback to 1120-1130 is really in order. Everyone went long today at the theoretical limit of price travel. before and it normally doesn’t end well. I’ve seen it

I’m not suggesting you fight the FEDs 1.1 trillion dollar buy program. I’m suggesting he hasn’t given anyone the actual schedule yet. Until we see that schedule and because price is MAXED out I would strongly suggest some caution. At least wait for a decent pullback. Transports, Technology and Consumer Discretionary are all way above their std deviation of 2.0. In other words everyone is long. Manias go higher but normal takes a breather. Today was the single biggest spike beyond the std deviation of 2.0 on record and it has never failed to signal a sell signal. Might be a bit delayed but it’s sell none the less. I’ve repeatedly said 2010 would be another 2004 so here is the chart from 2004:

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It’s almost an exact match. We can modify the outcome by pulling back to trend now at 1127 or we can do it the way it was done in 2004 and pullback next year when the fed pulls the money away in June of 2011. Oddly enough the timing is almost an exact match also!! The plan is to be on the fed side but we NEED that schedule and it had better say we start immediately or we will get that pullback an fast.

Now we know the FED will be ACTIVE next Tuesday just like they were today:

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Now the good folks at the FED will publish another schedule November 10th but this time around they have said they will “monitor” the program and publish the schedule “monthly”. That sounds like chop to me folks but we will see soon enough. THAT leaves tomorrow and Monday for a decent pullback with Tuesday turning back up. Bottom Line: EXTREMELY OVERBOUGHT, needs a rest and we may see sideways to down pending further fed scheduling. We have the opportunity to JOIN the fed in their program for the first time in history. The profit potential of that is rather large. James

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-- Fed will purchase an addition $600 billion of treasury securities by the end of Q2 2011. This is on top of the MBS reinvestment, which the Desk expects will be $250-$300 bil over the same period. So, the TOTAL in treasury purchases will be $850-$900 bil through June. - The AVERAGE purchase per month will be roughly $110 billion, with $75 bil per month in additional purchases and $35 bil in reinvestment. -The purchases will have an average duration of between 5 and 6 years. The distribution of purchases is as follows: - 1.5Yrs-2Yrs = 5%; 2.5Y-4Y= 20%; 4Y-5.5Y= 20%; 5.5Y-7Y=23%;7Y-10Y=23%; 10Y17Y=2%; 17Y-30Y=4%; TIPS (1.5Y-30Y)= 3%; This means that the FED will purchase approximately $53 billion in the 10Y-30Y range. The bulk of the purchases, approximately $403 billion will be in the 5.5Y-10Y range. -- The distribution of purchases could change if conditions warrants, but "such changes would be designed to not significantly alter the average duration of the assets purchased. -- the 35% per-issue limit on SOMA holdings "will be allowed to rise above the 35% threshold only in modest increments." -- Operations will be consolidated into one set and will be announced on or around the 8th business day of each month. That schedule will go out about one month. The first schedule will be published next WED, Nov 10th at 2PM. -Omair Sharif

And from Germany:
The Fed announced that it “intends to purchase a further $600 billion of longerterm Treasury securities by the end of the second quarter of 2011, a pace of

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about $75 billion per will regularly review of the asset-purchase the program as needed believe this language “up to an additional”

month.” The statement then goes on to say, “The Committee the pace of its securities purchases and the overall size program in light of incoming information and will adjust to best foster maximum employment and price stability.” We is more strongly worded than if the statement simply said amount as was the case in March 2009.

Additionally, the Fed was clear in its desire to raise inflation expectations by stating that “Although the Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability, progress toward its objectives has been disappointingly slow.” The last phrase is key: the Fed wants inflation higher and unemployment lower; it hopes to achieve this by further expanding its balance sheet and keeping rates “exceptionally low…for an extended period”. It is also noteworthy that the Committee took a more balanced tone toward their dual mandate of maximum employment and stable prices. In the September statement the Fed appeared to be more focused on undesirably low inflation, whereas in the current statement they acknowledged that the unemployment rate was “elevated” and measures of underlying inflation were “somewhat low”. Based on our analysis of economic troughs and inflation bottoms, the latter should begin to stabilize this quarter or next. In terms of the details, the average duration of the Treasury purchases will be between 5 to 6 years. And, the Fed announced it is going to temporarily relax its SOMA limits, but said it would only do so only modestly. Joseph A. LaVorgna Managing Director Chief US Economist Global Markets Research 212-250-7329

In a nutshell: no fed money, no market. Want proof? I would…

NOW WE GET WILL HIT THIS HARD…NOW THE TIMING IS RIGHT….

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So it seems the best way to beat the life out of a short and reality is to print money. How you ever get off the addiction is beyond me. But for the time being shorts will find they must cover or DIE because you cannot fight 1.1 trillion dollars, fake or not.

So for the time being and for those of you with a sense of ironic humor (but be sure to see the CHART after the humor):

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THAT is a collapse folks..and if billions flow out of bonds it needs a HOME… http://tinyurl.com/26nftwa Did any of you get a tax break? Just asking…. james

Market Outlook:
Trading Outlook is concerned with intermediate and long term macro economics. It has a bearing on INTERMEDIATE and LONG TERM thinking.

http://advancedtrading.com/articles/228200026?cid=nl_at_daily

finally some sanity

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A Primer on Quantitative Easing: What Is It and Will It Save the Economy?
By Hans Wagner Created 10/29/2010 - 18:28

Quantitative Easing (QE) is a hot issue. But even though the term is used frequently by journalists, analysts and investors, most people are only repeating what they heard someone else say. Let's see if we can shed some light on QE: the challenges the Fed is facing, the actions it's likely to take, and what an investor should do to prepare. The upcoming announcement from the Federal Reserve will be one of the most important in recent months. The question is what you should do to be ready when the news is announced. Some Basics Quantitative easing is a strategy employed by a central bank like the Federal Reserve to add to the quantity of money in circulation. The premise (which is largely theoretical and untested) is that if money supply is increased faster than the growth rate of Gross Domestic Product (GDP), the economy will grow. To understand the rationale behind the strategy, it helps to look at the basic relationship among GDP, money supply and the velocity of money. In general, GDP equals money in circulation (M) times the velocity of the money through the economy (V): GDP = M * V Velocity is the speed at which money passes through the hands of one person or company to another. When money is spent quickly, it encourages growth in GDP. When money is saved and not spent, the GDP of the country slows.Today, one of the problems the United States faces is people and companies are saving their money and paying down debt instead of spending it. When people spend less and save more, the velocity of money falls and drags down economic growth. Through quantitative easing, the Federal Reserve will try to counteract falling velocity by increasing the money supply. It has two primary tools with which to do it. The first way the Fed manages money supply is via the federal funds rate. Banks with excess reserves can lend money to other banks that need additional reserves before
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closing their books for the day. The federal funds rate is the interest rate the banks charge each other for these overnight transactions. The Federal Reserve sets the federal funds rate. As one of the most important interest rates in the world, it is widely quoted in the press.

The current fed funds rate is between 0% and 0.25%. Essentially banks can "borrow" at a very low rate of 0 – 0.25%, making their cost of funds very low. Theoretically, this should encourage banks to lend funds to individuals and businesses at higher rates -- if they can borrow at 0% and lend to someone else at more than 0%, they make money. The second tool the Fed uses is the open market operation (OMO). The Fed uses OMOs to buy or sell securities that banks generally own -- mortgages, Treasury bonds, and corporate bonds. When the Federal Reserve buys securities, they trade the security for cash and increase the money supply. When they sell securities back to banks, they decrease the money supply. In the past, the Federal Reserve has not resorted to this approach to manage the supply of money in the economy. But starting in 2008, it started buying large amounts of mortgage-backed securities (MBS) and Treasuries in order to add more money to the economy and help stabilize the banks. Where We Are Today Since the Federal Reserve has lowered the fed funds rate to 0 – 0.25%, banks have access to cheap money. The Fed was hoping that access to cheap money would encourage the banks to lend to their customers at reasonable rates. But it hasn't been that easy. The Fed has run into two problems. First, many companies and individuals are afraid to borrow. They lack confidence in the economy. They prefer to save their cash and pay down existing debt. This phenomenon is reflected in the rising savings rate and the falling level of consumer and corporate loans. Not only has money supply not increased, but increased saving has slowed the velocity of money through the economy. Second, banks are afraid to lend because they're afraid they won't get it back. Should the company or individual run into financial difficulty, the bank may be stuck with a loan loss. So instead of investing in loans, the banks are turning back around and buying high-quality securities like long-term Treasury bonds. Today, a 10-year Treasury is paying a yield of around 2.5%. With a cost of funds of 0.25%, this gives the bank an interest rate spread of 2.25% -- a very nice profit with almost no risk. All of this means the Federal Reserve's attempt to stimulate the economy with low short term rates is not achieving its desired goal. The economy remains in slow growth mode.
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And relatively high long-term Treasury yields (when compared to 0% short-term yields) have perversely created an incentive for banks to stop making loans except to the U.S. Treasury. How Will Quantitative Easing Help? The Federal Reserve recognizes that banks are using very cheap short-term money to purchase longer-term securities and pocketing the difference in interest income. So the Federal Reserve has decided it wants to drive down longer term rates and remove the incentive to buy Treasuries. If the Federal Reserve buys enough 2-year, 3-year, 5-year and 10-year Treasuries, they force an increase in their prices. And bond prices are inversely related to bond yields: when prices go up, yields go down. A lower yield means banks cannot make as much money using the overnight money at 0 – 0.25% and buying long-term Treasury bonds, since the yield on those bonds will be pushed lower and lower. The hope is the banks will then be encouraged to lend more, thereby stimulating the economy. The Bottom Line Most people expect the Federal Reserve to announce they will add another $1 trillion in new money to the economy by buying Treasuries. I don't think the Fed will go that far that soon. Announcing a large number commits the Fed to buying that many Treasuries and it doesn't give it the flexibility it needs to adjust the program as its effects ripple through the economy. Rather, I believe the Fed will announce it stands ready to purchase 2, 3, 5 and 10-year securities in blocks of about $100 billion a month. The exact makeup will depend on the Fed's view of where it can get the biggest benefit for the money spent. By carrying out the quantitative easing over a series of months, the Federal Reserve allows itself some flexibility to adjust purchases based on updated forecasts of the economy. It also allows the Fed to communicate its intentions over time, cutting down on the number of surprises inflicted on the fragile economy. If the Federal Reserve buys $100 billion of intermediate-term Treasuries each month, it will place downward pressure on the interest rates of the Treasuries they purchase. But because the Fed has already telegraphed its intentions to the market, rates have fallen significantly in anticipation of the official quantitative easing announcement. Therefore, we are likely to see a brief move up in longer-term rates as bond traders close out their profitable positions. After the initial shake out in the stock and bond markets, it's certain that economist will continually monitor the economy to gauge QE's effectiveness. If the program is encouraging more lending, the economy should start to grow faster. But if lending does not pick up, it is telling us borrowers and/or lenders lack confidence in the future and are
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unwilling to compromise their balance sheets. If this happens, the economy will remain in slow growth mode. Fed Chairman Ben Bernanke is sure to make regular announcements on the state of the program. If he indicates they will buy more Treasuries in the future, it means the economy is not responding as well as he hoped, and he wants to add more money to the system. If he suggests the Fed will reduce purchases, it indicates his belief that quantitative easing is working and the economy is improving. As far as trading, the short-term downside vastly outweighs the upside, if only because of uncertainty. If you are a short-term trader, you might want to move to cash to avoid the inevitable volatility that will ensue, as this is a sell on the news event. If you are a longer-term investor, be sure to add some downside protection to your portfolio. You may also want to own some longer-term Treasuries, since the whole point of QE is to drive up the price of those specific securities. Don't be prepared to hold them forever, though. At some point (hopefully), the economy will grow again and bond prices will come back down. This round of quantitative easing will be studied for years. We are in uncharted territory and the risks should not be underestimated. Capital preservation is important to success. Take steps to reduce your risk until we have a better idea of the longer term effects of this next round of QE.

Comments:
Comments are concerned with news links, commentary from other sources and any other news worthy item(s). It deals with what can change the macro economic landscape; with what is brewing under the surface.
http://www.chicagofed.org/digital_assets/publications/economic_perspectives/2010/ 4qtr2010_part1_agarwal_barrett_cun_denardi.pdf

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Standard CFTC disclaimer:
The risk of loss in trading commodities can be substantial. You should therefore carefully consider whether such trading is suitable for you in light of your financial condition. The high degree of leverage that is often obtainable in commodity trading can work against you as well as for you. The use of leverage can lead to large losses as well as gains. In some cases, managed commodity accounts are subject to substantial charges for management and advisory fees. It may be necessary for those accounts that are subject to these charges to make substantial trading profits to avoid depletion or exhaustion of their assets. The disclosure document contains a complete description of the principal risk factors and each fee to be charged to your account by the commodity trading advisor ("CTA"). The regulations of the Commodity Futures Trading Commission ("CFTC") require that prospective clients of a CTA receive a disclosure document when they are solicited to enter into an agreement whereby the CTA will direct or guide the client's commodity interest trading and that certain risk factors be highlighted. This disclosure document will be provided via electronic mail or hard copy upon request to any interested parties. This brief statement cannot disclose all of the risks and other significant aspects of the commodity markets. Therefore, you should examine the disclosure document and study it carefully to determine whether such trading is appropriate for you in light of your financial condition. The CFTC has not passed upon the merits of participating in this trading program nor on the adequacy or accuracy of the disclosure document. We are required to provide other disclosure statements to you before a commodity account may be opened for you.

Written by James M. Edwards 602-441-4303 James85306@cox.net Please do NOT redistribute the letter.

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