Crisis Over===OR JUST BEGINNING

THE MONEY MULTIPLIER CONTINUES TO MAKE NEW LOWS. Take a look at the chart below.




Let me tell you what puzzles me about this chart. We have had unprecedented government borrowing and stimulus, yet the money multiplier is as Dennis Gartman would say is "Moving from the upper left to the lower right" Wouldn't conventional wisdom tell us that for the economy to get going again the money multiplier would have to increase? The shaded bars depict the recessions we have seen during the given time period. Note that as we came out of the recession period the multiplier stabilized, but never really seemed to assume a bullish pattern. Yet didn't the economy resume bullish activity?

So the question is how did the economy begin churning again with the money multiplier stagnant.

What role did credit play with respect to the money multiplier? We know that the U.S. consumer relied heavily on credit during the time period. But wouldn't overly accessible credit have increased the money multiplier?

Would the dovish monetary policy of the Greenspan era have had any impact on the multiplier? Many would argue that the dovish policy would have increased the money multiplier--but did it? So if Greenspan was truly creating a "bubble" as many have argued then wouldn't the multiplier have increased?

Take a look at the steep drop in the multiplier recently. That is the point that many pundits, including many that appeared on our show argued that the credit was destroyed and deflation set in. I believe that assessment is right, but according to the experts we have fixed the financial system. So the money multiplier should be increasing? Right? But it is not.

Many would argue that this time is no different---we came out of recessions with no increase in the money supply before and we will do it again. I DISAGREE!!!! There are those who would argue that we have always used debt and that we are intelligently utilizing debt over the short run. I DISAGREE!!!! Why is this time different you ask? Let me make this point. Companies use debt because they believe that they can earn a greater return on the debt than they will have to pay. It is that simple. So why would the government borrow money? To get the economy going again? It is that simple. BUT THE MONEY MULTIPLIER IS NOW IN NEGATIVE TERRITORY. So what happens if a company borrows money--lots of it---for say 6% and then earns a NEGATIVE RETURN? They go bankrupt. And that is exactly where we are headed with our entire economy if we don't focus on being PRODUCTIVE. There is no free lunch and you can't get a multiplier effect on giveaways because it has to be paid for. It is not just a zero sum game where one pays and one receives. The giveaways are being financed and the ones paying are paying for the gift and the interest.

More inefficient government dollars will NOT get the system going again. Many have argued that we cannot see stagflation for a sustained period of time. I will in a coming post show why I think that we can. I will give you the fact that the markets looked like they did not seem to want to go lower today.

BUT IN THE LONG RUN, OUR LACK OF PRODUCTIVITY WILL SEND THE ECONOMY INTO A TAILSPIN. I AM STICKING WITH MY SHORTS AND MY INFLATION HEDGE----SOUNDS LIKE AN OXYMORON AND I WOULD HAVE NEVER BELIEVED THAT I WOULD BE WRITING THAT IN THE SAME SENTENCE.


MORE LATER

RBS Needs $42 Billion Infusion

When I woke up this morning, I turned on Blomberg to hear them report that RBS will get a 42Billion dollar infusion. Fair to say that banking is back at the epicenter of traders minds? The futures are lower (though off the lows of the morning) and I just can't see anything positive this week.

Yesterday proved that there are both some jitters and some money ready to be deployed. The see saw action yesterday reminded me of this time last year when we started a fairly rapid descent.

Is the Euro-Yen telling us that risk is ready come off of the table? The pair is down about 1% which is just another sign to me that we are going to see a rapid decline in equities (particularly financials) in the coming days. I added to my FAZ position yesterday and even though the position moved against me by the end of the day, I was content to hang on to it and wait. With bad news out of the banking sector on a daily basis I think FAZ will be a good one for me.

It always amazes me when I get comments like "have faith in your country" after I make a negative post about the economy. First and foremost, I love this country. I am proud to be an American, but I don't think the recent actions of our government are going to be good for our ECONOMY. It takes a ridiculous individual to interpret a short play on our economy as unpatriotic. It also amazes me when I see comments like "we always rebound and have always used debt". We have never used this massive amount of debt and thing will not always stay the same. We have been prosperous because we had a system of capitalism and a system that could be trusted. If we compromise those principles, things will change for the worse in a hurry.

BREAKING NEWS: BLOOMBERG REPORTS THAT BERKSHIRE HATHAWAY IS BUYING BURLINGTON NORTHERN. The futures got a quick pop off of the news, but are still in negative territory.

QUESTION OF THE DAY: WHERE DO OUR MARKETS GO IF OUR MONEY MULTIPLIER STAYS DOWN AS JOBLESS AND SAVINGS RATES INCREASE IN TANDEM WHILE GLOBAL INFLATION SLOWLY SETS IN WITH THE EXPANSION OF OTHER ECONOMIES?

Futures Point to Higher Open

At 7:15 am eastern, the futures are pointing to a higher open. Will I take criticism if the markets rally today? You bet---but part of being a successful trader is being able to accept being wrong. You just have to live to trade another day. I am not giving up on my thesis, and am still expecting us to end the week lower than we were on Friday.

Ford is out this morning with "blowout numbers" and will open much higher. While I admit that the team at Ford has done a better job than the competition during the economic downturn, I can't get excited about any numbers driven by government stimulus (Cash for Clunkers) created demand.

Why do I feel so strongly that these markets are headed down?

1. The deficit is overwhelming---enough said.
2. The falling dollar contributed to both the top line and bottom line to many companies last quarter. We are past the point of diminishing return.
3. The jobless rate is getting worse.
4. The money multiplier is in NEGATIVE TERRITORY
5. The next government stimulus (if there is one---will send the markets down as the markets have already told us that we are at the breaking point on debt)
6. Banks are failing every week.
7. Valuation got ahead of itself, money has been made and many are going to be willing to bail out of the markets with their profits.
8. The worst is yet to come for commercial real estate.
9. GDP across the globe is improving and we could find ourselves redefining stagflation.

Sound simple? If the above list seems to simple, then go take a look at how many stocks have recently violated their 200-day moving average. From a technical perspective what happens after that all important line is violated?

I will be watching volumes early this morning. Friday had some high volumes late in the day, but you have to remember that many mutual funds ended their fiscal year on Friday.

I consider the biggest risk to my thesis to be the potential that the dollar falls faster than expected. Jim Rogers has made the point on our show that if the dollar falls fast enough, the major averages can go up while you lose "real" wealth. Marc Faber has called cash a risky asset for that very reason.

I think we see 9000 before we see 10,200.

I bought FAZ on Friday (not one for the faint of heart). I am holding FCX as my inflation play. Otherwise, I am watching and waiting.

Please make your comments. We WILL NOT ever sell or otherwise release your email. I firmly believe that we learn from each other. Just keep it clean.

Eric Cantor: Small Businesses to Pay for Healthcare Overhaul

There is no doubt that any additional tax on small business will rock the stock market. Later we will have a detail about the money multiplier, the so called good GDP number and how it was worse than one of Greenspan's bubbles, and why we think the market will go below the March 2009 lows in the coming months. Stay tuned

HELP US TURN THIS INTO A GREAT FORUM FOR THE EXCHANGE OF IDEAS. HAVE YOUR VOICE HEARD.

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Government Policies Taking Us Back To 1987?????

I am not a history buff at all, but sometimes it pays not to ignore the obvious. When in history have huge defecits been good for the economy in the long run? When have artificial bubbles not burst? We saw the market make a huge rally on Thursday as we "discovered" that GDP grew during the quarter. BUT a deeper look saw the artifical increase by government stimulus-THAT CAN'T OCCUR AGAIN. Can't? Well couldn't the government just heat up the ole check writing machine and pump some more stimulus into the pockets of consumers? They could, but it would not have the same effect? Why? Because everyone knows that our NATIONAL DEBT IS AT THE BREAKING POINT!!! We are on the verge of collapse if tax, spend, regulate, and fake doesn't come to a screaching stop.

Has this been a government stimulus rally? Was the smart money on the street able to take advantage of the momentum and push the markets even higher? And perhaps the biggest question WERE THE MARCH 2009 LOWS THE LOWS OF THIS RECESSION? I believe that the smart money took advantage of the change in momentum and picked up consumer confidence. I believe that the March 2009 lows will be tested and probably broken within the next 6 months.

Taking a look at charts around various industries, we find many charts close to their 200 day moving averages. If these averages are violated, will panic set in? I believe that it will----AND THIS TIME, IT WILL BE WORSE THAN BEFORE.

I bought FAZ on Friday had a nice gain. I am looking to roll out of many of my positions and be prepared to get short. The obvious play appears to be short real estate and mortgage companies---but be careful. That trade could be crowded as many well know experts brought the thesis to the forefront of attention late last week.

Is the American consumer in the tank? Is it in worse position than it was this time last year? A government stimulated jobless recovery (and the most socialistic policies of our time) tell me that the consumer is in far worse long term shape than anyone in the MAINSTREAM MEDIA IS WILLING TO ADMIT.

No the drop might not be overnight---but our standard of living is in decline. Those willing to overspend will not be able to access the levels of credit they were able to access just 18 months ago. And those with excess income, are going to tend to save rather than spend. So how far will we contract? How far socialist will our nation become? The more socialist we become===THE MORE BEARISH I WILL BECOME. AND LETS DON'T EVEN TALK ABOUT HOW INFLATION DURING THESE TIME COULD HAMMER THE ECONOMY IF IT GETS OUT OF THE BAG.

See Congressman Michelle Bachmann speak out against SPEND NOW AND LET SOMEONE ELSE PAY LATER. SHE ALSO TALKS ABOUT WHAT IS HAPPENING TO THE DOLLAR!!




MAKE COMMENTS!!!!! LETS HAVE SOME THOUGHTFUL DEBATE HERE. WE CAN ALL LEARN FROM EACH OTHER'S IDEAS!!!!! We will never release your email address.

CHECK BACK SOON!!!!

IS IT 1987 ALL OVER AGAIN?

I have taken several months off from blogging and must say I miss the daily interaction with readers and am glad to be back. I have been telling my friends that I am reducing my holdings in stocks and believe that we could be headed for a 1987 type crash in the near future. Am I crazy? Well those of you that saw my call on UNG may think so. I lost a lot of money on that trade.

How do I recover from my losses, by analyzing what I did wrong and making another play---essentially living to play another day and by being smarter on the next trade.

I really thought we were headed for a period of massive inflation and I chose to play that through natural gas. Was I wrong on my inflation play? Was I wrong that inflation would begin with the decline in the dollar? I think I am still on the right track, but I think we are in for a very weird period first. Right now we seem to be in a quagmire whereby the strength in the dollar will hammer the markets? Wait a minute---doesn't Larry Kudlow scream for King Dollar every night? If the dollar strengthens, we lose two components that really helped earnings this quarter---exports and the boost from the exchange rates for companies earning in other currencies. If that shoe drops, we quickly find out that this market got overvalued in a hurry and the future isn't so bright. 700 on the SP by years end? Stay tuned.

I will have more this weekend and I am glad to be back. We will be bringing you interviews again in the very near future.

Natural Gas

I lost a lot trying to play natural gas last year. I bought the UNG at $38 and sold out much, much lower. I say that to temper excitement as I think Natural Gas is the play of the year. Now I know that the G8 met this weekend and according to the MAINSTREAM MEDIA, they have inflation under control as they have figured out how they can "flip the switch" and call in all of the excess liquidity. The dollar is even moving higher on the word out of the G8. I don't buy that for one second. I think we will see inflation and that will push nat gas much higher. Lets take a deeper look.

Natural Gas is undervalued in comparison to crude oil according to historical standards. Why? Because as panic subsided over crude oil, natural gas became a less viable alternative as it would take massive infrastructure spending to make a transition to power our automobiles. A conversion to natural gas is mandatory in my mind and the price of the commodity will go up as it becomes a reality in the minds of more investors. Crude oil has doubled in the past couple of months and natural gas is still working to put in a bottom. History tells us that this will change and often times these disparities right themselves in a very short time period.

Why has gas stayed down? Inventory levels have stayed surprisingly strong as prices plunged. There were several major finds and the drilling had been completed in these areas which sustained supply over the long haul as demand fell dramatically. The companies owning these wells had spent a tremendous amount of money completing these wells. They were not going to leave it in the ground as prices fell, they are pressured to recover their investment as quickly as possible. As a result, they have been producing the commodity even in the face of major declines in demand.

This trend will NOT continue as demand increase. Sure they will keep producing what they have, but will not be spending extra money to increase production until prices show a sustainable recovery. It is easier to take supply (drilling rigs) offline than it is to put it online. The cost to produce new finds is approximately $3.70 mcf. I would expect that prices would need to be sustained well over $4.50mcf before we see an all out effort to get production back online---and all the while inventories will be declining.

All of this is just the natural demand supply relationship and does not factor in the "panic spiral" that I expect we will see with the dollar/oil relationship. I think as we see the dollar fall (and it will over time in my opinion) oil will rise and Nat Gas will rise even further as it makes up ground in relation to oil. In summary, I think we could see a double in Nat Gas by the end of 2009. I just hope my prediction is better this year than it was last year.

Consumer Confidence===I have no confidence in IT.

I have no confidence in the consumer confidence number. The market may move when it is reported but we have seen it improving lately and I truly think that the number is impacted by what the Mainstream Media is saying. The gauge that I use for consumer confidence is the Money Multiplier and it is at historic lows. Confidence is worth nothing unless consumers are putting their money where their confidence is---and the money multiplier tells us that they are SAVING NOT SPENDING. We need to see the savings rate increase and saving is a good thing--but the MM is telling everyone how important the Consumer Confidence number is and it is simply not important in my book.

I think natural gas is very close to the bottom. It is down in premarket trade, but I will be looking at it today. I will do my analysis this weekend and have it posted here. The market tried to break above 950 on the S&P yesterday, but could not close above that level. I would expect a down day today to test 930-925, but the futures are hovering around the key 939 pivot at the time of this writing. If we get a down day I might be looking to add to my key "inflation" plays such as FCX,X, and oil and nat gas drillers/producers/servicers.

I will wait for more clarity and would like to see us test 925 today. Be careful until we get clear direction from here.

CONSOLIDATION---GET READY FOR THE BREAKOUT

The tight action lately (on a closing basis) shows me that we are heading for a major move in one direction. I have been wrong but I think we are going to test and break 925 on the S&P. Futures are up slightly at this time, but they are also talking about Russia and others threatening to diversify away from Dollar Denominated assets. I see the dollar continuing to fall over time and think oil is still a decent buy here if you can stand some volatility. I still like FCX and X as plays on inflation and am looking in depth at natural gas. I will have my detailed analysis on natural gas this weekend.

Jim Rogers laughs at the accuracy of government jobs numbers. I will have more when we get more clarity. See the Rogers video below.

STOCKS HEADED HIGHER?

The futures are pointing to a much higher open and are above the key 945 level on the S&P. I have been looking for a pullback and have been wrong. Jim Rogers explains in the video below that he has no shorts right now and that is unusual for him. He makes some great points and I guess I will have to listen more closely as today doesn't appear to be anything but upward for the averages and commodities.

Headed Down?

Yesterday was a very interesting day and many traders walked away with the attitude that it was a good day because we rallied at the end of the day. I am concerned as I saw many of the stocks that I consider to be leaders drop on higher volume. The futures are almost flat here, but I am looking for a down day. At the current time, the DAX futures are above the 5000 level and I need to seem them go below that level for us to get a really nice "correction" day in our markets.

There is a lot of talk on FOX this morning about how small business has been limited in terms of their normal credit during these trying times and that will hamper true economic recovery. I like BOOM here and think it will go much higher unless the market gets hammered. I would love to have a pullback day here for the market and get the opportunity to buy this one at lower levels.

The energy sector is going to continue to rise in my opinion. The dollar is going to fall slowly and that is going to cause the price of oil and gas to rise. DID I MENTION THAT FOX NEWS REPORTED THIS MORNING THAT GASOLINE HAS GONE UP 41 STRAIGHT DAYS AT THE PUMP? AND PEOPLE TRY TO TELL ME WE ARE HEADED FOR DEFLATION!!!

FCX AND X presented good buying opportunities yesterday in my opinion--and they will again, so be patient. I am looking to put some solar in my portfolio as the sector is on fire. I will have more analysis later on this sector.

Trend Reversal?

Some are saying that we had a trend reversal on Friday because the "better than expected" jobs number should have sent the market much higher. I think at best this rally is overdone. I sold a call spread on COF and have been burned but have 2 weeks to see it turn around if the stock gets below $22.50. I am curious to see how today pans out. If we roll lower, I will be ready to get short---I have my list ready. The German DAX futures are hovering right at the 5000 level (4998.5 at the time of this writing). I would like to see it fall below 4970 to confirm my short bias.

McDonalds sales are up 5.1% for the month of May--but the stock is trading lower as it sees potentially a 20% drop in earnings according to a report this morning.

Keep an eye on the Dollar, Oil, and Natural Gas as well. If the market pulls back very far--it will be key to asses whether the commodities get cheaper and the dollar stabilizes. It will be a very scary scenario if the commodities continue higher as the market falls.

I don't like to trade as much on Mondays, so I will be content to sit on the sidelines and get ready for tomorrow. If we break key levels, I will make some trades on SDS.

Jobs Report Sends FUTURES HIGHER

The jobs report has send the futures much higher. Oil is soaring as well and I am happy with my X and FCX. I sold a call spread on COF a couple of days ago and it appears that I will take a big loss on that one. I was not in the camp that thought the banks were poised to headed higher through the summer. I am surprised by this market strength.

I still think the place to be is owning "stuff". Oil, Nat Gas, Coal, Gold and Silver are going to outperform the market. I like RIG, MEE,BTU and those type stocks for the long haul. I will do more of an in depth analysis on those specific stocks over the weekend--they will be volatile in the short run. I have gotten hurt from time to time trading each of those names.

It is scary to me that this market reacted so positively to this jobs report and did not react to the announcement that the White House intends to appoint a PAY CZAR
CLICK HERE TO READ THE ANNOUNCEMENT More taxes and regulation will cause our economy to collapse.

I believe that the jobs report points more toward stagflation. This may be a trap setting up in the markets. I still think we retest the lows, BUT I HAVE BEEN WRONG.

PULL BACK COMING---BUT HOW SEVERE???

I have been pretty much on the sidelines as I have been unimpressed with the volume in the latest rally. I think we are going to see a pullback today and it is going to tell me a lot based on its severity. I have been dabbling in options--selling puts on FCX as I think it will continue to do well as inflation takes hold. I sold half of my X and hope the other half will run.

We have a great interview with John Williams of Shadow Stats coming soon and will have more market analysis when we feel like there is something to play. We don't make calls just for the sake of making them and are frankly scared of this recent rally. Good volume could change my mind---but right now I am on the sidelines.

Crisis Over?

I am amazed at all of the cheerleaders that want to declare this economic crisis over. We are now hearing speculation that the DOW will hit 10,000 before year end and the S&P could get into the 1200 range. We won't fight the tape--but don't share the overall economic optimism. The government deficits will play a role in running up interest rates and people seem to be forgetting that rates going up will not be great for growth and expansion.

Monsanto (MON) is down in premarket trading as they see earnings in the lower end of the range. These markets seem to be discounting the fact that while certain economic indicators look improved--we still have the possibility of dismal earnings coming from some of these companies. There is money on the sidelines and it may get suckered into these markets and make them go higher. I ask the following questions when deciding if we are on the road to total recovery:

Are interest rates going to be stable?
Are the government deficits going to cause higher taxes?
Are energy prices going to be stable?
Are jobs going to improve within the next six months?

Just something to think about as all of these points will impact consumer behavior. Consumer Confidence was great according to reports yesterday. The strange thing about this recession was that it was a pocketed recession. There were pockets of strength around the country and likewise there were pockets of weakness.


I still have a good deal of my portfolio in cash and because I am worried that we could see another leg down. The futures are strengthening right now---I got short a few minutes ago and am about to get stopped out. This run is tough to fight, but you just have to keep your losses under control.

I sold FCX put spreads yesterday as I really like that stock. I have never really utilized spreads in the past, but intend to do so in the coming months as it can help reduce my risk.

WE HAD A GREAT INTERVIEW WITH JONATHAN HOENIG THAT WILL BE POSTED LATE TONIGHT!

CHOPPY MARKETS

The futures are well off of the lows of the morning and point to what has become somewhat of my "theme" for these markets. CHOPPINESS I will say that I am planning to sell options in this type market. I am selling some puts on FCX. I like the company and can get some decent premiums on the options. I am also considering selling some calls on Caterpillar CAT. Even if the market rallies, I just don't see CAT jumping over the summer.

This morning gold and other commodities are down and we are hearing some of the talking heads talks about deflation again. I look at deflation talk as a great way to find what I want at cheaper prices. I don't see deflation as a problem at all. The North Korea nuclear test seemed to shake the markets for a short while, but not as much as I would have expected. As I am typing the futures are getting stronger and even though I am surprised---you can't fight the tape.

I won't make up things to say and while this is a much shorter post than normal---the market visibility is less for me. As we get more clarity, we will have more to say.

Asian Markets Head Higher---Commodities Drive

Check out this Article from Bloomberg as Asian Markets head higher tonight driven by oil and gold stocks. Click here to read the Article

Here what legendary investor Jim Rogers said on 5/17/2009 Part One of The Interview
Jim talks about how we must start living within our means and our current policy of spending to counter defecits is INSANITY. Jim says politicans are doing what they have to do to get re-elected and it is wrong for them to ignore the needs of 300 million Americans. WE ARE DESTROYING THE VALUE OF THE DOLLAR AND ARE THE LARGEST DEBTOR NATION IN THE HISTORY OF THE WORLD!!!! He says the Bureau of Labor Statistics has been lying to us for years about inflation. Hear him talk about the ANTI-CAPITALIST ATTITUDE. IS THE GOVERNMENT TRYING TO CONTROL THE BOND MARKET? If you are looking for a low APR credit card--check out low rate credit cards



And Part 2 of The Interview
Hear Jim talk about why he is not selling his gold and wheter or nor he is buying more.
The IMF is working to get permission to sell some of their gold and if they do, it may be a good buying opportunity. Is Farming going to be the occupation of the future?

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We are going to do a show soon on CAPITALISM VS. SOCIALISM.

CHOPPY ACTION

I think we continue to see choppy action and I believe that one of the greatest disciplines in trading is to know when to stay OUT!!!! I have lost a lot of money in the past by forcing trades.

That said, I am more convinced than ever that we are going to see increasing oil prices. Natural gas will follow. Inventories showed that oil demand is at least stabilizing and will grow in the long term. The dollar is going to continue to be choppy but weakening and this will push oil prices upward. That combination is worrisome. Oil prices acted like a tax on the American consumer and I believe had a lot to do with consumer confidence numbers last year. I will detail the plays that I like in the oil and natural gas space in our post this weekend.

Don't get emotional about this market---it is easy to see a good run in one direction and believe that we are off to the races in that direction. Look at the overall picture and you see price action that would lead you to believe that this market could go higher. Listen to what is going on with the dollar, housing, oil, and other commodities and you know that this economy faces headwinds. My recipe for staying cautious and waiting for more clarity before putting my money at risk.

Caution

I am exercising extreme caution here. These markets are going to be choppy. Those of you that have followed our blog for a while know that I won't make a trade just for the sake of making a trade. The housing numbers have confused the markets and I am in wait and see mode. I hate to play the waiting game but I hate worse to be wrong and lose money.

We have some great interviews next week and if the markets continue to be choppy, we will continue our exploration of trading psychology.

I am convinced that we will have rampant inflation but am trying to figure the "when". I will have more on that subject in the next few days.

Headed Higher

These markets are determined to head higher. You can't fight the tape and my analysis yesterday of when all of the talking heads are in agreement---go the other way. We could see 1100 on the S&P before another major correction. The money on the sidelines must be coming in out of fear of missing the buying opportunity of a lifetime.

I still contend that we are going to see inflation and the market rise will contribute to it. The markets will make individuals more confident to spend as they will feel wealthier. I have said over and over that the money multiplier will not remain at these low levels for long and when it moves up inflation will take off.

The housing market still appears to be lagging and will have to stabilize before we see the hyperinflation scenario that we have been fearing. Notice I said stabilize not grow. It only has to stop falling to be the final ingredient in the inflation mixture.

Some of our guest have contended that the Fed can pull in the liquidity faster than ever before because they can just not renew some of the troubled assets they have gotten through the discount window. I don't know that I subscribe to that theory.

I still like FCX but wouldn't chase it here. Natural Gas through the UNG is worth a look but I wouldn't chase it either.