Philly Fed Report Reveals an Unmistakable and Serious Stagflation

The outsized financial sector in the US continues to weaken the real economy by over-utilizing intellectual and capital resources, and twisting public policy to its own greedy benefit. Even worse, the efforts of the co-opted and corrupted central planning bureaucrats and politicians to support, rather than reform, the financial sector is triggering a nasty monetary inflation and just making our problems worse.

Things will not improve until fundamental reforms are made in the market processes which have become distorted over the past thirty years by the wealthy elite and Wall Street financial corporations.

The political process in the US needs new blood, new outlook, a new respect for the protection of the Constitution, and politicians less saddled down by special interests, favors, and past bad behaviour that allows others to control them. We can send Washington a message.

You have been played for a fool. Get over it, and do something. Send the pampered politicians packing. They have turned our trust into their personal trough. The first step will be to vote almost all Republicans and the Democratic leadership out of office in the fall elections.

The skeletons in their closets have become anchors on the Republic.

Manufacturing in Philadelphia Region Shrank in July
By Courtney Schlisserman

July 17 (Bloomberg) -- Manufacturing in the Philadelphia region shrank in July for an eighth straight month as orders and employment sank. (The Philly Fed report is an important bellwether for the national manufacturing report, and a key barometer of the real economy - Jesse)

The Federal Reserve Bank of Philadelphia's general economic index "improved" to minus 16.3 from minus 17.1 in June, the bank said today. Negative readings signal a decline. The measure averaged 5.1 last year. (The quotation marks on 'improved' are mine. That is not an improvement. It is a statistical flucuation in an undeniable and serious contraction in activity, but it was also 'worse than expected' which they forget to mention until later - Jesse)

The housing recession, now in its third year, has depressed demand for building equipment and materials and hurt consumer spending. Demand may keep slowing in coming months after the government finishes distributing tax rebate checks, indicating factories won't rebound.

''We're going to continue to see declines in manufacturing output,'' said Kevin Logan, senior market economist at Dresdner Kleinwort in New York, in an interview with Bloomberg Television. ''As manufacturers see the final demand for their products go down and inventories go up, they have to slow production and that means less employment.''

Economists forecast the gauge would improve to minus 15 this month, according to the median of 56 projections in a Bloomberg News survey. Estimates ranged from a minus 22 to minus 5.

Another report today showed builders began work in June on the fewest single-family homes in 17-years, signaling the real- estate recession continues to deepen. A change in the building code in New York led to a jump in construction of condos and apartments in the Northeast that unexpectedly propelled overall housing starts up 9.1 percent, the Commerce Department said.

More Claims

First-time claims for jobless benefits rose last week, the Labor Department also reported. Rising benefits reflect a weakening job market.

The Philadelphia Fed's measure of new orders was little changed at minus 12.1 from minus 12.4 last month. The shipments measure dropped to minus 8 from minus 6.7.

An index of prices paid climbed to 75.6, the highest level since 1980, from 69.3. A gauge of prices received decreased to 28.8 from 29.7, the Philadelphia Fed report showed.

''The pricing numbers are important too because it indicates that we're in a period of stagflation,'' said Dresdner's Logan. In the 1970's, the U.S. had 10 percent inflation and 10 percent unemployment, he said. Now, ''we're looking at 5 percent unemployment and 5 percent inflation. It's a sort of stagflation light.'' (Too bad the numbers are seriously dampened by government antics. Its more like 10 and 10 - Jesse)

Boosting Prices

U.S. Steel Corp., the second-largest U.S.-based metal producer, will boost prices for flat-rolled steel by $40 to $1,100 a ton, to pass on rising costs, two people familiar with the matter said July 11.

Fed Chairman Ben S. Bernanke told lawmakers in semiannual testimony earlier this week that inflation risks have ''intensified.'' At the same time, he dropped his June assessment that risks to the economic expansion had diminished, indicating policy makers aren't ready to raise interest rates to contain prices.

The Philadelphia Fed index measuring the manufacturing outlook for the next six months dropped to 18 from 21.3. (The outlook is negative - Jesse)
Today's report follows one by the New York Fed earlier this week that showed manufacturing in that state shrank less than forecast this month.

Exports

International demand has helped some factories keep running, preventing production from falling as much as in past economic downturns. The U.S. trade deficit narrowed in May as exports increased 0.9 percent, the Commerce Department said on July 11.

The Institute for Supply Management's factory index averaged 49.3 in the first six months of this year. During the 2001 recession, it averaged 43.5. Readings less than 50 signal contraction.

The Fed reported yesterday that industrial production rose 0.5 percent in June, more than forecast, helped by a jump in utility output and increased manufacturing of autos and computers.

Some manufacturing companies are prospering. Allegheny Technologies Inc., a metals maker that supplies Boeing Co., earlier this week boosted its profit forecast for the second quarter.

Allegheny is benefiting from ''our product, market, and geographic diversification,'' Chief Executive Officer Pat Hassey said in a statement.

Bear Market Rallies

"We wished to make this post on a day in which the markets started to rally, so as to give readers the latitude to exit their long positions gracefully should they choose to do so, and not leave them in a panic, which is not necessary nor productive." Jesse July 15

Bear market rallies, or 'relief rallies,' are sharp upward spikes in prices on the US equity markets.

They are fed by short covering. Those who are short, or have positions based on the assumption that the stock market is going lower, are forced to buy stocks either from fear of losses, or because they are undercapitalized and overleveraged. The leverage may be in terms of time (as in the case of stock options) or money (margin).

The bear market rally consists of a violent opening spike. That spike will be up to the nearest strong overhead resistance as the short sellers panic. Then the market will pull back, because there are no serious buyers yet to sustain the prices, and the early shorts have covered. Also, insiders will begin to feed their dog stocks into the public markets.

The prices will pull back to the nearest support. Once the bulls feel confident again, the buying will resume, this time more slowly as naive speculators begin to succumb to the 'good news.' The highwater mark of the opening price spike will be a definite target for this secondary move higher.

Often the initial effort to find support fails, and the bullish sentiment will pull back and try to find stronger support from which to resume the price advance.

Very infrequently there is a 'failure to rally' and a failure to find support at a near support level. Buyers (also known as 'the greater fool') are not to be found, and the dip buyers panic, and a freefall ensues. This also can be quite breath-taking, as the insiders are selling not buying, and the small speculators are exhausted and starting to panic. This is an uncommon event, but can be quite damaging if you are caught on the wrong side of it. This is how we came up with the term 'chasing nickels on the freeway' to describe it. Buying the dip in price in bull markets is easy money; buying the dip in bear markets is for gamblers.

The way we keep our orientation in these market events is to take a slightly longer time perspective. We like to watch the hourly futures chart, rather than the customary ten minute charts watched by daytraders. We also like to plot the support and resistance levels not only on the hourly charts, but also on the daily charts and keep a close eye on them. Why? Because this is how you know if you are still in a bear market or not. Are the longer term trends still in place?

The best way for most traders to play these markets is to stay out. The opportunity to be whipsawed is very high. Take a break. Go for a walk. The market will always be there. The greed of 'lost profits' pulls you back in, and then fear will take you out, on a stretcher if you are not careful.

Controlling one's emotions in volatile markets is the primary challenge for experienced traders.

Bear market rallies can be quite impressive. Wall Street insiders feed these rallies with stories and 'good news.' The financial reporters and many well-meaning people will go along with this because they wish to be optimistic, for any variety of reasons. Fundamentals can mean little in the short term in financial markets. Although in the longer term markets are 'efficient discounting mechanisms', in the short term a market is more like a tug-of-war, or a rugby scrum, dominated by the biggest players with the most money.

These are the trend corrections in which short term traders can make some very tidy profits, and insiders can unload more of their underperforming stocks on the unsuspecting public. The government and other officials are often complicit because they are seeking to calm the public and avoid a panic, so they will take whatever 'good news' they can get.

There is an ethical if not legal question involved. When does avoiding a panic become leading people into losses and bad decisions? If a major tsunami was approaching the eastern coast of the US, would the government be justified in hiding that fact, in telling people to stay in their homes near the coast, to 'avoid a panic?' We hope to see this tested in the courts in the next few years, in particular with regard to the financial news media and chief market strategists.

The way we are playing this market today, just as an example, is to add to some long positions in contra dollar plays on weakness (gold, Swiss franc and other instruments in bull markets), scalp profits from the primary trend of the equity markets, and to spend a little time with the kids, go for a walk, work outside, while we wait for this cycle of greed and fear to subside. (PS. We went into the close on the short side because we approached the end point of a classic short term rally. If we advance further tomorrow we will pull them back. - Jesse)

SEC Kicks Over Financial Stock Manipulation Rocks and Finds... Goldman Sachs

An earlier and related story from April: Secret of Bear Stearns demise revealed: Competitor Goldman Sachs started the run on the bank


Goldman Is Queried About Bear's Fall
By Kate Kelly and Susanne Craig
July 16, 2008
The Wall Street Journal

Goldman Sachs Group Inc. is the envy of Wall Street, navigating the credit crisis relatively deftly as many of its peers have been battered.

Now, the big securities firm has come under suspicion, at least from the chiefs of two rivals who have questioned in recent months whether Goldman, even indirectly, might have put pressure on their firms' stocks.

Alan Schwartz, who headed Bear Stearns Cos. when it collapsed in March, has pointedly asked Goldman Chief Executive Officer Lloyd Blankfein whether there was any truth to talk that in the days preceding Bear Stearns's fall, traders in Goldman's London office manipulated the struggling firm's stock, according to a person with knowledge of the conversation.

Lehman Brothers Holdings Inc. CEO Richard Fuld Jr., whose firm's shares also have been battered, also has contacted Mr. Blankfein. "You're not going to like this conversation," Mr. Fuld told Mr. Blankfein, according to people familiar with their talk, but he was hearing "a lot of noise" about Goldman traders who allegedly spread negative rumors about Lehman. In recent months, Mr. Fuld has contacted traders he felt may have been bad-mouthing his stock, according to someone familiar with the matter. Spreading rumors one knows to be false with the intention of manipulating a public company's price is illegal.

Mr. Blankfein was taken aback by the inquiry from Mr. Schwartz, according to a person with knowledge of the discussion, even though the former Bear Stearns CEO was quick to add that he didn't believe Mr. Blankfein would ever knowingly tolerate misconduct. Mr. Blankfein responded that he had no knowledge of any alleged manipulation, this person said, adding that he told Mr. Schwartz he would respond severely if he ever discovered such behavior by Goldman traders. Through a spokesman, the Goldman CEO says he doesn't recall the conversation with Mr. Schwartz.

Goldman strongly denies wrongdoing. "We went out of our way to be supportive of Bear and were rigorous about conducting business as usual," spokesman Lucas van Praag said. He said Goldman never altered its terms for doing business with Bear, even as lenders pulled their financing and some trading partners retreated during the troubled securities firm's struggles in early March.

The SEC investigation into Bear's collapse partly involves trading documents, which have been reviewed by The Wall Street Journal. The documents indicate that in the weeks before March 16, when Bear Stearns reached its initial agreement to sell itself to J.P. Morgan, Goldman Sachs International, which encompasses the firm's European trading units, was one of the most-active parties in trading securities known as credit default swaps that it had bought from or sold to Bear Stearns -- more than most other Bear trading partners.

Goldman Sachs Asset Management, the money-management division, exited a number of swaps on behalf of clients, the documents show. Mr. van Praag said it would be unwise "to make assumptions about this information without understanding the underlying transactions." He said Goldman's international unit handles trades "around the world, on behalf of clients" as well as for Goldman itself.

The documents show that a handful of other prominent firms cut their exposures to Bear Stearns, including Chicago hedge fund Citadel Investment Group and New York hedge fund Paulson & Co., which is run by a Bear Stearns alumnus.

Dozens of similar securities known as interest rate swaps, originally bought from or sold to Bear Stearns, were exited by Fairfax International Investments Ltd., a unit of Citadel, and transferred to another internal unit, Citadel Equity Fund Ltd., on March 3. An additional 40 or so credit default swaps were exited separately by Citadel Equity Fund; those contracts were taken on by a variety of other brokers. About 40 trades were exited by the hedge fund Paulson, primarily during the week of March 10, when Bear Stearns nearly ran out of cash.

In recent weeks, SEC investigators have questioned Citadel about its moves to unload complex securities contracts it had either bought or sold from Bear Stearns in early March, according to people familiar with the matter. Citadel executives have explained the moves as having been part of a long-planned restructuring in which certain holdings were transferred from Fairfax to another internal entity, these people say.

Senior people at Paulson & Co., run by former Bear Stearns executive John Paulson, have told associates that the swaps bought or sold from Bear during the March 10 week, most of which were transferred to Goldman, were part of the firm's overall effort to curb exposure to financial-services firms.

Comparison of the Market Declines of 2000-1 and 2007-8

This comparison is the number of days from the market high.