Weekly Dollar DX Chart with Commitments of Traders and Dollar VIX

As shown by our proprietary Dollar VIX indicator, currency trading recently has not been for the weak of heart, if ever.

The funds are still net long, but are also holding the smallest short position since we started tracking this number in January 2004.

General Motors is on the Brink of Default and Bankruptcy

Right at the close of trading Fitch and the other rating agencies cut General Motors debt ratings. In particular Fitch was quite specific that GM will either be bailed out or will be forced to default and restructure.

"Given the current liquidity level of $16.2 billion and the pace of negative cash flows, Fitch expects that GM will require direct federal assistance over the next quarter and the forbearance of trade creditors in order to avoid default."

In addition, and perhaps unrelated, AIG has moved its 3Q 08 financial results from after the close of trading on Monday to 6 AM, before the Bell.

Another late Sunday night before the start of Asia trading?

Fitch Places GM's 'CCC' IDR on Rating Watch Negative
07 Nov 2008 3:57 PM (EST)

Fitch Ratings-New York- Fitch Ratings has placed the Issuer Default Rating (IDR) of General Motors (GM) on Rating Watch Negative as a result of the company's rapidly diminishing liquidity position.

Given the current liquidity level of $16.2 billion and the pace of negative cash flows, Fitch expects that GM will require direct federal assistance over the next quarter and the forbearance of trade creditors in order to avoid default.

With virtually no further access to external capital and little potential for material asset sales, cash holdings are expected to shortly reach minimum required operating levels.

GM remains dependent on the capacity and willingness of its suppliers to continue extending trade credit, as the company does not have sufficient resources to finance ongoing operations in the event that trade credit is curtailed.

Over the intermediate term, GM's expanded debt load and debt service costs, when combined with significantly reduced earnings capacity, indicate that material improvement in the balance sheet is unlikely absent a restructuring of the balance sheet. This could eventually take place through a distressed debt exchange.

Fitch believes that direct federal aid is highly likely to be forthcoming, although the amount, timing, structure and term remain uncertain. Without material federal assistance in the short term, Fitch would review the rating for a potential downgrade to 'CC', which indicates that default is probable.

Given the extended cash drains expected through at least 2009 and the need for balance sheet restructuring, provision of federal assistance may not preclude a downgrade to 'CC'.

Deteriorating macroeconomic conditions and the effects of the credit crisis continue to ratchet down retail sales volumes and to expand negative cash flows.

Restructuring costs, other one-off items, and working capital outflows have exacerbated operating losses, factors that will continue to hamper any recovery in the near term. The rationing of retail financing highlights the tremendous capital advantage held by transplant manufacturers, further impairing near-term volume and pricing potential.

In addition, Fitch has placed the following on Rating Watch Negative:

--Senior secured at 'B/RR1';
--Senior unsecured at 'CCC-/RR5'.

General Motors of Canada Ltd.
--Long term IDR 'CCC';
--Senior unsecured at 'CCC-/RR5'.

The Recession Started in June at the Latest and is Deepening: Non-farm Payrolls

The most important chart is the 12 month moving average of the changes in US non-farm payrolls directly below.

It should have been apparent to any economist, as it was to us, that the US was falling into recession at the end of 2007. The actual start of the recession is a formality, but no dating for the start past June 2008 seems justifiable, especially when all the other coincident non-jobs indicators are consulted.

The primary argument for a later dating to September 2008 is based on 'real GDP' number which in our view is distorted by a significantly understated rate of inflation. The traditional coincident indicators do not agree with that dating as well.



The headline or seasonally adjusted payroll number turning negative does not necessarily imply a recession in and of itself. It could be a response to a transitory exogenous shock. However, when one looks at the longer term trend as we show in the chart above, and the many other coincident indication as we have been pointing out this year, the implications of an endogenous recession is obvious.



Much is made of the Birth-Death Model, which the BLS uses to account for the jobs created by small business that are not in its survey. As you can see, every year the pattern repeats with some regularity and revision. The numbers are added to the payroll number from the surveys, to the actual number, which is then seasonally adjusted to create the 'headline number.'



We hope it is obvious that the seasonal adjustment factor is large, and often far more significant than the birth death model. This is why they choose to 'adjust' the birth death model lower during periods of extreme seasonal adjustment. It does seem to be statistically useless at best, and at best a tool for very short term data manipulation at the worst. It can have an effect in months where seasonality is slight.



It should be noted that this are the numbers that the BLS shows in its database today. They have been revised, and sometimes significantly so, from their original introduction to the public in the Wall Street headlines.

The economic luddite will ask, "What good does this do to me now? Of course I know that the US is in recession!"

The answer of course is that this is the same conclusion we presented as early as February, when it was more easily ignored.

The better question now is, how deep will the recession go, and when will the recession end? Questions with answers not so obvious as of yet without some informed insight. Common historic averages are just that: common, average and old.

The Gold Bull in Context

One of the most difficult things to determine is a trend change, from a bull market to a bear market, and vice versa. The market needs a wall of worry to climb, and a slope of hope to decline.

Historical data shows that the prevailing climate in corrections in a bull market reach conditions that are bleak and worrisome, with the majority of investors bearish and pessimistic before the next upleg is taken.

This is what makes it so difficult to separate a trend change from a correction; sentiment is often a misleading indicator, and people will self-select soft indicators to suit their bias.

But sometimes a trend DOES change. So how can we tell the difference?

This is where technical analysis becomes an indispensable companion to the fundamental perspective. While the trend is intact it remains in control of the market, until it is broken.