US Equities Showing Signs of an "Exhaustion Top" Amidst Rumours, Hype, and Shenanigans

The US stock market seems to be getting rather tired after what can only be described as a remarkable rally on light volumes and program trading.

The market is trying to rise here, with announcements like the Cisco backbone router for carriers and the AIG unit sales being hyped incessantly on financial media. The hype over the Cisco backbone router today is almost embarrassing. The anchors on Bloomberg keep saying that the router can download entire movies in 4 seconds, which is a lot faster than the 10 minutes it takes today. To anyone who knows anything about how networks are provisioned this is a howler of the first order, to say the least. For the consumer, the network is only as fast as the last mile.

It has also been reported by Adam Johnson on Bloomberg television that J.P. Morgan, a major broker dealer, stopped lending shares in AIG and Citi today "on rumours that the US government might ban short selling in stocks in which it has a financial interest." This squeezed the shorts and helped give an artificial boost to financial stocks over all. The company has since stopped this self-imposed ban on loaning shares and stocks are falling off their highs.

Needless to say, the SEC is unlikely to investigate this, or advise market makers not to start arbitrarily constraining the supply of stock based on market rumours, especially when they might be trading these same stocks for their own proprietary portfolios. They ought not be able to institute ad hoc bans on buying or selling by manipulating the supply.

Perhaps another leg up, after some consolidation, but this market is now very vulnerable to a reversal. The volumes are light on the rallies, and tend to increase quite a bit on the declines. Today the volume was a little better, in a consolidation perhaps, or a simple distribution. .

As we reported last week, the cash levels in the mutual funds are near record lows. Stocks do not typically rally unless there is large scale buying. All well and good, but until selling volumes show up, the market can continue to drift higher, especially with the support of the monetary magicians and the Wall Street wiseguys.



Don't get in front, wait for it. But start getting defensive if you have not done so already.

The Ides of March are on the 15th.

Are Traders Demanding US Credit Default Swaps Payable in Gold?

If another author had said this I might not pay it so much attention. Lately some have been given over to a tabloid approach to overstatement and sensational headlines to attract attention. This is a strong temptation as the blogosphere expands, similar to the development and evolution of newspapers as a popular medium in Victorian London for example.

But as you know, I have a great deal of respect and admiration for Janet Tavakoli and her knowledge in this area. If she is seeing a new demand for Credit Default Swaps on the US payable in gold I would credit it since this is her area of expertise and industry connections, but would ask for some particulars, which I have done. This would match up with some things I have heard from other sources, and desire to continue to put the puzzle pieces together without traveling false trails. For now it remains all opaque, speculation, and rumour.

It does make sense, of course, to price a US default in something other than dollars. The question that comes to mind though, is not the suggested method of payment, but the nature and quality of the counter-party who could stand reliably behind such a claim without it being a fraudulent contract by its very nature.

If the US should default, what major financial institutions will be in a position to have written and then uphold the terms of these CDS, payable in anything at all? Surely only a sovereign bank like the US Fed, the Treasury, or the IMF, or some other central bank could be so capable. But what possible motivation could a non-profit-seeking official institution have in writing CDS on a US sovereign default? Perhaps more likely a private bank or GSE, with the buyers thinking it has some sovereign guarantees that would be upheld in extremis.

Truly, remember AIG? It was insolvent when payment was demanded, and acted improperly in paying collateral to Goldman ahead of its inevitable insolvency, and then receiving the support of the Treasury to pay obligations in full, above all others. It ought to have been placed in a receivership and its assets allocated with the previously disposed collateral clawed back. This kind of private arrangement between parties involving the sovereign wealth of nations may be indicative of things to come. The recent example of Iceland comes to mind.

I agree with her that credit default swaps should be curtailed. Indeed, I would tend to severely limit the trading of most if not all naked derivatives and stock sales by requiring capital requirements near 100 percent and secured by good collateral.

But I think the gold aspect of this may be overdone. The US has more gold than any other individual country, and still values it cheaply at a sub-fifty dollar historical price on its books. If a counterparty fails, it will fail, and a settlement will be arranged. The issue of course, is if some encumbrance of the gold in the US has already been accomplished through unfortunate leases to bullion banks who will not be able to return it.

Indeed this horse may already be 'out of the barn' as some evidence indicates that a few banks like JPM are already short more gold and silver than they can possibly deliver under the conditions of the contract without selective default to paper if demanded by their counter-parties.

If there is any sort of government guarantee, it will be payable in dollars, unless some private arrangement is made for the benefit of the recipient. For example, if a bullion bank is caught short of gold, and requires it to avoid a default and 'systemic risk.' The rationale will be to pay the debt in full so as to avoid a collapse, even though there was no guarantee involved. If we did not have such a recent historical example of AIG I would say that such an abuse of the Treasury for the benefit of a few for placing the system at risk was not possible. And yet here we are.

There is another possibility, based only on speculation as far as I can determine, that a major purchaser of US debt is now demanding it be backstopped against ratings downgrades in gold payable CDS. Until now I have given this little credibility. How can such a thing be arranged in secrecy and maintained as such? How could a private bank, even a money center, write such a swap in good faith?

You see, to my knowledge no private corporation has the right to engage in contracts that encumber the US gold reserves, not the Fed nor the Banks, and not even the President or Treasury alone. Only the Congress, with the knowledge of the people, may allocate and distribute such a sovereign asset. If swaps and contracts and leases are being made on the US gold reserves, the people then are the subjects of a monumental theft and fraud. And if the US is writing or guaranteeing CDS in gold, then most likely it is doing so as a means of rescuing those who have already gone hopelessly short the gold market, and need to arrange a 'back-door' bailout.

So the rule at hand would be the epigram of the famous trader, Daniel Drew:

"He who sells what isn't his'n
Must buy it back, or go to prison."

Unless they have good friends at the Fed or the Treasury, or in positions of power in the exchanges perhaps. But does anyone believe that the American people would stand again for another bailout of the very same banks that it has bailed out previously? I would hope that there would not be a Reykjavík on the Potomac in my lifetime.

In short, if the existence of CDS on the default or downgrade of US sovereign debt payable in gold bullion be true, who would be in a position to stand behind these Credit Default Swaps with any reliability, and what buyer would be in a position to make such a demand of a credible source?

The US most likely will resist the banning of credit derivatives because it is in the hands of the Banks, and such derivatives are the source of enormous profits. Further, such a ban might cause the existing bulk of derivatives to fall in value, destabilizing the financial system. Nothing could be more obvious, at least for now. So this situation will continue most likely until it falters, and the entire system is once again placed at risk. But these markets are so opaque, and the intentions of government in them even less apparent, that one can only watch and wonder.

At some point the Banks may seek to make the people yet another offer they cannot refuse. And America will choose. But first I think, the UK will reach this point.

Huffington Post
Washington Must Ban U.S. Credit Derivatives as Traders Demand Gold
By Janet Tavakoli
March 8, 2010

...Remember AIG? When prices moved against AIG on its credit default swap contracts, AIG owed cash (collateral) to its trading partners. AIG paid billions of dollars and owed billions more when U.S. taxpayers bailed it out in September 2008.

U.S. credit default swaps currently trade in euros. After all, if the U.S. defaults, who will want payment in devalued U.S. dollars? The euro recently weakened relative to the dollar, and market participants are calling for contracts that require payment in gold. If they get their way, speculators on the winning side of a price move will demand collateral paid in gold.

The market can create an unlimited number of these contracts very rapidly. The U.S. wouldn't have to ever default to trigger a major disruption in the gold market. Spreads (or prices) on the credit default swaps could simply move based on "news," and demand for gold would soar.

If this speculation drives up the price of gold, and the available gold supply becomes limited, are you willing to post your children as collateral? I am pushing the point so that we put a stop to this before it is too late."

Net Asset Value of Certain Precious Metal Funds and Trusts

US Dollar Charts Still Technically Strong

The US Dollar Daily Chart is showing a continuation pattern, indicating the likelihood that its rally has more room to the upside. This implies more troubles for the Euro, the Pound, and the Yen if in fact the dollar can break out from this formation. There is some probability of failure, but not so great as continuation of the trend higher.

There is also the matter of the 3, 10, and 30 year Treasury auctions this week. The dollar is often dressed up for the occasion. If not with the fundamentals, then by weakening the 'competition' to make it look prettier than them.

If the US stock market cannot move up or hold its ground while the Treasury conducts even modestly successful Treasury auctions, then this is a cautionary indication that Wall Street and the Fed are moving capital in a circle of manipulation to attempt to maintain the illusion of growth, in the manner of a Ponzi scheme.



The Dollar rally is obviously consolidating its recent overbought condition, and has more room to the upside if the trend continues. Keep in mind that the fundamentals work slowly and on the long trends. In the shorter timeframes the price is just a trade, more subject to emotions and fluctuations. Do not try and fight the ticker if you are a trader. If you are a long term investor, then you can ignore what at the end of the day will turn out to be noise. But there are some imperative requirements to do so regarding your cash levels and leverage.