About Those Strong November US Retail Sales Numbers

Gasoline Purchases.

Early deep discounts on electronics to spur Christmas buying and 'green rebates' on new appliances.

Higher prices. Subsidized purchases. Let's party!

The Correlation Between Gold and US Equities

The relationship between US equities and gold obviously changed around the middle of 2008.

But how has it changed? Has the correlation really reversed so dramatically?

Is this the result of the Fed's reflationary efforts? But has not the Fed does this many times in the past? What is the relationship with both of these markets with the US dollar, and that with the money supply?

Perhaps there is not a direct correlation but a relationship to other things that relate in common.

All good questions. Explanations will be coming, but we have not seen many that are any good. Most are simplistic and self-referential to the person's biases. So we will have to do it ourselves.

Obama's Big Sell Out

This is an effective articulation of why so many Americans who voted for Barack Obama and 'change' and reform feel betrayed, and rightfully so.

The funny thing is, the result would most likely have not been all that different if McCain had won, except the world might be worrying quite a bit about his health, given his utterly unqualified successor, the Decider in a skirt. American politics sometimes appear to be more like competing crime families and special interests than legitimate alternatives to national governance.

Well, at least an American President has not appointed his favorite horse to the Senate -- yet.


Obama's Big Sellout
By Matt Taibbi
Dec 09, 2009 2:35 PM

The president has packed his economic team with Wall Street insiders intent on turning the bailout into an all-out giveaway

Barack Obama ran for president as a man of the people, standing up to Wall Street as the global economy melted down in that fateful fall of 2008. He pushed a tax plan to soak the rich, ripped NAFTA for hurting the middle class and tore into John McCain for supporting a bankruptcy bill that sided with wealthy bankers "at the expense of hardworking Americans." Obama may not have run to the left of Samuel Gompers or Cesar Chavez, but it's not like you saw him on the campaign trail flanked by bankers from Citigroup and Goldman Sachs. What inspired supporters who pushed him to his historic win was the sense that a genuine outsider was finally breaking into an exclusive club, that walls were being torn down, that things were, for lack of a better or more specific term, changing.

Then he got elected.

What's taken place in the year since Obama won the presidency has turned out to be one of the most dramatic political about-faces in our history. Elected in the midst of a crushing economic crisis brought on by a decade of orgiastic deregulation and unchecked greed, Obama had a clear mandate to rein in Wall Street and remake the entire structure of the American economy. What he did instead was ship even his most marginally progressive campaign advisers off to various bureaucratic Siberias, while packing the key economic positions in his White House with the very people who caused the crisis in the first place. This new team of bubble-fattened ex-bankers and laissez-faire intellectuals then proceeded to sell us all out, instituting a massive, trickle-up bailout and systematically gutting regulatory reform from the inside.

How could Obama let this happen? Is he just a rookie in the political big leagues, hoodwinked by Beltway old-timers? Or is the vacillating, ineffectual servant of banking interests we've been seeing on TV this fall who Obama really is?...

Read the rest of the story at Rolling Stone online here -

Today's US Treasury 30 Year Auction

Well, it is year end.

But there is undeniably a strong move to the short end of the curve, especially by the big debt buyers like foreign central banks who prefer their maturities in the 3 to 5 year range or less, sans agences s'il vous plait. This was also seen in yesterday's Ten Year Auction.

As for domestic buyers, the yield curve preference is less an investment decision than an IQ test. Only Zimbabwe Ben and the Last Resort Boys, along with a few pension and insurance funds who are compelled by a government mandate to match duration of obligations, are buying the long end ten years and out.

There was nothing in Treasury Secretary Geithner's appearance before the cameras today to compel one to do anything but hide in short durations, preferably offshore. Mr. Secretary engaged in a battle of wits with Elizabeth Warren, with Le Crampe de Cervau coming out a bit on the short end himself as he attempted to justify the bailout of AIG at par.

As you may recall, Liz Warren is a prof at Harvard with a portfolio in the field of financial liquidations, and Tim's rhetorical wind was met with a blazing fire of informed incredulity. No Congressperson or money honey she.

When the time comes the longer duration will be an excellent buy again, but not until Fed Funds is around 20% or so. What is that, about 2,000 basis points to go? I'll make a note.

Maybe there will be a protracted monetary deflation and a stronger dollar to justify those four and a half percents of return over 30 years. And maybe Timmy will get a job NOT working for Wall Street or the Fed when he passes out of the Obamasphere next year, in favor of a seasoned financial consigliere more conversant with the management of a currency crisis. It is hard to just throw money at them.


Bonds down after poorly bid 30-year auction
By Burton Frierson

NEW YORK, Dec 10 (Reuters) - U.S. Treasury debt prices fell on Thursday, sending 30-year yields to four-month highs after a poorly bid long-bond auction rekindled worries over the huge federal budget deficit.

The government sold $13 billion of 30-year bonds in an auction that was weak on all measures and suffered from its year-end timing, when many financial market professionals are reluctant to commit funds for such long-term investments.

However, the gaping U.S. budget deficit will outlast the seasonal factors and some analysts worried that the sloppy long bond auction was a sign of tough times to come for a government that has tried to borrow its way out of a credit crisis.

"It was pretty ugly. The old lump of coal in the stocking," Kim Rupert, managing director of global fixed income analysis at Action Economics LLC in San Francisco.

"It is just going to be a difficult year ahead fiscally and with respect to monetary policy and also the markets. I think Today's 30-year auction could just be the harbinger."

The 30-year long bond US30YT=RR fell rapidly after the auction, pushing yields up as far as 4.51 percent, their highest since August.

They were last down 30/32, yielding 4.48 percent versus Wednesday's close of 4.42 percent.

The benchmark 10-year note fell 8/32, yielding 3.47 percent, versus Wednesday's close of 3.44. During the selloff, benchmark yields rose to a four-week high of 3.52 percent.

However, the market recovered from its worst levels as both 4.50 percent 30-year yields and 3.50 percent 10-year rates have been seen as attractive levels by some investors to get into bonds.

The 30-year auction ended this week's three offerings totaling $74 billion. Though that's below the weekly record of $123 billion set in October, it is a lot of debt to sell in a traditionally quiet time of the year....

SP Futures Daily Chart at 3:45 PM

From the "Gold Chart" post earlier today

"P.S. Around 3:20 NY Time some downside hedges went back on (gold 1130ish and SP futs 1105). The stock market is bifurcated between big caps and the broad index. Probably year end shenanigans but it makes me edgy. Probably another little cut and bleed, but it helps me sleep."

It bothers to no end that they cannot get it back up to the top of the range.

That, and the bifurcated market in equities, favoring the big names over the broader markets. Looks like window dressing.

Volumes are high frequency gossamer. The 10 Year Treasury Auction results yesterday were odious. But, it is never this obvious or easy. The downside looks magnetic.

A twist is that gold has been traveling with the SP 500 these days. When that reverts to the 'norm' it is going to be a new ball game.

Worry worry.

Gold Charts

Gold is attempting to make a bottom here, looking to consolidate in the 1100 - 1120 area. The selling was a series of bear raids determined to shake out the new buyers and weak hands from a short term very overbought condition.

The bulls were asking for it, leading with their chins a bit as they say. Newbies tend to buy high, panic early, buy back in abruptly and stupidly, and get taken down again in the normal overbought correction cycle. Its a greed-fear thing.

Now that the easy gains have been made, the bears start running into physical problems, and attempts to push down the price become harder to obtain and less 'sticky.' Dips are met with buying. Its a funny seesaw really, with the price increases overnight when the BRIC's and the Mideast buy, and then decline when Wall Street and the City of London paper hangers move into action.

Remember, anything can happen. It's not over until it is over, and we cannot say it is over yet. Still, the overbought condition has been substantially worked off, if in a rather precipitous manner. If one took the chart's counsel to take profits on December 2, then the portfolio has cash to now buy back some trading positions. Remember we do not touch the long term positions while the bull trend is intact.

We are back up to 1/6 position, having made a small purchase at 1150, another at 1140, both with hedges for more downside, and a larger purchase in the 1120's.

Now we wait, and buy weakness in dips to 1100 while the trend remains intact. There is downside risk to 1070, with the long term trend remaining sound. There really is no need to rush into this. Most markets look like they are rangebound at the moment, and quite possibly into year end. Waiting for a break one way or the other makes compelling sense. No one knows the future.

We have taken the hedges off, at least for now, as holdings in miners are slight. Mining stocks are correlated with both bullion and the SP 500 and should be considered levered positions. What is funny here is that gold bullion and the SP 500 are moving together, which is not the usual relationship. It can be deceptive if it changes.

Unless the markets melt down which is not likely but which is always a possibility, the risk probability is much more favorable now. If you wish to guard against a meltdown, a hedge for a stock decline is easy enough to obtain. Watch your leverage. A change in trend is ALWAYS possible.

And if 'traders' come clumsily piling back into paper gold here, the trading desks will see it and skin them alive, charts or no charts. That is how markets overshoot targets.

A much more deliberate and long term approach to the markets is preferable for those who are not traders. That is about 90% of the people who read these blogs. For them, there should only be four or five trades per year, if that.

We have to look at all markets within the context of the economy in which they operate. As we have stated, our outlook for the real economy is still very gloomy. This is not a cyclical recession we are experiencing. We are in dangerous waters.

It really is going to come down to the willingness of the Fed and Treasury to monetize the next wave of bad debt that comes rolling in from the Commercial Real Estate markets, and fresh rounds of residential foreclosures.

That is what makes the difference between inflation and deflation in a fiat regime of the world's reserve currency: a policy decision, and the willingness or timidity of the rest of the world to challenge the status quo.

The middle ground between Scylla (monetization) and Charybdis (deflation) without a serious systemic reform looks like a nasty stagflation with a few big winners and many smaller players losing big, so that's the target, for now at least.

P.S. Around 3:20 NY Time some downside hedges went back on (gold 1130ish and SP futs 1105). The stock market is bifurcated between big caps and the broad index. Probably year end shenanigans but it makes me edgy. Probably another little cut and bleed, but it helps me sleep.

Gold Daily



Gold Weekly

Treasuries Fall After Weaker Than Expected Results in the Ten Year Auction

Interest rates rose and stocks and commodities faltered a bit on the result of this ten year treasury auction which was weaker than this Bloomberg piece suggests.

Metals declined as a reflexive reaction to 'higher interest rates.' The hit on the metals preceded the release of the results, in yet another bear raid by the Wall Street banks holding undeliverable short positions.

Foreign central banks were noticeably light buyers, much preferring the shorter durations like the three year.

Primary Dealers took a big chunk of the offering. Current trends suggest that Ben will take it off their hands through monetization.

The Fed will be under signficant pressure to buy the bonds as the bias to the short end of the curve creates imbalances that precipitate a funding crisis, and a possible currency crisis, at the Treasury in 2010 if this trend continues. It is unlikely that they will raise rates when monetization is a viable, if not preferred, option.

Geithner looks likely to be replaced in 2010 by a Treasury Secretary who is more 'seasoned' and who will guide the US multinational banking industry through what could be later known as the currency wars, analagous to the trade wars that occurred in the Great Depression. One might even say that they are already underway.


Bloomberg
Treasuries Fall After $21 Billion Auction of 10-Year Notes
By Cordell Eddings and Susanne Walker

Dec. 9 (Bloomberg) -- Treasuries fell after the U.S sold $21 billion of debt maturing in 10 years, the second of three note and bond auctions this week totaling $74 billion.

The notes drew a yield of 3.448 percent, compared with the average forecast of 3.421 percent in a Bloomberg News survey of seven of the Federal Reserve’s 18 primary dealers. The bid-to- cover ratio, which gauges demand by comparing total bids with the amount of securities offered, was 2.62, compared with an average of 2.63 at the past 10 auctions.

“Investors are not sure they want to be holding this many Treasuries going into a year where duration is going to be extending and rates may go higher,” Suvrat Prakash, an interest-rate strategist in New York at BNP Paribas Securities Corp., said before the auction. BNP is one of the primary dealers, which are required to bid at Treasury auctions.

The yield on the current 10-year note rose five basis point to 3.44 percent at 1:02 p.m. in New York, according to BGCantor Market Data.

Indirect bidders, an investor class that includes foreign central banks, bought 34.9 percent of the notes at today’s auction. They purchased 47.3 percent at the November sale. The average for the past 10 auctions is 39.1 percent...

The spread between yields on 2-year and 30-year Treasuries touched 366 basis points as the U.S. prepares to sell $13 billion of bonds tomorrow. The last time the spread was so large was 1992, when the Federal Reserve cut interest rates to bolster growth after a recession...

Many Markets Are In Trading Ranges and Trends That May Hold Into Year End

Markets in the short term in the US are the hunting preserves of the proprietary trading desks of the Wall Street Banks and large hedge funds. No place for amateurs.

This is a major impediment to financial reform and economic recovery because it imposes a heavy tax on the productive economy, and produces a misallocation of capital and malinvestment in unproductive financial instruments and pyramid schemes.

Both the Democrats and Republicans serve their special interests and different monetary masters, and not the public. The news presented by the financial media channels is heavily nuanced propaganda.


SP 500 December Futures

Trading range between 1080 and 1115 with uptrend intact.



Nasdaq 100 December Futures

Trading range between 1760 and 1810 with uptrend intact



US Dollar Index Continuous Contract

Still maintains the patina of a safe haven, although some of this is a natural technical reversal in the carry trade.



Gold February Futures

Correction driven by a series of heavy handed bear raids led by a group of banks that are holding undeliverable short positions.
Profit seeking sellers do not step in to a market and pound it lower with concentrated selling. Open Interest is the 'tell.'

The Banks Must Be Restrained, The Financial System Must Be Reformed

There has been a loss of perspective with regard to the financial sector led by the Anglo-American banking interests.

This will have to change before there can be a sustainable economic recovery. This will be difficult to accomplish, because there exists a fusion of corporate and government desires to control the distribution of wealth and power that is opposed to any significant reforms.

"A certain type of person strives to become a master over all, and to extend his force, his will to power, and to subdue all that resists it. But he encounters the power of others, and comes to an arrangement, a union, with those that are like him: thus they work together to serve the will to power. And the process goes on." Friedrich Nietzsche, The Will to Power

Until then the world will experience a series of asset bubbles and increasing disparity in wealth and political power between the productive and administrative sectors of the economy ad society. This will continue until it becomes unsustainable, and unstable. And then it will change, as it always does.

UK Telegraph
Ex-Fed chief Paul Volcker's 'telling' words on derivatives industry
By Louise Armitstead
9:41PM GMT 08 Dec 2009

The former US Federal Reserve chairman told an audience that included some of the world's most senior financiers that their industry's "single most important" contribution in the last 25 years has been automatic telling machines, which he said had at least proved "useful".

Echoing FSA chairman Lord Turner's comments that banks are "socially useless", Mr Volcker told delegates who had been discussing how to rebuild the financial system to "wake up". He said credit default swaps and collateralised debt obligations had taken the economy "right to the brink of disaster" and added that the economy had grown at "greater rates of speed" during the 1960s without such products.

When one stunned audience member suggested that Mr Volcker did not really mean bond markets and securitisations had contributed "nothing at all", he replied: "You can innovate as much as you like, but do it within a structure that doesn't put the whole economy at risk."

He said he agreed with George Soros, the billionaire investor, who said investment banks must stick to serving clients and "proprietary trading should be pushed out of investment banks and to hedge funds where they belong".

Mr Volcker argued that banks did have a vital role to play as holders of deposits and providers of credit. This importance meant it was correct that they should be "regulated on one side and protected on the other". He said riskier financial activities should be limited to hedge funds to whom society could say: "If you fail, fail. I'm not going to help you. Your stock is gone, creditors are at risk, but no one else is affected."


Times UK
‘Wake up, gentlemen’, world’s top bankers warned by former Fed chairman Volcker
By Patrick Hosking and Suzy Jagger
December 9, 2009

One of the most senior figures in the financial world surprised a conference of high-level bankers yesterday when he criticised them for failing to grasp the magnitude of the financial crisis and belittled their suggested reforms.

Paul Volcker, a former chairman of the US Federal Reserve, berated the bankers for their failure to acknowledge a problem with personal rewards and questioned their claims for financial innovation.

On the subject of pay, he said: “Has there been one financial leader to say this is really excessive? Wake up, gentlemen. Your response, I can only say, has been inadequate.”

As bankers demanded that new regulation should not stifle innovation, a clearly irritated Mr Volcker said that the biggest innovation in the industry over the past 20 years had been the cash machine. He went on to attack the rise of complex products such as credit default swaps (CDS).

“I wish someone would give me one shred of neutral evidence that financial innovation has led to economic growth — one shred of evidence,” said Mr Volcker, who ran the Fed from 1979 to 1987 and is now chairman of President Obama’s Economic Recovery Advisory Board.

He said that financial services in the United States had increased its share of value added from 2 per cent to 6.5 per cent, but he asked: “Is that a reflection of your financial innovation, or just a reflection of what you’re paid?”

Mr Volcker’s broadside punctured a slightly cosy atmosphere among bankers and regulators, assembled in a Sussex country house hotel to consider reform measures, at the Future of Finance Initiative, a conference organised by The Wall Street Journal.

Another chilling contribution came from Sir Deryck Maughan, a partner in Kohlberg Kravis Roberts, the private equity firm, who in the 1990s was head of Salomon Brothers, the investment bank.

He warned delegates that many of the flawed mathematical techniques that underpinned banks’ risk management approaches were still being used, saying that the industry had not “faced up to the intellectual failure of risk management systems, which are still hardwired into many banks and many trading floors”.

Sir Deryck also questioned whether it was right that taxpayers should continue to underwrite many of those risks: “There’s something wrong about large proprietary risks being taken at the risk of taxpayers. The asymmetry will not hold. I’m not sure we’ve thought about that.”

Earlier Baroness Vadera, adviser to the G20 — and an adviser to Gordon Brown during the banking crisis — had warned the world’s most senior bankers that continental lenders had yet to acknowledge the scale of their losses and bad debts. She said: “It’s not the UK banks that have to come clean, but some of the continental banks still have issues.”

She added that, contrary to City assumptions, the supposedly hardline French and German governments were more relaxed about leverage and liquidity constraints than Britain and America.

The former UBS banker said that she continued to have nightmares about how close the British banking system came to collapse last year.

She also warned bankers that the G20 process was “like herding cats” and that one of the main problems with the group of the world’s wealthiest nations was that they did not want to give up national sovereignty and co-ordinate their behaviour.

Meanwhile, George Soros argued that CDS should be banned. The billionaire investor likened the widely traded securities to buying life assurance and then giving someone a licence to shoot the insured person.

“They really are a toxic market,” he said. “Credit default swaps give you a chance to bear-raid bonds. And bear raids certainly can work."