Although there were two good economic data points Monday, the market was slammed.  The Dow closed down -258 points, while the S&P500 closed down -32.19 points or -2.85%.

The first report to be released was the construction spending data.  It was expected to be another negative reading of -0.2% but surprised all with +1.4%.  Bloomberg said the following…Construction made a comeback in August, largely from the public sector although major private components also gained. Construction spending in August rebounded 1.4 percent in August, following a 1.4 percent drop in July. The rise in August came in much higher than the consensus forecast for a 0.2 percent decrease.

The latest month's rebound was led by a 3.1 percent jump in public sector outlays, following a 1.5 percent dip in July. Private residential construction spending made a partial rebound of 0.7 percent, following a 3.2 percent fall the prior month. Private nonresidential outlays edged up 0.2 percent after a 0.3 percent advance the prior month.

The real surprise, however, was the ISM data.  Many were expecting a negative print that would all but guarantee another recession is coming around the corner.  Consensus was 50.5 and a reading under 50.0 is recessionary; however, the data point was 51.6.

Bloomberg reported Employment picked up and production picked up, but orders in the manufacturing sector are flat at the very best, according to September data from the Institute for Supply Management whose composite index came in at 51.6 vs Econoday expectations for 50.5. The employment component rose two full points to 53.8 to indicate a tangible increase in hiring. This is in line with a tangible increase in production which rose more than 2-1/2 points to 51.2.

Now the bad news in the report. New orders are under 50 for a third month in a row, though just barely at 49.6 in a reading that hints at fractional contraction in final demand. Manufacturers, waiting for new orders to pick up, have been chewing through back orders in recent months and continued to do so in September as backlog orders fell 4-1/2 points to a 41.5 level that indicates sizable contraction.

So why did the market tank despite the decent news?  Greece.  Once again the fools in the banking industry and global political houses are realizing they’re closer to a major Greek haircut.

Trade well and follow the trend, not the so-called “experts.”

Trading Tips #7: Five Ways to Stay Focused In Scary Markets

In the fallout from the 2008 global financial crisis, there have been moments that have been driven by pure fear. These are the moments when it can be hard to maintain your composure and trade your plan. Unfortunately, these big days are the times when you need that composure the most. Here is a quick lesson in why it is important to keep focused in a scary market and how to achieve that focus.

Market Basics

First let us understand some market basics. Markets exist to facilitate trade. From moment to moment the market offers traders the opportunity to profit from price movement. It's an environment where every trader has the freedom to create his own results, i.e. all the choices and the power to exercise those choices reside with the trader.

'Scary' implies fear, anxiety, or insecurity.

In his book, The Disciplined Trader, Mark Douglas addresses these issues in a no-nonsense, no holds barred way.

Let me give you an example of his views on this subject:

"It was only the lack of trust I had in myself to do what was needed to be done that I was really afraid of."
"The market is never wrong in what it does; it just is."
"The market cannot take anything away from you that you don't allow."
"In the trading environment the outcome of your decisions is immediate, and you are powerless to change anything except your mind. You have to learn to flow with the markets; you are either in harmony with them or you are not."

It becomes self evident that your trading success will be dependent on your ability to correctly perceive opportunity, to execute a trade arising from that perception and your ability to allow your profits to accumulate.

Are You Consumed by Fear?

Markets are inherently scary. If you are a trader consumed by fear, then the market will always be scary, and the only variable is how scary it is at any given time. When consumed by fear a trader is doomed to failure. Fear will twist your perceptions and blind you to the opportunities available. Fear will almost always drive us to make the wrong action, and it will without question make us totally incapable of accumulating profits that might be made. Even for disciplined and proven successful traders, the markets can be scary. Objectively scary markets can be quantified by the Volatility index, the VIX - the ticker symbol for the Chicago Board Options Exchange (CBOE) Volatility Index. It is constructed using the implied volatilities of a wide range of S&P 500 index options. This volatility is meant to be forward looking and is calculated from both calls and puts. The VIX is a widely used measure of market risk and is often referred to as the "investor fear gauge." Levels below twenty are associated with market complacency and over thirty with increasing market anxiety. Extremes are often excellent contrarian indicators.
 
Trading should be considered a business, and your rules should reflect good business practices. These would include adequate capitalization. Conservation of capital is your primary job. If you are under-capitalized, you are half way to the losers stall before you even start.

Over-Trading & You

Do not over-trade. This too will drain your energy, your attention to detail, your perception of price changes and the efficiency of your trade execution. Over-trading will inevitably drain your capital from your account to the guy on the other side of your trades, who you can be sure does not have his/her perceptions blunted. If you have this as your guiding star, chances are you will eventually succeed in this business. Preserving capital is closely associated with risk management, and I will address this in the five things you can do when there is evidence of market anxiety.

5 Rules to Trade By

1) Stick to a Trading System that has proved itself over time to be profitable despite losing trades. No system is 100% correct. It only needs to be correct 50% of the time if profits are substantially greater than losses.
2) Never Anticipate Your System. Let your system fully play out so that its various criteria are fulfilled before entering your trade. When in doubt keep out or if already in a trade, get out!
3) Always Use Stops; NEVER trade without them. Make it your practice to enter your stop loss trade before you enter your trade.
4) Never Let a Winning Trade Become a Losing Trade; use a trailing stop once your trade is showing a profit. Once a trade is showing a two-point profit, consider bringing in your stop to the entry price. Should the market unexpectedly reverse, it would be a scratch trade. After that, trail your stop two points for every two points prices move in your favor.
5) Trade with the Trend. Do not attempt to pick tops and bottoms to trade against the trend. Following these principles and spending the time necessary to create the psychological stability necessary to succeed is the most difficult part of this profession. Your goal should be to have the self knowledge and confidence that you unquestionably believe in your trades. Identify with Mark Douglas' dictum, "markets can't do anything to any trader who completely trusts himself to act appropriately, in his best interests, under all market conditions."

 
 

The market exploded Monday on the nationalization news of Dexia, no additional sovereign downgrades (but that hasn’t mattered recently anyway), and an announcement by Merkel & Sorkozy that they have, in essence, a “plan” to “create a plan” in the near future.  When asked about the details, Sarkozy said “It’s too early for details…” 
 
And with the absence of anything concrete, but lots of Hopium to go around, the stock indices blasted higher with the Dow closing up over 300 points.  To be clear: there is NO PLAN to do anything, but they plan on having a plan “real soon, we promise (this time).”  Moreover, there are NO DETAILS OF WHAT THEY WILL EVEN DISCUSS!  Explode indeed; after all, the banking mafia won’t have to clean up Dexia or anything touching Dexia as well as Greece, Ireland, Portugal, Spain, and Italy. Oh no!  That’s for the saps that pay taxes. 
 
So on and on it goes…where it stops nobody knows.  But wait a second here; could it actually stop with Slovakia?  All of the countries in the Euro need to ratify the “bailout the banking mafia (EFSF) fund” and the only two that haven’t ratified it yet are Slovakia and Malta.  Who wants to bet, despite it written into the treaties that ALL countries must ratify something this major that “this time” the details of the treaty just won’t matter.  In the end, can the happiness and bonuses of the banking mafia be held up by Malta and Slovakia?  “Meh, just ignore them and the rules” will be uttered by Sarkozy & Merkel.
 
In der Spiegel we read about the possible cog in the wheel: Slovakia.  The full article can be read here http://www.spiegel.de/int...pe/0,1518,790577,00.html
 
Richard Sulik, 43, is an economist specializing in tax policy, the speaker of the Slovak parliament and head of the Freedom and Solidarity (SaS) party, a minor party in the country's four-party coalition government. He lived and studied in Germany for over 10 years before returning to his homeland in 1991.

Sulik has been a vociferous critic of aid packages to Greece and of the expansion of the euro backstop fund, the European Financial Stability Facility (EFSF). As an adviser to the Slovak minister of finance, Sulik played a decisive role in the introduction of a 19 percent "flat tax" on incomes, which led investors to flock to the country.
 
SPIEGEL ONLINE: Mr. Sulik, do you want to go down in European Union history as the man who destroyed the euro?
 
Richard Sulik : No. Where did you get that idea?
 
SPIEGEL ONLINE: Slovakia has yet to approve the expansion of the euro backstop fund, the European Financial Stability Facility (EFSF), because your Freedom and Solidarity (SaS) party is blocking the reform. If a majority of Slovak parliamentarians don't support the EFSF expansion, it could ultimately mean the end of the common currency.
 
Sulik: The opposite is actually the case. The greatest threat to the euro is the bailout fund itself.
 
SPIEGEL ONLINE: How so?
 
Sulik: It's an attempt to use fresh debt to solve the debt crisis. That will never work.
 
SPIEGEL ONLINE: Slovakia's parliament is scheduled to vote on the bailout fund expansion on Oct. 11. How do you predict the vote will turn out?
 
Sulik: It's still open. The ruling coalition is composed of four parties. My party will vote "no"; the other three coalition parties intend to say "yes." What the opposition says is decisive.
 
SPIEGEL ONLINE: What will you do should the EFSF reform pass despite your opposition?
 
Sulik: For Slovakia, it would be best not to join the bailout fund. Our membership in the euro zone, after all, was not conditional on us becoming members of strange associations like the EFSF, which damage the currency.
 
SPIEGEL ONLINE: If the euro only causes problems, why doesn't Slovakia's government just pull the country out of the euro zone?
 
Sulik: I don't see the euro as the problem. It's a good project. Everyone involved can benefit from it -- but only if they stick to the ground rules. And that's exactly what we're demanding.
 
SPIEGEL ONLINE: Which ground rules should we be following?
 
Sulik: We have to observe three points: First, we have to strictly adhere to the existing rules, such as not being liable for others' debts, just as it's spelled out in Article 125 of the Lisbon Treaty. Second, we have to let Greece go bankrupt and have the banks involved in the debt-restructuring. The creditors will have to relinquish 50 to perhaps 70 percent of their claims. So far, the agreements on that have been a joke. Third, we have to be adamant about cost-cutting and manage budgets in a responsible way.
 
SPIEGEL ONLINE: Many experts fear that a conflagration would break out across Europe should Greece go bankrupt and that the crisis will spill over into other countries, including Portugal, Spain and Italy.
 
Sulik: Politicians can't allow themselves to be pressured by the financial markets. Just because equity prices fall and the euro loses value against the dollar is no reason for giving in to panic.
 
SPIEGEL ONLINE: But do you really believe that politicians can calm the financial markets by stubbornly sticking to their principles?
 
Sulik: Let's just ignore the markets. It's ridiculous how politicians orient themselves based on whether stock prices rise or fall a few percentage points.
 
Excuse me, but is Mr. Sulik suggesting that politicians do what’s right and not what’s politically expedient?  Where the heck is the political equivalent in the USA to this man?  One can dream.
 
Surely the EFSF will pass.  The banking mafia and political class will get its way in the end.
 
Greek 1-YR bonds now yield 150%!?  No problems there – Just move along.

Trade well and follow the trend, not the so-called “experts.”


Larry Levin
Founder & President- Trading Advantage

MF Global

As you know, MF Global has gone bust thanks to outrageous bets on worthless sovereign debt.  But as you will read, it wasn’t the sovereign debt alone but how MF Global treated these bets via accounting shenanigans.  Accounting gimmicks…it is so often accounting gimmicks.

The following is a great article, by way of ZeroHedge, of the accounting scams pulled by so many on Fraud Street but most recently by MF Global.

Submitted by Jeff Snider, President & CIO of Atlantic Capital Management

MF Global Shines A Light On Monetarism's Incapacity To Enhance The Real Economy

The temptation to compare any financial institution’s failure to those that preceded the 2008 crisis and panic are reasonable.  It is easy to classify MF Global as 2011’s “Lehman” event, just as it was to use the same term to describe Dexia a few weeks ago.  The use of the term “this year’s Lehman” is somewhat misplaced simply because its users are looking for an event that kicks off another crisis or panic.  Instead of using “Lehman” to describe a potential inflection point that propels the crisis into panic, it might be better to see MF Global as AIG.

The comparison to AIG is not to say that MF Global was as interconnected, that its failure will be as devastating, or that it is the straw that breaks the European camel’s back.  The urge to see the past in the present is historically valid, but it will never be exactly alike (Mark Twain had this right).  Rather I think the comparison is useful in that AIG taught the wider world what was really rotten at the core of modern finance, namely hidden risks that were shockingly existential.  MF Global’s failure importantly shows that none of the lessons have been heeded in the days since, providing a somewhat unique window into the real dangers that still lurk hidden in the shadows.  More than that, though, MF Global demonstrates an obvious shortcoming of the financial system as it relates to the real economy.

ZeroHedge posted the bankruptcy affidavit of MF Global’s President and Chief Operating Officer Bradley I. Abelow, drawing attention to Section E, item 33 on page 13.  Mr. Abelow makes the following statement under oath:

“On September 1, 2011, MF Holdings announced that FINRA informed it that its regulated U.S. operating subsidiary, MFGI, was required to modify its capital treatment of certain repurchase transactions to maturity collateralized with European sovereign debt and thus increase its required net capital pursuant to SEC Rule 15c3-1.” [emphasis added]

The transaction in question was a “repo-to-maturity” financing deal, collateralized with the troubled sovereign European debt that everyone has been talking about in the past few days.  What is particularly striking about this is that a “repo-to-maturity” deal is accounted for as a sale, meaning that what is essentially an ongoing collateralized loan is, surprise, hidden off the balance sheet.  Maddeningly, MF Global likely booked a profit up front at the transaction’s consummation using obviously faulty mathematical expressions of those “reasonable” expectations of profit, thus avoiding the need to post any liability to the balance sheet.

This makes a lot of sense, then, in why FINRA “demanded” it change its capital treatment of the transaction.  Though it was “properly” accounted for according to convention, the risks of collateralizing a loan with questionable debt means that MF Global has ongoing liquidity risk attached to it.  As the value of the European debt collateral is questioned, or falls, the lender/cash owner counterparty will ask for additional collateral posting as it applies a stricter haircut to that original, troubled collateral.  So, even though this transaction has fully cleared MF Global’s books, the company is still on the hook should it be required to post additional collateral or cash (which ended up with the company in bankruptcy, just like AIG).

The stink here is that this is not an isolated case of cheating (aside from MF Global’s use of client funds).  It is a pervasive shadow element to the modern financial system, fully allowed by accounting conventions and regulators.  Just like AIG, MF Global was not brought down by bad debt per se, it was brought down by the hidden liquidity risk of the deterioration of off balance sheet arrangements that were allowed by accounting standards.  The fact that it was classified as a sale was completely inappropriate in terms of describing the overall liquidity risk of the company, as FINRA belatedly recognized.

MF Global was expressing a bet that it could earn a spread, essentially risk free, on the rate it paid on the repo transaction (the lowest borrowing rate around) and the interest it received on the Euro sovereigns (among the highest rates of the sovereign class), all the while counting on the European politicians and the ECB to provide enough “support” to maintain a relatively constant debt price in order to fool the marketplace into complacency about real risks.  So the risk hidden but embedded within the transaction appears long before there is a default, hitting the company once the repo counterparty devalues the collateral (the market was apparently not fooled enough by the ECB’s attempts at price stability).  This is the essential financial misrepresentation of the age.  Repo accounting is responsible for so much hidden risk, yet it has become central to the ongoing survival of the system as it is currently constituted.

The pliability of how the system is allowed to “book” and account for risk is certainly the driving force making repos so vital to modern banking.  For instance, a gold or silver lease arrangement is essentially the same as a repo-to-maturity transaction, yet it is accounted for in exactly the opposite way.  A gold lease is really a sale transaction since the physical metal is literally removed from the custody of the gold owner, yet it is accounted for as a collateralized loan where the gold remains on the owner’s books as if it is really there (since it technically involves a repurchase agreement on the back end, even though these deals are simply rolled over in perpetuity and the repurchase never takes place, nor is it intended to).  Both gold leasing and the repo-to-maturity transaction are forms of collateralized loans, yet they receive far different treatment so that they accomplish exactly what the banks want to accomplish, which is disguising the real nature of each transaction.  The gold lease presents risks in that metal may not be where everyone thinks it is, and the sale treatment of the repo-to-maturity removes haircut and liquidity risks from what are supposed to be transparent statements of condition.

That is why this system has to change at some point.  It is exactly designed to be misleading, and the reason is so very simple.  In any fractional system there will be a desire to amplify that fraction to the maximum degree.  But in doing so, participants recognize that the process of maximization entails creating negative human emotions and perceptions since history is not really that kind to this manner of fractionalization.  So the system has institutionalized, abetted by the very regulators that are supposed to cap fractions and leverage, these methodologies of hiding just how much financial entities have engaged in maximizing themselves under the cover of mathematical precision.  Trillions in derivatives are no problem because there are powerful and elegant equations to net and hedge them.

Without any sort of exogenous anchor to credit production and banking, risks are theoretically nearly infinite (since the slightest disruption to expected haircuts renders firms utterly bankrupt!), while at the same time there are multiple avenues for misdirection and disguising those realities.  The Panic of 2008 was supposed to correct these excesses and remedy the fact that risks have not been accurately priced for decades.  Yet the system has resisted every effort, simply settling for redefining the appearance of safety yet again.  Somewhere in that mathematical pursuit of maximum fractions, the very goal of finance changed, as if traditional banking was no longer sufficient to support the pursuit’s ever-growing ambitions.  So the financial economy has broken away from the real economy, using the ironic cover story of enhancing price discovery to the process of intermediation – complexity is good!

Intermediation is supposed to be about matching the wider (real) pool of savings to worthwhile economic projects that have a real, productive impact on the real economy.  MF Global’s repo-to-maturity transaction cannot be fairly classified as real intermediation since the firm knowingly advanced credit to an economically unfeasible obligor with the expectation that the price would never reflect that reality (how’s that for enhancing price discovery).  This crystallizes, I believe, just how far the financial system has moved away from real intermediation and reflects the biggest part of the real problems in the real economy – money is no longer productive in economic terms and has not been for decades.

The Occupy Wall Street crowd sees this as a problem with capitalism.  I believe that they are correct in their target, but wrong in their diagnosis.  This is not a problem of capitalism since Wall Street is a practitioner of monetarism.  A real capitalist system works through real intermediation creating positive opportunities for productive enterprises (scarce money is actually vital here).  Our current system of repo-to-maturity and gold leasing is nothing but empty monetarism’s habit of regularly forcing the circulation of empty paper.  And when the system begins to doubt itself, as it did in 2008, the answer is always about finding a way to restart the fractional maximization process yet again, which means disguising the real risks inherent to that process.  There is no real mystery as to why prices and values have seen such a divergence, and why that is a big problem to a system that depends on appearances.

The fact that money is disconnected from the real economy never enters the consciousness of monetarists since money is always the answer.  But make no mistake; the primary reasons for this global malaise are that money has lost its productive capacity and its proper place as a tool within the system, not as the ultimate object of that system.  MF Global’s failure is an apt demonstration of just how far modern finance has strayed, just as AIG was three years ago.

Trade well and follow the trend, not the so-called “experts.”

Best Trade To You,

Larry Levin

Founder & President of Trading AdvantageTM

Yields Soar

Before US equities opened Tuesday, markets were roiled by soaring bond yields in Italy, Ireland, Spain, France, and Belgium. What’s this? I thought Ireland was fixed? I thought Spain was no problemo? And France; doesn’t it have an AAA rating? Belgium? Seriously; the contagion is spreading to Belgium now?

Mike Shedlock gives us a quick rundown here:

http://globaleconomicanalysis.blogspot.com/2011/11/sovereign-debt-yields-and-spreads-soar.html

The ECB, IMF, EMU, and EU are on the verge of multiple emergency meeting, if indeed meetings are not already underway. A quick check of the following bond spread tables and today’s yield action will explain.

Across the board, yields and spreads widened significantly today. Note in particular the jump in the 2-year bond yield of Belgium. Also note the inverted spread situation for Belgium.

The spread to German 2-year bonds is 3.49 while the spread to 10-year bonds is 3.13.

Belgium has been off nearly everyone’s radar, but not for long. The EFSF is underfunded for Spain and Portugal alone. It’s now time to add Belgium to the major problem list.

On second thought, the major problem list now includes every country but Germany.

Trade well and follow the trend, not the so-called “experts.”

Behold the age of infinite moral hazard! On April 2nd, 2009 CONgress forced FASB to suspend rule 157 in favor of deceitful accounting for the TBTF banksters.

Trade well and follow the trend, not the so-called “experts.”

Larry Levin

President & Founder

Dysfunctional

Yesterday I said “The reason why I am mentioning this again is that I believe it will become a bigger story this coming week.  Oh sure, the European insolvency drama will continue and could still be a market mover, but I think the media will focus a little more on the ‘group of idiots.’  Pardon, I meant ‘supercommittee’ and its lack of agreement.”
 
It became a big story this morning when investors sold off stocks in anticipation of a further debt downgrade from one of the other ratings agencies.  The Dow was down almost -350 points at its low.  For those you who said S&P was crazy to downgrade the USSA because of its non-stop profligate spending and a dysfunctional Congress (yeah, we’re looking at you “old-codger-of-Omaha”) the staff of Standard & Poor’s would like to say something: WE TOLD YOU SO!
 
By my count this is four attempts to slash a few bucks from the TRILLIONS the government spends every year.  Let’s see what we have here…

1. Remember the Bowles and Simpson commission?  The National Commission of Fiscal Responsibility and Reform recommended cutting $4 trillion dollars over 10-years.  Result?  IGNORED.
2. Pete Domenici and Alice Rivlin recommended $6 trillion in cuts in their Debt Reduction Task Force.  They were IGNORED.  
3. Apparently these numbers were too large for our dysfunctional Congress so the next attempt by “The Gang of Six” at that point recommended the lowest cut of $3.5 trillion and was…IGNORED.
4. S&P cut the debt rating of the USSA.
5. And now the “stupidcommittee” pardon, “supercommittee” can’t even cut $1.5 billion over 10-years.  DYSFUNTIONAL, indeed.

But don’t worry, “this time” the so-called cuts will happen anyway.  There are automatic cuts built in, just in case the so-called supercommittee failed to meet the deadline, which it did.  So the cuts are guaranteed…yeeaaaaah, sure they are.

Would you like to know just how dysfunctional Congress really is?  It was reported today that Senator John McCain and Congresswoman Maxine Waters are both working on ways to STOP the automatic cuts.
 
Dys-#!@&*$-functional, indeed!

Trade well and follow the trend, not the so-called “experts.”

_________________

Larry Levin
President & Founder

Trading Tip #8: Avoiding Mental Sabotage

Trading Tip #13: How to Pick Intraday Market Direction – the 80% Rule

Let me introduce you to one simple technique I've used to pick intraday market direction with 80% accuracy.

Would you like to know if a particular trade has an 80% probability of working? Would you like to know exactly where to enter that trade, and where to exit? Would you like to trade this technique with a 2 point stop loss or less?

It Doesn't Matter if the Market is Going Up or Down, This Simple-to-Learn Method Has a Historical Accuracy of 80 Percent!

Using just two key numbers each day, floor traders and other professionals can try to pick the direction, entry price, stop loss and target price of a particular trade. It doesn't matter if the market is going up or down - this simple to learn method has a historical accuracy of 80%. In fact it's called the 80% Rule.

Each morning you will know what those two key numbers are. Then, if the set up is correct, simply enter the trade, set your stops, set your target price and sit back with a trade that has an 80% expectancy of hitting the target. What could be easier?

Here are the basics for the 80% Rule:

The Value Area (Secret Tip #12): The range of prices where 70% of yesterday's volume took place. For instance, if the value area in the S&Ps is 115800-117200, then 70% of the previous day's volume took place between the prices of 115800-117200.
The 80% Rule: When the market opens above or below the value area, and then gets in the value area for two consecutive half-hour periods. The market then has an 80% chance of filling the value area.



The value area and the 80% rule can be excellent tools for judging potential market direction. Many traders familiar with the value area and the techniques that go along with it use it to help them decide what trades to do each day.

A couple of key points to remember:

If the market opens above the value area, try to enter a short position as close as possible to the top of the value area.
Conversely, if the market opens below the value area, aim to enter any long position as close as possible to the bottom of the value area.

Once you get used to it, you will find that using the value area each day will be valuable in your trading. (Pun intended!)

The 80% rule is a simple way to ride the market as it potentially fills the value area. However, there is an exception to be alert for. If the market opens inside the value area and then migrates above or below it, the 80% rule can still come into play. Watch for it to get back into the value area for those important two consecutive brackets or 30-minute bars.

Best Trades to you,

Larry Levin
Founder & President- Trading Advantage

Trading Tip #10 : How to Determine Where the Real Support and Resistance are Everyday

Not According to Plan

The market fell again Tuesday and although three down days in four is nothing for central banksters to truly worry about (and there is plenty of lower support in the S&P) – it nevertheless is not going according to plan.  The Fed’s QE1 plan did work – it saved the markets from total annihilation.  However QE2, QE Lite, ZIRP, the Twist, secret loans, unlimited swap lines, etc has done little if anything.  Moreover, the market is right back to where it was when the Fed announced its latest bid-rigging scheme with multiple other central banking mafia heads in tow.  
 
So I’d say that overall it simply isn’t going as they had planned and Bill Bonner of the Daily Reckoning agrees in a recent article.  

http://dailyreckoning.com...snt-stick-to-the-script/
 
12/13/11 Baltimore, Maryland – Darkness without a dawn…
 
The Dow down 167 yesterday. Gold down $48. Nothing to get excited about.
 
The excitement is still ahead. When the Dow cuts through the 10,000 mark and heads to 6,000. Stay tuned…
 
In the meantime, yesterday’s Financial Times told us that the industrialized nations will borrow $10 trillion this year. Next year, the figure should be higher.
 
Where does all that money come from? It’s more than the world’s total savings. Not that we know exactly, but total world GDP is about $50 to $60 trillion. Savings should be about 10% of that — or only about $5 to $6 trillion.
 
So how are the developed nations able to borrow so much?
 
With so much debt turning over, it makes the world financial system extremely vulnerable to inflation…or just a change of sentiment in the bond market. Which makes us wonder. What would happen if the lenders balk?
 
We are, as all Dear Readers know, in a Great Correction. And in a great correction asset prices fall…along with a general fall-off in employment, consumer spending, investment, GDP growth and all the other things that make a robust economy. Demand drops…which typically causes prices to fall (or at least not to rise as quickly as before). There is less demand for credit as for everything else. So, the pool of available bonds falls…forcing up bond prices and forcing down bond yields.
 
Got that?
 
Well, don’t worry if you don’t. Because there’s at least a 50/50 chance it won’t happen that way.
 
So far, the Great Correction has followed the usual script. Bond yields have fallen. Price inflation has generally come down. But demand for credit — as evidenced by the aforementioned $10 trillion government financing costs — is running hot. ‘Typically’ may not matter. Because this is no typical downturn. And it wouldn’t be too surprising if all this demand for credit pushed up bond yields.
 
Wouldn’t that be a drag?
 
And here we find ourselves with a grim, but philosophically amusing, insight. Typically, every cloud has a silver lining. Every glass that is half empty is also half full. And dawn follows even the darkest night. That’s just the way the world works. But what if the cloud has no lining, neither of silver nor of anything else that reflects light? And what if the glass is completely empty?
 
In the normal economic world, low interest rates are the half-full part of the correction glass. A correction comes. Asset prices go down…along with all the other things mentioned above. But interest rates go down too…which make it easier for new projects to clear the “hurdle rate.” At 6% interest, for example, a new project has to return at least 6% to breakeven. Any new investment that won’t produce more than a 6% minimum gain is quickly abandoned. But as the correction drives down yields, to say 3%, all of a sudden a lot more investments begin to make sense. Dawn comes.
 
Lower inflation rates…and lower asset prices…help too. As prices fall, shrewd investor and careful businessmen can put their money to work again. Employees are re-hired. Household earnings recover.
Soon, the downturn is over.
 
Both booms and busts are, normally, self-correcting.
 
But leave it to the feds to stop the sunrise. This huge demand for credit from the industrialized governments could drive up interest rates. Imagine what that will do. Already in a slump, households, businesses and investors could find their borrowing costs going up, not down. They could find prices rising, too, especially the prices of energy and food. What a world…a major slump, but with rising prices and rising interest rates!
 
And then, consider what happens next. The feds will err again. They will feel obliged to finance government borrowing themselves. Here’s the Bank of International Settlements, giving us the heads up:
The Bank for International Settlements Sunday issued an oblique endorsement of coordinated action by the world’s largest central banks to ease funding conditions for banks. “A freezing of interbank markets in major funding currencies, as during the recent crisis, may require the ability to supply official liquidity in major currencies in an elastic manner,” the BIS wrote in its regular quarterly report.” — MarketWatch
 
It was only a week ago that 6 major central banks announced a coordinated rate cut — expected to juice up the markets. And now all major central banks seem ready and willing to sacrifice the integrity of their currencies in order to protect their bond speculators.
 
This is what we expected all along. But we didn’t expect it so soon. It causes us to revisit our “long, dark road to Tokyo” forecast. You remember our prediction: the US has already followed Japan through one “lost decade.” We figured it would lose another one as the Great Correction drags on.
 
But things could happen faster…and worser. Japan financed its own deficits with its own money. Now, everybody is running deficits. And the amounts to be refinanced are staggering. Bond buyers may balk…or simply be unable to swallow so much debt.
 
Which will cause the central banks to come into the picture — with coordinated money-printing. Instead of going down, bond yields and consumer prices could go up.
 
Think things are bad now? Wait until the economy has to deal with a Great Correction and inflation.

Trade well and follow the trend, not the so-called “experts.”

Larry Levin
Founder & President- Trading Advantage

Lawsuits

Friday’s early trade was higher on general optimism. The early rally ran into resistance and started its normal sideways (lack of) trend.  Shortly into this sideways zone the news hit: lawsuits.

On the face of it you wouldn’t expect the news to drive down equities, but this is the only thing of importance that hit the tape.  Perhaps the market is worried that the government subpoenas will spread.  Are Citibank, JPM, and Goldman execs next on the list.  Maybe when hell freezes over, but we can hope.  

From the lawsuit:

This action arises out of a series of materially false and misleading public disclosures by the Federal National Mortgage Association ("Fannie Mae" or the "Company") and certain of its former senior executives concerning the Company's exposure to subprime mortgage and reduced documentation Alt-A loans. Eager to promote the impression that Fannie Mae had limited exposure to- subprime and Alt-A loans during a period of heightened investor interest in the credit risks associated with these loans, Fannie Mae and its executives misled investors into believing that the Company had far less exposure to these riskier mortgages than in fact existed.

Between December 6, 2006, and August 8, 2008, (the "Relevant Period"), Daniel H. Mudd ("Mudd"), Enrico Dallavecchia ("Dallavecchia") and Thomas A. Lund ("Lund") (collectively, "Defendants"), made or substantially assisted others in making materially false and misleading statements regarding Fannie Mae's exposure to subprime and Alt-A loans.

For example, in a February 2007 public filing, Fannie Mae described subprime loans as loans "made to borrowers with weaker credit histories" and reported that 0.2%, or approximately $4.8 billion, of its Single Family credit book of business as of December 31, 2006, consisted of subprime mortgage loans or structured Fannie Mae Mortgage Backed Securities ("MBS") backed by subprime mortgage loans.

Fannie Mae did not disclose to investors that in calculating the Company's reported exposure to subprime loans, Fannie Mae did not include loan products specifically targeted by the Company towards borrowers with weaker credit histories, including Expanded Approval ("EA") loans. As of December 31, 2006, the amount of EA loans owned or securitized in the Company's single-family credit business was approximately $43.3 billion, yet none of these loans were included in the Company's disclosed subprime exposure.

…The result of these disclosures was to mislead investors into materially underestimating Fannie Mae's exposure to reduced documentation loans. Fannie Mae made similarly misleading disclosures concerning its exposure to reduced documentation loans in public filings throughout the Relevant Period.

By engaging in the misconduct described herein, Mudd violated and aided and abetted the violation of the antifraud and reporting provisions of the federal securities laws; Dallavecchia violated the antifraud provisions and aided and abetted the violation of the antifraud and reporting provisions of the federal securities laws; and Lund aided and abetted violations of the antifraud and reporting provisions of the federal securities laws. The Commission seeks injunctive relief, disgorgement of profits, prejudgment interest, civil penalties and other appropriate and necessary equitable relief from both defendants.

This news seemed to send the market lower, which then led to yet another maddeningly narrow chop channel.  For more than four hours, the ES traded in roughly a 5.00-point range.

Trade well and follow the trend, not the so-called “experts.”

Larry Levin

Founder & President- Trading Advantage

Larry Levin's Trading Advantage is a leading investment education firm that empowers traders to achieve and surpass their financial goals. More than 50,000 students have used Larry Levin's proven techniques for powerful results.

Euro

Today’s early signs of life in the market were arguably due to the large drop in the Euro.  And by “early signs of life” I mean the drop of US equities at the open.  We don’t care which way it moves, just as long as “something” is happening.  Sadly, when the Euro slowed its trading pace, which usually occurs @ 1-1:30pm CT, the mini-S&P slowed as well.  In fact, the S&P traded in about a 5-pt range from mid-morning into the close.
 
Some folks were perplexed: “Why is the Euro falling?  Wasn’t the Italian auction excellent?”  Yes it was; however, it was only an auction for 6-month Bills.  Heck, I’ll bet even Greece, California, and Illinois can auction off 6-month Bills.  Nevertheless, the yield demanded by investors was 50% lower than the Nov. 25th auction.
 
What probably worried the markets were the recent actions of European banks and Thursday’s next Italian auction.
 
This morning’s news from the European Central Bank shows us that (ECB) overnight deposits swelled to a record high of €455 billion.  Why would banks park their money at the ECB and get 0.25% when it costs 1%?  Isn’t that a guaranteed loss?  Doesn’t this imply rather forcefully that the banksters know there is another shoe ready to drop?  It sure seems like it, and that’s why I believe the Euro fell apart today.
 
So what could be that other “shoe to drop?”  Well, if there is one, it suggests that the bankers know they will not be buying the Italian junk…pardon, debt…and therefore the trading desks slammed the Euro and bought “safety” in the US dollar.
 
Perhaps they know something else entirely?  Is a major downgrade of sovereign debt coming to a EuroZone country and that caused the move in the Euro/Dollar?  Thursday could be interesting.


Larry Levin
Founder & President - Trading Advantage

ISM and Debt

I had high hopes for Monday’s trade when I said “Are enough traders home from their holidays to make for good trading Monday?  That’s a close call in my opinion; however, there just may be enough scheduled economic data releases, including the Fed, to make our first day of 2012 a good one.”

Sadly, it was not a good trading day; volume was still low; volatility was non-existent; and news was plentiful but the entire intra-day range was less than 10-points.  100% of the day’s gains were put in at the open – it was all done on Globex.

The ISM manufacturing report in the morning was good, but not good enough to extend the huge gains of the pre-open session.  Consensus for this report was for a reading of 53.2, but the actual number was 53.9.  A reading above 50.0 indicates an expanding manufacturing sector.

Some analysts had expected this good reading because it was the report that covered the end of the year.  And what’s important about that are the many expiring corporate tax incentives and credits of 2011 that businesses made sure they received by bringing production forward.  Here are a few; Credit for Construction of New Energy Efficient Homes, New Markets Tax Credit, 15 Year Straight Line Depreciation, 100% Bonus Depreciation, and many more. They have now expired.

In other news, the USSA is now officially a banana republic.  As of today, the US Treasury admits that it owes more than 100% of the USSA’s GDP in debt.  To be specific, our admitted-to debt to GDP ratio is now 100.3%...not including the $100+ trillion in unfunded liabilities that the government refuses to count, yet refuses to cut.

Trade well and follow the trend, not the so-called “experts.”

Larry Levin

Founder & President- Trading Advantage

The Market is Dead

The market is dead.  Continuing with last week’s theme – there was no volume, no volatility, and no “action” of any kind.  If the market isn’t dead, it sure is in a very deep slumber.  The range has been so tight for so long that when it does wake up, or come back to life, it should do so with a bang. 

Speaking of today’s lack of action, Reuters said the following… NEW YORK (Reuters) - Stocks ended slightly higher on Monday in a light-volume session as investors stayed cautious ahead of corporate earnings and key auctions for European debt this week.

After breaking out of the gate with strong gains on the first day of trading in January, stocks have been confined to a tight range in daily moves and volume has been low. The S&P 500 faces strong technical resistance as it has been unable to pierce through 1,285, the closing high set in late October.

Months of summits and meetings have still not convinced investors that Europe will avoid messy defaults or a break-up of the euro zone.

"That is what the market wants to get a look at - what is it that these multinationals are seeing in the global environment that gives them pause, or is the tone going to be a little better than expected," said Peter Kenny, managing director at Knight Capital in Jersey City, New Jersey.

Debt sales by Spain and Italy later in the week should provide insight about investors' confidence in plans to solve the euro zone financial crisis.

"There is this sense that we really need to see something that is going to convince us that this EU challenge ... is a headwind that can be managed," Kenny said.

After meeting in Berlin, German Chancellor Angela Merkel and French President Nicolas Sarkozy warned Greece it will get no more bailout funds until it agrees with creditor banks on a bond swap and a deal to avert a potential default.

Perhaps the market will find whatever it is looking for that will provide a spark to the market on Tuesday?

Trade well and follow the trend, not the so-called “experts.”

Larry Levin

Founder & President- Trading Advantage

Europe Downgraded

Last Friday the European continent was (essentially) completely downgraded.  Standard & Poor’s slammed the region with NINE downgrades – some one notch and others two notches.  
S&P cut the ratings of Italy, Spain, Cyprus, and Portugal by two notches while the ratings of France, Austria, Malta, Slovakia and Slovenia were each cut by one notch.  In its statement S&P said the following “Today's rating actions are primarily driven by our assessment that the policy initiatives that have been taken by European policymakers in recent weeks may be insufficient to fully address ongoing systemic stresses in the eurozone.”
 
Since the market is rigged by policymakers and central bankers, the market rallied on the news.  We heard the normal excuse of “it’s priced in” and “it wasn’t a surprise” all day.  It surely wasn’t a surprise because S&P warned of this move about six weeks ago; but was it really priced in? 
 
When the market first learned of the potential mass downgrades, it was trading at 1255.00.  If the damaging downgrades were indeed “priced in,” wouldn’t that have led to an overall market decline from which a reasonable excuse would have been “it is too low now and we saw this coming; it wasn’t as bad as expected; and it’s priced in?”  Clearly nothing was priced in because Friday’s market was already trading 30-points higher before the news even hit the tape.
 
When an individual stock is expected to lose money in a quarter it often declines in share price; however, when the news is released that it wasn’t worse than some may have feared, the price often rallies.  But in this scenario, it is rallying from a much lower starting point; so to say that the “bad news was priced in” is true.  In our recent real life example above – it is a farce to claim such a thing.
 
It sure was “lucky” that the market was all a flutter with near guarantees of QE3 coming from the Federal Reserve on the very same morning that such a bomb would explode on Fraud Street.  Coincidence?  Uh-huh, sure.
 
But that was only part of the story Friday.  JPM missed earnings and although it closed lower, it rallied from its open.  Greece was back in the news too.  Fears of it defaulting very soon are reaching new heights along with its bond yields.  On Monday Greek 1-YR Notes yielded a 415% interest rate. 
 
Yields that high are a default but as mentioned above, the markets are now rigged daily by political hacks and central banksters.  No CDS instruments have been paid out because bondholders are said to have accepted a 50% haircut.  Of course, everyone knows that 50% is higher than 0%, which is what Greece will pay when it finally pulls out of the EU…and yet not a single cent of this insurance (CDS) has been paid.  Why?  Because the market is rigged by politicians and central banksters, who have told the agency that decides what a “default is” refuses (read: has been told) to declare a default.
 
Now Greece is demanding an 80% haircut and bondholders are fighting back.  Some say this needs to be resolved by the end of THIS WEEK in order to keep from a total default.  I say – get it over with already!
 
In other “bullish” news, Standard & Poor’s downgraded the actual slush fund facility that is bailing out Greece, Spain, Ireland, Italy, and Portugal from AAA to AA+.  S&P says "if we were to conclude that sufficient offsetting credit enhancements are, in our opinion, not likely to be forthcoming, we would likely change the outlook to negative to mirror the negative outlooks of France and Austria. Under those circumstances we would expect to lower the ratings on the EFSF if we lowered the long-term sovereign credit ratings on the EFSF's 'AAA' or 'AA+' rated members to below 'AA+'."
 
In other words if S&P keeps downgrading the individual countries, the bailout facility will also be downgraded.  But no matter – it’s “priced in” 4evvvaaaaahh!!  It’s all bullish.  It’s all rigged.

Trade well and follow the trend, not the so-called “experts.”

Larry Levin
Founder & President- Trading Advantage

Rigged and Predetermined

You have often heard me say that the market is rigged, which it most certainly is via the Federal Reserve’s overall interest rate “engineering,” as well as outright manipulations through quantitative easing (QE), backdoor bailouts, POMO, massive swap lines, etc.
 
Many of you believe that national elections are also rigged and therefore predetermined.  Perhaps this is true in the USSA and why not; after all, the Fed will stop at nothing to “save” the banking mafia via the few things mentioned above.  And there is so much more to list; however, what’s happening in Europe is frightening and that’s what I’ll focus on.  What is happening over there is indeed rigged & predetermined; it is now out in the open for all to see; and it is yet again for the benefit of the banking mafia.
 
1.    In early November of 2011 the Prime Minster of Greece, George Papandreou, had the temerity to announce he would allow the people of Greece to vote on a referendum regarding the Greek bailouts, and thus the “austerity” they were going through. The bailouts are wildly unpopular and therefore were sure to fail. This, of course, would go against the predetermined plans for Greece, and by extension the bailouts of the banking mafia. Within hours, Mr. Papandreou was removed from office not by the people of Greece, but by unelected Eurocrats in Brussels.
2.    In mid-November of 2011 the Prime Minster of Italy, Silvio Berlusconi, also had the temerity to announce he was unhappy with the talked-about “austerity” that was coming his way when Italian bond yields spiked. This, of course, would go against the predetermined plans for Italy, and by extension the actual bailouts of the banking mafia. Within days, Mr. Berlusconi was removed from office not by the people of Italy, but by pressure from unelected Eurocrats in Brussels. Additionally, the unelected Eurocrats put an ex-banking mafia elitist in charge as its stooge.
3.    Recently, Greece has made overtones that future “austerity” will not be welcome. It has done enough for now, Greek politicians say. This goes against the predetermined plan for Greece and may hurt the banking mafia so the pressure has been raised: Germany is demanding that Greece lose it sovereignty. The unelected Germans and Eurocrats in Brussels are demanding that Greece have no future control over its own budget. This has gone too far! How will the Greek people respond to this?
4.    Finally, the president of France, Nicolas Sarkozy, has a high probability of losing the upcoming election and since he is part of the unelected bullies that pressure other countries, he must be saved. Losing Sarkozy raises the real possibility that the new president won’t go along with the predetermined outcomes they want for the banking mafia. Therefore, the chancellor of Germany just announced that she will help rig the presidency in France to get the predetermined outcome they all seem to want. She will actively campaign for Sarkozy's re-election.
 
In the Global Post we read Hermann Gröhe, the general secretary of Merkel's Christian Democratic Union (CDU), said over the weekend that Merkel would "actively support Nicolas Sarkozy with joint appearances in the election campaign in the spring," The Guardian reported.
 
"France needs a strong president at its head, and...The UMP and France are in good hands with Nicolas Sarkozy, who has demonstrated foresight," Gröhe said, according to Le Figaro.  (Read: Gröhe knows better who should be president of France than the French people and therefore the Germans should intervene…it’s being rigged)
 
Hermann Gröhe, the general secretary of Merkel's Christian Democratic Union (CDU), said over the weekend that Merkel would "actively support Nicolas Sarkozy with joint appearances in the election campaign in the spring," The Guardian reported.
 
"I did not know she voted in France," the French president said in an interview with multiple television channels on Sunday evening.
 
It is a rare move for Merkel; European politicians tend to have an "unspoken pact" to not interfere with other countries' elections, according to the Guardian.
 
The end of the last sentence should read… European politicians tend to have an "unspoken pact" to not interfere with other countries' elections…until NOW. After all, there are banksters to be bailed out and national sovereignty will never come before a bankster’s profit.
 
The Onion had this nailed years ago in The Sham Election that you can watch here…
http://www.youtube.com/watch?v=LBrDzZCOQtI

Trade well and follow the trend, not the so-called “experts.”

Larry Levin
Founder & President- Trading Advantage
 

Greek Deadline

The market continues to wait on the news of the next Greek bailout. Each day that something “might” happen, the market grinds higher. When that “something” falls flat, the market goes flat again. After an early slide this morning, the market received the headlines below from Bloomberg and resumed its pathetic, no volume, and zero volatility churn higher.

There was a “final” deadline LAST Friday; then another “final-final” deadline Sunday evening; then another on Monday; then (today) Wednesday there was the “final-final-final” deadline; and now there is another: Thursday is the latest “now-we-mean-it-for-realz” deadline, before the latest ridiculous summit where Eurocrats will convene to steal more national sovereignty on behalf of the banking mafia.

Will this newest deadline be met? Would it matter if they didn’t meet it?

TROIKA DRAFT GREEK ACCORD SAYS 2012 GDP TO SHRINK AS MUCH AS 5%
GREECE TO CUT MEDICINE SPENDING TO 1.5% OF GDP FROM 1.9% OF GDP
GREECE PLEDGES TO MERGE ALL AUXILIARY PENSION FUNDS
GREECE TO PLEDGE 20% CUT IN MINIMUM WAGE IN TROIKA DRAFT
TROIKA DRAFT GREEK ACCORD RENEWS PLEDGE TO CUT 150,000 EMPLOYEE
TROIKA DRAFT GREEK ACCORD PLEDGES 15,000 STATE JOB CUTS IN 2012
GREECE TO PLEDGE ACCELERATED LABOR, PRODUCT MARKETS REFORMS
GREECE PLEDGES PERMANENT SPENDING CUTS IN TROIKA DRAFT REPORT
GREECE PLEDGES NOT TO INCREASE SALES-TAX IN DRAFT REPORT

But no worries folks – the genius Eurocrats of the Troika exclaimed that Greece will actually believes Greece will “return to growth” in 2013. Yup, in less than 11 months Greece will be on its way to stellar GDP growth. Give me a break.

Trade well and follow the trend, not the so-called “experts.”
_____________
Larry Levin
Founder & President TradingAdvantageTM

Trading Tip #2: Trade with a Plan – Setting Your Limits

I think trading with a specific plan is one of the most sensible things a trader can do. It helps you learn and identify key areas to watch for in a market. More importantly, it helps you avoid sabotaging yourself because it helps keep your emotions in check. One of the key components of a trading plan is knowing your exits. One way to close an open trading position is with a limit order.

Limit orders target a specific price level – they won't be filled unless the market trades there

Limit orders are pretty straightforward once you get the hang of them. They are contingency orders. The market has to trade at a specified price level before it is even possible for the order to get filled. Even then, there is no guarantee that it will get filled.

Limit orders say that the trade can be executed at a specific price level or better, but not worse

Buy limit orders are used for an exit strategy on open short positions. Use these if you sold a contract to enter the market. Sell limit orders are used in a plan to exit open long positions. They are employed if you bought a contract to initiate a trade.
Basic limit orders specify the market and the price level and the action to take. For example:
Buy one December e-mini S&P futures contract at 1350.00 or better.

To be an effective limit order, the market would have to be trading above that price point at the time the order is placed. Why? Because if you were to put in an order like that and the market was already trading lower, it would already be a better price to buy at. That means the order would probably just be executed at the market.
The same kind of logic has to be played out when you are picking a price for a sell limit order. For example:
Sell one December e-mini S&P futures contract at 1355.00 or better.

For this order to work as it is intended, the market must be trading lower than the limit price, otherwise it is already at a "better" price to sell.
Limit orders are likely the "happy" exit plan for a trade. They represent better prices than the market will be trading at the time you place them. That means if you enter a market and then place an exit order at a "better" price, you are probably aiming to exit at a profit.


Past performance is not necessarily indicative of future results.
Chart courtesy of Gecko Software.


Once the limit order has been placed (buy limit to close an open short position, sell limit for an open long position), it is just a matter of waiting to see where the market goes. This part of a plan can help traders avoid those mental traps where they ride trades just a little too long, hoping to scoop up extra. Limit orders can prevent you from getting greedy. If you have other working orders at the same time, don't forget to cancel them if the other orders are filled.
Traders can use limit orders as part of a complete trading plan that covers the potential for the good and the bad

Limit orders only come into play when the market trades at or through your limit price. Otherwise, they remain in waiting. If the market trades through the price, you can only be filled at your limit price or better. It's that simple. These contingency orders can also be used to enter a market position, but I often recommend they work as part of an exit plan for trade design.

Best Trades to you,

Larry Levin
Founder & President- Trading Advantage
larry@tradingadvantage.com