Investor Contributed Research edited by Financial Trader Research inc.

Time to Short the Euro

By Phil Volkoff, 8-21-2010

As I mentioned in my 7-11-2010 update, " soon it will be undeniable" the depression continues to gather steam. The numbers continue to come in weaker and weaker.

The mainstream economists have slowly gotten around to downgrading 2nd quarter GDP from 2.4% to 1.7%.  The stock market continues to chop around holding up on extremely light volume and dreams of QE from the fed and more fiscal stimulus from Washington in an election year.  This is one of the reasons I had moved most of my positions into bonds and yen:   to profit from my opinion on the weak economy waiting for stocks to finally get the joke.  

Bonds Yen Liquidated

As of Friday, I sold all of my Bond positions and yen positions. Bonds are feeling way to crowded for me and might have a sharp pull back before they go higher.  As I mentioned in my 7-11-2010 update, I thought the ten year note would get to 2 1/2% from 3% which we got pretty close to this week and also the yen reached my 118 target as I mentioned in earlier posts. So its time for me to reevaluate those positions. From a contrarian point of view bonds are over loved. I sold my short silver (ZSL) that was a Mexican standoff and as mentioned earlier I sold most of my BOM which was a loser, although I added some this week around 17 and I am still long some FAZ.

Action Going Forward

So what to do? I have taken a large concentrated position this past week in short euro around 128 .I am trading this position in the double short euro etf EUO. From a time, price, and sentiment setup I think it is time to get short the euro again. If I am right the euro will be starting a large wave 3 down which will eventually take out the June 2010 lows. None of Europe's problems have been solved and I think one will start seeing social unrest to the austerity programs. Don't be disappointed though, the social unrest show is just opening up in Europe but will definitely be coming to a U.S. town in the not so distant future. On that note have a great week.

Inconsistent Logic

By Phil Volkoff, 8-1-2010

Earnings growth for the second quarter beat the analysts numbers game and have been beating the numbers thru bottom line results. What American business does exceptionally well is squeeze its employees. They squeeze especially hard during rough times. They get every bit of productivity (blood) out of employees, by way of fear of outsourcing and layoffs. This fear of layoffs becomes self reinforcing, which causes further retrenching. We can see this retrenching in the falling consumer confidence numbers and declining consumer credit, which is demand destruction, logically bad for top line growth.

If you look at top line growth it hasn't been nearly as good. Top line is what is going to fuel future job growth and without job growth future demand will be weak. So going forward what is going to drive the demand side? Forget exports, they are such a small part of an economy that is based on 70% consumers. Forget income growth.  Real income growth has been sliding for over 30 years masked by increased indebtedness or vendor financing and asset inflation that made up for these lost wages. Remember MEW, mortgage equity withdrawal, in case you forgot there is now no more of that inflated asset to make up for lost income. Average FICO scores have been falling so creditors are raising the cost of financing or declining altogether. 

In an economy that is based on asset inflation and consumption no growth in debt means no increase in asset prices which means no assets to borrow against to spend eventually leading to falling asset prices and deflation thru lack of income to support debt service. We can see this reflected in the increasing number of problem regional banks which is now topping over 800. Rumors of another round of fiscal stimulus and QE (quantitative easing) have been getting the equity bulls excited. Look to Japan for the results of that experiment. So cheering today's earnings results that come at the expense of future growth is inconsistent with future top line earnings growth. Maybe growth will come from overseas except that our biggest trading partners are in the same sinking global boat as we are.

I am long cash 5 & 10 year treasuries plus (TYD) triple long 10 Year Treasuries and (TMF) triple long 30 Year Treasuries. Although eventually bonds will collapse that is clearly down the road. I am still long FAZ but I am expressing my opinion of economic contraction and deflation in being mostly long Treasuries. I believe the equities will finally get the joke and collapse as the depression becomes undeniable and deflation overwhelms asset prices. Still negative silver and long ZSL triple short silver. Still long a small amount of BOM which is short base metals.  It Is comprised mostly of short copper which has rallied and hurt BOM's price. I am also long a small long yen position thru YCL and I am still looking for 118 on the yen futures as mentioned in previous posts.

Phil

Sentimental Journeys and Dreams of Simpler Times

By Phil Volkoff, 7-20-10

I've been busy for the last week working on a commercial that features such football greats as Vince Young, Shockey, Jared Allen and others. It was a long and tiring shoot but quite fun. Talking about sentimental journeys, I got to work last month with Mr T. One of the nicest and most animated actors to work with who is having a renaissance in his career.  Robert Prechter would probably say that Mr T was popular during the 70's bear market and he is now making a reappearance for the grand supercycle bear market that started in 2000. Mr T should have a good career run , and all the best to him!

On the markets, the S&P had a nice reversal up today on the dream that the fed will be able to force banks to lend by removing interest paid on reserves. During times of inventory corrections, or old fashioned recessions, lowering rates would help businesses through the inventory cycle. The market is dreaming if it thinks that removing interest on reserves, an easing move, is going to create credit demand . Just look how successful Japan has been. A recent study out of the Atlanta Fed exposed the current credit environment; those companies who are good credits don't want to borrow; while those who want to borrow are those companies that need to rollover debt in a falling asset environment. Not exactly the kind of credits you want to lend to. Last weeks ECRI hit a negative -9.8 where a -10 implies a recession. Why argue over a negative .2, it's time to beat the crowd out the exit door before they hit the panic button!

I am maintaining a short position in the financials with FAZ, short silver which is looking ripe to tumble with ZSL, and long triple leveraged ten year treasuries with TYD, with the Ten Year Treasury note headed for 2 1/2 %.

Soon It Will Be Undeniable

by Phil Volkoff, 7-11-2010

I 've been amazed at how weak the numbers since May have been, yet the mainstream economists don't get that we are in a depression. The mainstream economists keep comparing this depression to a post war inventory correction. As I have written before, depressions are caused by mal-investment and over-leverage and ponzi debt, debt that is none productive that gets rolled over until it can't.  The economy is imploding. New home sales dropped to 60's levels, money supply is contracting along with velocity, consumer borrowing contracted in May by $9.1 billion and April's were revised down to $14.9 billion from originally being reported up $ 1 billion.

Last week's retail sales numbers were cheered as proof that the consumer is alive, but on further investigation the numbers included massive discounting and some same store sales looked better because of less competition from competing stores that have been liquidated.  Mall vacancy rates are at the highest since the depression began in 2008 which is more anecdotal evidence that the consumer is dead. Without job and income growth and vendor financing our great consumer economy has little capacity to grow and create jobs and is more likely to keep imploding because all we do is sell each other imported trinkets. 

Main stream economists keep looking at a steep yield curve and see recovery, the yield curve is a component of the leading indicators, but if we look at the ECRI which includes credit spreads which have been widening we see another contraction in Friday's release to 121.5, the lowest level since July 24, 2009 which is a negative 8.3 annualized rate of decline. Throw in steep fiscal cuts in Europe and demand should continue to contract.

The market is correcting from being oversold maybe up to 1085 on the S&P before the resumption of the downtrend. Long term cycles and demographics are negative. I added TYD which is triple long the Ten Year Treasury which I see going to 2 1/2, long FAZ, and still short silver with ZSL.

Market Analogy:  BP Oil Spill and the 1906 San Fran Earthquake
 

by Phil Volkoff, 6-16-2010

Living in the age of instant information it seems so quaint to think of times when it took several days for news to travel across the country.  For example, the devastating 1906 San Francisco earthquake, which leveled the city and  required several days for the news of the devastation to filter back east where its reception was greeted by a total meltdown in the markets. 

Those that had faster access and understanding to the news were able to take advantage. Could we be revisiting a time when news took days to disseminate, in this BP disaster? I think so.  If you've followed the story thus far the amount of oil flow has been constantly downplayed but private forecasts have been estimating the flow multiples higher. Officialdom is now starting to rapidly raise their estimates. More and more news flow has revealed the actual extent of both the ecological and financial devastation of the BP event.

One report that really got my attention was from Matt Simmons, a legitimate expert in the oil business. In his report he states, "...forty percent of the gulf may be covered by an underwater lake of oil many meters thick and the only way to stop the flow is to use a nuclear bomb." Mr. Simmons has a very credible reputation, and has been ahead of the curve with accurate information on the spill. As we come into hurricane season there is a high probability that this highly toxic brew gets forced inland and causes a massive biohazard and destruction of property. Think Chernobyl!

I covered all my euro shorts last week. I've been getting squeezed on my FAZ but added some more on 6-15. Also added more ZSL which is short silver and BOM which is short the base metals on 6-15 .

Sliding Down the Wall of Worry into the Abyss

by Phil Volkoff, 6-5-2010

I always get a laugh hearing the Wall Street cheerleaders talking about climbing a "wall of worry". When is bad news good and bad news bad? That's why I rely on my charts. Don't get me wrong, I do pay attention to fundamentals - such as good news bad price action and vice versa, but I also like to have a big picture fundamental scenario in my head.

Those who have been following my work know that I was one of the few Euro Bears around last summer.

Many of those forecasted problems are now front page news. I played with scenarios in my head regarding what would happen to confidence in the Western European banking system with problems in Eastern Europe. Keep in mind: "Credo Equals Credit", which means "I believe," and when the markets trust has been so abused it doesn't take much to cause the markets not to believe. What is worrying me are widening credit spreads, lack of demand for credit, which was made clear from a research report from the Atlanta fed basically saying good companies don't want to borrow and bad companies do, but can't get credit. Also, a report on broad money showed M3 falling at a 9.6% rate. In an economy which is 2/3 consumer based that relies on consumers ability and willingness to borrow I don't see much impetus for growth as I believe these reports are suggesting.

In a fractional banking system: lack of credit growth is deflationary. Both the CRB and coppers breakdown are warning of a slowdown as the sugar high from the stimulus expires.  I believe the thousand point flash crash is an omen of things to come, a loud announcement to the kickoff of a primary wave 3 decline. I am still long FAZ and EUO and I also added a new position, ZSL double short silver, because I believe silver is over-loved and has a nice sell setup.  Those that are worried about currency debasement, which we will see after the massive deflation destroys the ability to pay, should invest in the ultimate convenience store, as my friend LM Lupo says, Alcohol, Tobacco and Firearms. I sold out my long yen position, though I still think it has a lot of potential, but I'm not interested in all the volatility.

On a funny but painful note, after I sold out my Nat Gas position it began rallying like a monster. I guess they had to get one of the last bulls out before it rallied. I hope those that held on make a ton of money!

The Icelandification of the Western Banking System

Phil Volkoff, 5-24-2010
I was one of the few dollar bulls last summer not simply because of technical reasons, but also because of a fundamental belief that the European banks have enormous bank debt to GDP exposure. 

Credit is derived from the Latin word credo, meaning I believe. Once belief that the debtor entity does not have the ability to pay, no more credit will be extended. In a world of Ponzi banking, where banks have built up enormous obligations relative to the GDP of their countries, when markets lose confidence in the banks ability to pay, their funding gets pulled, creating an old fashioned bank run. 

The usual response has been the sovereign nation guaranteeing the banks obligations or back stopping them so that the whole financial system doesn't implode.  This did not end well for Iceland as the banks obligations were greater then the entire sovereign GDP. As Iceland's currency vaporized, its foreign denominated external debt exploded, thus crashing the entire banking system. I believe we are seeing the markets questioning the ability of sovereign entities with high bank debt to GDP to backstop their financial systems.  Rising Libor rates are telling us the European banks aren't trusting each other, and the markets are telling us that they aren't trusting the sovereigns by devaluing their currencies.  I believe we are real close to reaching the tipping point or have already arrived for the Icelandification of the western financial system.  A total and complete freeze up!!

Future Events Cast Their Shadows

Phil Volkoff, 5-19-2010

I' am looking at a potentially explosive looking chart pattern on the Japanese yen. If I am correct the yen could move significantly higher to the 118 area basis the June 2010 yen futures over the next several months.

The implications of a dramatic move would support my bearish view of stocks and should not be underestimated. It would imply some kind of yet unforeseen crisis. As noted below, I covered my Euro shorts on Monday and Tuesday and positioned flat, with a bullish bias to long dollar. I am still very bullish the dollar but it might have some correcting to do. I am still heavily short the financials with FAZ and short Europe with EFU. I added YCL which is double long the yen.

Note: 5-17-2010,  I took a lot of profits off of the table today since I expected that the market would have accelerated lower but didn't oblige. I will continue to watch the price action over the next several days for safer opportunities.  The downtrend remains...Phil

Damned If They Do and Damned If They Don't

by Phil Volkoff, 5-16-2010

I was filming at night last week in the Mohave dessert and had no time to write.  However, I got the answer to my question from the 5-2-2010 article for timing of "when will the next bailout be?"   I honestly didn't think it would be a week later and almost ten times bigger, but that's the nature of crisis for they take on a life and time frame of their own. I did belch a good laugh at the rabid clowns out of Europe threatening the market speculators like Tony Montana. They have no self awareness and don't realize or admit that their part of the problem.

Good Money After Bad

So their solution is to throw the taxpayers good money, including U.S. citizens thru the IMF, at debt problems that were allowed to build up over the years under theirs and others watch, creating an exit for the owners of this bad debt and leaving the taxpayers on the hook. This debt will eventually have to be liquidated, but the bureaucrats always want to extend the day of reckoning and make it another bureaucrats problems. I don't think these clowns are going to get much breathing room from the markets.

Failed Option, Cut Budgets for Market

If budget cuts are really going to happen, the markets will start to price in a slowdown or recession, which will become self fulfilling and debt to GDP ratios will have a hard time coming down . We saw copper and crude sell off last week and also the CRB. The emerging markets sold off and China's stock market took out important support somewhat validating this scenario.

Make no mistake, what is happening in Europe will effect the whole world economy just like the sub-prime problem. Damned!

Failed Option, Don't Cut Budgets

On the other hand, if the bureaucrats think that they are going to get a break with this bailout, and not have to make sharp cuts in deficits, then they will be wrong. I believe the markets are going to be hyper sensitive to what they do and not what they say. The Euro and the weak credits will sell off sharply if deficit cuts aren't convincing, which will effect worldwide markets. Once again, damned!

So even though the Euro is considered oversold I remain short.  Some of the best trades come from staying with oversold and overbought markets, in the direction of the primary strong trend. Elliot wave threes, usually the strongest impulse, can get very overbought or oversold.  If you use mechanical indicators they can take you out of a strong trend too soon. Remember, this is very likely the wave of recognition that I have been discussing for some time. The Euro is currently trading in a strong wave 3 down as though it were in a price vacuum.  I have been slowly scaling out of my EUO and UUP position taking profits. Friday I added more FAZ on the close. I think this coming week will be volatile and I am only looking for places to get short stocks.

My positions are FAZ, EFU, EUO and UUP.

Smack Me Mr. Market, I'm Stupid

by Phil Volkoff, 5-2-2010

When I read some of the comments from the bureaucrats about the Greek bailout, it bought back childhood memories when times weren't so politically correct.  Invariably there would be days when some poor victim, who was clueless, would walk around all day at school with a sign on their back saying," smack me I am stupid." For example, Reuters reported these comments:

“I don’t think the markets will put Portugal and Spain under attack because their situation is in no way comparable to Greece,” Luxembourg’s Jean-Claude Juncker said yesterday after chairing the talks.  French Finance Minister Christine Lagarde said “Greece was a special case, because it reported special numbers, provided funny statistics.”   Not to be outdone, the IMF’s Poul Thomsen, who heads the mission to Greece, said the austerity plan was designed to “shock and awe markets and re-establish confidence.”

Call me cynical, but when you make remarks like these it's like wearing a sign that says "smack me I am stupid."  Somebody will eventually take them up on it. How many more days till the next bailout?

Still long UUP, EUO, EFU and FAZ and back to flat on natural gas.

Phil Volkoff

A Depression Virus Spreads

by Phil Volkoff, 4-27-2010

Like a plague that multiplies exponentially in a population, so too are financial crisis. First the population is infected but unaware of the disease. Some of the experts may notice that a new disease has emerged, but seems to be under control and just needs to be monitored. This reminds me of the complacency that was taking place in the summer of 2009 regarding the peripheral regions of Europe. Those economies were collapsing, and the enormous exposure that the western European banks have to their sovereign debt was viewed as containable. Like the sub prime fiasco the weak credits work their way up the credit chain impairing stronger and stronger credits like a plague spreading in a population killing the weak first .

As a plague starts to spread in the population it may reach a point of amplification.  This is when the pathogen reaches a critical mass and breaks out into the general population and it's virulence increases in magnitude infecting the healthy and causing severe illness by spreading rapidly. This is the stage I think we are at in Europe.  The PIIGS (Portugal, Ireland, Italy, Greece, Spain) which are higher up the credit ladder then the peripheral European countries are now catching the disease. 

Since the PIIGS are part of the union they must cut there deficits which will drive them deeper into depression by reducing revenue and crushing asset prices since they are tied to the Euro and cannot devalue their currency.  Western European banks have enormous cross border exposure to the PIIGS and we know that during a financial crisis bank debt becomes public debt which will explode the stronger countries deficits. Like amplification of a pathogen the initial infection of back water European countries that seemed benign has now morphed into a much more unpredictable and virulent disease that is inflicting the stronger hosts.  This is the stage of the plague that becomes very unpredictable and dynamic.

With the downgrades today of Greece and Portugal and also downgrades of major Greek banks to junk status, money is leaving the banks for safer places. This potential run on bank assets can create an overwhelming rush to the exits like we saw with Lehman and other banks, except this could become a sovereign country run.

My positions are heavy short Euro with EUO instead of DRR because of higher volume in EUO,UUP which is long dollar index, EFU which is a double short on European indexes and FAZ which is a triple short on the U.S. financial sector.

Another Conspiracy Theory?

by Phil Volkoff, 4-22-2010

I am not much for market conspiracy theories but here's one. The equity markets have been on a one way tear since the March lows. As Alan Greenspan said in his Senate testimony that as long as the equity markets remain buoyant the economy will improve.  We had a virtuous circle of public bailouts provided by politicians for the banks, and the banks cheered and pushed the markets higher to help sentiment.

Now that the November elections are on the minds of the politicians, and the visceral fear of a populous eruption, Washington is trying to distance itself from Wall Street and even going aiming for it. With financial reform trying to push through Washington, would it not seem plausible for Wall St. to take the markets hostage once again and pull the plug with a frightening plunge so that reform is defanged? Just a paranoid thought for the day.

Phil Volkoff

Marching Parade Of Fraudsters Impact

by Phil Volkoff, 4-19-2010

I've been working on set the last week and I  am just getting some time to write. In the 4-9-2010 update, I had covered my euro short before the Greek rescue announcement.  After a quick zig-zag gap up to 1.37 the Euro was unable to extend any further gains. I re-shorted the Euro with a full position on Thursday, 4-15-2010 around 135.77, after a breakdown of a 3 day pattern that failed to extend on supposedly good news. I do not want to get caught without my short position mostly because I think the Euro has a lot lower prices to probe.

Interesting news on Goldman Sachs (GS):  They were once (still?) the government's golden boys. Could the politicians be sniffing the winds and smelling a debacle in the November elections by setting up a populous attack on the banks?  This should remain interesting political theater. Please keep in mind, Salomon Brothers which was the trading king before GS was dethroned by a bid rigging scam in its Treasury bond department .Something to keep in mind. With elections on the minds of the politicians I think the GS announcement could be the tip of the iceberg. I guess we will see.

Phil

Note for 4.9.2010

by Phil Volkoff, 4-9-2010

Currently, I am looking for a possible bounce up to around 1.38 on the Dollar/Euro pair. Based on bullish momentum divergences for the Euro we completed 5 waves down from the November high with extreme sentiment readings.  I will look to re-short at higher levels. Still long natural gas with HNUZF @ around 6.15.

Adding Commodities

by Phil Volkoff, 4-6-2010

As a note to readers, I have been buying back HNUZF over the last week around 6.25 after selling out in January 2010.  The buying signals include the following:  a potential completion of a wave 2 low on the weekly continuation chart at a .618 retracement from the Sept-2009 low @ 2.41, and the Jan-2010 6.11 high @ 3.82, plus bullish momentum divergences and wave pattern.  Also, an interesting and potentially bullish development regarding the EIA supply numbers over stating supply appeared in the Wall Street Jornal on 4.5.2010.  This could explain why the massive drop in rig counts from the highs didn't diminish supply. I am still short the Euro with DRR and long the dollar with UUP.

Spooky Price Action

by Phil Volkoff, 3-28-2010

My major premise continues unabated:   we are headed into a major deflationary depression that will be followed by hyperinflation.  There are some analysts that see the macro fundamentals entirely different and I respect their opinions and try to keep an open mind.  However, I view the scenarios as a process and not one big watershed event.  There will be times when events will unfold rapidly and then times when events will appear orderly as we head for the cliff. 

Think here of Japan, by analogy. They are basically bankrupt with public debt at 200% of GDP and still muddling along.

What spooked me last week was the sharp price action in the Treasury market. The auctions were poorly received and a potential technical head and shoulders top appears to be complete on the ten year bonds.  Since this crisis theme is primarily the repudiation of debt and the destruction of belief in the ability to service debt, my concern is the message the steep yield curve is sending, which I mentioned in my 2-27-10 update, below. 

I believe the steep curve is not because of increasing inflationary pressures but longer term sovereign credit concerns. If yields continue to rise this will be poison for the equity and commodity markets.  On Friday, I sold out my 5 year Treasuries and went into cash. I am still heavily short the Euro with DRR and long the dollar index with UUP. I think the U.S. relative to Europe is the least of a bad bunch of currencies.
 

Acceleration

by Phil Volkoff, 2-27-2010

Acceleration:   the rate of change of a moving object;   applicable to financial indicators.

Acceleration is the word that jumped into my head over the last week for some of the salient market indicators that I scrutinize and watch.  As a follower of Elliott, the market is simply a proxy and gauge of social mood similar to a thermometer that shows one the temperature. When the collective mood of society is positive; markets move higher, and when the collective mood is negative; markets move lower.

The first indicator that jumps off the page was February's consumer confidence which plunged to 46. This blew the bottom out of the consensus range of 52-57. Also, part of this indicator is the expectations component which had a sharp 13 point fall to 63.8 and the present situation component, reaching levels seen in the severe recession of the early 1980's at 19.4, a sharp drop of 6 points. Out of Europe you had a surprise drop in the German IFO business sentiment index from Jan 95.8 to 95.2 and lackluster retail sales out of France all blamed on the snowy weather. In the UK, broad money supply turned negative and officials said that exports to Europe were weak.

Back to the USA, new home sales for January took the bottom out of the consensus range of 345k-381k coming in at 309k and unemployment claims came in at 496k versus consensus of 460k.  Today Feb 27, the Rasmussen Presidential tracking poll shows Obama and Congress at or near all time lows. All of these statistics are volatile and subject to revision, but when I see acceleration away from the consensus I take notice. To me, these stats along with contracting consumer credit in an economy 70% based on consumption, widened credit spreads, and an extremely steep treasury yield curve, which I believe economists are misreading as a sign of growth instead of a worry about the deficit, tells me that we are headed for trouble, and not a sustained recovery.

In a credit based economy confidence is everything. People are becoming aware of the huge dilemma the states and sovereign countries face in trying to get their out of control budgets under control. What is in the near future are more job cuts and higher taxes and all very negative for confidence.  Meanwhile , diverging from all of these stats is mutual fund cash levels which are at market extreme low levels. I believe these low cash levels are a real negative, because of the reduced buying power left to support the equity markets.

On another note my year ended this weekend and I am down about 4%, remember my year runs March to March. Fortunately my March 08 to March 09 performance was much better up 9% when a lot of investors were down big. I am fairly optimistic about this years results. I think there will be some exceptional moves in the markets to profit from the bearish side. I am long the dollar with DRR and UUP, long 5 year ,3 year, and 2 year treasuries plus short the European stock indexes with EFU .
 

Of Cockroaches and Bankers

by Phil Volkoff, 2.19.2010

As any longtime resident of NY City could tell you--25 years in the big apple-- find one cockroach in your apartment during the daytime and you can rest assured once it's nighttime the little critters will be out in full force.

Like bankers these little creatures thrive in the darkness.  Turn the lights on and there gone in a flash. For example, take the trillion dollar derivatives market which operates in the opacity of the OTC market.  We were honored with a glimpse of the little 'nasties', over the last year and a half, and how these derivatives can go terribly wrong.  Some of these products are designed to hide the true state of an entities financial health: think Enron.  Recently, the concern and outrage has been directed at Greece and their little loan from the bloodsucking vampire squid (GS) which was designed to look like a currency swap. 

Lets just say this little swap made Greece's finances look a lot better. So today the talk was Italy. Word is that they might have some of these same swaps lurking on their books. But if you understand the nature of cockroaches you shouldn't be surprised that another country has been infested. And I'll really go out on the limb and say that Greece and Italy won't be the last countries either. Not to pick on Europe, but right know it's in vogue.  Don't worry though, the U.S.A will not be out done. We have our next disasters festering in the trillion dollar municipal market. So for now the show is in Europe, but I promise it will be coming to the U.S.A because there are just to many cockroaches running around.

Phil Volkoff

Bear Market Awakens

by Phil Volkoff, February 15, 2010

I have been in hibernation since my last update which was 10-04-09. I have engaged very few directional positions and have just patiently watched the markets run while waiting for a high probability setup that the markets were indeed finishing their respective counter trend bear market rally. As some of our past readers my recall, I am an Elliottician , and thus I was looking for a completion of the primary wave 2 bear market rally from the March 2009 lows before jumping on the primary wave 3 move down.  Odds favor that the week of Jan 11, 2010 was the top of primary wave 2, which means that a devastating resumption of the long term secular bear trend that started in 2000 is now  resuming, again.

I barely participated in the counter trend bear market move up except with my long natural gas position, which was a loser. On the week of Jan 11, I officially came out of hibernation and became very active in the markets. I liquidated my natural gas position which put me down 8% for the year.  My year runs March 2009 to March 2010. I got out of natural gas because my fear is that this wave 3 down will be so devastating and deflationary that it will take commodities including natural gas down.  I extended my U.S. Treasury Bond position from 2 years out to 5 years and got short the euro using the double short ETN, (DRR),  plus I got long the dollar using the ETF (UUP).

As some of you may remember, I was one of very few dollar bulls in existence last year.  In past posts I was looking for the dollar to rally and stocks and commodities to tank.  As of the week of Jan 11,  I believe the stock market completed its counter trend move, which was a triple three, and the dollar bottomed in the middle of December.  Now the dollar is leading the way down for stocks and commodities.  As I mentioned, wave 3's in Elliott is the wave of recognition. People are going to finally recognize that the government cannot bailout all the bad debt that was underwritten; from bad municipal debt to bad sovereign debt.  I've been waiting to trade in the direction of the secular trend since October by just sitting on my hands. I am now positioned short the S&P with the double short ETN (SDS), long the dollar with UUP and DRR and long cash 5 year Treasury Bonds.  I am only down 3% now and have plenty of ammo to make money with the new bear trend. I'll be posting again when I have some strong opinions to pass on.

Bear Market Sooner than Most Think

by Phil Volkoff, 10.4.2009

"The central fact in all depressions, as well as in those crises which are followed by depressions is the condition of capital.  These disturbances are due to derangements in its condition which, for the most part, assume the form of waste or excessive loss of capital, or its absorption, to an exceptional degree, in enterprises not immediately remunerative. In some form or other this waste, excessive loss, or absorption, is the ultimate or real cause."

Quote from Financial Crises and Periods of Industrial and Commercial Depression, by Theodore Burton first published 1902.

So here we our, the Fed and Treasury giving each other high fives for saving the day, yet all they have done is miss allocated more capital from the taxpayer and concentrated risks in too big to fail banks.  Nothing has been done to diffuse the bomb, just an extension of the fuse.
 

Financial System Nearing the Cliff

In Elliott wave analysis, all price targets as well as wave structures have been met for primary wave 2.  Important cycle highs have been met.  The financial system is in a much more precarious position then before the crisis with increased leverage and concentration of risks in too big to fail institutions.  The government has reached a point where it will have a problem borrowing for the next round of coming bailouts.  The tsunami populous backlash to anymore bailouts because of the blatant abuses by banksters, and the futile releveraging of the governments balance sheet (to revulsion levels) to take up the slack of credit expansion from the private sector, and the consumer which has imploded, will completely impede anymore rescues. Real wages have been declining since the late 1970's.
 

The Wave of Recognition (Bear Market)

The great Wall Street bubble machine that provided financing to keep living standards rising through debt for the masses whose incomes were actually falling is broken. There will be very little job growth in this recovery; just a statistical bounce in GDP.  In Elliott wave parlance, primary wave 3 will begin soon: the wave of recognition, where all this leverage will be recognized for what it is, A Giant Ponzi Scheme.

Positions

Still hiding out in 2 year treasuries at 95% of the portfolio plus HNU.To at 5%.Still down for year at around 5%.
 

Conflicting Signals

by Phil Volkoff,  9.14.2009

As I mentioned several updates ago, I liquidated all positions except HNU.TO which is 4% of the portfolio, and put 85% in off-the-run 2 year Treasuries placing the remainder in money market funds.  When I see conflicting signals I'd rather sit out market risk. 

The first conflicting signal is coming from Dow Theory which has a buy on stocks, but as an Elliottician I have wave patterns that appear to be concluding a primary wave 2 correction, confirmed by the renown Elliottician,  Robert Prechter.

Also, credit spreads--which I pay a lot of attention to--have been the tightest to Treasuries since Lehman collapsed, which is bullish for stocks but short term Treasury yields are grinding lower; a bearish signal.  In addition, bullish sentiment remains in the high 80's on stocks which as a contrary indicator is bearish not to mention the negative momentum divergences and cycles.  Yet, stocks continue to grind higher. Thus, I'll sit on my hands here.

Last week's post on Nat gas mentioned that we might be seeing an important low.  Looking at the commitment of traders report the large specs are short, and with the enormous open interest bulge we have a potential powder keg. Normally, I like to fade the retail trade but retail tends to be 'buy and hold' and large specs have trading hair triggers Retail is long natural gas in the ETF UNG,  which is a large percentage of the front month futures contract open interest.  If the large specs, ie hair triggers, try to cover there are not going to be many sellers down here.  Today, Goldman said that Nat gas could triple next year, which I have mentioned could happen in previous posts.  With the calendar for nat gas becoming more normal starting in Nov. I am willing to add HNU.TO as I did today at 2.5.  Currently, the portfolio is down around 5 1/2 percent for the year that began in March.

Awaiting The Equity Vortex, Dollar Rally, & Natural Gas

The last update I posted on natural gas was 7-26-09.  I was looking for a new low then, but I am the first to admit that I didn't  think it would be this low. The problem with ETF's and ETN's when picking bottoms are the rollover costs because of the huge contango in the calendar spreads, which makes buying HNU.TO and UNG a tough play right now.  In addition, we need to deal with the negative compounding from up, and down movements which obviously hurts prices.

As I am writing this update, Nat gas is down over 20 cents with the Oct. contract around $2.50 and Nov. at $3.66, a huge 40% premium.  I need to see some of this spread come out before I add anymore HNU.TO.  This morning spot natural gas was trading around $2.00 at the Henry Hub.  With the roll coming up for HNU and especially UNG in the coming week and a half it will be interesting to see if the front OCT contract, which needs to be liquidated, holds around long term Elliott wave swing support of $2.00 where the 12-15-05 high of $13.65 to the 09-29-06 weekly low of $4.05 equals the same move from the 7-04-08 weekly high of $13.69 down to around $2.00.  This completes a C wave and 5 wave movement down from the 7-04-08 weekly high.

What I would like to see is the front October 2009 contract hold around $2.00 and the November 2009 contract melt towards $2.00. This would tell me that arbs are willing to buy and STORE the front month because they can hold for a month and deliver into the Nov contract, which now reveals a huge 40% premium.

Part of the fear in the market is no storage, thus the huge contango. So, if the Oct/Nov spread starts to really narrow and Elliott swing support of around$2.00 holds plus the impetus of strong seasonals for September lows we may have the making of a long term low.  But how to play this move without getting crushed from the roll?  I am not going to buy until I see the spreads narrow which would tell me the market is clearing and probably reaching a low.

For the record, I liquidated all positions except HNU and went 85% into 2 year cash Treasuries waiting for the dollar to turn up and stocks to crater.
 

by Phil Volkoff, 8.24.2009

Was working on set all last week filming. Some brief observations and updates:

Lots of negative noise on the U.S. dollar from Buffett and Gross which sounds to me like they were talking up their book. I added UUP to my long dollar position; an ETF designed to replicate the performance of being long the US Dollar against the Euro, Japanese Yen, British Pound, Canadian Dollar, Swedish Krona and Swiss Franc.

 Prechter has called a bottom in the dollar so I have interesting company here.  Today (8.24.2009) I put 2/3 of the account in off the run 2 Year Notes at 1.19%. Remember, these notes should perform very well when primary wave 3 kicks in, the wave of recognition, to the downside. I can't come up with a scenario where job growth is going to support this economy.  Consumer credit continues to collapse which is bullish the dollar as credit dollars shrink.

by Phil Volkoff, 8.9.2009

My fundamental premise, which is secondary to my technical bias, states that the economy will demonstrate a false bottom, which the stock market is discounting as "the bottom" in a primary wave 2 up, thus performing as the bottom were in. Once the market figures out that it's just a shiny new paint job on a rotten structure the primary wave 3 will dominate.

Remember, the wave of recognition means no long term recovery. However, Friday's unemployment number coming in better then expected, (a real dubious number with seasonal adjustments and birth death model disinformation) raises the question, is my fundamental view for a dollar rally against the euro built on the wrong fundamental premise?

The bonds acted as if there is future tightening with the 2 year note future breaking below the 108 area of support, and credit spreads tightening to pre-Lehman Bros. implosion levels. The dollar no longer sold off on good news, as the talking heads see the dollar falling because risk appetites are increasing on stronger fundamentals. So what's up? One of the most important pieces of the puzzle that helps confirm my technical bias is good news, very poor price action.

As I said in last weeks update, I was looking for a miserable failure in the Euro rally... and we got it. Both the Euro and the Swissy put in reversal bars as I predicting and failed outside of the range setting up for a possible upthrust reversal where you break out of a range and then trade right back into the range.  If the markets take out the other side (support) suddenly you have a great sell signal to take advantage of.

The hydraheaded pieces seem to be in place for a huge $U.S. dollar move up against the Euro as follows: one sided negative sentiment, negative volume, open interest, and momentum and a complete wave structure out of a terminal triangle pattern.  In addition prices are mapping directly into long term fib resistance and retracement levels with a complete wave pattern, and finally good news bad action for the Euro bulls.  So is my fundamental view wrong for a dollar rally?

In my methods the technicals rule over fundamentals; however, I do believe that the markets fundamentals will reveal the story, once the dollar starts rallying, that Europe is behind the U.S. in recovery and that will be the talking heads new reason for the dollar to rally.  So relative to Europe,  the U.S. is in a classier section on the Titanic than Europe. I thought the kick off to the dollar rally would come on negative news instead, but instead it came on good news which makes me wrong, but what a great confirmation for my technicals:   good news poor price action.

If the dollar low is in, it will be interesting to see how the stocks and commodities react since they have been trading inversely. I am still holding core shorts in the Euro and European equities, and long natural gas HNU.TO. I am still down about 3% for the year which runs March to March.

Getting Technical

by Phil Volkoff, 8.1.2009

Corrections are notoriously difficult to trade. In Elliott theory there are 11 different types of corrections:  from zig zags, flats, triangles, double and triple three's and their myriad variations. For example, you could have ascending, descending, contracting and expanding triangles all within the category of triangle. Phew!
 

What it all Means

So how does all this fit into what's happening in the markets? We are experiencing major corrections in most markets.  I believe that the dollar will be the answer  when the tsunami change in trends occurs, which will kick off a primary wave 3 decline in stocks that will be a multiple of the primary wave 1 decline from Oct-07 to March-09.  Very big moves indeed. As this crisis of credit has been unfolding, the dollar continues to correlate inversely almost 1:1 versus stocks and commodities.

Rationale

Correlation doesn't always mean causation, but in this instance I believe there is a direct relation. Let's just say it is the ebb and flow of liquidity thru the system. 

Right now stocks are coming into a cluster of various resistance including cycles, and relations that could pause, end or accelerate the trend higher.  Sentiment is not extremely one sided bullish, which tends to show up at major trend changes.  This means that stocks could continue to grind higher in the near term. However, as I mentioned earlier, I believe the dollar holds the key to the major trend changes for the markets.  My analysis focuses on the Euro since I am long the (DRR), double short Euro, and the Euro is a large component of the widely followed dollar trade weighted currency index.   The Euro traded from an April-08 high of 1.5988 to an Oct-08 low of 1.2362 which was a 5 wave impulsive decline.

As I mentioned in last weeks update, the Euro was getting ready to accelerate up out of a triangle which in Elliott is an ending pattern.  But I mentioned that  I was seeing negative momentum, volume and open interest divergences. The euro tried to accelerate out of the triangle, then sold off to the apex, and then advanced sharply up to overhead resistance on Friday.  Some currencies made retracement highs and others like the Swissy and Euro stayed within congestion.
 

Euro Vulnerability

The Euro needs to get going  this week because the odds are starting to stack up against it.  If we continue higher out of this triangle, think ending pattern (termination). We run into .618 resistance @ 1.4602 and a potential double top at 1.4687 in the Euro. Sentiment remains extreme against the dollar similar to April-08 which kicked off a 36 point move down in the Euro. I also show large increases in open interest on the currencies at an important inflection point, which means that large bets are being made in the futures market and as a proxy in the giant cash markets. What I could see happening this week is a spike up to the .618 retracement and potential double top area and failing miserably, thus giving us a big reversal bar. Big trend changes tend to occur with high volatility.
 

Analogue

I use the analogy of a sail boat changing wind direction. As the sail boat turns into the wind the sails buffet back and forth violently until the wind catches the sails just right and the boat turns direction. So if I am right, the trend change in the dollar will lead the trend changes in the stocks and commodities and perhaps all smoldering around a lot of volatility

Deficits Don't Matter

By Phil Volkoff, 7.28.2009

Gee, look we can sell over one hundred billion in debt this week and look how low the rates are...3.70 percent for ten years!  As some  past, wise U.S. leaders have proclaimed, "deficits don't matter".  Yet, all that keeps going through my head is an article I read this week on Bloomberg saying that the U.S. has the highest real rates since 1994 (around 5.10% on the 10 Year Note).

Normally, in my experience real rates usually average around 2.25% to 2.75%.  Having real rates this high with imploding debt creating deflationary pressure is like adding lead weights to the chest of an emphysema patient.  This is the ultimate crowding out. 

In order to finance such large sovereign debts  governments around the world need to compete against each other to offer the highest real rates. This means that money is going to be sucked out of many productive investments to finance dead money. This is poison for stocks and commodities and very bullish for the dollar.

Just think of the U.S. being a giant vortex sucking money in from any investment that can't give a so called risk free return of 5%. Very scary!

Phil Volkoff

Risk Management Now

7.26.2009, by Phil Volkoff

The Macro View

So earnings were great?  Lower the bar so an infant can crawl over it and suddenly...earnings appear fantastic.  Cut enough jobs fast enough and you too can have a great quarter.  So what if top line growth at many firms spiked down 20 to 30 percent.  Ship some more jobs over seas, I say, and cut, cut, cut until there are no more customers left to service the debt bubble and buy ones products. 

Equity investors need not worry about more crises brewing, no potential for job growth, commercial real estate and construction loan ball and chain on regional banks balance sheets and the coming European banking debacle brewing. 

As a technician the technicals rule for now and what a mother of all short squeezes we have going on.  As an Elliotician comment, it is not uncommon for bear market rallies to retrace anywhere from .382 to .618 of the prior wave, in which case your talking the October '07 highs to the March '09 lows, which is a primary wave 1 decline.  Currently, we are making a primary wave 2 correction up. If you do the math that could take the S&Ps any where from the low 1000's to the 1200' area, which by the way is significant resistance.

So how do I make money?  My year runs from March to March and I am now down almost 3%. Last week, for money management purposes, I lightened up on my European short, which is EFU to 5% of my portfolio.

Elliot Wave Findings

I want to maintain a core short position because I have a very strong conviction that once primary wave 2 is done we will see wave 3 which is known as the "wave of recognition", and it should begin with a bang. Why the wave of recognition? Because it will be so clear to everyone that the system is so broken that you can't unwind a massive 30 plus year debt bubble in 2 years.  This wave 3 will be a Fibonacci multiple of wave 1:   pure panic material . So in order to live and fight another day I reduced my FX Euro short position, DRR, to 20% from 30% of my portfolio. Technically the euro is breaking out of a triangle, which in Elliott terms is considered an ending pattern but does not mean the Euro couldn't trade up to 145 before it tops.  However, normally you rocket out of triangles and that's not happening here.

Technical Analysis

My volume and open interest and momentum studies look bearish, plus you had what in the past would have hurt the dollar; rising stocks having a limited impact . This should be a make or break week for the Eurobulls.  The euro has been riding up it's 21 day moving average but not taking out long term resistance.  If it doesn't get going soon it will fall back.  If so, and the market takes out the apex of the triangle one can have an explosive move to the downside. 

HNU.TO

Natural gas bounced last week and the count is looking clearer. It appears we are making a little wave 4 rally and may get one big wash out down in a wave 5 before this bear market is over.  On a big wash out lower, I will be adding more HNU.TO to my position. I think over the next 2 years natural gas will be a big winner, but just not yet.

7.19.2009, by Phil Volkoff

No Market Mystique, Just Method

IIt's the weekend, and I am reflecting on the past week.  As I mentioned in my last update, there were 2 possible outcomes for the major indexes.  The first was the break of the neckline and an acceleration down in a wave 3; or a possible zig zag and then a rocket up. We got the latter, but with various indexes making notable divergent highs for the week. 

The possible wave count that I am looking at for Europe is a 1 down followed by a sharp 2 up with a sharp wave 3 down.  Here, I want to explain a little bit about how I look at the markets.  I take a long macro look at the markets and try to identify trends that might be developing where I can hold positions for a long time and trade around them in the short run.  I see the equity markets in a long term bear market.  Why buy the stocks when you can buy their bonds and lock in a nice yield?  I always look at cash flow to determine actual investment value.  

As an example, I recently bought a home in California after renting for six years because it's much cheaper for me to own now then to rent.  No way am I calling a bottom in real estate; its still going lower, but in the long term I've locked in cheap payments.  

I am long natural gas because there is a glut that built up from last years bubble and once worked off natural gas will go much higher because its too expensive to drill new wells.  Remember, think cash flow.  This crisis is about credit, and drillers are not going to be able to get financing when it makes sense to drill, thus, we're setting up for our next shortage.  On an Elliott wave perspective, we are very close to a long term bottom in natural gas, which could mean a tripling in price over the next 2 years.

Cheers, Phil Volkoff

Talking the Market Up?

by Phil Volkoff

7.11.2009

All the talking heads this week became armchair technicians discussing head and shoulders patterns with contrarians saying that because everyone is seeing them they won't work.  That is why I love Elliott wave analysis since it demonstrates whether or not a pattern is truly a head and shoulders pattern which would be a one two count for equities with two being the final shoulder with an impulsive 3 and 5 to follow, or a zig zag which is just  just a correction of the uptrend which breaks the neckline, gets everyone short, and then rockets to new highs.  I feel strongly that the European indexes are in impulsive moves down but I am not as confident with the U.S. indexes at this juncture.

Last week I took profits on my DTO position (risk management) which was double short crude even though it will probably go lower before sharply higher. I am still long SDS but will roll that into more EFU next week and still long HNU.TO .I  am still looking for a sharply higher U.S. dollar versus the euro and I am starting to get good confirmation on that trade from some of the peripheral currencies such as the Australian Dollar, Canadian Dollar, New Zealand Dollar, and British Pound all starting to break down.  Commodities are looking weak and bonds are rallying:  clearly, the recovery is questionable despite the talking up by the talking heads.

by Phil Volkoff

7.4.2009

Looking at the last two weeks of trading in the U.S. dollar, crude oil, and European indexes we see that all of these markets created counter trend technical flags.  A flag can be characterized by a tight rectangular area counter to an impulsive move, which usually appears about half way through a trending move.  

For clarity, if you look at a daily chart of the German ETF (EWG), our proxy for the Dax index, you'll see a clear rectangular formation rising up after the low made on 6-22-09 which marked a low after a five wave move down from the $20 area.  In Elliott wave terms, this is a wave two countertrend rally from the $20 bear market rally high.  If this analysis is correct, we should start to see a powerful wave three down of a bigger wave five which should take the European indexes to new multi-year lows. 

My wave count is the same for crude, which is also down.  Looking at the dollar long position I am still really bullish the green back.  My count shows a one and two wave already completed and if this analysis proves correct the impulsive wave (three) should follow relatively soon.

My June performance for the Volkoff fund is down 3% which puts my performance flat for the quarter since I started the maiden voyage here in late May, 2009.

Have a great 4th, Phil Volkoff.

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