SmartChart_November 5 2010

8/8/2019 SmartChart_November 5 2010

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1 James M Edwards 602.441.4303

SmartChart/Cycle Update Monday 11-08-2010

Bias:

DI: BUY per the INTRADAY guidelines

Key numbers:

Intraday Break Point: Buy above 1188 sell below 1188, special attention to 1178

Cycle: current reading is 938 Cycle Stage: buy, possible PEAK but divergences last

longer than logic

POMO: November 1, 4 and 8

Pre-market:

Premarket talks about those items that directly affect what we will be doing each day in the market.Premarket has NOTHING to do with macro economics.

Ok, I’ll quote a few comments from around the world on QE2 in a moment but I’llfirst that they basically match mine from a prior letter.

It is not my job to say if Ben is right or wrong but rather to understand justwhat it is he is doing. In this regard we have an opportunity once the initialrun of optimism is over. His current program will run thru June of 2011significantly delaying the pain of his actions.

One pain that will be immediate is the decline in the dollar. We are alreadyseeing a rise in crude oil because of it. You can expect $100.00 a barrel oilsoon and $4 gasoline soon.

Anyway a few thoughts from around the world:

If the markets are quiet about QE2 today, leaders in other countries are not. In

fact, it’s drawing scathing reviews… “As long as the world exercises no restraint in issuing global currencies such as the

dollar -- and this is not easy -- then the occurrence of another crisis is inevitable,” says Xia Bin, an adviser to China’s central bank

Brazilian finance minister Guido Mantega -- who warned in September the UnitedStates was launching a “currency war” -- was more direct: “Everybody wants the U.S.

economy to recover, but it does no good at all to just throw dollars from a helicopter”

Germany’s finance minister Wolfgang Schäuble was the most blunt of all, saying QE2

won’t solve America’s problems, but it will “create extra problems for the world.”

“With all due respect,” Schäuble added, “U.S. policy is clueless."

Just a wild guess here… but this doesn’t bode well for President Obama at the G20 summit




next week. He might want to dial back on Treasury Secretary Tim Geithner’s scheme to

have everyone limit their trade surpluses and deficits to 4% of GDP.

On that subject, China just issued its first official comment: “We believe a discussion about

a current account target misses the whole point,” says deputy foreign minister Cui Tiankai.

“If you look at the global economy, there are many issues that merit more attention -- for

example, the question of quantitative easing.” (Just an example, of course.)

More choice words from Cui: “The artificial setting of a numerical target cannot but remind

us of the days of planned economies.” Ouch.

The summit is next Thursday and Friday in Seoul, Korea. Usually these gatherings are the

stuff of mealy-mouthed joint communiqués and awkward photo ops. But for this one, we

might want to grab the popcorn…

They don’t sound very happy do they?

Well, Americans are not very happy either. No one screamed when Japan intervenedin their currency. No one, besides me, screamed when China joined the WTO andcut their currency in HALF and then pegged it to the dollar. (thanks Clinton)

Did anyone scream when France and Germany launched a currency war to gain RESERVEstatus and trade oil in Euro’s?

China recently stated: “we will do what is in the interest of China”. OK

Perhaps the world should adopt what Geithner called for: “domestic demand” andstop asking the United States to support everyone because of their exportrequirements.

“Problems for the rest of the world” came from Germany. The same people who arefamous for “adapt or die” and they meant die. These are the people who said “let

America pay for it” when it came to the twin towers…that was cold guys, realcold. Go ahead and complain, I’m sure we hear you.

Folks we await the FED’s new schedule on Wednesday but from what I read the fedwill be active each day. Don’t even think of trying to short this market. With1.1 trillion this market could exceed any expectation and I will be takingadvantage of it.

We have a once in a life time opportunity and I won’t be getting much sleepbetween now and June. Those of you that are in the room know the tools and youshould be very happy.

james

PS Ben to the world: We will worry about it later…




All I can say is that today was the single biggest over reaction I’ve seen in themarket in a few years. The promise of easy money was just to great and it seemsthe world jumped in with both feet and everyone else’s feet too. That’s fineuntil common sense kicks in and the floor realizes the stops go down to 1180.That fine until you realize the FED has not published their schedule of buyingand wont’ until Nov 10

th. That’s fine until you realize that we are now so

overbought that we broke long standing records today and price is now inuncharted territory.




Ok, so the party started but some level of common sense needs to kick in; realityas the fed only solved a few problems for the banks and did nothing for the restof us.Technically tomorrow should see a slight uptick and then a doji. A pullback, a

serious pullback to 1120-1130 is really in order.

Everyone went long today at the theoretical limit of price travel. I’ve seen itbefore and it normally doesn’t end well.

I’m not suggesting you fight the FEDs 1.1 trillion dollar buy program. I’msuggesting he hasn’t given anyone the actual schedule yet. Until we see that

schedule and because price is MAXED out I would strongly suggest some caution.At least wait for a decent pullback.

Transports, Technology and Consumer Discretionary are all way above their stddeviation of 2.0. In other words everyone is long. Manias go higher but normaltakes a breather. Today was the single biggest spike beyond the std deviation of2.0 on record and it has never failed to signal a sell signal. Might be a bitdelayed but it’s sell none the less.

I’ve repeatedly said 2010 would be another 2004 so here is the chart from 2004:




It’s almost an exact match. We can modify the outcome by pulling back to trendnow at 1127 or we can do it the way it was done in 2004 and pullback next yearwhen the fed pulls the money away in June of 2011. Oddly enough the timing isalmost an exact match also!!

The plan is to be on the fed side but we NEED that schedule and it had better saywe start immediately or we will get that pullback an fast.

Now we know the FED will be ACTIVE next Tuesday just like they were today:




Now the good folks at the FED will publish another schedule November 10th

butthis time around they have said they will “monitor” the program and publish theschedule “monthly”. That sounds like chop to me folks but we will see soonenough. THAT leaves tomorrow and Monday for a decent pullback with Tuesday

turning back up.

Bottom Line: EXTREMELY OVERBOUGHT, needs a rest and we may see sideways to downpending further fed scheduling.

We have the opportunity to JOIN the fed in their program for the first time in

history. The profit potential of that is rather large.

James




-- Fed will purchase an addition $600 billion of treasury securities by the endof Q2 2011. This is on top of the MBS reinvestment, which the Desk expects willbe $250-$300 bil over the same period. So, the TOTAL in treasury purchases willbe $850-$900 bil through June. -- The AVERAGE purchase per month will be roughly $110 billion, with $75 bil permonth in additional purchases and $35 bil in reinvestment. --

The purchases will have an average duration of between 5 and 6 years. Thedistribution of purchases is as follows: -- 1.5Yrs-2Yrs = 5%; 2.5Y-4Y= 20%; 4Y-5.5Y= 20%; 5.5Y-7Y=23%;7Y-10Y=23%; 10Y-17Y=2%; 17Y-30Y=4%; TIPS (1.5Y-30Y)= 3%; This means that the FED will purchaseapproximately $53 billion in the 10Y-30Y range. The bulk of the purchases,approximately $403 billion will be in the 5.5Y-10Y range. -- Thedistribution of purchases could change if conditions warrants, but "such changeswould be designed to not significantly alter the average duration of the assetspurchased. -- the 35%per-issue limit on SOMA holdings "will be allowed to rise above the 35% threshold

only in modest increments." -- Operationswill be consolidated into one set and will be announced on or around the 8th

business day of each month. That schedule will go out about one month. The firstschedule will be published next WED, Nov 10th at 2PM.-Omair Sharif

And from Germany:

The Fed announced that it “intends to purchase a further $600 billion of longer-term Treasury securities by the end of the second quarter of 2011, a pace of




about $75 billion per month.” The statement then goes on to say, “The Committeewill regularly review the pace of its securities purchases and the overall sizeof the asset-purchase program in light of incoming information and will adjustthe program as needed to best foster maximum employment and price stability.” Webelieve this language is more strongly worded than if the statement simply said“up to an additional” amount as was the case in March 2009.

Additionally, the Fed was clear in its desire to raise inflation expectations bystating that “Although the Committee anticipates a gradual return to higherlevels of resource utilization in a context of price stability, progress towardits objectives has been disappointingly slow.”The last phrase is key: the Fed wants inflation higher and unemployment lower; ithopes to achieve this by further expanding its balance sheet and keeping rates“exceptionally low…for an extended period”.

It is also noteworthy that the Committee took a more balanced tone toward theirdual mandate of maximum employment and stable prices. In the September statementthe Fed appeared to be more focused on undesirably low inflation, whereas in thecurrent statement they acknowledged that the unemployment rate was “elevated” andmeasures of underlying inflation were “somewhat low”. Based on our analysis ofeconomic troughs and inflation bottoms, the latter should begin to stabilize thisquarter or next. In terms of the details, the average duration of the Treasurypurchases will be between 5 to 6 years. And, the Fed announced it is going totemporarily relax its SOMA limits, but said it would only do so only modestly.

Joseph A. LaVorgnaManaging DirectorChief US EconomistGlobal Markets Research212-250-7329

In a nutshell: no fed money, no market. Want proof? I would…

NOW WE GET WILL HIT THIS HARD…NOW THE TIMING

IS RIGHT….




So it seems the best way to beat the life out of a short and reality is to print money. How you ever get

off the addiction is beyond me.

But for the time being shorts will find they must cover or DIE because you cannot fight 1.1 trillion

dollars, fake or not.

So for the time being and for those of you with a sense of

ironic humor (but be sure to see the CHART after the

humor):







THAT is a collapse folks..and if billions flow out of bonds it needs a HOME…

http://tinyurl.com/26nftwa Did any of you get a tax break? Just asking….

james

Market Outlook:

Trading Outlook is concerned with intermediate and long term macro economics. It has a bearing on

INTERMEDIATE and LONG TERM thinking.

http://advancedtrading.com/articles/228200026?cid=nl_at_daily

finally some sanity

http://tinyurl.com/26nftwa









A Primer on Quantitative Easing: What Is It and Will It Save the

Economy?

By Hans Wagner Created 10/29/2010 - 18:28

Quantitative Easing (QE) is a hot issue. But even though the term is used frequently by journalists, analysts and investors, most people are only repeating what they heardsomeone else say.

Let's see if we can shed some light on QE: the challenges the Fed is facing, the actionsit's likely to take, and what an investor should do to prepare.

The upcoming announcement from the Federal Reserve will be one of the most

important in recent months. The question is what you should do to be ready when thenews is announced.

Some Basics Quantitative easing is a strategy employed by a central bank like the Federal Reserve toadd to the quantity of money in circulation. The premise (which is largely theoretical anduntested) is that if money supply is increased faster than the growth rate of GrossDomestic Product (GDP), the economy will grow.

To understand the rationale behind the strategy, it helps to look at the basic relationshipamong GDP, money supply and the velocity of money.

In general, GDP equals money in circulation (M) times the velocity of the money throughthe economy (V):

GDP = M * V

Velocity is the speed at which money passes through the hands of one person orcompany to another. When money is spent quickly, it encourages growth in GDP.When money is saved and not spent, the GDP of the country slows.Today, one of theproblems the United States faces is people and companies are saving their money andpaying down debt instead of spending it. When people spend less and save more, the

velocity of money falls and drags down economic growth.

Through quantitative easing, the Federal Reserve will try to counteract falling velocity byincreasing the money supply. It has two primary tools with which to do it.

The first way the Fed manages money supply is via the federal funds rate. Banks withexcess reserves can lend money to other banks that need additional reserves before




closing their books for the day. The federal funds rate is the interest rate the bankscharge each other for these overnight transactions.

The Federal Reserve sets the federal funds rate. As one of the most important interestrates in the world, it is widely quoted in the press.

The current fed funds rate is between 0% and 0.25%. Essentially banks can "borrow" ata very low rate of 0 – 0.25%, making their cost of funds very low. Theoretically, thisshould encourage banks to lend funds to individuals and businesses at higher rates -- ifthey can borrow at 0% and lend to someone else at more than 0%, they make money.

The second tool the Fed uses is the open market operation (OMO). The Fed usesOMOs to buy or sell securities that banks generally own -- mortgages, Treasury bonds,and corporate bonds. When the Federal Reserve buys securities, they trade the security

for cash and increase the money supply. When they sell securities back to banks, theydecrease the money supply.

In the past, the Federal Reserve has not resorted to this approach to manage thesupply of money in the economy. But starting in 2008, it started buying large amountsof mortgage-backed securities (MBS) and Treasuries in order to add more money to theeconomy and help stabilize the banks.

Where We Are Today Since the Federal Reserve has lowered the fed funds rate to 0 – 0.25%, banks haveaccess to cheap money. The Fed was hoping that access to cheap money would

encourage the banks to lend to their customers at reasonable rates. But it hasn't beenthat easy. The Fed has run into two problems.

First, many companies and individuals are afraid to borrow. They lack confidence in theeconomy. They prefer to save their cash and pay down existing debt. Thisphenomenon is reflected in the rising savings rate and the falling level of consumer andcorporate loans. Not only has money supply not increased, but increased saving hasslowed the velocity of money through the economy.

Second, banks are afraid to lend because they're afraid they won't get it back. Shouldthe company or individual run into financial difficulty, the bank may be stuck with a loan

loss. So instead of investing in loans, the banks are turning back around and buyinghigh-quality securities like long-term Treasury bonds. Today, a 10-year Treasury ispaying a yield of around 2.5%. With a cost of funds of 0.25%, this gives the bank aninterest rate spread of 2.25% -- a very nice profit with almost no risk.

All of this means the Federal Reserve's attempt to stimulate the economy with low shortterm rates is not achieving its desired goal. The economy remains in slow growthmode.




And relatively high long-term Treasury yields (when compared to 0% short-term yields)have perversely created an incentive for banks to stop making loans except to the U.S.Treasury.

How Will Quantitative Easing Help?

The Federal Reserve recognizes that banks are using very cheap short-term money topurchase longer-term securities and pocketing the difference in interest income. So theFederal Reserve has decided it wants to drive down longer term rates and remove theincentive to buy Treasuries.

If the Federal Reserve buys enough 2-year, 3-year, 5-year and 10-year Treasuries, theyforce an increase in their prices. And bond prices are inversely related to bond yields:when prices go up, yields go down. A lower yield means banks cannot make as muchmoney using the overnight money at 0 – 0.25% and buying long-term Treasury bonds,since the yield on those bonds will be pushed lower and lower.

The hope is the banks will then be encouraged to lend more, thereby stimulating theeconomy.

The Bottom Line Most people expect the Federal Reserve to announce they will add another $1 trillion innew money to the economy by buying Treasuries. I don't think the Fed will go that farthat soon. Announcing a large number commits the Fed to buying that many Treasuriesand it doesn't give it the flexibility it needs to adjust the program as its effects ripplethrough the economy.

Rather, I believe the Fed will announce it stands ready to purchase 2, 3, 5 and 10-year

securities in blocks of about $100 billion a month. The exact makeup will depend on theFed's view of where it can get the biggest benefit for the money spent.

By carrying out the quantitative easing over a series of months, the Federal Reserveallows itself some flexibility to adjust purchases based on updated forecasts of theeconomy. It also allows the Fed to communicate its intentions over time, cutting downon the number of surprises inflicted on the fragile economy.

If the Federal Reserve buys $100 billion of intermediate-term Treasuries each month, itwill place downward pressure on the interest rates of the Treasuries they purchase. Butbecause the Fed has already telegraphed its intentions to the market, rates have fallen

significantly in anticipation of the official quantitative easing announcement. Therefore,we are likely to see a brief move up in longer-term rates as bond traders close out theirprofitable positions.

After the initial shake out in the stock and bond markets, it's certain that economist willcontinually monitor the economy to gauge QE's effectiveness. If the program isencouraging more lending, the economy should start to grow faster. But if lending doesnot pick up, it is telling us borrowers and/or lenders lack confidence in the future and are




unwilling to compromise their balance sheets. If this happens, the economy will remainin slow growth mode.

Fed Chairman Ben Bernanke is sure to make regular announcements on the state ofthe program. If he indicates they will buy more Treasuries in the future, it means the

economy is not responding as well as he hoped, and he wants to add more money tothe system. If he suggests the Fed will reduce purchases, it indicates his belief thatquantitative easing is working and the economy is improving.

As far as trading, the short-term downside vastly outweighs the upside, if only becauseof uncertainty. If you are a short-term trader, you might want to move to cash to avoidthe inevitable volatility that will ensue, as this is a sell on the news event.

If you are a longer-term investor, be sure to add some downside protection to yourportfolio. You may also want to own some longer-term Treasuries, since the wholepoint of QE is to drive up the price of those specific securities. Don't be prepared to hold

them forever, though. At some point (hopefully), the economy will grow again and bondprices will come back down.

This round of quantitative easing will be studied for years. We are in uncharted territoryand the risks should not be underestimated. Capital preservation is important tosuccess. Take steps to reduce your risk until we have a better idea of the longer termeffects of this next round of QE.

Comments:

Comments are concerned with news links, commentary from other sources and any other news worthy

item(s). It deals with what can change the macro economic landscape; with what is brewing under the

surface.

http://www.chicagofed.org/digital_assets/publications/economic_perspectives/2010/4qtr2010_part1_agarwal_barrett_cun_denardi.pdf











Standard CFTC disclaimer:

The risk of loss in trading commodities can be substantial. You should therefore carefully considerwhether such trading is suitable for you in light of your financial condition.

The high degree of leverage that is often obtainable in commodity trading can work against you as well asfor you. The use of leverage can lead to large losses as well as gains. In some cases, managedcommodity accounts are subject to substantial charges for management and advisory fees. It may benecessary for those accounts that are subject to these charges to make substantial trading profits toavoid depletion or exhaustion of their assets.

The disclosure document contains a complete description of the principal risk factors and each fee to becharged to your account by the commodity trading advisor ("CTA"). The regulations of the CommodityFutures Trading Commission ("CFTC") require that prospective clients of a CTA receive a disclosuredocument when they are solicited to enter into an agreement whereby the CTA will direct or guide theclient's commodity interest trading and that certain risk factors be highlighted. This disclosure documentwill be provided via electronic mail or hard copy upon request to any interested parties. This brief

statement cannot disclose all of the risks and other significant aspects of the commodity markets.Therefore, you should examine the disclosure document and study it carefully to determine whether suchtrading is appropriate for you in light of your financial condition. The CFTC has not passed upon the merits of participating in this trading program nor on the adequacy oraccuracy of the disclosure document. We are required to provide other disclosure statements to youbefore a commodity account may be opened for you.

Written by James M. Edwards

602-441-4303

[email protected]

Please do NOT redistribute the letter.

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SmartChart_November 5 2010