Remember never forget the power of greed and fear, and the propensity for investors wanting to own stocks (taking long-side) and fund managers chasing performance as we saw today especially if they think the bull-train is pulling away they will want to hop on board.  Please, remember when in doubt as to market conditions/direction CASH is always king (or queen depending on your gender J ) please trade cautiously and be quick to protect your profits. I’m guessing that this the days ahead we will become embroiled in a major bull-bear battle as we head into my major turn time. 

Strap-yourselves in tight the next few days to a week or so is sure to be a another wild rollercoaster ride!!  As a technician the charts are flashing more and more negative-divergences and many overbought and distribution sell-signals….during the past few weeks as we have seen some significant periods Gaps-runs-distribution and tape painting. I believe that traders and the prop-desks will now start to sell into each and every-rally attempt as each passing trading day brings another piece of economic data with conflicting view of the economy, and this seems to be adding to the overall apprehension and skittishness….at this point we have renewed optimism and giddy-euphoria. We have two opposing forces at work, those who desire to step into the markets and buy the dips and those who will in my opinion start to sell the rips…and then we have those who are looking to sit out this period of uncertainty, as the market swings will start in my opinion to pick up in intensity….then we have those significantly stricken with greed or the fear of missing out on the buy-side of this so called bull-market.

We are only 5 days away from the Non Farm Payroll report for July and with the weekly initial claims data stubbornly high the early estimate for jobs lost is creeping up into the range of 250,000. That would be a major drag on the markets and this is already weighing on market sentiment. I remain very skeptical of the rally and still expect the markets to start to show distinct weakness soon. As the 2010Q2 earnings cycle is drawing to a close and the news headlines that have had the potential to move the markets higher are dwindling. I will be very surprised if we don't trade significantly lower over the next 2-3 weeks as the technicals have been indicating to me as I have laid out below but I will still be a very reluctant bullish trend follower if the prop-desk/program traders manage to push the SPX-500 traders over 1,122….as I mentioned last week we could also see some window dressing as we come into the end of the month as new monthly money could seep into the market but the big inflows usually come in at the end of the 3rd quarter, and 401k/IRA contributions are re-set in August - October; so any pop could be short-term.   The economic news of late has not been even remotely bullish, and have been weak and getting weaker, (see my references below) and as such there is really no reason at all to be bullish! 

The economic calendar for this week has two important reports to watch for as we get the national ISM manufacturing report released on Monday and that is expected to be flat to slightly up a tad, and while an inline report may not produce a market crisis any material drop or significant improvement is sure to create a significant move.  The big report for the week of course will be the Non-Farm Payrolls on Friday, and right now the consensus estimate is for a loss of 55,000-75,000 jobs; however the unofficial estimate is for a loss of 100,000 - 125,000 jobs; and of course we will have census data that will cloud the overall job loss picture again. Morgan Stanley believes the headline number will be a decline of 50,000 jobs but net of the census losses we will see a nice gain of 135,000 plus jobs. That means they are expecting census terminations of approximately 185,000 jobs.  **I believe they are way off base as my numbers are way-way lower (I believe we have a loss of 155,000 net of census!   Friday's non-farm payroll report is going to be critical for market sentiment for the rest of the month as it will be hyped if great and dispelled if crummy, and ignored as a true read on whether the economy is going to be able to improve in the days ahead or decline into another recession. Most of the weekly regional reports have indicated that the employment components improved a tad even as the overall production components decline (a very strange divergence). Jobless claims continue to hover in the 465,000 range and while down from the peak over 640,000 in early 2009 they are stubbornly refusing to return to normal in the 310,000 range. This suggests that a high level of terminations are still persisting in corporate America the land of screw the worker, hello profits for insiders. This is going to be a tough report to predict and the market will probably be whippy and thinly traded ahead of the report. 

Worse yet we have another Fed-head meeting just two days after the payroll report yet another reason for the market to worry. The various indexes have rallied strongly in July with gains in the 6.5-8.5% range across the board. This was because the markets hit eight-month lows on 7/02 and were oversold and the vast majority of the rebound came in the first half of the month. The rebound was due to distinct oversold conditions, and a vast number of Gap-Runs as the markets ran into their earnings cycle. Now that the earnings cycle is nearly over and the various indexes are struggling at OHR the outlook is not as positive as hyped. Now the ;likely focus will turn from earnings back to the economy and the big reports due out this week will be a jumping off place for the markets next move. 

On a positive front….in Europe we are seeing declining credit default swaps on almost every country but Greece; growing evidence of more confidence that the sovereign debt crisis has disappeared; as the worries over EU nations like Spain and Portugal have diminished almost completely (I find this very strange).

We could see a distinct futures ramp/drop after the release of China's PMI on Sunday night and this could be a market mover. The consensus estimate is for 51.1-51.4 according to Reuters; we had seen that the June number declined to 52.1 from 53.9 in May; when we saw a major market decline when the big drop in the month of June was announced. China's Shanghai Composite index closed at a 9-week high on Friday so their market is primed for a big downdraft if the number comes in soft.  

Right now we are at dancing on cloud "9" these past several weeks a very dangerous state in this bear-market and post-bubble cycle. It is clear that leading indicators have turned downward, and I have a host of nasty negative divergences triggering in my technical arsenal, but of course if you believe the hyping media from the various bubblevision networks we are sowing the seeds of a plantation of green-shoots…that the public just can't see as they do not have rose colored glasses like the hypsters wear! Despite more and more developing signs that we could be entering a Japan type scenario (the lessons from Japan that we should not dismiss is that once the cyclical rally is over, any downturn in the leading indicators should see a developing recession. Unfortunately as I see it we are debarking what I believe into a nasty age of what could be a secular stagnation and deflation environment that put an anaconda grip on Japan's economy for over a decade. While there are significant differences, there are parallels in the unwinding of extreme equity valuations in a massive deleveraging of a post-credit bubble environment.

This past week we saw that Fed-head Bullard Wants to see Significant- Easing if recovery fails, as St. Louis Federal Reserve Bank President James Bullard on Friday there is unanimity among officials on the central bank's policy-setting panel over providing more support to the economy if the recovery suffers a serious setback."I think everyone on the committee is completely on board with the idea that, you know, if things got really bad, we would try to take other action," he stated.  "I call for a plan to have significant easing if the situation arises," Bullard said.  "I'm still an inflation hawk but … we're in a low side right now," he said, explaining that the consumer price index, excluding food and energy, has been coming down (this is a very bad economic condition that he failed to address at all).  If the economy continues to recover in the second half, "this will all go away," but meanwhile there must be a plan to deal with deflationary expectations, Bullard stated; he said the risk of deflation in the United States has risen somewhat compared with the beginning of this year.  He said the most likely option in easing monetary policy is to buy more long-term Treasury securities, adding that there was room to influence medium- to long-term interest rates.

He stated that the central bank should revive a crisis-era program to buy government debt if the country seems headed toward a bout with deflation. The weak economy poses the risk that the United States could tip into a Japanese-like bout of deflation, he alluded to. Deflation is a widespread and prolonged drop in prices of goods, values of homes and stocks, and in wages.  Last year, the Fed bought up to $300 billion worth of Treasury securities.

I believe we are embroiled in a huge secular decline which will be punctuated by sharp but short-lived cyclical rallies that reverse as the transitory economic data surfaces and displays continues weakness after this recent inventory build that will likely find little demand….please remember, we have seen in the past that the Nikkei has seen 40%-50% tradeable pops and as I stated before the key was to get out as soon as leading indicators turned lower; which they have been doing for the past 11+ weeks!  To this old economist its clear from the recent stream of economic data being released and the ECRI weekly leading indicator, which are in my opinion now in a recessionary-reading that this market rally has been orchestrated and like a house of cards will likely come tumbling down!  Right now the ECRI folks do not look for a double-dip but they have been forecasting a second-half slowdown.  

I believe that the ECRI weekly leading indicator for the most part right now are overly influenced by mortgage applications; the slope of the yield curve, which under normal times would be pointing to a boom is signaling concern these are not normal times (anything but), as evidenced by the Fed-heads holding their funds rate near zero for an extended periods of time, if things were so rosy this would not be the case. If the Fed-funds rate was not manipulated to extreme low levels for so long to bail out the lecherous banks/bankers  that created this credit/debt debacle the yield curve would not be nearly so positive, either in its slope or in its implications for the economy (as is so hyped). 

We have seen that other leading indicators from the OECD and the Conference Board are rolling over as well but their decent is more moderating. The hyping media fails to realize that real gross domestic product growth was hugely driven by the end of inventory liquidation and it sorely contrast with the sub-2% (1.7%) rebound in final sales [GDP minus inventory change] worse yet my friends this pitiful gain is on the back of the biggest-ever peacetime stimulus, package devise in our history so it doesn't take a rocket scientist to see that when the stimulus soon ends, we are going to see a dramatic reduction in GDP growth.  So I believe sincerely that all the bullish hypsters being pranced about on the various bubblevision networks are missing this important nuance; it doesn't take a recession to be signaled first for the equity market to sell-off briskly as they are a forward pricing mechanism and there are many savvy economists like me that understand what is truly happening.  

It's also worth noting that real nominal final sales are very low, this is a real contagion as they are running significantly below normal recessionary levels (of course you do not hear this on the bubblevision networks), which helps to explain the vast number of revenue misses and warnings during this current earnings season. 

On Friday we saw that our economic news wasn't as stellar as hyped as the GDP revisions will no doubt end up being a major force in the early morning market trend on Monday. The headline number on the GDP for 2010Q2 dropped to 2.4% compared to estimates of 3.0-3.2% and the 2010Q1 GDP revised estimate of 3.7% and this was more than a full point drop and should have been more of a shock to the markets, and it was ignored as was the huge revision to the last three years of quarterly GDP estimates. As the BEA revisions show that the recession was much deeper than previously hyped. The revision showed that the bottom of the dip was a nasty 6.8% drop in 2008/Q4. The revision also moved the severity of the drop backward by a from previous estimates.   Mark Zandi of Moody's is going to revise his 2010Q3 GDP estimates and he has stated that he may cut them to less than 2%, and I'm betting it could be as low as 1%. As he and I worry alike that the declining inventory cycle (we saw a huge build the first 4-6 months of this year) and the likelihood of anemic job creation at best and the stimulus impact which is deteriorating, when governments on the surface are attempting to reduce spending.  Moody's believes as many as 500,000 government employees could lose their jobs.  

This past week, on Tuesday we saw that The July Consumer Confidence report dropped to 50.4 and this was the lowest level since February, again hardly bullish, this was a 4 point drop from June and a 12.3 point plunge since May's near-term high of 62.7. The present conditions component dropped a smidgeon only 0.7 to 26.1 but the expectations component coughed up 6 points to 66.6. Unfortunately Job expectations declined as did home buying intentions. However, people planning on durable goods like cars and appliances picked up slightly. What I found very interesting was that the percentage of respondents to the survey expected the equity markets to decline over the next 6-months rose to a whopping 75%.

If things were so rosy and we were turning the corner why has Congress been through political pressures and out of necessity extended jobless benefits a whopping 7-times over the past two years, and almost half of the ranks of those still unemployed have been looking for a job over 9-months or longer. The unemployment rate for adult males aged 25-54 years old has hit its highest level since WWII, while the youth unemployment rate is over 25% (these are hardly bullish data points) and as such these developments will have profound long-term negative consequences on our economy as well as our society as a whole.  Just this week the fuzzy math experts in Washington increased their projected deficit for 2011 to a stunning $1.49 trillion (I believe we will continue to see upward revisions here) from $1.27 trillion.  This is happening when we see further credit/loan tightening as Last week alone, bank wide consumer credit outstanding fell $2.7 billion; real estate lending contracted $9.8 billion; and commercial and industrial loans dropped $5.1 billion.

This past week my buddy….Jim Rogers, chairman of Rogers Holdings, stated that he believe that another significant recession will hit around 2012 but central banks will not be able to throw cash at it anymore; and hyper inflate their way out of this one, as he stated and I concur "We do have significant in the world … most central banks should resign," Rogers stated when on CNBC, in an obscure time.

There has always been a recession every 4-6 years in the United States "since the beginning of time," and that would mean another one is due around 2012, according to Rogers. When the next one comes the world is going to be in worse shape because the world has shot all their so called proverbial bullets, he stated and I have said this for over a year now.

This week US financial terrorist #2 U.S. Treasury Secretary Timothy Geithner dismissed fears of a double-dip recession, but warned of a very slow US recovery with the economy only gradually gaining strength. he was asked on NBC's "Meet the Press" whether he thought the economy would dip back into recession before things got better. "No, I don't," he answered. "I think the most likely thing is, you see an economy that gradually strengthens over the next 2-3 years. When asked whether he saw job growth start to come back again, he said yes but also at a very slow pace (hardly great for those currently unemployed or soon to be).

Bernanke warned just last week (seems the markets already forgot) when he testified before congress on 7/21 that the outlook for the U.S. economy was "unusually uncertain," saying the central bank could step in if the recovery fails. Bernanke said the world's largest economy would see "moderate growth, a gradual decline in the unemployment rate and subdued inflation over the next several years."

The new Wall Street reform law **what a joke** leaves in place the same uncertainty that led to the financial crisis, and as I have said before its worthless and the bill is another stack of congressional toilet paper…as the idiots (mostly bought and paid for by Wall-Street lobbyists) the Obama administration is continuing the same lamebrain mistakes of the Bush administration by codifying the worst parts of the last crisis haphazardly and without real logical thought. There are few rules/requirements surrounding the use of (excessive use of) leverage and disclosure requirements are hardly addresses at all it this so called comprehensive financial regulation bill. . . . In my opinion it does little to nothing to provide investors with better disclosure and/or allows them access to information to have a better sense of what a financial institution actually has on their respective balance sheets and of course off-balance sheets. Instead, the law authorizes disparate treatment of creditors to big banks, which will create a run for the hills in the face of what are believed to be factual rumors as disclosure is so lame as it will likely increase uncertainty, fear, and people’s inclinations to run on headline news till its dispelled.

On another note….letting the Bush tax cuts lapse, as will happen unless Congress acts before 12/ 31, doesn’t bode well for small and medium-size business, who are starving for credit and liquidity. As these firms are generally self-funded by their owners, who will be the ones facing higher taxes, higher healthcare costs, higher hiring costs etc.  You can count on further stress on funding to small businesses as a result of increased taxes, and this is hardly a bullish development.

A precursor to a dismal jobs report: As on Wednesday we saw that unemployment rose in 75% of Metro areas last month as nearly one million teenagers/young adults entered the work force looking for summer jobs and there were few to none available. The Labor Department said that the unemployment rate rose in 291 of 374 areas in June from May; significantly reversing the trend of the previous three months, when joblessness fell in most metro areas. The economic recovery has spurred some hiring, with private employers adding an average of 100,000 jobs each month this year (but we need to add 160,000 or better just to keep pace with population growth; we have seen that the pace of hiring slowed in May and June and it surely will not bring down the unemployment rate.  Most of the cities with the largest increases in unemployment last month are college and university towns.  Twelve areas recorded unemployment rates of 15 percent or higher, the government said, with 10 of them in California.

The Governor Schwarzenegger's new executive order requires employees take three unpaid days off per month. But unlike that policy, it has no termination date: Furloughs will end when lawmakers pass a 2010-11 budget.  The governor made the decision this week after Controller John Chiang said that unless lawmakers enacted a budget soon, the state's cash would go into the red by October. Chiang said he'll start issuing IOUs in August or September to conserve funds as long as possible.

 

Some bad news for the labor markets….for this Friday's employment report

I read a report this week that forecasted (I agree) that many cities and municipalities may take the Chain-Saw AL-Dunlop approach as they will be forced due to declining revenues to slash more quality benefited jobs (which will in turn lead to an increase in the under/unemployment rate and will negatively impact consumer discretionary spending as local government revenue have dwindled so significantly that many cities, municipalities and counties will have to cut hundreds of thousands of jobs in the coming months, leaving some communities without basic services and pressuring jobless rates, according to a recent survey.

Most folks do not realize that local and state government employment accounts for more jobs in the US than construction and manufacturing combined. The survey by the National League of Cities, National Association of Counties and U.S. Conference of Mayors found that they are unfortunately the primary employer in many communities. Those recently surveyed (214 cities with populations of more than 25,000 and 56 counties of more than 100,000 people) reported they will reduce 8.6% of their full-time positions from 2009 through 2011; and more cuts are coming to deal with severe budget short falls "If applied to total local government employment nationwide, an 8.6% cut in the workforce would mean that 481,000 local government workers were, or will be, laid off over the 2-year period," the report indicates as a minimum.

Local governments across the country are now facing the combined impact of decreased tax revenues, a fall-off in state and federal aid and increased demand for social services, the report showed as over the next two years, local tax bases will likely suffer from severely depressed property values (less property taxes), hard-hit household incomes (less state income taxes) and declining consumer spending (less sales tax revenues).

So far, more than 52% of cities and more than 34% of counties have reduced staffing for police, safety and firefighting in response to the deep recession that began in 2007. A majority of cities and counties are cutting public works staff such as trash collectors, and postponing infrastructure projects such as bridge and much needed highway repairs. These cuts will trickle down (tinkle down) into the private sector because they will limit the number of contracts various firms can place bids on, according to the survey as in house staff scramble to stave off more layoffs by eliminating contracts and doing the work internally!

The beige book was a terrible report

As the various Fed-head regions warned that slower growth keeps the so called recovery from taking off….and gaining strength, the beige book released by the Fed revealed that the U.S. economy was growing a tad even as risks and contagions grow as we saw that within the 12 regions overall economic activity was lackluster and described in the best regions as only modest at best. High unemployment, cautious consumers and businesses, and a very ailing housing market have kept the recovery from gaining any strength.  Manufacturing expanded in several regions; however, more than half of them (New York, Cleveland, Kansas City, Chicago, Atlanta and Richmond; reported that activity had "slowed" and they pointed out that steel production declined in both Chicago and Cleveland. Retailers reported sales gains, although merchants in many places said shoppers focused on buying "necessities." Sales of big-ticket goods were slowing very significantly in fact, reports across most regions found that auto sales had declined (hardly bullish for "F" Ford).  We also saw that the housing market turned more sluggish after homebuyer tax credits expired in April. Commercial real estate businesses continued to "struggle" across all 12 regions, the survey said.   Bernanke told Congress last week that the Fed is prepared to take new steps to stimulate economic growth if the recovery were to flash more signs of sliding back into recession.  In their previous report, released 6/9 referring to May and April, the Fed said economic activity had improved across all of its 12 districts…the U.S. economy has been expanding at a moderate pace for most of the past year, gradually recovering from the deepest recession in many decades; now most economic data for June is pointing to a slowdown, especially in consumer spending and in an already weakening housing sector. Worse yet bank credit remains tight and is getting tighter in most of the country and some areas noted soft or lower levels in overall loan demand.  We have shed jobs in June and the unemployment rate remains unmanageably high, adding to concerns that the pace of the recovery will slow even more in the second half. The number of U.S. workers filing new claims for unemployment benefits has jumped in the past weeks, reversing declines posted the prior weeks and signaling there is still little improvement in job-market conditions

A negative surprise as Durable Goods Orders came in significantly weaker than expected this week reigniting Double-Dip Fears, but this went under-reported on by the various bubblevision networks, as new orders for long-lasting U.S. manufactured goods fell for a second straight month in June, posting its largest decline since August, further evidence economic our so called green shoot economic growth cooled significantly in the second quarter; as the Commerce Department stated that durable goods orders dropped 1.0% after a revised 0.8% drop in May (revised down from a 0.6 percent drop) the number was weaker than expected and it adds fuel to the idea that the economy is slipping into a double dip recession.

As I have written about these past weeks data ranging from consumer spending to manufacturing have suggested the so called pro forma recovery from the longest and deepest recession since the 1930s is starting to backpedal in the past few months.

Non-defense aircraft orders plunged 25.6% in June after falling 30.2% in May; overall orders were also pulled down by bookings for computers and electronic products, which saw their largest decline since October. Orders for machinery recorded their biggest decline in over 14 months, while those for primary metals plunged the most since March 2009. This is a terrible report as durable goods orders are a leading indicator of manufacturing, which in turn provides a good measure for overall business health, and potential for economic growth or not! Manufacturing was leading the so called economic recovery from the most brutal downturn since the 1930s as businesses replenish inventories that were significantly drawn down to record lows during the recession, but this reversal trend has shown significant signs of exhaustion in recent months.

Hardly a bullish posturing for the financials, but the contagion was ignored as Moody's Investors Service this past week lowered their outlooks to "negative" on Bank of America, Citigroup and Wells Fargo citing a new law (financial regulation) that is expected to reduce the likelihood of government bailouts of banks (do they need additional bailouts).   The outlooks on the banks debt and deposit ratings were previously as "stable."

In a note to investors, analyst Sean Jones wrote that Wall Street Reform and Consumer Protection Act should result in lower levels of taxpayer support for banks that run into trouble. The new law attempts to strengthen the ability of regulators to supervise and liquidate banks if need be, he wrote. He stated that in the near term regulators would continue facing significant obstacles in trying to liquidate global firms without causing economic upheavals, so the current ratings are still appropriate. However, he said that as the new law is implemented over the next year or two, Moody's "support assumptions" for major banks will likely revert to pre-crisis levels, or even lower. "Since early 2009, Bank of America, Citigroup, and Wells Fargo's ratings have benefited from an unusual amount of government support," Jones noted. That support resulted in debt and deposit ratings that range from three to five notches higher than that appropriate for the banks' intrinsic financial strength, without the support.  

In a separate action, Moody's placed the ratings of 10 U.S. regional banks under review for possible downgrade as they stated that they are reviewing the ratings of 10 large regional banks for possible downgrades because of a new law that will likely lower the possibility of government bailouts.

The banks under review are subsidiaries of BB&T Corp., Capital One Financial Corp., Fifth Third Bancorp, KeyCorp, PNC Financial Services Group Inc., Popular Inc., Regions Financial Corp., SunTrust Banks Inc., U.S. Bancorp and Zions Bancorp.

In a note to investors, analyst Robert Young said Moody's had previously factored in the assumption of extraordinary government support into the banks' ratings last year when the banking system was in turmoil.  None of the banks' financial strength ratings are on review, because those ratings hadn't previously benefited from the assumption of government support.  The extent of the possible downgrades would only reflect the ratings boosts the banks got as a result of Moody's assumed government support. For example, eight of the banks got a one-notch rating lift as a result of government support, so their ratings would only fall by the same amount, if at all.  Young noted that the government has a financial stake in six of the regional banks on review: Fifth Third, KeyCorp, Popular, Regions, SunTrust and Zions.

Again how is this construed to be positive news?  

A vastly under-reported data release this past week, and a major contagion as according to the U.S. Census Bureau there are now 18.9 million vacant properties in America; this is up 330,000 from the first quarter of this year (again I ask how can this be construed as an economic bullish data point?); we also saw that home ownership is at its lowest level since 1999. Only 66.9% of Americans now own the property they live in (and this doesn't include squatters who have stopped paying their mortgages).  The second quarter report also said a record 270,000 homes were foreclosed upon; and its conservatively predicted that more than 1 million homes will be seized this year alone.  

Foreclosure filings rose in 75% of the nation's metro areas during the first half of 2010, according to a report issued on Thursday which received only a tiny sound bite on the bubblevision networks; we saw a report from RealtyTrac that highlighted that once again California, Florida, Arizona and Nevada (all four of these states are nearing bankruptcy in my opinion) continue to lead the nation in the rate of foreclosures. But we have seen a change as now under/unemployment has replaced toxic mortgages as the leading cause of foreclosures throughout the country, according to the report.

Strangely we have also seen that foreclosures are booming among our nation's most credit-worthy, the report showed this past week as a record number of borrowers once judged to be the most creditworthy are heading into foreclosure as the job market continues to erode and these figures do not lie, as this vastly deteriorating employment picture leaves more homeowners unable to keep up with mortgage payments. We saw a report this past week that showed that foreclosures among borrowers with prime conforming loans have shot up 425% since January 2008, according to Lender Processing Services, which compiles mortgage data. These conforming loans are those eligible for purchase by Fannie Mae and Freddie Mac (to behemoth taxpayer bailout POS firms). Jumbo prime loans not eligible for purchase by Fannie or Freddie have far worse as their rate of foreclosures have increased nearly 600% (jumbo loans are typically mortgages worth more than $730,000).   This situation is getting worse as a lot of homeowners that are considered higher end are also savvy investors; many have seen that their home has lost 30-45% of their value, so the so called strategic default numbers are increasing….a strategic default occurs when a borrower stops paying a mortgage they can afford to pay, often because the house's value has fallen below the loan balance (this is an atrocity that these shits are getting away with this).

These rises in foreclosures of prime loans will be felt most acutely by Fannie and Freddie, which own or guarantee nearly half of the $10,000 billion in mortgages outstanding. Both firms are unfortunately backstopped by the taxpayers (those still paying on their loans and paying taxes) as these firms have set aside some reserves to cover these bad loans, but I do not believe it will even cover 15%. Through the first quarter of 2010, Fannie and Freddie reported $330-billion in non-performing loans and of the roughly 10% of those loans that have been liquidated, Fannie and Freddie have recovered a mere $0.55-0.58 on the dollar, and when the crisis hits the perfect storm scenario I expected that to fall to $0.27-0.30 on the dollar and non-performing loans to balloon to $675-725 billion over the next several years.

We saw this past week data that supports my analysis as Fannie and Freddie Foreclosures are increasing at an rapid rate as the number of homes with mortgages owned by government sponsored entities (GSEs) Fannie Mae and Freddie Mac entering foreclosure is at an all-time high, and is still increasing. Thus far, 1.47-1.48 million homes have entered foreclosure this year alone 2010 (not a figure you will hear on CNBC, except late evenings) during the same period of time in 2009, we had 1.68-million foreclosures, and 1.25-million in 2008. And according to a study by Lender Processing Services, the rate foreclosure starts are increasing by is the fastest pace yet. The increasing foreclosure rate may be attributed to borrowers falling out of government mortgage modification programs, or it could be an increase in strategic defaults, which are increasing rapidly amongst more expensive homes. 

Employment growth has stagnant and very slow to take hold and lower home prices have continues to affect the mental outlook of average Americans and their feeling of overall net wealth; and as such their lack of confidence may further restrain their spending in the months and quarters that lay ahead and of course in our great nation consumer spending accounts for approximately 69% of economic activity, and this contagion will surely limit growth.

The hypsters on the various bubblevision networks have stated that consumers have little to be worried about, but I disagree wholeheartedly as private job growth is again showing signs of abating and turning around in a negative fashion instead of accelerating as promised by this administration after the infusion of historic stimulus.

We also saw this week that our economy slowed significantly in the second quarter as consumer spending cooled, according to Commerce Department data released. Gross domestic product increased at a mere 2.4% annual rate this past quarter; while consumer spending grew at a measly 1.6% pace in the second quarter when it was compared with a 1.9% rate the previous quarter.  We saw that the University of Michigan’s gauge of current conditions, which reflects Americans’ perceptions of their financial situation and whether it is a good time to buy durable goods, dropped significantly to 76.5 from 85.6 from June. The index of consumer expectations for 6 months from now, which more closely forecasts the direction of spending, dropped to 62.3 from 69.8 in June (these readings are anything but bullish). 

Jobs especially real-decent/benefited jobs are becoming as scarce as politicians that speak the truth and with stagnating incomes that when adjusted for inflation have dropped 18% during the past 14-years consumers who live in the real world are deeply worried as we saw that in July their recognition that the anticipated slow down in the economy will keep jobs scarce for some time is very apparent while their uncertainties about their future prospects are increasing as the idiots in Washington do little to nothing to help main street, they are to busy bowing and cowering to Wall-Street.

Its apparent to me that many consumers have begun to actively embrace a defensive balance sheet demeanor making them more likely to further pare their debt (aside from their homes as they are becoming more aware that the lecherous banks will not take action to force them from their homes after defaulting as they do not want the contagions on their balance sheets) and increase saving and reserve funds. This defensive posturing will likely result in slower economic growth and fewer jobs in the future, it’s a domino affect that becomes a self-serving economic negative.

During this period we have also seen (should eventually be a positive) that mortgage rates dropped to the lowest level on record for the fifth time in the past six weeks, making home buying and refinancing the most attractive in decades for those who can qualify for loans, and with homes at depresses values the coupling of low prices and interest rate is extremely attractive in my opinion, the best situation in almost 100-years. The average rate for 30-year fixed loans this week came in at 4.54%, down from 4.56% last week. That's the lowest level since Freddie Mac began tracking rates in 1971. The last time rates were lower was during the 1950s, after WWII when most mortgages lasted just 20 or 25 years, now we have 30-50 year paper being offered.

Lower rates helped spark a little activity in the weak housing market, this past week as we saw an increase in applications to purchase homes 2% last week from the previous week, according to the MBA report but this has done little to alleviate a deteriorating housing market as it has been struggling and overall applications for loans were down this past week as fewer people applied to refinance as the pool of those eligible shrinks. We still have very high under/unemployment, slow job creation and very tight credit which make it very difficult for many to afford to buy homes.

We saw this past week that sales of previously occupied homes dropped 5.1% in June; while new home sales jumped a tad due to seasonality last month, but it still was the second-weakest month on record and it came after sales plunged in May.

How is this bullish?     We saw this week that business activity in New York City fell in July from June to its lowest level in over 11 months, according to an industry survey released on Friday (but this survey got little attention from the cheerleaders on the various bubblevision networks.  We saw that future optimism and job growth retraced as well, underscoring the belief that the economic recovery according to the bubblevision networks is pure hype and manipulated sound bites. We saw that the Institute for Supply Management-New York's seasonally adjusted index of current business conditions plunged to 58.4 in July from 69.3 in June. The six-month outlook index also reached an 11-month low, falling to 67.5 in July from 69.6 in June. The employment index dropped to 53.2 in July from 64.3 in June.  When asked what their firm's plans were for worker compensation during the next six months, we saw that a majority of respondents in the survey said compensation plans would be steady to reduced!

We saw a report that showed that home prices pose this past week without signs of sustained recovery a negative divergence!

U.S. home prices managed to eke out an increase in May on a monthly and annual basis, according to the S&P Case-Shiller home-price indexes, on Tuesday and it was boosted by several seasonal factors and the residual impact of the now-discontinued home buyer's tax credit in my opinion, hardly bullish….nevertheless we saw that the Case-Shiller 10-city index rose 1.2% compared with April; the 20-city index rose 1.3%, and when they adjusted for seasonal factors, both increased 0.5%; from last year the 10-city index rose 5.4%, and the 20-city reading rose 4.6%.  The homebuyer's tax credit that expired on April 30th had a positive impact on the reading, and the report actually warned that the recent gains in home prices are not likely to last. In addition, the new home sales surge in June was off of record lows and we have seen that existing homes sales fell even with continued support from the homebuyer tax credit; couple that with the fact that May's pending home sales plunged 30% and estimates are calling for another 5-6% drop in June, this number is very bullishly misleading.  May is historically a very strong seasonal period for home sales, S&P said, and buyers who rushed into the market to sign contracts by the April 30 deadline for up to $8,000 in tax credits have until 9/30 to close on the properties.  

Nevertheless the markets this week got a gift/lift after US new home sales in June rebounded 23.6% after plunging to a revised 36.7% in May (this was hardly bullish). The June pace recovered to an annualized 330,000 units from a revised 267,000 in May and revised 422,000 in April (this is the last hurrah). The bad news that went under-reported was that May's record drop was revised down from the initial estimate of a 33.0% decline. The latest figure is down 16.7% year over year. On a bullish side the monthly supply has seen improvement in recent months and in June it eased to 7.6 months after surging to 9.6 in May. Once again, this report was less bad than expected and is giving the housing market something to hold onto in hopes for a recovery.

Yes I'm still bearish as while May's report on its own looked somewhat positive on the headlines , a broader look at home price levels over the past year doesn't show that the housing market is in any form of sustained recovery, unlike the hypsters on CNBC (especially Cramer have repeatedly stated for 18-months now, someday he will be right though). Since reaching its recent trough in April 2009, the housing market has only stabilized at these historic low levels…and now that the housing market stimulus has vanished the housing markets once again are on their own.

Before increasing during the month of April and now May both months were helped by the tax-credit and the need for families to close by September when the kids will be changing schools…the price trend had plunged for 6-straight months, and now they rebounded and before that, they had dropped off sharply for several years and began sliding again into the cesspool last fall.

Sales of existing homes slid in June for the second consecutive month as the effects of the tax credit continued to wane, the National Association of Realtors said last week (hardly bullish). The group also said inventories rose and prices remained fairly stable. There is still a huge amount of supply on the market but sales appear to have improved enough to stabilize prices for the near-term in May however it will be many-many years in my opinion before prices recover back to where they were before the 2007-2008 debacle!     Even with May's recent upturn, prices still are 29.1% lower than the peak just four years ago (so many home owners have huge negative equity; many others have no access to their favorite ATM machines). Worse yet we still have a record inventory of foreclosed properties yet to even enter the mix, and this will prevent any real price upturn in the near term.  The payback from the federal tax incentives went beyond most expectations and some reports have started to show some stabilization from historic lows. Sales of new homes in June surged 23.6%, but remained at the second-lowest level since the Commerce Department started keeping records in 1963. High unemployment and wage cuts are keeping many potential buyers at bay.

A huge negative and strange divergence continues to develop, as when implied correlation are approach par with each passing day, and when historical relationships are ignored, every correlation somehow immediately becomes a causation only to be invalidated, within a few hours/days there is one certain and virtually guaranteed statistical relationship that has never been left for dead and that is the basic supply/demand function, and no matter how much manipulation we see, it will ultimately come back to the real basics of economics and the stock-market called supply/demand….despite the attempts by the prop-desks of the too big to fail lecherous banks, and the vast array of manipulative program-trading algorithms , that persist day after day and for the herd but has now become a self-fulfilling prophecy. I am speaking of course of the (inverse) correlation between stock prices and volume: meaning that we gap-up than rally on miniscule volume, however when stocks sell-off volume increases significantly. Rarely has this correlation been as pronounced as we have seen since the March 2009 bottom, to me this means now that distribution is occurring in vast amounts and when we couple this with huge swells of insider selling the eventual path should be clear…. to the downside, and that the second that wall-street believe that they have sucked in the herd into the markets once again for whatever reason, the selling pressure will again materialize. Investors and traders are increasingly basing their outlook for the economy on what the stock market is telling them (this is an oxymoron) So one week the tape says we are double dipping, and the very next...now that the market is surging, we must be in some sort of economic boom….Investors are caught in bouts of monthly euphoria and depression...and I can attest to that as trading this market makes one very bi-polar; it is utterly amazing that we have all this euphoria as is breaking out on the various financial bubblevision networks for a market that has made its way back to the middle of the range and a market that is basically flat on the year.

I become more perplexed each week as the market's totally turn a blind eye to the contagions brewing such as the recent spike in the number of jobless claims (this will not be a positive for Friday's jobless report). They have ignored the ongoing dispute between Hungary and the IMF which makes that country “the next hot spot for sovereign default risk! 

No one has really mentioned the dramatic drop in the ECRI weekly leading economic index to a level that is more negative than it was during the worst point of the 1990-91 recession, this amazes me.

None of the perma-bulls on Fast-money or the other hyping bubblevision networks talk about the dramatic plunge in the price of most industrial metal prices since mid-April (we have seen a a drop of 18% for aluminum, 14% for copper, and a whopping 27% for nickel and 16% for steel. Since China is reported to be responsible for 40% of global consumption of base metals over the past year, these price drops are surely suggesting that the economic landing there might not be as smooth and soft as hyped to be.

What happened to the death-cross chatter, has it disappeared, from the bubblevision networks…..why I wonder....as the technicals still exist…. a death cross does not occur often, in fact, in the past 3+/- years we've only seen this happen three times. The most recent occurred just last week and is something that every investor and trader should pay very close attention to, and not get sucked into the hype on the various bubblevision networks. Old time, savvy and smart money investors and traders watch this simple indicator very closely so you should too. 

Volatility is the major play of the past few weeks…..As almost every trading day for the past 5 weeks, the SPX-500 made at least a 1.0% intraday move. It's very apparent that we're in a situation now where the VIX (the so called fear indicator) has been battered about with some massive swings.....the VIX closed at 23.50 and after posting a potential double bottom 21.86 [6/21/2010 low = at 22.87........7/13/2010 low = at 23.12 when I issued my last a VIX sell-signal it appears that we will retest that level, and likely break below it to the 18.50-*20.00 level if the program traders keep pressing this market and selling validity )  The falling VIX supports the recent strange light volume bullishness  however a rising VIX, could foretell of a market correction, as we encroach into some very decent support areas         As a technician we are always watching for what we call a broad bullish pattern called the "golden cross" this occurs when the rising 50sma of the underlying (asset, stock etc.) in this case the VIX the 50sma = 29.01 and the 200sma = 23.39  so you can see the 50sma has moved up above the rising 200sma. Conversely when the opposite happens on the downside, I like to call it the "kiss of death cross" the $64,000 is whether this technical pattern have any meaning as it applies to an indicator or statistic-indicator, like, the VIX (as the VIX is an optional indicator hence bets are being laid out daily on this sentiment indicator)!  Please remember that if you believe there is a correlation and it's indeed bullish for the VIX, then it's bearish for the market due to the inverse relationship. Like the golden-VIX-cross during the Bear-Sterns debacle (we have to ask whether the PIGS/Greece is the new Bear-Sterns); we saw a dismal pattern, as the last time we saw a golden cross on the VIX it took place on 9/17/2008, after which the market imploded 18.66% over the next month, and 21.79% over the next 3-months **(so please watch this indicator very closely as this could be a preemptive signal for continued potential weakness on the SPX-500).       What's interesting about the extreme moves we have seen in price this week is that volatility is not really showing up to the party as seen in the VIX. Most often price volatility from uncertainty is associated with a higher VIX and a VIX trending higher, this has not been the case as this uncertainty almost always results in a greater willingness to buy options as either a hedge play or a pure directional play. Instead the VIX is showing to mush complacency. The wall of worry for the bulls is not there and that's actually quite bearish. The VIX is down testing its 200-dma for the 3rd time since June 21st and the MACD is showing bullish divergences . While I see the possibility for the VIX to drop a little lower to its broken downtrend line from January 2009 (if the indexes are going to rally into the end of the month), currently near 21.60, I think the potential bullish setup here for the VIX is of course a bearish setup for the stock market.

I have repeatedly focused on two distinct and very important moving averages (at least for me), that I have through my many years of trading have consistently keyed on as indicators, from which I have derived my bias of the regarding the market's overall health, and I have written several times during the past several weeks after the so called flash crash plunge and the subsequent declines in the days and weeks thereafter. 

One that has served me well has been the SPX-500 160 monthly simple moving average; this is of course a very long-term indicator as it has shown to be very significant as it indicated support at the 2002-2003 lows and once it was broken back in October 2008 the subsequent purge/plunge off a cliff ensued. During the past month or so I have referenced and cautioned my subscribers that a drop below the 160Msma at 1,169+/- would be very bearish, and once this level was breeched to the downside we saw a huge pick up in subsequent selling!  Now that it has been breached to the downside I believe that until regained we are in a bear-market, and all subsequent relief rallies are opportunities to be sold into!  

The SPX-500 monthly 200sma unlike the 160-month, is an extremely slow moving average that is essentially a huge technical analysis tool I use as I always buy this level of support till broken, as once broken on significant volume we historically are in store for another 15-20% or greater drop!  Currently the monthly 200sma = 1048.65 and we have bounced several times at this level after regaining this level!   

We also have the SPX daily 200sma which is very widely followed indicator as the vast majority of herd based investors/traders from street market technicians to amateur traders/investors alike and even by many fundamental analyst type folks without real meaning; hence I almost never initiate or close trades based on this moving average (as its way to crowded an indicator to speak, and it way to often creates fake signals), as such from years of trading and in depth research it has moderate to little psychological significance for the index to successfully navigate back above this level because of the vast widespread agreement that it is an indication of its health; it as I have said before is to often a head fake indicator! The SPX-500's 200sma comes in as of Friday's close came in at 1,107.95 the likely target for the bulls on any additional bullishness! 

That said, I am now a very old and seasoned/savvy trader (at least I think I am) as such I have a better indicator when coupled with others provides me some considerable insight into the so called health of the markets….simply put it’s the Russell 2000 Index as it to me is the play-ground of fund-managers, hedge funds, and high-beta seekers and it holds even greater importance than that of the SPX-500 in many ways; because this index holds the true sentiment/conviction of most fund-managers across a broad spectrum of players! If you look at the charts below of the Russell-2000 you will find that the majority of the strength of the rally off the March 2009 bottom was concentrated in the small/mid cap arena, as the index moved higher fund managers were forced to chase performance; and the subsequent breakdown in this leadership area of the market has provided negative contagions.   

I also like to follow several little known ETF's of significant interest (iShares Lehman 20 Year Treasury Bond called the TLT….[the bearish side of this play is the TBT], these ETF's are an indicator  and measure of our government's (USA) bond performance. If you reflect on the charts (daily) of the TLT you will see that early in May (5-06-2010) we saw a huge spike on the TLT to 100 and later on 5-25-2010 at the first lows we saw that the TLT again nearly toughed the 100-mark, and on both occasions we saw very strong rejections at that level (these levels are where I suggested buying the inverse ETF called the TBT) as bonds and stocks have been moving for the most part in an inverse relationship, as currently bonds are being sought as proverbial safe haven assets to which investors flock to when there are huge periods of uncertainty and FEAR (fear is often defined as False Evidence Appearing Real). It's also important to recognize that at these extreme levels the TLT trading volume exploded and when we reflect on volume during the past 8-years it was the most significant volume easily exceeding volume even during the 2008-2009 TLT price spike during that melt-down…that was related to the financial debacle/crisis and the subsequent stock market plunge off the proverbial cliff. This recent mega TLT volume spike to me strongly suggests an increasing level of fear among investors which is in my opinion quite disproportionate to the relatively extent of the stock market pullback, which for the most part suggest to me that a near-term market bottom (on the recent retest of the lows) may well have been put into place this past week!