My friends I will be away from trading Tuesday Afternoon for a period of time as I have to have a broken tooth that needs repairing before the Holidays Please also note that I also will be taking the day off before Christmas the 24th, as I have several family chores to take care of....I am also cooking  Christmas eve for those not as fortunate...there will be no weekend market report over Christmas-Weekend, but I will update the website!

Its a Monday expect a bullish tone for the open (Merger/Monday) and we follow Asia's and Euro land's lead! (tone) watch for announcements from the TARP banks.....we have only 8-trading days  left to 2009 and the major trading desks, hedge funds and mutual funds will do their very best to hold the markets stagnant to protect their massive gains...they may even paint the year-ending-tape as performance chasers behind the curve attempt to catch up. I would not be surprised if they  again attempt a Gap/up and then a run...into the 10:45-11:00 inflection window, volume should be anemic for the entire week, making for an dangerous trading environment...the propriety trading desks will be completely in control, and they have yet to share their play-book with me!  The bears will likely  tepid ahead Christmas as they will not want to get squeeze if a Santa-rally emerges. The markets could get a boost (on dollar weakness) or succumb to selling on dollar strength again, we will need to watch crude, the greenback and the Asian markets very closely....I am also watching the Russell-2000 for initial directional clues!  I’m still seeing smart money selling into strength time and time again; keeping a lid on the bullish trend, this is a clear indication of a classic market distribution process marking a significant top.   As such please take on LONG positions very carefully at these levels as the risk to being long at these levels is compounding every day especially in over-bought technology and consumer-cyclicals and retailers  Strap-yourselves, as it is sure to be another wild another wild rollercoaster ride!! The question is do you want a ticket to partake of this amusement ride     I believe we are close to another major inflection period for the markets, so please trade cautiously and be quick to protect profits.   Please remember folks there are usually 7-8 bullish (participants) to every 2+/- bearish traders/investors, so the propensity for bullishness is almost always stronger, as no one wants to be a party pooper, especially those funds that are playing with other people’s money as they attempt to pad their books into their fiscal-year end! However the reason that the market usually drops 4-5 times faster then it goes up is liquidity, when selling picks up is a contagion and the lack of buyers due to FEAR, can feed on itself very quickly like a plague or a quick acting cancer, as such markets plunge (normally) quicker than they go up!   

It appears that Santa came in early spring for the markets this year by delivering a 22+/- return for the SPX in 2009, and with just a handful of trading days to go, stock traders/investors aren't expecting to find much more under the tree or do they….remember my Friends we started this decade at 1,469 well off of Friday's close on the SPX at 1,102. (a mere 367 points away)

While it may a volatile light-volume trading week as we head into the Holidays and it could be like watching paint dry at time in the markets, investors and traders will be very eager to see if shoppers turn out in full force for the year-end buying rush (Due to a nasty storm in the North East the traffic was likely anemic at best in this area). Investors will pay attention to a final reading of third-quarter gross domestic product, but with the market already factoring in a huge and sustained economic recovery, the GDP data could evoke a nasty response if its revised downward as I expect. Reports on existing home sales and new home sales will also be the center of the markets attention due to the central role that the housing sector's collapse played in the financial crisis. With the countdown to Christmas on Friday (and New-Years the following Friday) this week's significant economic indicators will include consumer sentiment, personal spending and the latest weekly claims.

Markets historically enjoy a brief and sometimes very parabolic “Santa Claus rally” in the final days of December and the beginning of January. But the SPX racked up a gain of 63% from March's 12-year closing lows, investors question what catalyst could drive the market significantly higher. I thought there might be one more bump higher (performance chasers and tape painters), but it now looks like investors are willing to let the market consolidate its gains into the end of the year, and are happy to lock in the profits that they managed to orchestrate. Year-end window dressing is a historic practice where/when fund managers sell underperformers in favor of gainers to spruce up their lagging portfolios, and if this occurs it could lift stocks that have done well this year. Volatility could also increase this week as fewer participants make it easier for the large propriety trading desks of the lecherous banks to push the indexes around. We have seen a very strange divergence as the indexes have risen on very light volume this year, not a typical strong bullish scenario!

Most importantly for the market's this week will be the insight that investors get from retail sales as this will gauge the success of the holiday shopping season following a “Super Saturday” weekend. Retailers are hoping to see a surge of shoppers over the last weekend before Christmas, but experts doubt whether it will be enough to push sales much above last year's dismal readings. Last year was the first time holiday shopping fell during this decade, according to the International Council of Shopping Centers as shoppers fretted about the financial crisis and growing unemployment. Spending has remained anemic this year and the lack of real solid consumer participation remains one of the biggest headwinds to the burgeoning economic recovery.

A potential headwind for markets could be any increase in tensions between Iraq and Iran. On Friday, Iraq demanded that Iran immediately withdraw its soldiers from a disputed oilfield on the two countries' border, but Iran denied any incursion; as an escalation in hostility between Iraq and Iran could push investors out of stocks and into safe-haven assets such as the U.S. dollar or bonds.

I still believe that a major correction is just around the corner as our and the global markets have gone up way too much, way too fast, and this rally has been built on a foundation that is very shaky like a house of cards and the indexes could easily suffer a major sell-off after climbing to the highest levels in almost a year 2-weeks ago.

The Group of Seven finance ministers and central bankers also struck a cautious tone after meeting on the shores of the Bosporus over the weekend, saying the prospects for growth remains fragile. The real economy where main-Street lives is still in a cesspool while the irrational stock markets (at least they seem to be) are some how exploding as such I see the risk of a correction, especially when the markets now come to realize that the recovery is not even close to a V-shape recovery, but more like U-shape at best (I believe more like a “L”).

A contagion no one is talking about, as it’s not market friendly.

Despite historically high bond sales that helped corporate borrowers significantly stretch out and lower their cost of their ballooning debts, U.S. firms defaulted in record numbers this year according to Standard & Poor's.

The number of firms defaulting on their bonds in 2009 rose to 262 this week, the report stated that is twice as many as last year and exceeds the previous record of 229 in 2001, when we saw the technology bubble burst. Most defaults (87%) occurred on so-called junk bonds, securities with credit ratings below investment grade, the ratings agency stated.

Defaults include companies missing principal or interest payments, but the top reason for defaults this year has been cash-poor companies forcing bondholders to swap existing debt for new debt with longer maturities, thus postponing when a borrower must repay the principal. Bankruptcy proceedings were another of the top reasons for default this year, said S&P, a unit of McGraw-Hill Cos. (MHP).

Paradoxically, record defaults came during a year of record bond sales. Year-to-date, firms have sold more than $1 trillion of U.S. dollar-denominated high-grade bonds (stripping away market liquidity) a record, according to data provider Dealogic. Speculative-grade bonds also saw a boom in supply, with issues sold totaling more than $153 billion this year.  

Can this path of record issuance and the Fed/Treasury intervention continue as there are a record amount of corporate bonds are set to mature between 2011 and 2013 and those securities need to be repriced (and the corporate insiders want the record low interest rates, as they got from Greenspam). That wave of maturing debt, combined with firms normal needs to borrow for general business purposes, and the supply may press into another massive record-breaking level.

Americans should be extremely outraged and furious. These TARP paybacks are absurd, and ridiculous on merit and substance. Worse yet we even hear our numbnut Treasury Secretary speak about the “profit” we made. This is such nonsense. This isn’t like banks went out and created new products and sold them on the market for a benefit for Americans the very taxpayers who bailed their assess out, they didn’t make loans for the most part with the taxpayer bailout money nor did this money venture into systems that enhance our society.

What they did do with the help of the Fed and Treasury is revert back into the casinos and they again made gigantic bets, this time with insider information and the full backing of the current administration, and since they with the Washington spin machine coupled with the spin machines of the bubblevision networks pulled off a remarkable bear-market-relief rally that paid off handsomely. The problem of course is these bets were significantly financed by the American taxpayer….and despite the headline touting the TARP repayments trillions in bailouts still remain outstanding and the Fed’s balance backstopped by the taxpayers is expanding still. Right now we have over $1.2 trillion in toxic assets still sitting on the books of the Fed. What have they taken for collateral? Who knows so far they have refused to open up their books (even to congress) and I believe they will not release this information because what we would ultimately discover would horrify the public. I know what we would find…as from my best guess research we would find the worst of the toxic mortgages, the crummiest questionable loans, and other securitized junk/crap that was exchanged for U.S. Treasuries. Is it any wonder why the dollar is being plummeted…Americans have been stealthily being robbed by Wall Street and the Federal Reserve and they do it with big grins and smiles. And who needs to build up in depth conspiracy theories when they are doing it right in front of our eyes…its just that to many idiots that are responsible for reporting financial news are all wearing the same rose colored glasses with apple iPods tuned into redundant tunes of “Don’t worry be happy” the vast majority of so called experts being pranced about on the various bubblevision networks are tied into the very same Wall-Street firms hyping this game!  

What I’m pondering in depth these past days is if the vast majority of banks, made similar bets at the March/April lows and have been subsequent big winners…I’m now perplexed as I’m searching for the proverbial losers (besides the taxpayers)…as an entire industry (*Banks/brokerage firms and hedge-funds with mutual funds tagging along) cannot all position themselves in a (zero-sum game) the same side of the trade and have no one to experience the bad-side of the trade (or can they).  Lets think back to the largest ponzi scheme of all to a relatively cashless financial industry recovery (on paper…not reality) as a product of the capitulation of FASB to the pressures of the lecherous bankers, by allowing them to continue to commit sins freely again with impunity by marking up their crappy paper and declaring these mark ups a trading, inventory profit or realized investment gains…this is fuzzy math at its best as they are allowed to again take near-worthless assets and claim excessive valuations on them.  

Then of course they now have paper profits again (as long as they do not have to prove real tangible worth) so now they are seeking and many have been paying back the TARP so that the Lecherous Bankers can pay themselves whatever they wish without some government pay Czar deciding that they are not worth thousands of dollars a day (many bankers and especially chieftains at the various brokerage firms were reaping in excess of  $80,000 a day in pay in 2007 and the top players were getting $150,000 or more a day, and they wonder why main Street hates them so as they were taking share holder monies…that they said they were due from paper profits and enriching themselves with out often a vote of the average shareholder (all they need were stacked boards of their buddies)…I will stop my ranting for a tad!  

The replacement of TARP monies is a now a product of selling stock (diluting existing shareholders, floating huge loans and selling good assets; all so t6he company insiders can again become enriched. What the hell type of financial business recovery is this…it reeks of trouble as this action results is a zero sum gain at best now they shift the burden for excessive playing to a new-crow of bagholders. This is clearly not rebuilding a putrid and deteriorating financial system.

Why are they allowing the banks to pay back TARP

And why did Geithner, who is praising these lecherous banks as if they are model citizens, and not responsible for the largest financial debacle in our life times…as on 12/09/2009....In a letter to House Speaker Nancy Pelosi and Senate Majority Leader Harry Reid, Geithner said the administration was winding down its use of the controversial bailout funds but wanted the continued flexibility provided by its mountain of money; seems very fishy to me especially after the banks are scrambling to pay back TARP so they can once again rip-off share holders by paying insiders huge pay packages and bonuses).  

From my vantage point and research conducted I believe we will see a significant escalation of bank failures around the globe not just in the US, and I believe they will total 3-4 times those experienced in 2009; its simple economics. How do I know that my premise is factual and not just plain speculation or conjecture!  

We have unheard of (practically free-money being handed out like candy out by the Fed in massive quantities to the banks, *those to big to fail* and regional banks as well) but these same banks are hording this massive inflows of liquidity as they are extremely reluctant to lend.  

The lecherous bankers who caused this credit-debacle have stated that they are in a very tough position (not when it comes to taking huge bonuses though) as they are forced into a difficult quandary to lend or not to lend, that is the question they are pondering. When will they after taking massive taxpayer bailouts and free-easy-money from the fed-heads; start to lend it out to struggling small-business, Americans in search of loans and new homebuyers, as for the past 18-20 months they have taken the Nancy Regan approach “just say no”!  

We have seen data showing that the banks are hoarding these so called stimulative liquidity inflows of money. Worse yet thanks to the Fed-heads (out home grown terrorists targeting many fixed income Americans needing yields in CD’s etc.) it very true that they are paying Americans who are attempting to save nothing on your deposits and in turn they are leveraging up their exposure with taxpayer monies and investing in the yield curve, with leverage 30:1/20:1 again in order to make a their earnings.  

This week we saw a report from the Treasury and they always understate a contagion) that showed bank lending down again as the value of loans held by the banks that received the largest amounts of government bailout support dropped for the ninth consecutive month in October. The Treasury Department reported the numbers just one day after President Barack Obama criticized the nation's top bankers for not doing enough to boost lending. The monthly report, which monitors the top 22 recipients of support from the government's $700 billion rescue fund, showed that their average loan balances dropped in October by a mere $36.8 billion which followed a decline of $45.9 billion, in September. Obama urged the nation's big banks to make “extraordinary” efforts to increase lending to help consumers and businesses who have been staggered by the worst recession since the 1930s…but they keep waving the bird at the American populace. 

These bankers are sticking in deep and often to the very folks who bailed out their sorry asses as in almost every single case now the banks are asking for more money down before they even consider lending to average Americans. They are asking for better collateral, and they are asking for that because that's why they got in trouble (as they pushed no-document, no-job, no-income loans to pad their massive bonus structures, which lead to the collapse of the sub-prime and then prime lending markets).  

The above chart shows how banks are sitting on $1.1-1.2 trillion in excess reserves that was pumped into the economy by the government at taxpayer expense and get this they get loans from the Fed at 0.15-0.25%, they leverage it up and get paid by the Fed for excessive deposits. Instead of lending out this money the banks use it to mask over their $1.8-2.0 trillion in toxic assets being held on their books…the pipes are still clogged as these idiot mortgages which are in default the same crap that caused the Great Recession, have not been dealt with and are still preventing bank lending. Last year the Federal Reserve started the TALF (Toxic Asset Loan Fund) program to buy back toxic assets. This year, the Treasury Dept. launched the Stability Initiative Program do the same thing. These funds were meant to free up banks to lend to small businesses, which are the primary drivers of job growth (well this has not happened at all as the banks are still hording capital). The economic stimulus package can create some jobs, but it can't replace the private sector as the primary driver of growth. Banks must start lending again to avoid a double dip recession and they must open up the spigots. 

Tight credit not only hurts homeowners and future homeowners, but also adversely effects consumer spending, which is needed to fuel any real economic recovery. Refinancing would help consumers by lowering their monthly mortgage payments and could boost consumer spending; but the banks are not lending. It is estimated that 60-65% of existing mortgages have rates that exceed the current 4.9% going rate for mortgages. In 2009 refinancing activity may if we are lucky reach a trillion dollars, well below the $3.0 trillion in 2003 when Greenspam lowered interest rates; as such mortgage applications to purchase a new home have recently fell to the lowest level in over 12-years (Again Wall-Street prospers and Main Street gets the shaft).

An economic and financial contagion no one reported on this week in depth was that we saw deteriorating international demand for long-term U.S. financial assets and this is not very bullish at all, as investors abroad sold agency and corporate debt, the Treasury Department report showed. Net buying of long-term equities, notes and bonds totaled $20.7 billion for the month, compared with net purchases of $40.7 billion in September. Including short-term securities such as stock swaps, foreigners sold a net $13.9 billion in October, compared with net buying of $127.6 billion the previous month…this is setting the stage for a huge market correction as foreign appetite for our debt and markets deteriorate! 

China remained the biggest foreign holder of U.S. Treasuries, after its holdings held at $798.9 billion. Japan, the second-largest holder, reduced its holdings by $5 billion to $746.5 billion. Treasury Secretary Geithner said earlier this month that the U.S. remains a haven for investors is just not watching the data, nor is he living in the real-world

How many times will the American investor get burned, before they abandon the markets (usually they only got burned once every 20-30 years….this past decade they got burned twice very badly as they bought into the hype of buy and hold stocks for the long run, and now they are just where they started in back in September of 1998. Then they jumped on the commodity bandwagon and got their heads handed to them and once again many investors with memory loss issues are buying back into these very same markets, but strangely I’m seeing a massive herd led by fund managers running into what they perceive as a safe haven “bonds” another bubble inflating making it almost 3-massive bubbles in less than a decade “yields” in the municipal bond market have been depressed so far this year, as investors have “poured a record $55 billion” according to Bloomberg into muni bond funds, and many other investors are buying muni-bonds outright. These are the folks who state that they can’t live without some “yield” and also cannot imagine their city, county or state governments going bust; well I hate to tell you they may not go bust at first but yield when they approach default status will soar. 

Municipalities have borrowed more than they can repay, they have as I have written before massive pension liabilities that they cannot meet (up to $1.3 trillion dollars’ worth, according to Moody’s), and their tax receipts continue to plunge. The only reason that states haven’t defaulted yet is the benefits from the so-called “stimulus program,” which took money from savers, investors and taxpayers and transferred it to the impoverished the people who live in the various states that are approaching collapse like California. I believe that starting this year and going through 2017 the muni bond market will be embroiled in a huge wave of defaults.

The recent massive wave of pro forma optimism since the March lows has shown up in every financial market, and has fueled a retracement in muni bond yields to their lowest level since 1967 and narrowed the spread between muni bond yields and Treasuries; this will become unwound starting this year and next! What I find extremely strange is that this stampede to buy municipal bonds is occurring right on the start of a dramatic decline in their real values; once again the lemmings are loading up right at the peak so they can participate in the next major market debacle while the smart-money-investors are handing off the hot-potato to the next round of retail bagholders.

Surging energy costs drove U.S. wholesale prices up nearly twice as much as expected in November while core prices posted their largest increase in over a year.  The producer price index for finished goods leapt 1.8% on a seasonally adjusted basis in November, after rising by an unrevised 0.3% in October according to our pro forma reporting Labor Department.  

Today’s data shows the producer price index is up 2.4% from November 2008. Core PPI, which excludes volatile food and energy prices, rose 0.5% in November, driven up by higher prices for light motor trucks and cigarettes. The increase in core PPI is the largest since October 2008 and is more than double the 0.2% rise economists had expected.  

Today's data show energy prices rose 6.9% in November following a 1.6% gain in October November's increase was driven by surging gasoline prices, which rose 14.2% and by increases for home heating oil and liquefied petroleum gas.

• Food prices were rose 0.5 %, as the index for fresh and dry vegetables advanced by 8.7%.

• Prices of passenger cars fell 2.0% last month, while light truck prices jumped by 4.2%.

• Prices of raw materials, known as crude goods, advanced 5.7% on the month. Core crude goods prices dipped 0.8%.

• Intermediate goods prices climbed 1.4% in November. Core intermediate goods prices increased 0.3%.

NY Fed's Dec Manufacturing Index plunged to 2.55 from the previous reading of 23.51 last month “November” Conditions for New York manufacturers deteriorated in December significantly following 4 so called months of improvement. I was surprised at the drop as in the Fed-beige book the NY Fed didn’t mention many of these blatant and huge contagions!

• The Federal Reserve Bank of New York's Empire Manufacturing Survey, released this Tuesday, showed its general business conditions index dropped a whopping 21+/- points to 2.55 from 23.51 in November.

• The index for new orders dropped 14.4-points to 2.20 from 16.66 last month. The index for shipments also dropped (by 6.6-points) to 6.30 from 12.97.

• Worse yet the index for employment declined as well, dropping into negative territory, at -5.26, from 1.32 in November. Soft labor markets have been the biggest risk to the economic recovery's sustainability.

• The index of prices paid moved (inflationary pressures) jumped to 19.74 from 10.53 in November, suggesting that price increases are not being passed along to consumers, this will eventually weigh negatively on profits). The index of prices received dropped to -9.21 in December from -2.63 in November.

• Unfilled orders moved deeper into negative territory, to -21.05 from -2.63 in November.

Expectations about economic activity in the New York region signaled somewhat less widespread optimism than in recent months. The index for manufacturer’s expectations for general business conditions six months ahead fell to 43.01 from 57.00 in November. The employment index for the next six months fell to 17.81 from 30.83.

The International Air Transport Association, or IATA, said this week that they expect the global aviation industry to post a $5.6 billion net loss in 2010, significantly wider than its previous forecast for a $3.8 billion loss, because of low yields and rising costs…this is not very bullish for the airlines! 

However it’s not as bad as their losses for 2009 as the world's airlines will lose $11.0 billion in 2009. And the data shows that between 2000 and 2009, airlines have lost close to $50 billion, which is an average of $5.0 billion a year (not very bullish, so why would anyone buy an airline except for the tax-loss and expenses write off).  

Demand will likely continue to improve and airlines are expected to drive down non-fuel unit costs by 1.3%. But fuel costs are rising and yields are a continuing disaster especially if the central-terrorists bankers start to raise the cost of capital!  

IATA, which represents some 230 airlines comprising 93% of scheduled international air traffic, said they expects revenue in 2010 to rise by $22 billion to $478 billion compared with 2009 levels (wow let me use my IRA to invest here….kidding of course), still lower than the $535 billion peak in 2008 and still $30 billion below 2007 levels…so I believe Airline-stocks are in disconnect mode from reality of earnings or lack thereof! 

They stated that passenger traffic is expected to grow 4.5% in 2010, stronger than its previous 3.2% forecast, with a projected 2.28 billion people flying next year, in line with 2007 peak levels. Cargo demand is expected to grow 7% to 37.7 million tonnes in 2010, a higher rate than its previous 5% expectation (FDX, UPS could be winners as EXPD).

Cargo yields are expected to increase 0.9%, having fallen 15% in 2009. However, passenger yields aren't expected to improve because of excess capacity and reduced corporate budgets for travel.

IATA said an additional 1,300 aircraft due for delivery in 2010; which will contribute 2.8% to global capacity growth, will put continued pressure on yields. The industry is structurally out of balance. After almost a decade of cost cutting and bankruptcies, non-fuel unit cost reductions will be incremental at best, and the risk of rising fuel costs will be constant.  Consolidation is the great hope for the industry. The industry can't afford the mounting losses of the status quo. The next decade must facilitate consolidation.

Mortgage Applications increase slightly last week as we saw today that applications for mortgages rose a seasonally adjusted 0.3% this past week compared with the week before, as rates on 30-year fixed-rate mortgages increased, according to the Mortgage Bankers Association. Applications for mortgages to refinance an existing home loan were up an unadjusted 0.9% for the week from the week before, according to the survey.

Mortgage applications filed for the purchase of a home were down a seasonally adjusted 0.1%.  The MBA survey covers about half of all U.S. retail residential mortgage applications.

The four-week moving average for all mortgages was up 1.5%. Refinance mortgages made up a 75.2% share of all mortgage activity last week, up from 74.4% the previous week. It's the highest share of refinances observed in the survey since the week ended April 24. Adjustable-rate mortgages, on the other hand, made up a 4.1% share of applications, down from 4.7% the previous week. That's the lowest share of ARM activity since mid-June.

Rates on 30-year fixed mortgages averaged 4.92% last week, up from 4.88% the previous week; rates on 15-year fixed mortgages averaged 4.33%, unchanged from the previous week. One-year ARMs averaged 6.52%, down from 6.55% the previous week. To obtain the rates, the 30-year fixed-rate mortgage required payment of an average 1.08 points, the 15-year fixed-rate mortgage required an average 0.91 point, and the 1-year ARM required an average 0.39 point. A point is 1% of the mortgage amount, charged as prepaid interest.

I'm still bearish right now (see my technical section below)....but between here and options-X (quad-witching) and the end-or the year it could be dicey as fund managers chase performance and fight to maintain their gains to secure their bonuses...I will utilize any bullishness on this week to establish some longer term (2-4 month, Short positions *or Puts* as we would need to breech the relative near-tern highs for me to change my bias outlook....as such I'm looking to establish call positions and outright positions in the inverse leveraged funds....see a partial list below (we could also use a put-write strategy as well (example of a put-write play, we could write/sell the January 2010 SDS  $36 strike puts for $1.92 taking in $192.00 per contract, if they are pus to us at $36.00 we have a built in protective stop-loss of $1.92)....I'm also looking to SHORT a host of high-beta high P/E stocks as well (like  AAPL, AMZN, PCLN)   In a nut shell I'm looking for the resurgence of a very significant correction to take the bulls by the bulls in the days/weeks ahead and slap the bulls about...as the greenback is more oversold than at any time in history, way to many folks all leaning to the Short-side of the dollar market!!     See my in depth analysis below of various market conditions!

How has your 401ks (or are they now 201ks) and IRA account been doing for the past 10-years, the market performance has sucked.....Not a very great 10-year period

• Dow                  closed at 11,502 in 1999, well off Friday’s close of 10,472….(off by 1,030-points)

• Transports      closed at   2,977 in 1999, a winner as Friday’s close of  4,094 (up by 1,117-points)

• Nasdog             closed at   4,186 in 1999, well off Friday’s close of   2,190….(off by 1,996-points)

• NDX                  closed at   3,756 in 1999, well off Friday’s close of   1,792….(off by 1,964-points)

• SPX                   closed at   1,469 in 1999, well off Friday’s close of   1,106….(off by    363-points)

• Russell-2000  closed at      505 in 1999  a winner as Friday’s close of  600…(up by     95-points)

• SOX                  closed at      704 in 1999, well off Friday’s close of      335….(off by    370-points)

As goes energy goes the SPX and integrated energy firms and supply-firms

I recommended this week to re-establishing a LONG position in the DTO an inverse crude fund…there is normally a direct inverse relationship and tomorrow could see this trade again trend in the historical pattern.  Crude oil is finally moving back to where prices should be, given the current demand structure, I believe in the days and weeks ahead crude trades down and back to $60.00-62.00. Consumption is at the lowest level in a over a decade and if not for reduced utilization rates the prices would be in a free fall. The average consumption over the past four-weeks was 18.1 million barrels per day; this is down 589,000 bpd from last year and 2.3 mbpd below the five-year average. Inventory levels of crude are 7.6% above the five-year average and gasoline stocks are near decade highs and 5.4% above the five-year average.  

Production is rising in the U.S. thanks to new production in the Gulf of Mexico and new drilling in existing fields onshore. Current inventory levels would support a complete lack of imports for 117 days should something happen on a global scale to impact deliveries. That rises to more than 200 days if the SPR was tapped. Our dependency on imported oil has fallen from 62% to 51% of our current consumption.

Basically, for the immediate future there is a lot more oil in the U.S. than we need. Cheating on OPEC quotas is growing with compliance falling to 58% in November from 60% in October. OPEC production hit a post quota high of 29.1 mbpd in November. With an extra 2 mbpd over quotas now coming out of OPEC and global demand still refusing to rebound the price of crude is finally returning to realistic levels.  

Cushing oil storage capacity rises 11% to 51.5 mln barrels, and right now there only 5+/- mln barrels of Cushing storage space still vacant this Cushing expansion normally would mean less pressure on front-month WTI….however Canadian crude inflows still pose threat a crude glut!  

Oil storage capacity at Cushing, Oklahoma, the primary U.S. crude delivery point, has expanded by 5.2 million barrels this past year, cutting the risk that a shortage of tanks could cause oil prices to plunge (Hum 11% more storage and its already ½ used….seems like crude demand is only apparent for those trading it, not using it). The Capacity at Cushing, the pricing hub for NYMEX oil futures, has stealthily grown 11% to 51.5 million barrels, up from 46.3 million barrels this past February, according to company filings. 

The boost in storage space was requested and planned by the huge commodity traders as this could lessen the risk that Cushing will quickly fill up, forcing traders to sell off prompt crude hurriedly, rather than try to deliver it into the hub. When Cushing filled to near its limit in January and February of last year, the sell-off scenario triggered a collapse in NYMEX crude prices, and gaping futures spreads. 

Limited space to store crude at Cushing, and a dearth of pipelines to pump oil away from the tank farm to other regions, have pushed WTI front-month contracts into steep contango, or discount, to barrels for later delivery this year.  Due to safety precautions, Cushing tanks can typically hold between 80-85% of their shell capacity. Thus, operational storage capacity at the hub is more likely between 41.2 and 43.8 million barrels. What most do not know is that Cushing stocks rose 2.8 million barrels to 36.1 million in the week ending 12/11, according to U.S. government data. 

The hype/story is that due to Cushing's capacity expansion, traders holding WTI contracts may now be less concerned by swelling in Cushing stocks (which have risen 9.4 million barrels during the past six weeks to 36.1 million barrels although the rise has been affecting rolled-out-prices. The discount for front-month WTI versus supplies for delivery a month later has widened to around $2.00 a barrel, up from around $0.40 in October and $0.60 in November. Note back in February, when Cushing rose to 34.9 million barrels, front-month WTI crude was discounted by a record $10+ a barrel, and traded at a discount of up to $11 a barrel to Europe's Brent oil. In theory, more storage space at Cushing, the smaller the contango discount should be. The chance of a glut is obviously less….Crude storage capacity figures at Cushing are often kept private (pay for services), leaving oil traders guessing about how close the hub is to filling up.  

This contango curve (if it gets steeper) in crude can weigh heavily on outright oil prices, dragging them down even though the pressure stems from a localized glut. Cushing is landlocked, and there is little pipeline capacity to pump oil away to other regions.  The contango structure and Cushing inventories grow together in a self-perpetuating loop {higher oil stocks/supplies widen the contango, which in turn makes it more profitable to squirrel away crude (pay to store it) and sell it for delivery later, at a higher price.} But as Cushing nears capacity, the market impact can be striking, as oil producers and traders are forced to lower prices quickly or shut down the flow of oil into the hub.  Brimming onshore stocks of crude at Cushing and other hubs has encouraged trading firms (GS, MS, BAC and other crude-playing hedge funds) to store increasing quantities of crude on tankers at sea, where they held more than 129 million barrels recently according to shipping firms. Companies have been adding storage space at Cushing to prepare for profitable storage plays in the future (not a real demand/supply function more of a squirrel-supplies away from the public and bleed them as prices increase due to manipulated demand/supplies. Since February, Enterprise/Teppco has upped their Cushing crude storage capacity by 3 million barrels….while Semgroup Corp and Blueknight Energy Partners (EPL) have added a combined 3 million barrels of tank-space. However we have seen that Canada's Enbridge (ENB), Cushing's biggest storage holder, cut their tank-storage this year by 800,000 barrels to 14.9 million recently, by retiring some older tanks….Plains LP, however, will add another 2.3 million barrels of tank-storage capacity over the first half of 2010, boosting its share to 13.1 million barrels. 

Rising Cushing stocks-supplies come amid recently weakening refinery demand in the U.S. mid-continent, but Canada's increasing crude sales to the region may pose the biggest threat to these new gluts. Enbridge's newly expanded Spearhead pipeline, which carries Canadian crude to Cushing, was booked to transport around 150,000 barrels a day in the fourth quarter, up more than 50% from levels early this year. Two new pipelines will pump more Canadian supplies into the U.S. mid-continent starting next year, potentially increasing crude flows to the region by nearly 1-1.25 million barrels a day when they reach full capacity. 

I have written about several times that the CEO of Exxon claimed recently there was $20-$25 of dollar weakness and $10.00-12.00 in speculation built into these prices (a huge premium); basically meaning that the steady decline in the dollar we saw the price of crude increasing as a dollar hedge. With the dollar suddenly finding strength to breakout to a six-week high the price of crude could reverse downward sharply.  

Strangely though the report indicated that weekly crude stocks at Cushing, Oklahoma, the delivery point for NYMEX crude oil futures, were up last week by 700,000 barrels, EIA report showed, when added to a 2.5 million bbl increase last week in crude storage at Cushing, we have a total build of 8.78 million barrels in that key location over the past 6 weeks. As I expect the builds to continue due to massive pumping and hording, it has now breech levels experienced this past February. Total Cushing tank shell capacity still allows room for additional oil stock increases. But we are getting to fill levels where further builds can start to negatively impact the capacity needed for operational requirements. The crude inflows from Canada into the Midwest, is picking up not diminishing and they have actually printed a new historic high on a 4-week average basis (henceforth this glut will in my opinion drive prices down very soon). 

Stockpiles of middle distillates, which include heating oil and diesel, dropped by 2.9 million barrels to 164.4 million, far exceeding forecasts of a decline of just 600,000 barrels….Heating oil stocks dropped by 2.3 million barrels to 48.3 million last week, as cooler/colder weather started to move into the northeast, the world's largest market for the fuel (I find this hard to fathom as most tanks have not received their second topping-runs yet! Meanwhile, gasoline inventories increased by 900,000 barrels to 217.2 million barrels, the EIA report showed, lagging projections of a 1.3 million-barrel gain. What was interesting was that crude runs decreased by 117,000 bpd to 13.8 million bpd last week; and refinery utilization lost 1.9 percentage points to 79% of capacity. 

While the draw-down report provided support to move energy prices higher as well as related stocks, there was a contrary sign in the U.S. refinery utilization rate, which dropped to 79% from 81.25% a week earlier. We aren't really seeing a trend that demand is getting any better as far as refinery utilization is concerned, not a very bullish development; as demand is not increasing but supplies are! This is one factor that has driven crude/oil lower over the past several weeks (a strengthening dollar and a glut of supply, in storage tanks and in sea-borne storage). Overall, there just isn't the demand out there to justify crude moving higher, and I still think we could see prices in the mid-$60s to high $50’s before the end of the year. I think that we will be moving into a trading range of $65 on the upside and $50 on the downside at least into the first quarter when we can see how the demand and storage picture shapes up.  

The API reported on Tuesday evening this past week a build of about 925,000 barrels of crude oil versus an expectation for a decline of upwards of about 1.8 million barrels….while gasoline inventories rose by 2.1 million barrels and distillates dropped by 2.6 million barrels. The API data showed builds in both PADD’s 1 (East Coast) and 2 (mid-continent or WTI territory). The big decline was in the US Gulf Coast (PADD 3) which is likely the result of year inventory management as well as a delay of some imports after last week’s 2*+ hour closure of the Houston Ship Channel (due to extreme fog). The most interesting aspect of the API report was that we saw another strong build in PADD 2.

We have consistently seen these past weeks that the stock market has been on a consistent bullish run since it bounced off the lows in March 2009. As stocks (especially high-beta and crap-stocks that have been placed on the HTB-lists) keep hitting new highs for the year, driven by the prospects (hopes and prayers) of a so called vast and global economic recovery, and many value investors like me are more than concerned about these lofty valuations. The P/E ratio on the SPX, for example, has risen to its highest levels in many years (depending on the calculations 27, 39 and 56). In addition, many once highly sought after dividend stocks, which were once selling at very attractive valuations just a few months ago, are now very expensive.

Since this bear-market leg has started we have experienced 2-distinct and significant relief up-waves (wave 1 and 3 of a 5-wave pattern) and now we are embroiled in what I believe is the third (wave 5) and last wave up in this corrective pattern what I believe is a (B) wave up and I believe we are very close to finishing this up-wave!

According to my wave analysis the 1^st sub-wave of the (B) corrective wave up was (a) which lasted 68-69 trading days from 3/6/09 to 6/11/2009….thereafter the second wave (b) down lasted from approximately 6/11/209 to 7/8/2009 a mere 18-trading days….and this was a very shallow retracement….here is the tricky part if wave (c-up of the B up corrective wave) tops in the next 5-10 trading days (likely in and around my next inflection period (11/6 to 11/13, we have a weekend and a holiday Veterans day on the 11^thin the mix) it would mean that the (c) wave lasted approximately 68-up-days plus 18-down-days or 86+/- days now not all Elliot-wave patterns are exact-linear-counts but I would pay particular attention to the 11/9/2009 date as it would be 86-trading days from the 7/8/2009 bottom!      

Now for my bullish friends….I am issuing a serious red-flag-warning as if I’m correct and I believe that I am, when the up-leg of this (B) relief rally is completed…we will become embroiled in a very-nasty (many will be in the land-of denial) plunge, and this will be the third leg of this bear-market super-cycle-down-draft, and this plunge will catch many if not all of the perma-bulls in a state of shock and utter denial…I believe that history will be repeated and we will unfortunately plunge our economy into a deep and protracted recession (hopefully not another great-depression) 

VOLUME on the bullish side is worsening as the days wear on.....When I see decisive breaks below the bottom boundary lines of Rising Bearish Wedges for the Dow, SPX, and NDX I will be announcing that a major/major top is occurring. I’m also seeing increased bearish divergences between price and actual market breadth, price and volume, and price and momentum indicators that I follow for longer-term significant market moves. Please watch the weekly MACD indicators which are showing very distinct signs of respective topping patterns in the various indexed and are now starting to curl over which is a very bearish signal.  The concept behind MACD is fairly straightforward. Essentially, it calculates the difference between an instrument's 26-day and 12-day exponential moving averages (EMA). Of the two moving averages that make up MACD, the 12-day EMA is obviously the faster one, while the 26-day is slower one. In their calculation both moving averages use the closing prices of whatever period is measured, in the sector I watch for longer term moves (I use the weekly chart). On the MACD chart, a nine-day EMA of MACD itself is plotted as well, and it acts as a trigger for buy and sell decisions. MACD generates a bullish signal when it moves above its own nine-day EMA, and it sends a sell sign when it moves below its nine-day EMA