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Orders for durable goods plunged 2.8% in March to post the biggest decline in over two years, while consensus expectations called for a rise of 0.3%. Orders for February were revised from a gain of 0.3% to a decline of 0.2%. The report is considered volatile in its month to month fluctuations, but analysts who follow the report regularly concede that the numbers are legitimately soft. According to John Shin, an economist at Lehman Brothers, “The details are as soft as the headline numbers.” When the news broke, stock market futures hit the skids, bonds caught a bid and moved higher, and the U.S. dollar fell back to yesterday’s close after opening higher for no apparent reason. I was baffled as to why the dollar opened much higher than yesterday’s close, so I began to dig into the financial news wires to try and figure out why the dollar gapped higher. The U.S. Dollar Index closed yesterday at 83.94 and opened this morning at 84.33. As I searched the news for a reason, Rick Santelli came on CNBC to say that the dollar moved higher overseas in the stealth of the night because the Bank of Korea denied a report they were planning to sell $17 billion worth of U.S. Treasuries. This was a completely BOGUS reason for the dollar to open higher, since the news was out during yesterday’s trading. I’m guessing, but I don’t think that was Mr. Santelli’s reasoning…I think it was scripted for him to give that line of thinking. The Korean announcement could not have been the reason for the dollar’s gap higher this morning because it was used as the reasoning for yesterday’s decline in Treasury prices. Here is what I read from Reuters: U.S.
Treasuries on Defensive In a statement, the Bank of Korea denied a report by a local online news provider it was planning to sell $17 billion worth of U.S. Treasuries from its foreign exchange reserves to finance an investment management agency due to be launched in July. Still, the reports renewed jitters about a diversification away from Treasuries kept the market on the defensive ahead of a $24 billion sale of 2-year bonds. "As far as the Treasury market is concerned, there is clearly an underperformance against other markets this morning," said Lena Komileva, global market economist at Collins Stewart Tullet in London. "The new supply is coming amid speculation about reserve diversification in Asia and although the rumors have been denied, they are still having an impact." "The South Korean story is putting some pressure on the market with a lack of anything else to trade on," said one London-based Treasury dealer. "But there hasn't been much follow through selling, although we may see some pressure on the market before the auction." How can they say bonds reacted to this yesterday, but the dollar didn’t move during N.Y. hours? Instead, the dollar waited to move higher before the open this morning. The dollar should have been nailed lower today with the horrid durable goods report, but not in these heavily managed markets! No! No! No! We have a bigger priority…we have to sell U.S. Treasury debt today, to the tune of $24 billion of two-year notes. The government's borrowing needs are first in line, and we never see the dollar take a hit on a day the Treasury conducts debt auctions. I have pounded the table in the past on how the markets are pre-conditioned to buy Treasury paper whenever the government is in need of more cash. The following Reuter’s quote more accurately describes what is happening today: “The weak data could make it easier for the Treasury to sell $24 billion in new two-year notes later in Wednesday's session. The last few two-year sales have drawn disappointing demand, but talk of an economic soft spot might attract better money to this auction. The last sale in March drew bids for a pedestrian 2.03 times the amount on offer while indirect bidders, a class that includes foreign central banks, took a modest 31 percent of the issue.” How do you think the demand would have been for today’s auction if the U.S. dollar was tanking badly versus the yen and euro? The big spin in the news today keeps talking about how the euro is going to suffer due to weakening economic conditions. A recent manufacturing report from France showed confidence falling, and a separate report from Germany had consumer confidence falling from the prior month. For Germany, this was only the first decline of consumer confidence in the last nine months and it was attributed to high energy prices and rising unemployment due to outsourcing. Nothing new here, so why is there so much pressure on the euro? We face the same consumer confidence issues with high energy prices and workers standing in line for unemployment benefits.
Remember on Monday and Tuesday the dollar strengthened modestly, but surprisingly, gold moved higher. It looks like yesterday’s gold action was intended as a trap for unsuspecting investors…a false breakout higher as a prelude to the take-down for auction day! You should have been given a head’s-up when the gold and silver mining shares were hammered lower yesterday with gold’s unusual strength at the close. As you might guess, the mining shares are even lower today. This is absolutely disgusting for me to watch the carnage in the gold and silver stock prices in the face of screamingly bullish fundamentals for the metals. Mine supply is in a structural deficit to demand with production actually in decline, as miners continue closing mine shafts due to the low price of the metals….very frustrating indeed!!! I did the best I could to describe the current situation when I wrote “The Stakes Are Very High” just two weeks ago. The stakes are definitely quite high, but I didn’t think we would continue witnessing these acts of desperation to prop-up a U.S. dollar that is ultimately destined for lower levels. Watch for stocks to crash right in front of the quarterly debt refunding auction that is coming in just a few short weeks on May 10, 11 and 12. Crumbling stock prices with continuing weakness in economic reports will be needed to create enough demand to sell the auction…just like the Treasury demand that was created for today’s auction! These clowns are making a bad joke out of our markets. Who will be indicted next for fraud or cooking the books or insider trading? As I said earlier, stock futures took a nose dive with the horrid durable goods numbers and the broad market indexes sold off at the open with the Dow Industrials down 72 points and the NASDAQ off by 14 points. If you have been conned into the investment strategy of holding on for the long-term in the stock market, you got your warm-fuzzy within 90 minutes of the open when the Energy Department announced higher inventories for crude oil. Crude was hammered more than $2.00 lower and the stock market bulls jumped right in and started buying. By noon the Dow was back in positive territory, and I expect it will remain higher for the close. (It did hold on by closing 47 points higher at 10,198.) I’m a bit bewildered to see stocks higher, the dollar higher, and bonds higher…all on a MUCH worse than expected report for durable goods orders. Just when I think I’ve seen it all…it gets worse! I’m waiting for the emails that tell me I am wrong to expect gold and silver to move higher as I blame it all on market manipulation. I’ll answer those emails right up front by saying you would be very naďve to think central governments, especially the U.S. government along with the Federal Reserve, are not doing all they can to prop-up the failing fiat money system we use today. The real battleground our military is fighting on is the long-term viability of the U.S. dollar as the sole reserve currency for the planet earth. Here are a few snippets from some well respected analysts as they try to discern the current situation in the financial markets. From Morgan Stanley’s Stephen Roach: “An unbalanced global economy is at risk of becoming unhinged. Beset by record imbalances between current account deficits and surpluses, it doesn’t take much to derail a system that is already in serious disequilibrium. Such a possibility now seems less remote in the face of a confluence of powerful blows -- an energy shock, threats to European unity, an outbreak of overt hostility between China and Japan, and the rising tide of US-led protectionist sentiment. Meanwhile, steeped in denial, global policymakers are asleep at the switch. With an unbalanced world lacking the inherent resilience needed to overcome these mounting tensions, the global expansion is now at risk. That conclusion does not seem to be lost on stretched and still overvalued financial markets.” From the Prudent Bear’s Doug Noland: “Major Uncertainties: I have never experienced an environment with so many Major Uncertainties….There are myriad factors that continue to make Bubble analysis challenging, at best. The unprecedented dimensions of both leveraged speculation and the derivative markets – as well as the system’s dependency on massive unending Credit creation – create fragility to recent market losses in CDS (Credit default swaps), corporate bonds, and equities. For a system so leveraged and commanded by speculative finance, there is little room for error. And there is little doubt at this point that GM, Ford, and the airlines, among others, are today in serious financial trouble; Bubble markets in their debt have dislocated. Two years of zealous “reflation” have done more bad than good for some key companies (throw in Fannie, Freddie and the FHLB). Importantly, key risk market Bubbles have burst, heightened risk aversion is the order of the day, and the Credit Cycle has turned.” As far as I’m concerned, the best description of current market activity came yesterday from Mark Pierce III (a.k.a. “Marky Mark”) when he wrote the following: “Trading Chaos: Markets on Acid” “With the 4/30/05 "Statement Print" approaching, and 9000 HedgeFunds trying to "make their month," the stock market has degenerated into total trading chaos…. Casino stocks and homebuilders breaking out. One semiconductor stock (ALTR) breaking out, while the rest languish. Steel stocks crushed. Oil stocks, banks, and REITS relatively unfazed. With some stocks, it's "Breakout City" and with others, it's "Clothesline Central." I've attempted to predict some type of short squeeze, an orderly bearish flag consolidation, or some other normal and typical pattern. But it seems impossible. Gaming individual stocks has become a complete joke. Gaming the Index ETFs has become futile, due to the slow movement and erratic trading. After hours action is even worse. Every night, there are some spectacular blowups, accompanied by maniacal squeezes in the most unexpected areas. In a nutshell, its a scene where HedgeFunds Have Gone Mad, and nobody is making any money except NYSE and ARCA. No wonder there is such a huge cat fight to buy that operation. A virtual money printing machine. How much commission income is being generated these days, compared to 5 years ago? Who knows? Seems that the only ones making money are the brokers, specialists, and the exchanges handling the flurry of orders every day, and collecting a fat check for margin interest each month. Watching the markets and trying to predict its behavior is like taking a 1974 Acid Trip. Other than that, I have no comment or observation about what may happen next.” Mr. Pierce has a very casual style of writing, but don’t let it fool you…he is quite savvy and makes very candid comments on what he sees in the markets. His last sentence probably has the most wisdom of all by saying, “Other than that, I have no comment or observation about what may happen next.” It’s a pure crap-shoot out there in financial land! Just roll the dice and see what comes up. Your odds would be better in Las Vegas and you will have more fun losing your money at the tables than sitting in front of your computers watching this mess in the markets. I realize I haven’t offered much food for thought in today’s WrapUp, so if you need some more profound intellectual stimulation, by all means go straight to “The Credit Bubble Bulletin” by Doug Noland that he posted last Friday. His very first sentence in the article: “Financial instability is dizzying.” After reading his work, you will probably walk away with a better perspective on how huge the economic boom is in China and Malaysia, a better perspective on the excesses in the real estate markets around the globe, and the overall systemic risk due to half-century low interest rates. The Federal Reserve has created moral hazard beyond belief. They have boxed themselves in a corner where they are seemingly forced into raising interest rates at the same time the economy is obviously slowing. You would think it’s a recipe for disaster, and in many ways it is…except they have a bigger problem on their hands…the real battleground of the U.S. dollar in global markets. I have to steal the wisdom from Mr. Pierce for my parting words in today’s WrapUp. “I have no comment or observation about what may happen next.” (Except to say it will be fancy to see how disconnected the market relationships will be with stocks, bonds, the dollar and gold when the first quarter GDP numbers are released tomorrow.) Good luck, ‘cause you will need it when gambling in the Wall Street Casino!!! Enjoy your evening! Mike Hartman
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