Hewlett Packard

Hpq. A good buy at the fifty-day moving average (blue line). Continuation of the uptrend with support at forty. They must like this Hurd guy.

Microsoft

Msft. resistance just above thirty. Once it breaks through on volume, thirty will become support. Release of Vista just around the corner in January. You'll be competing with institutions to buy it at the fifty-day moving average (blue line).

American Express

AXP. Sixty; resistance becomes support.

The Gift of October

Hey volatility is low as the market continues to rally, and it will stay low as long as stocks rise. But will it go much lower than this? Probably not.

With vol low, options prices--both calls and puts--are cheap. So making directional bets on a stock by buying options, is less expensive than normal.

Betting on the downside by buying puts has the added benefit that when stocks go down, implied volatility goes up, kicking up the prices of the puts higher than you would've expected. So if the rally has given you some profits to protect, consider buying the puts to hedge.

October can be full of nasty surprises.

Let that be the other guy's problem.

This Ain't no Party...

Fleckenstein gets it right in his May 23 article on MSN:

...For now, folks may actually think that the Fed will fight inflation. So, days like last Wednesday lead to "Fed's gonna be tough" talk. Which is why metals can go down in a session when inflation fears are running on the high side.

Setup for metals' gain, stocks' pain

Nevertheless, as the vise tightens down the road -- i.e., inflation is still not under control, but the economy is clearly slowing down -- you can be sure that the Fed will opt for rationalizing inflation, in the (futile) hope of not presiding over a nasty downturn. That will be the moment in time when the metals (and foreign currencies) really go wild to the upside.
Meanwhile, I believe that the path of least resistance for equities will now be down in the short run. And when we get the next rally, I would expect it to fail, since I firmly believe that the top of this three-year-long bear-market rally has finally been seen.

Sell in May and go away. Especially during a mid-term election year. Rates around the globe are going higher; the equivalent of cutting the purity of a junkie's fix--someone out there is gonna start shaking. I wonder which hedge funds will be going belly-up this year.

We'll see how well Bernanke can dance when he is presented with the " this one is too big to fail" argument for Central Bank "intervention", i.e., print up billions of new money or credit in order to save chequed-pants multi-millionare hedge fund inbreds from taking one on the chin, and oh, by the way send the bill to Johnny blue-collar's children, so they have to drop out of college and learn "a trade" instead of attending Hops & Barley U. on the six year "undecided" plan. What a system.

Currencies markets are starting to get rocked. Bank of Korea surprised the markets and raised rates.

"With the Asian markets all slumping, recent bearish sentiment, which initially began with caution over more (possible) U.S. rate hikes, has gotten worse and worse," said Samsung Securities analyst You Sung-min. "The (BOK) rate hike was just one more on top of layers of negative factors."

South Korean banks were hit hard by the rate hike, fueling worries of a possible cooldown in South Korea's sizzling property market and concern over whether the economy is strong enough to sustain higher borrowing costs.

The losses came after stocks dropped on Wall Street Wednesday, extending investors' losses for a third straight session and pushing the Dow Jones industrial average below 11,000 for the first time since March 9.

Yeah, Central Banks around the world are tightening up, the Fed has been bumping up the Fed Funds rate for a while now claiming it will continue, and you want to be net long this market? How stupid are you?

At least wait till October. Until then, enjoy the volatility.

Gulliver?

Apparently my prior post here on The Moon and the Sixpence has forced a lot of people to go public about the next step in the expansion of the NYSE, beyond Europe--towards Asia.

As long as they don't mention my HEx, we're cool.

NYSE Euronext, Inc.

The deal is closer to being done.

If it happens, the NYSE will have a worldwide exchange reach of a 22-hour trading day, with exchanges in San Francisco, New York, Lisbon, Paris, Brussels, and Amsterdam.

The future of the Pacific Exchange in San Francisco just got a little brighter.

Now, if I could just get a little help with my own startup--The Honolulu Exchange. Perhaps the NYSE would eventually want to buy us out and add the HEx to it's collection. Remember how the NYSE got started.

Are you in?

A Bit Uncertain

Just a picture of the recent spike in Nasdaq volatility. You weren't expecting a slow summer doldrum kind of trading season, were you?

Amex to Join the Living

The Amex, faced with the question: "sink or swim?", changes it's mind and starts to paddle...

NEW YORK (Reuters) - The member-owned American Stock Exchange said on Thursday it intends to convert into a for-profit corporation and likely move toward an initial public offering -- becoming the latest exchange to revamp its structure as investor demand for the sector heats up.

Exchange Stocks Getting Spanked

After big runups since their IPO's, these stocks take a needed breather to shake out some of the weak holders and form sound bases. From a Yahoo.Reuters story:

CHICAGO, March 23 (Reuters) - The shares of two high-flying financial exchanges, International Securities Exchange Inc. (ISE.N: Quote, Profile, Research) and CBOT Holdings Inc. (BOT.N: Quote, Profile, Research), plunged on Thursday in profit-taking and worries about competition.

ISE, the largest U.S. equity options mart, led the way as it continued a steep decline from its March 15 high of $52.84.

But CBOT finished as the day's biggest loser on the New York Stock Exchange after analysts at Jefferies & Co. said some profit-taking should not come as a surprise for the parent of the No. 2 U.S. futures mart.

In the above article Frederic Ruffy comments that the NYX Group, which now includes the Pacific Exchange, could become a serious competitor for the ISE.

The ISE makes note of the NYX and it's potential for drawing away some of it's order flow:

"Consolidations and alliances among our current competitors may create larger liquidity pools than we offer. The resulting larger liquidity pools may attract orders away from us, leading to a decline in our trading volumes and liquidity, which would lead to decreased revenues," ISE said.

ISE also said that, with other exchanges now running hybrid open-outcry/electronic trading systems, "certain qualities of our market are becoming more common."

As competitors improve their market quality, "commoditization of electronic trading in the options industry may begin, which could lead to an increase in price competition," the company said.

Here is a quick look at the graphs for some of the exchange related stocks.

NYX, why look abroad?

Is New York losing it's market share in financial capital to the rest of the world? Daniel gross says yes over at Slate.com.

According to the most recent monthly report from the World Federation of Exchanges, the NYSE and Nasdaq combined had $16.9 trillion out of the world's $41 trillion in stock market capitalization in December 2005, or 41.2 percent of the world's total. That's impressive. But it's down sharply from January 2001, when the NYSE and Nasdaq combined held 48.4 percent of the world's stock market capitalization.

One of the reasons cited is Sarbanes-Oxley. A merger with the LSE could help this once geographically challenged institution get around that. Financial centers throughout the world are in competition with each other to attract capital, not only with the technologies and services that they provide, but also with the regulatory environment that goes along with it.

If the managment at NYX is smart, they will be looking for a way to limit the risk that the same idiots who passed Sarbanes-oxley will be coming back with even more well-intentioned legislation in the future.

An LSE merger would be a good start.

In the minds of politicians no one ever reacts to the regulatory burdens that they impose.

In the real world it's hard to find anyone that doesn't.

Maybe there oughta be a law against that, too.

NYX Rival Bids for LSE

From Reuters on Yahoo, the LSE rejected the Nasdaq's bid as too low as the NYX gets busy consolidating it's merger.

This was the third bid received by the LSE in 15 months and its rejection of Nasdaq's offer fueled speculation it might not be the last, with the New York Stock Exchange -- the world's largest stock exchange and Nasdaq's arch rival -- rumored as a potential buyer.

Nasdaq's approach comes just two days after the NYSE Group Inc. (NYSE:NYX - News), owner of the Big Board, went public by sealing its purchase of electronic rival Archipelago Holdings.

The competition for dominance of the International exchange market continues at a hectic pace.

But Repetto expects the NYSE to come up with a rival offer and thinks that among U.S. players the Chicago Mercantile Exchange Holdings Inc. (NYSE:CME - News) could be a "longshot" to put in an offer.

These newly public companies now have a pile of cash and their own stock, with which to buy other exchanges and catch their competition napping.

It's like a game of street basketball where the captains are picking their teams before the big showdown. Leaving the best players for the other guy to pick up could be the fatal mistake.

The Pacific Exchange's Future?

What will become of the options trading floor in San Francisco now that it is owned by the NYSE? Carolyn Said, from the SF Chronicle:

Margaret Nagle, a spokeswoman for Archipelago, said the Pacific's electronic option-trading, which now uses a system called PCX Plus, will change to an entirely new electronic trading platform in the middle of this year, to be based on Archipelago's technology. "The new platform that we're rolling out includes there being a physical (trading) floor," she said.

In response to conjecture that the trading floor might close this year, she said: "I know nothing of any plans of it being phased out in the near future, meaning anytime this year. That would be news to me. My understanding was that the floor, I can't say will remain in place in perpetuity, but there are no plans to phase it out this year."

So far it appears that the NYSE trading floor will remain in operation along side of it's "Hybrid" electronic trading platform, so the management of the NYSE Group, NYX, must see at least some value in physical trading floors.

But then what does this quote from cnn.com mean?:

Thain has expressed confidence in the hybrid program and appears to be poised to take advantage of the exchange's newfound independence from its seat holders. The former Goldman Sachs president hopes to expand the NYSE's offerings to include derivatives trading, including equity options side-by-side with sales of the stocks themselves, as well as corporate bond trading.

Will they be traded side by side in New York, or San Francisco, or both?

If both, wouldn't that be redundant? Perhaps San Francisco will be allocated some underlying products and the New York trading floor, others. Perhaps San Francisco will get to trade all of the Nasdaq stocks along side of their options...

In the future, it's possible that floor traders could not only trade NYSE-listed stocks, but also those listed on the Nasdaq. With NYSE-listed stocks already electronically traded on Nasdaq, as well as Archipelago, the NYSE could not only retain some of its own market share, but also eat into Nasdaq's.

Or perhaps foreign equity products along with their derivatives...

Thain has also said he is still considering expanding the NYSE's operating hours in order to compete with European markets, though that has run into some resistance from traders on the West Coast, who are already in the office at 6:30 a.m. Pacific time for the opening bell.

Foreign exchanges trade some of our equities, perhaps we will be trading more of theirs in a bid to capture more worldwide order flow.

But what would be the impact on the Pacific Exchanges trading floor if the following happened?

Alternatively, the NYSE could go after the Chicago Board of Options Exchange or the International Securities Exchange in order to get a bigger piece of the options and derivatives trade.

If the CBOE was aquired perhaps the two floors could once again divide up the optionable stocks like the days of old and reduce the competion between them for the same order flow, loosening up the sometimes very tight spreads on the more actively traded options.

The one underlying certainty for the options trading floor in San Francisco is this, out from under the thumb of the stifling "public-institution" bureaucracy, it now has at least a chance of finding it's niche, getting an edge, and joining the world of profit driven innovation that has been whirling around it for the past twenty years.

Perceptions of Inflation

Tom Au with a note on inflation, or rather, inflations.

China's foreign currency reserves too big?

From a member of an advisory body to the Chinese government:

"China's foreign exchange reserve hit 818.9 billion dollars at the end of last year but what China really needs should be no more than 250 billion dollars," economist Xiao Zhuoji told the Shanghai Securities Times.

"The current (holdings are) way above actual needs," he said.

Chinese reserves should be cut by more than two-thirds from current levels, said Xiao, who is also a member of the Chinese People's Political Consultative Conference (CPPCC), an advisory body to the government.

When the biggest buyer of your bonds becomes the biggest seller, yields are going higher.

If this were to happen, you would have the American central bank driving up the short end of the yield curve, and the Chinese central bank driving up the long end.

Not much left for market forces to do. Maybe the ideologies of governing officials in the two countries aren't so far apart after all, at least where government intervention is concerned.

Silver ETF Coming Soon

Silver prices moved above $10 a troy ounce for the first in more than 22 years buoyed by strong buying in metal and energy markets.

Traders said investors were also buying into the metal in the hope of a favourable US regulatory ruling on the launch of a proposed silver-backed exchange traded fund. Barclays Global Investors has filed with the Securities and Exchange Commission to list a silver backed ETF, which potentially opens up the silver market to new investors.

Continued at FT.com: Silver pushes to new 22-year high

China... Has a Dark Side?

Hat tip: Tyler Cowen at Marginal Revolution.

If you are one of those very knowledgable people who are gung ho on China and can't wait to throw your 401k money into the latest China fund, you may want to take a look at this article by Minxin Pei at Foreign Policy, the mouthpiece for the New World Order establishment types.

Then again, if you've already sent your money to China, you may want to finish your lunch first, because after reading The Dark Side of China’s Rise you may not be able to swallow for an hour or so.

Pei steps past the piles of steaming hype, and takes a realistic look at the "engine of future world growth" to reveal the darker side of this neo-Lenninist state, where monopolies, corruption and one-party rule are the norm.

Behind the glowing headlines are fundamental frailties rooted in the Chinese neo-Leninist state. Unlike Maoism, neo-Leninism blends one-party rule and state control of key sectors of the economy with partial market reforms and an end to self-imposed isolation from the world economy. The Maoist state preached egalitarianism and relied on the loyalty of workers and peasants. The neo-Leninist state practices elitism, draws its support from technocrats, the military, and the police, and co-opts new social elites (professionals and private entrepreneurs) and foreign capital—all vilified under Maoism. Neo-Leninism has rendered the ruling Chinese Communist Party more resilient but has also generated self-destructive forces.

Oh, and I know you don't want to hear about this...

But China’s tentacles are even more securely wrapped around the economy than these figures suggest. First, Beijing continues to own the bulk of capital. In 2003, the state controlled $1.2 trillion worth of capital stock, or 56 percent of the country’s fixed industrial assets. Second, the state remains, as befits a quintessentially Leninist regime, securely in control of the “commanding heights” of the economy: It is either a monopolist or a dominant player in the most important sectors, including financial services, banking, telecommunications, energy, steel, automobiles, natural resources, and transportation. It protects its monopoly profits in these sectors by blocking private domestic firms and foreign companies from entering the market (although in a few sectors, such as steel, telecom, and automobiles, there is competition among state firms). Third, the government maintains tight control over most investment projects through the power to issue long-term bank credit and grant land-use rights.

China’s business cycle is therefore driven by Beijing. Private-sector firms have very limited access to finance or new markets. The state even dominates many ostensibly deregulated sectors, such as the brewing industry, the retail sector, and textiles. Of the 66 publicly traded retailers in the country, only one is private. There are only 40 private firms among the 1,520 Chinese companies listed on domestic and foreign exchanges.

While the rest of the world has been buying into the PR campaign of the Big Red Pig from the Far East, The Moon and the Sixpence is one of the few stalwarts who stand firmly on common sense.

No matter how much lipstick you put on her, she's still just a butt-ugly pig.

End of the Currency Carry Trade

Ft.com's Steve Johnson reports that BNP Paribas' FX Strategy Indicator is turning negative on the carry trades.

Carry trades are simply borrowing money in a country/currency with low rates and lending it in a country/currency with high rates, capturing the difference.

The spread between the two rates is the source of profit, when it shrinks so does the payoff.

The U.S. dollar has been the beneficiary of the carry trade because of the higher yields available on U.S. debt securities. With the decline of the carry trade there will be less demand for the dollar.

These kinds of gifts to the market are often the result of central bankers attempts to evade reality by "liquifying" their economies and keeping rates artificially low in order to induce more economic activity and allow their politicians to stay in office for just a little while longer.

For example, rates in Japan were held down to zero while they attempted for years to end the deflationary spiral that was the consequence of their own prior action.

So while they created credit and pumped out new money 24/7, smart banks and hedge funds were borrowing that money for nothing and lending it to the U.S. treasury--and pushing up the dollar in the process. Note that the Japanese central bank was pumping it out hoping it would be spent domestically to the benefit of the Japanese economy and instead that money ends up financing the U.S. budget deficit thank you very much. No wonder their reflation attempts were not having the desired effects.

And that doesn't even count the direct purchase of U.S. dollars or government debt by their central bank held as foreign currency reserves.

The end of the carry trade? Don't worry about it, if history is any guide there will be ten more central bank freebies out there to take it's place.

NYSE Blog?

Yup,

The NYSE has just started a blog. I don't think they've quite gotten the hang of it yet but we here at The Moon and the Sixpence would like to extend our warmest welcome, and offer our full veteran blogging support to this young upstart.

Three cheers for establishment propaganda! er, I mean the NYSE blog marketing campaign.

NYSE, The End of the Innocence

After two hundred and thirteen years, the NYSE will finally join the rest of America as a capitalist--for profit--institution. On March 7th it merges with Archipelago.

Here's the Article from Bloomberg.

Through the merger it also joins forces with the Pacific Exchange, the equity options trading floor in San Francisco, an institution in desperate need of some new lifeblood. First step? Fire all of the old managers and then steam clean their offices before bringing the new leaders in.

Buying the PCX is like buying a fixer-upper, it's gonna take a litle cash and a whole lotta sweat equity to make the thing pay off.

Then again who knows if the management team of the NYSE itself is capable of running a for-profit corporation, answerable to shareholders and competing with other very aggressive exchanges? The first year will be crucial.

You boys better hit the ground running, or you may be the subject of the next takeover and house cleaning.

Capitalism is coool.

Fleckenstein on Bernanke

New Fed chief Bernanke is talking tough, but Bill Fleckenstein isn't having any of it:

While in the Fed-words-in-lieu-of-action department, I heard from a knowledgeable friend who expressed surprise "that Ben expects investors to hold firm to the concept that 12%-plus growth in short-term credit and 8%-plus growth of M3 is evidence that the Fed has reined in its past accommodations." The Fed has, of course, not reined in its past accommodations, and, in my opinion, has no intention of doing so.

For the moment, though, some folks seem to think the Fed is actually tight and inclined to be tighter -- a notion that I find almost laughable.

Beyond Equities

Think the interest in trading and investing in commodities is temporary? The big trading houses don't.

Here's Kevin Morrison at FT.com

“If you ask me again in three years time, I would say that the size of the market will have doubled again,” said Mr de Vitry.

An Austrian View of Fooled by Randomness

James Sheehan finds common ground between Nassim Talebs Fooled by Randomness and Austrian economics.

Though Taleb was influenced by Hayek's The Road to Serfdom, he seems otherwise unaware of the Austrian critique of mainstream economics and the use of mathematics in economic theory.

This reminded me of a similar situation back in the eighties reading Michael Rothschild's, Bionomics. It too was a very enlightening book whose main theme paralleled the Hayekian ideas of spontaneous orders and the use of knowledge in society.

But it's author made not one reference to any Austrian thinker, apparently unaware that he was not exactly discovering virgin territory. Even a college dropout at minimum wage job playing Nattie Bumpo in the high sierras knew better.

Anyway, what's Taleb's main point, you ask?

It's this: you know less than you think you do, so don't sell those way out of the money calls or puts.

Taleb is a buyer and he's patient--and time, is on his side.

Nasdaq's Low Volatility Index

With earnings season over it's laying down for a nap. Would someone pull down the shades and turn off the lights, please?

Government Fiction # 14708: The Savings Rate

The news is replete with government supplied "data" on the economy. Frank Shostak at Mises.org isn't fooled by it. Are you?

Now, since it is not possible to quantitatively establish the status of the total of real goods and services, obviously various data like real income, real personal consumption expenditure, or real GDP that government statisticians generate shouldn't be taken too seriously. The data that are generated by means of mathematical methods is just a fiction.

Yet this fiction passes as the facts of reality, which allows economists to make comments with a straight face regarding the likely future direction of the real economy. The debate is often confined to the decimal point of the rate of growth. Thus it is debated whether the economy will grow by 3.1% or by 3.5%.

The fictitious data are served as a benchmark against which various economic theories are validated. Also, once it is accepted that it is "possible" to quantify the state of the real economy then one can also establish another fiction — the price level. This in turn provides the rationale for the importance of keeping the price level stable. And this in turn provides the justification that the central bank ought to navigate the economy towards the path of stable price level and stable real economic growth.

Red Help Lowers Rates

An article on Bloomberg.com by William Pesek Jr. gives us a good idea about why our long term treasury yields are so low, and it has little to do with domestic "inflationary expectations" or "investors expecting a slowdown in the economy" or any of that other gibberish the experts blabber on about.

Foreign central banks buy a huge amount of these things; the Chinese are one of the biggest holders.

About $250 billion of China's reserves are in U.S. Treasuries. China's purchases ``put Pimco's Bill Gross to shame and contribute to low yields'' in the world's biggest economy, said Nouriel Roubini...

The press tends to hyperventilate over Gross's frequent comments about U.S. debt yields. The reason: He manages Newport Beach, California-based Pacific Investment Management Co.'s $90.6 billion Total Return Fund. Investors might be wise to pay more attention to where the really big money is: in Beijing.

Why do they hold foreign currency reserves, of which Treasury Bonds are a big part? According to Pesek:

Asia's currency-reserve arms race reflects two things. First, a desire to keep currencies from rising so that exports aren't hurt. Second, a determination to avoid a replay of 1997, when the region lacked ample reserves to fight speculators attacking currencies.

You should thank the commies for that low rate mortgage of yours. Their central bank is working hard for you.

It's Getting Warmer

Bloomberg news gives us the latest on the inflation front:

Costs of intermediate goods, those used in earlier stages of production, rose 1.2 percent last month and are up 9.3 percent in the 12 months ended in January. Prices of raw materials, or so- called crude goods, fell 0.5 percent and were up 23.6 percent in the last 12 months.

Crude goods prices are up 23.6% in twelve months! These are the goods that are furthest away from the consumer in the structure of production, the higher order goods. They are used primarily to make the capital goods which, themselves are needed to make and move lower order goods, consumption goods, to there final destinations.

Among other characteristics they are very sensitive to the business cycle. You might even say that they are the clearest evidence of it.

When the boom begins they rise to the sky and everyone is feeling groovy. When the inevitable bust appears, they get crushed the worst and no one will touch them. But you don't buy crude goods so why should you care, right?

Faced with rising raw-material costs, manufacturers are raising prices. Caterpillar Inc., the world's largest maker of earthmoving equipment, said last month that fourth-quarter profit surged 54 percent, helped in part by higher prices. The company raised its earnings forecast for this year and announced a price increase of as much as 5 percent, effective Jan. 1.

...and on down the chain of production they are passed, higher prices. But they would not be sustainable without the artificial expansion of money and credit by the central banks, the Fed in the United States. A price increase here would be offset by a price decrease there; no general rise in prices would be seen.

With all the talk about the Fed focusing in on the fixing of the Fed Funds rate very few people these days keep track of the changes in the money supply. Doug Noland from the Credit Bubble Bulletin gives us the latest Fed data:

Broad money supply (M3) rose $9.3 billion to a record $10.280 Trillion (week of Feb. 6). During the past 38 weeks, M3 has inflated $654 billion, or 9.3% annualized. Over 52 weeks, M3 has expanded 8.2%, with M3-less Money Funds up 8.3%. For the week, Currency added $0.4 billion. Demand & Checkable Deposits fell $26.4 billion. Savings Deposits jumped $24.2 billion, and Small Denominated Deposits increased $2.6 billion. Retail Money Fund deposits slipped $0.6 billion, while Institutional Money Fund deposits rose $11.0 billion. Large Denominated Deposits declined $11.0 billion. Over the past 52 weeks, Large Deposits were up $264 billion, or 23.3% annualized. For the week, Repurchase Agreements jumped $12.6 billion. Eurodollar deposits declined $3.5 billion.

Bank Credit gained $2.8 billion last week (5-wk gain of $103bn) to a record $7.591 Trillion. Over the past 52 weeks, Bank Credit has inflated $676 billion, or 9.8%. For the week, Securities Credit declined $6.1 billion. Loans & Leases were up 12.0% over the past 52 weeks, with Commercial & Industrial (C&I) Loans up 15.3%. For the week, C&I loans declined $3.6 billion, while Real Estate loans expanded $8.9 billion. Real Estate loans have expanded at a 10.9% pace over the past 20 weeks and 14.5% during the past 52 weeks. For the week, Consumer loans were about unchanged, and Securities loans increased $7.6 billion. Other loans declined $4.3 billion.

Total Commercial Paper dropped $14.5 billion last week to $1.675 Trillion. Total CP is up $25.4 billion y-t-d (7wks), while having expanded $241 billion over the past 52 weeks, or 16.8%. Last week, Financial Sector CP borrowings declined $13.5 billion to $1.537 Trillion, with a 52-week gain of $247 billion, or 19.2%. Non-financial CP declined $1.0 billion to $137.7 billion, with a 52-week decline of 4.0%.

Now I ask you, do those annual numbers leave you with the impression that we are living in a restrictive monetary environment?

Take monetary expansion down to zero and let rates go where they will, then we'll call it neutral.

Until then the business cycles will continue.

Big Cap Twenty

This weeks IBD big cap twenty list is out, you can see the first ten here and the second ten here.

Looking it over, there are a few things that one might notice. First, some of the biggest leaders have fallen off since the earnings season began. As IBD points out, Apple, Google, Ebay and Yahoo are gone. Mainly taken out by huge price corrections, and from here on out long stock holders will probably be using rallies in these stocks to unload more of their holdings because they know the short term party is over.

Second, the list is dominated by oil and commodity related names: SLB, HAL, PCZ, OXY, BHI, TLM,WFT, NEM. Also up are transports and big capital builders: NSC, CAT, BNI, CNI; and the big money houses of: LM, MER, LEH, and GS.

Techs are barely represented with BRCM and ADBE.

What's the point, you ask?

It's looking more and more like the beginnings of the Mises-Hayek Austrian business cycle. Money and credit is created out of thin air by the central bank providing "liquidity" to the economy and lowering the complex of interest rates below what would have existed without their intervention.

These false signals induce capital investments that otherwise would not have occurred, the boom phase, and lead to malinvestments which will eventually have to be corrected by business failures and unemployment, the bust phase. There are no free lunches, as Uncle Miltie has said.

But the desire in them to maintain political power is overwhelming. So the beat goes on...

Intro to Polycentric Law

I know you've been looking around for brief explanation of Polycentric law. Tom W. Bell offers one up here.

Economists since Adam Smith have argued that competition in production serves consumers' interests, while monopolies tend toward sloth and waste. Gustave de Molinari, editor of the Journal des economistes, was probably the first legal theorist who dared to ask why this should not be as true of the law as it is of apples, cotton, and iron. He argued that under the state's monopoly of law " Justice becomes slow and costly, the police vexatious, individual liberty is no longer respected, [and] the price of security is abusively inflated and inequitably apportioned. . . ." He therefore advocated a non- monopolistic legal system and projected that once " all artificial obstacles to the free action of the natural laws that govern the economic world have disappeared, the situation of the various members of society will become the best possible."

Thanks to Stefan Karlsson for the pointer.

The Trade Deficit Story

Frank Shostak at mises.org explains why the trade deficit is not a threat to the economy but the central bank is.

Our analysis doesn't imply that the US economy is in healthy shape - far from it. However, what we maintain is that the key factor behind the erosion of US fundamentals is not the widening in the trade account as such, but rather the policies of the Fed. During the reign of Alan Greenspan between August 1987 and December 2005, money AMS has increased by 173%. Greenspan's strong monetary pumping was accompanied by a massive artificial lowering of interest rates. The federal funds rate was lowered from 6.5% in 2000 to 1% in 2003. Obviously then such reckless policies must have severely undermined the process of real wealth formation. However, focusing on the trade account statements only diverts the focus of attention from the true culprit behind the erosion of US economic fundamentals.

The fear of a growing trade deficit is used to bully protectionist legislation through Congress, the threat of which could easily disrupt the economy and send the market into a freefall.

Then again, if you happened to be long puts, that would be a good thing.

VXN: Nasdaq Volatility Index

On the rise through January. What it means is that prices for both calls and puts on the nasdaq 100 stocks have been on the rise.

A number of worries for the market are out there including earnings season, the FOMC meeting, oil and other commodity prices continuing to go higher, and Iranian sanity problem, to name a few.

CBOE Plans New Exchange Index

The CBOE follows the lead of The Moon and the Sixpence and announces plans for an index of one of the fastest growing new industries in the country: trading exchanges.

The index "will provide an essential composite look at this new market, and will provide the benchmark that investors and analysts will use as the indicator for this emerging business sector," said CBOE Chairman and CEO William Brodsky in a statement. He expects options and futures to be listed on the index soon.

The Index symbol wil be "EXQ".

Trading and Innovation

Trading is a boom industry. Here are the graphs of some of the more interesting publicly traded trading related companies in the United States.

Look at the Chicago Mercantile Exchange, CME. After forming an eight week base on top of a long run up, it still has the strength to break out to new highs above $400.

The Chicago Board of Trade, BOT, an IPO from last year is also doing well. The quick money is gone. It may now be in stronger hands and under accumulation. Yahoo Finance shows that The Vanguard group is the only significant holder but a few other big funds have started to take positions at the end of last year.



Both the Arca Exchange, AX, and the Nasdaq, NDAQ, have shown big volume rallies off of their moving average supports with similar chart patterns.


AX of course owns the Pacific Exchange and is merging with the NYSE.



Do you want a link to most of the exchanges around the world? I found a pretty good one here.

This stodgy old industry is becoming more dynamic as new technology forces its way in, and those who refuse to innovate, get bought out or die.

Competition from abroad forces regulatory changes in the United States and elsewhere that never would have occured without it. Those who benefited from the lack of competition in the past would have watched their order flow dwindle down to a trickle.

The Self Regulated Organization, SRO, model is a failure. A P&L is crucial in decision making. It forces institutions to serve real people, and rewards the best for doing so efficiently.

This is an industry that is slowly being released from its bureaucratic bondage, into a world where it has more to gain from tech innovation than any other. These firms will come to realize that they are nothing more than networks.

An exchange used to be defined by its location. But no longer. The concept of an exchange is being released from its earthly location. If the Pacific exchange abandons it's trading floor in San Francisco and goes virtual with all of its market makers participating electronically, is it still the PCX? The customer may not even notice a change.

...and you are holding IBM in your IRA?

Genius.

Time's Up

According to the Stock Trader's Almanac, the end of January signals the end of the best three months of the year for stocks. The average gain for the Nasdaq since January, 1971 is 3.7%.

For the S&P 500, the probability of an up day today is about 67%, but tomorrow is historically one of the best trading days of the year with the probability of an up day at 81%.

It also happens to be the day of the FOMC meeting.

Bernanke's coming, look busy.

Half-Point Rate Increase from the Bernanke Fed?

Jim Otis over at Prudentbear.com speculates on one rate manipulation strategy for new Fed Czar Bernanke.

As an exercise for the students, compare and contrast the results from raising a boring quarter point now and another quarter point at the next meeting, versus a bold half point increase now and no increase at the next meeting. The following Fed meetings will show the timing value of a sharp increase in rates now. By then, the media will talk about little more than the dreaded deflation toward which our economy is surely falling, and the Fed will be able to cut rates by a half point at each of the next few meetings to protect us from the dastardly deflation fate which would otherwise crush our economy (despite the contrary evidence offered by energy and metals prices which will be setting new record highs). Those sharp rate cuts over the spring and summer, combined with the ever increasing M3 money supply which will no longer be published, will have our economy running at full speed again by late fall, and will push stock prices to record highs. Coincidentally, that will put voters in a good mood by November.

If you were the new head of the Fed how would you play it?

GM, Kerkorian Outed by Matias

In my last post I noted that GM showed unusual strength on that big down day on Friday. Evidently much of that strength was due to Kirk Kerkorian's stealthy accumulation of More GM shares on the cheap, raising his stake to 10% of the company.

Kerkorian, rumored to be a dedicated reader of this blog, The Moon and the Sixpence, realized he'd been outed and decided to go public with his activities.


Note the last three bars (elongated) are the Monday, Tuesday and Wednesday just past. Friday, which on most other stock charts is a big red slash, is an almost nonexistent dot on GM's chart.

Why is he buying again?

His latest move may indicate he believes GM is listening to his ideas for improving the company. In a speech to Wall Street analysts this month, Kerkorian's top aide Jerome York called on GM to cut its annual dividend in half and set profitability goals and a timetable for achieving them.

York said Kerkorian was interested in buying more GM shares and was optimistic about its recovery efforts, but he said it was time for GM to get into a "crisis mode."

GM just broke it's intermediate term downtrend. The company will report quarterly and full year results today.

Dow Check

Here are the graphs for most of the Dow stocks.

Of the bunch, McDonalds is the only one that had a strong up day on Friday, when most of the market got whacked.

T, Pfizer and Merck showed mild relative strength. And surprise surprise, GM may be forming a bottom while no one else is paying attention.

Nasdaq Check

With the QQQQ as a proxy, on a 3-year chart showing strong support at $40. Let it come in, then if the market action starts to look better, get long.

INGR Closing

We are short the Jan 45-50 put spread which means we are short the 50 puts and long the 45 puts. On expiration both will go to parity at the end of the trading day. Since the stock is around $49.50, parity for the 50 puts is 50 cents, and for the 45 puts zero.

All we really need to do is buy back the short 50s before the close.

Assuming that the market will be neutral, the stock should be drawn to $50 a share intraday and when it is, those 50 puts will have little value--their price will drop. So when the stock makes a run up through fifty, we should buy them back. Going into the morning let's keep a 20 cent bid in mind. But unless the stock runs up big, we will buy them back by the close.

To remind you, the opening trade was selling this put spread for $1.90. Let's see how well we do closing it.

AAPL legging Out

Apple, we'll be an $.85 bid on our Jan 80 puts to close. If it trades, we'll still be long the Jan 75 puts from the spread we sold on Monday.

Quick Charts; Oil and Exchanges

Here are a few good oil related stocks and exchange and trading related stocks. We'll need them in the future.

CMED Out

Just as I thought, the stock tried to punch through the $40 mark, as you can see on this intraday chart, but failed and closed down.

Fortunately we had a $5.80 offer out on the Jan 35 calls which got taken out on the stock's run up, and we then closed out the other part of our vertical, the short Jan 40 calls, to close.

Bought for $1.50, sold for $3.60.

$210 profit per spread on the initial $150 investment.

CMED, Legging out

We paid $1.50 for the CMED Jan 35-40 call spread--buying the Jan 35 calls and selling the Jan 40 calls--and since the stock has met our expectations we are looking to get out as the stock hits a ceiling at $40.

But CMED presents a problem common to stocks with illiquid options markets; the bid-ask spread is wide and we don't want to give that much money away.

On tuesday the stock closed at $39.41, and the Jan 35 calls, the part of our spread that we are long, was $4.60 bid, at $5.40--$.80 wide. Too wide.

We'll put out an offer to sell this Jan 35 call at $5.80 and see what happens. Why?

If the rest of the market is neutral we can bet that CMED will make another attempt at crossing above $40, even if it does not close above it. When it does make the run, those Jan 35 calls, which are deep in the money, will move up almost as much as the stock itself.

So if the stock moves up the required $.60 to hit the $40 mark, the calls should move up, let's say $.50. The $5.40 offer on the exchanges will rise to $5.90 uncovering our offer at $5.80--and we will become the best one; the next to sell to those momentum call buyers.

Even if the professionals keep lowering their offer to remain the best one, the stock may continue to rise and they will be forced to fade and maybe buy our call themselves in order to get us out of their hair.

Once we sell the 35 call we can pay the offer on the Jan 40 call or work out of it, and we will be out of the spread.

In the real world you can react to the market in real time, but it is always good to go into the trading day with a plan. As old Gomp used to say "ya've gotta have a plan". Of course that always included a sixer of King Cobra...

STJ Missed

Do you like apples?

Well I turned around and wasn't paying attention to STJ for a few days while it came back in to $50 and support at its 50-day moving average and so I missed my chance to sell the Feb 50-55 put spread for fat cash how do you like them apples?

AAPL Trade

AAPL Jan 75-80 put spread let's hypothetically sell it at a $3.20 limit. If the stock comes in closer to $75 during the day (mon.) it might get taken. The stock should find support @ $75 after it broke through and closed above resistance there.

As we've noted before, vertical spreads have a limited profit and a limited loss. To sell a Jan 75-80 put spread, you have to sell a Jan 80 put and buy a Jan 75 put. The difference between the two prices is what the spread trades for, if we sell it, someone else buys it.

Then net amount of money goes into our trading account and sits there until we close out the trade by buying the same spread back. Hopefully for a lot less than we sell it for if our offer gets taken.

Stay tuned...

China Shifting Away from the Dollar?

If so, the dollar gets weak and long term bond yields rise.

Economists estimate that more that 70 per cent of the reserves are invested in US dollar assets, which has helped to sustain the recent large US deficits. If China were to stop acquiring such a large proportion of dollars with its reserves - currently accumulating at about $15bn (EU12.4bn) a month - it could put heavy downward pressure on the greenback.

Goods imported to the U.S. will themselves become more expensive, and will no longer have as much of a dampening effect on domestic prices here, paving the way for a "surprising" uptick in future CPI numbers, including the phony "core" rate of inflation.

However, according to Stephen Green, economist for Standard Chartered in Shanghai, although the language was "vague", Thursday's statement was the first time Safe has publicly indicated a shift away from dollar assets.

"It is a subtle but clear signal that they are interested in moving away from the US dollar into other currencies, and are interested in setting up some kind of strategic commodity fund, maybe just for oil, but maybe for other commodities," he said.

And their appetite for commodities from around the world will continue to grow. Thanks to prudentbear.com for the pointer.

Under the Skin, All Central Banks are Alike

On the Prudence of China's central bank, again from Bloomberg.com:

"The People's Bank of China plans to restrict growth in M2, the broadest measure of money supply, to 16 percent this year, the central bank said on its Web site, citing an annual working conference held yesterday."

And Citigroup's best chimes in...

``The M2 target is in line with the aim of having a healthy and stable policy,'' said Huang Yiping, Citigroup Inc.'s Hong Kong-based chief Asia economist.

He makes it sound so easy...

``The M2 target is in line with the aim of having a healthy and stable policy,'' said Huang Yiping, Citigroup Inc.'s Hong Kong-based chief Asia economist. ``We aren't expecting any big tightening moves until inflation picks up and becomes a risk.''

China's consumer prices rose 1.3 percent from a year earlier in November, compared with a 1.2 percent gain in October. Inflation has eased from a high of 5.3 percent in July and August 2004 after the government clamped down on bank lending to industries such as steel and real estate.

It will be fun to watch all of this unfold.

No Inflation Here

"Inflation? What inflation? Didn't we tell you the core CPI was low--nothin' you needed to worry about?"

Yeah, sure.

Another piece by Bloomberg (Commodities rise to Record...) in the growing body of evidence, that in spite of the 13 headline-capturing rate hikes by the Fed, it has actually been a prolonged period of easy money.

The core rate of inflation is only two percent, you say? Man, you are well trained!

From a story over at the Financial Times (FT.com), metals prices continue to surge.

More to follow...

AAPL, Bite It?

While it's better to wait until a stock is trading near it's 50 day MA and basing for six to eight weeks, watch AAPL if it closes above $75 on strong volume. You may get paid off for taking a bite.

Go East Young Man

Think the U.S. is the leading growth market for retail equity derivatives? Think again. Think kimchi and...well, read on at FT.com.

Is the Alleged Tight-Money policy Over?

From Bloomberg:

The number of rate increases needed to control inflation ``probably would not be large,'' yesterday's minutes from the Fed's December policy meeting showed. The ``measured'' phrasing was retained to avoid any suggestion of bigger rate increases, the central bank said.

No wonder they want to get rid of M3, managing 'inflationary expectations' is half the fun of it.