DAILY REPORT (11/26/08)
Every time I think that enough is enough, the US government surprises me yet again. Yesterday the Treasury gave away US $323 billion to Citibank, and I say gave away because there is absolutely no chance over seeing that money again. It can't get any worse than that right? Wrong! Today I get out of bed to learn that the Fed gave away another US $800 billion - $600 billion to GSE's to buy their bad debt and US $200 billion for consumer loans - and again there is little chance that there will be any return on investment. Then we saw news that the economy shrank by 0.5% in the third quarter and home prices were off by a record 17.4%, and that seems to go hand in hand with how a lot of people feel right now. Consumers continue to cut back and that is not a good sign. Since the credit crisis began last year, the Fed has spent trillions of dollars and yet money seems to go everywhere but where it is needed.
Yesterday the market was all excited about President-elect Obama's choice of Tim Geithner as the new Secretary of the Treasury. This is all part of the change that the new President promised. Change? Mr. Geithner is the current president of the New York Federal Reserve and has worked hand in hand with Bernanke and Paulson on the bailout program that is presently being implemented, so where is the change? Better yet, I think that goes to the root of the problem, i.e. there will be no real change. It's just so much noise in order to calm the masses. In two days the Fed together with the Treasury has created more than US $1.13 trillion of your future and yet you are no better off. Actually, you are worse off because you are now responsible for that debt and yet you received none of the benefits. All the shareholders and CEO's of Citibank, Fannie Mae, and Freddie Mac are all better off in spite of the fact they created the mess in the first place, but you are completely screwed.
The first casualty of any bad management decision is a company's share price and the same holds true for a country. The share price for the United States is the value of the US dollar. Today's price movement is not includ-
ed in the preceding daily chart, but you can see that the trend was up since July. Recently the Greenback moved sideways out of the uptrend and the technical's failed to confirm the last high; all signs of coming weakness. Then we saw a significant break to the downside yesterday and that was followed by yet another breakdown today. At 4 pm EST the December US Dollar Index is trading down another large 1.44 at 84.84 and if that holds, will be a new closing lower low. That is bearish.
The dollar rallied as the cost of servicing debt increased due to deflationary pressures, but I think that phase has run its course. I now believe the dollar has topped. Below I have posted some of the relevant Fibonacci numbers, so you can follow the important supports:
I think the Fed sent a clear signal over the last two sessions that the helicopters are in the air and they will print whatever is necessary in order to fend off the inevitable. All Obama can do is keep printing. The rest of the world will not absorb these dollars, so they will be dumped back into the US. {None of this will be lost on gold and that's why we are seeing signs of life and the beginnings of a new leg up.}
Any hope that relief might come from outside the United States should take a good long look at the Baltic Dry Index. Recently it bottomed at 815.00 and then began to rally a bit, but I see no signs of improvement and today the BDI fell to a new all-time low, as you can see in the following daily chart:
In fact, I contend that the rest of the world is still behind the US when it comes to an economic slowdown and will help drag the US down even further into the mud.
One of the few beneficiaries of this mess has been the bond market as folks decide that receiving little or nothing over the coming months is better than losing a good chunk of capital. That will work for a while, but creating dollars is the same as creating debt, and sooner or later investors will demand a much higher interest rate for what they perceived as greatly increased risks. That will drive the price of bonds much lower. That hasn't happened yet, and today saw the December US Bond contract rally 2.24 to close out the session at 128.01, a new all-time high:
Today's close is not posted on this chart, but you can now see that the bond is extremely overbought and I will be looking for a top. That top will more than likely come about when the Dow puts in a decent bottom and begins a secondary reaction. We're not there yet.
With respect to the Dow, they tried to rally it today on the great news from the Fed but in the end, the rally failed. In the end, the cash Dow ended the session up 36 point at 8479 but almost 140 points off of the earlier intraday high. I believe today's intraday high of 8607 may have been it or at best you'll see a slightly higher high tomorrow and then we turn down. I know I harp too much on this, but we will not see a decent bottom until the urge to sell has been exhausted and we are not there yet. Take a look at the daily chart below:
Since we began the decent back in September only one rally exceeded three days and that was a six day affair back in late October. I continue to look for a test of strong support at 7286 and would be surprised if it held.
[This week is Thanksgiving in the US so there are no markets to speak of Thursday and Friday, so I will take time out to cook a turkey and catch up on some reading and a little football. My last report will be tonight and then nothing until Sunday night. There will be an AM Comment tomorrow and Friday.]
Happy Thanksgiving!!
ebo@dtanalysis.com
Dow Theory Analysis SAC
November 25, 2008
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