BUYING THE BOUNCE!

The markets have rallied swiftly since early March. Lack of clarity on the mega bailouts does not appear to concern the markets at the moment; and everyone seems optimistic ahead of the upcoming G20 meeting.









Speculators, Traders and Investors:
Bear Market rallies can be quite convincing as they can occur without any fundamental change for the better. The markets were oversold with the S&P500 well under 700 and panic stricken traders were forecasting the DJIA at 5000 levels.
The current market volatility is almost impossible to trade, with huge intraday directional changes, as hopes and dashed hopes (read: bailouts and failing instant fixes and solutions) keep traders on their toes.
Some make money buy buying markets when the sell off sharply, others get stuck in losing positions when the markets resume their decline.
For now, this market appears to be a traders market - where only the extremely lucky and nimble traders stand a chance of coming out ahead.
Longer term investors would do well to watch out for the coming earnings season and signs of further stress in the economy before jumping in right away.
It's painful to watch a market rallying away without reason ( especially when you are not in it - & the fundamentals don't justify a rally !), but its more painful to jump in too early; only to get stuck in a losing position in a chaotic market.
The market can stay irrational a lot longer than you can stay solvent!
It important to remember that bear markets can be irrational at times and last longer than people expect. As an Indian analyst Ramesh Damani recently commented : Equity returns are never linear - i.e. a stock can stay undervalued for an extended perid of time before suddenly turning into a multi bagger.
Good companies and solid balance sheets are not immune to bear market declines.

My caution at this stage is mainly due to worries that market regulators and the authorities are busy with just stabilizing the market and averting a near term 'panic collapse' rather than solving long term fundamental flaws that caused this mess in the first place.

As someone recently said; a recession is part and parcel of the economic cycle, but a depression is a collapse of the system of debt.
At this stage though, its all about stabilizing the ship, so as the Fed and US Treasury say - take on more credit, go out and spend it and hope that we can get the party started again.

NON USD GOLD AT NEW HIGHS

Gold is at record levels in every currency except US Dollars & JPY!

SUB 8000 - THINGS COULD GET NASTY!

Panic about deflation. A crashing CPI and many more Bailouts to come!

Too many 'experts' are calling for a bottom, and so I think there is more downside to come.

With each passing day, despair and delusion continues to spread.

Only when all hope is lost, and fear and regret( of not having cashed out earlier) take over, can the foundations of a 'market bottom' be laid.

GOLD prices meanwhile have remained reasonably stable in the $735-$744 range.

It will be interesting to watch how gold reacts to this 'asset deflation' and 'commodity rout.'

How will gold react to deflation amidst unstable fiat currencies,turmoil in the '''Central Bank Reserve Currency economy''' (USA), record debt levels, and unimaginable levels of OTC derivatives outstanding??

Short term directional calls are impossible, but, I maintain my positive views on Gold- as a true store of value, and an insurance in a world where no one, I repeat ''no one'' knows how bad its going to get.

GOLD - THE FLIGHT 2 SAFETY

For the past few days, I have been puzzled at the movements in the GOLD price, given all the turmoil in global financial markets. Although I added to my gold positions yesterday, I thought I would delay todays purchase until tomorrow, expecting a better price!!!!!!Well I just missed a 11 % rally in the precious metal!!!!!!!
BY A SINGLE TRADING SESSION !!!!!!!!!!!!!

Although prices were pretty flat through the Indian trading session ( despite news of the AIG Bailout which came in about mid day IST), in the US trading session, Gold rose sharply as fears of further bankruptcies across global financial firms triggered a flight to safety!!!

I'm not sure how much short covering contributed to today's rally, but things are getting pretty serious. Panics of this magnitude are extremely dangerous, as solvent firms can get dragged down by the overleveraged collapsing ones.

The USD rally over the past week appears to have stalled, but I would not be surprised to see gold rally, even as the USD holds out for a while longer, as the selloff across various asset classes continues.

Investment bank CEO's may blame the short sellers and try to calm panic stricken investors, but it appears that the overleveraged CDO, CDS mess is derailing the US economy at the moment.

Interesting times...........watch this space!

MERRILL LYNCH: Wall Street Credibility and Sovereign Wealth Fund Capital

You really can fool all of the people all of the time (or so it would seem); Writedown after write down, Lies and more lies: and yet Wall Street believes in the Investment Banks!!! The DJIA was up over 266 points yesterday!
"Fool me once, shame on you. Fool me TEN TIMES!!, shame on me."
Investors just don't seem to get it yet.

On Thursday 17th July, 2008 Merrill Lynch lost $4.9 billion for the June quarter.
John Thain (Merrill's CEO) reiterated his stand that Merrill did not need to raise more capital. (By selling equity). http://www.iht.com/articles/2008/07/18/business/18merrill.php

12 DAYS later, a stock sale is announced !!!! Yes they need more capital AGAIN!!!
Meanwhile, Mr. Thain is also looking to sell stakes in Merrill’s valuable assets (Bloomberg LP and BlackRock Inc) to raise capital.

The Bullish Bear says-----------------

Merrill sold some $30.6 Bn worth of TOXIC CDO’s at 22 cents on the dollar.

• Firstly, after Merrill Lynch, who’s going to be next? http://www.forbes.com/wallstreet/2008/07/29/merrill-citi-banks-biz-wall-cx_lm_0729writedowns.html
• Did the CDO’s turn toxic overnight or in the last 12 days since the June quarterly result.
  $ 30.6 Bn -> $ 11 Bn at the end of June -> $6.7Bn yesterday.
• Was the sale triggered by the Undercapitalized Bond/ CDO Insurers who could not pay up?
• Was the sale cheaper than marking them to market (since the really toxic stuff may have no market) which may have triggered more confusion and asset fire sales?
• What is the market value of the ‘Toxic Securities’ of Bear Stearns that the FED now holds; not 22 cents on the dollar I hope??
  

Wall Street Credibility and Downside protection for Sovereign Wealth Funds
Yesterday, a further $ 8.55 Bn stock sale was announced, including a stock sale to TEMASEK (Investment Company of the Government of Singapore).

Thanks to a downside protection clause, Temasek will be compensated for the nearly 50% loss suffered on their December 2007 ‘bailout investment’ in Merrill Lynch.

As per the clause, if Merrill raised more capital in the 12 months following the Temasek deal, at a stock price of less than $48, Temasek would be compensated for the difference.

The Wall Street Journal calls it a Sweet Deal for Temasek. http://online.wsj.com/article/SB121735266454993851.html?mod=googlenews_wsj

I would call it STREET SMART investing!!
When you must deal with someone whom you cannot trust completely, like bankers that just can’t be truthful and disclose to you the true value of their assets and liabilities:
You Protect Yourself.
This is definitely going to set a precedent, as new Capital becomes more expensive and comes with many strings attached.

Worse still, as investment banks look to dump Toxic CDO’s and avoid Mortgage related securities, the slowing MBS market is going to result in the unwillingness of Banks to lend to the Residential Housing market in the US.
If you are looking to buy the US Financials now that the worst is behind us - >Caveat emptor

DJIA - USDX - GOLD : YEAR TO DATE

LOOK NO FURTHER : THE CHARTS SAY IT ALL !!

GOLD & ITS 300 DAY MA !!

Gold continues to be extremely volatile, as the EURO and Crude Oil prices continue to dictate its direction in the short term.
The Fed cannot afford another rate cut (remember the Strong USD campaign), but any rate hike to fight inflation will trigger further sell offs in the already jittery equity markets.

As you can see, the 300 day MA has been a very consistent and reliable support for Gold since early 2001.

( The Chart below was compiled with data from my friend Stamatis Leontsinis!)

How LOW can Gold go???
Looking to GOLD's 300 day MA , I do not expect any downside below the the $800-$825 levels. I would buy Gold on days when it declines significantly, like the recent decline a week ago when it fell by over $20 in a single session.

The 300 day MA is at the $800 level currently. Over the next couple of months, volatility in Crude oil prices and any pullbacks in the Euro will lead to increased volatility in Gold. Use the declines to buy!

Remember, Gold loves stagflationary environments: Slowing Growth & rising Inflation.
High oil prices and High food prices are contributing to rapid inflation the world over
US Housing, US Financials and the US Auto sector have really struggled in the first half of 2008. These sectors are going to contribute to deteriorating employment numbers in the second half.
In the mean time I will add to Gold positions on declines.

BERNANKE, BANKS & BARTENDERS

As the markets await the next FED decision, newsflow on the economy continues to deteriorate.

http://www.bloomberg.com/apps/news?pid=20601087&sid=ajoJ77c7SY.I&refer=home

The tough talking Fed will have to deal with a credit crisis, a slowing economy, increasing job losses and raging inflation!!!

Take a look at the Standard & Poor's 500 Banks Index!!!

Also, heres an interesting post on the Financial Armageddon website: http://www.financialarmageddon.com/

Cutting Tips: http://www.financialarmageddon.com/2008/06/cutting-tips.html

The slowing economy is hurting Bartenders, Waiters, hair stylists and Taxi drivers.

I think Mr. Bernanke had better take a look at this!!!

THE SURGING JAPANESE YEN

As the carry trade continues to unwind, the Japanese Yen has risen sharply against the USD.

In addition to the slowing US economy; the rising Japanese Yen, is now affecting the profitability of large Japanese exporters like Toyota Motor Corp..
''A stronger yen cuts the repatriated value of vehicles sold by Japanese automakers in the U.S., the world's biggest auto market. Every 1 yen gain in the Japanese currency against the dollar trims 35 billion yen ($ 342mn approx.) from Toyota's annual operating profit, according to the company.''
http://www.bloomberg.com/apps/news?pid=20601080&sid=aBlqryleIE20&refer=asia

THE CRASH : CHARTS

SSE Composite Index (Shanghai) : 000001.SS
DOW JONES INDUSTRIAL AVERAGE : ^DJI
Nikkei 225 : ^N225
BSE SENSEX : ^BSESN
Hang Seng (Hong Kong) : ^HSI

THE LAST 5 DAYS

THE LAST 3 MONTHS


EUROPEAN MARKETS ALSO CONTINUE TO STRUGGLE

THE LAST 5 DAYS

CAC 40 : ^FCHI
FTSE 100 : ^FTSE
DAX : ^GDAXI

THE LAST 3 MONTHS

REALITY SETS IN : The downtrend resumes..

Markets around the world are correcting, amidst growing fears of a US Recession.

The US Stock Markets have had a rough start to 2008, and the FED seems helpless and unable to avert a severe slowdown. Small Cap companies are especially vulnerable due to their dependence on the US economy, as compared to Large multinationals that have a greater exposure to international markets.



Consumer Confidence is low.

Philadelphia FED DATA: The Diffusion Index of Current Activity.

Manufacturing in the Philadelphia region slowed significantly. The Index fell to a negative 20.9 in January, its lowest level since October 2001. Taken from the Philadelphia FED's Survey, it is considered to be the broadest measure of manufacturing conditions. http://www.philadelphiafed.org/

BOND INSURERS IN REAL TROUBLE
Bond insurers risk losing their AAA rating, as they struggle to raise fresh capital.

Any downgrades would really add to the turmoil in the credit markets.

Clearly not the right time to be buying stocks just yet. I expect gold prices to be volatile ahead of the rate cut, with some further downside likely if a world market sell off occurs.
GOLD will outperform, as overvalued markets correct this year.

The Goldilocks Economy : Return of the Bears

Post the Dot com crash, 9/11 and the subsequent Fed rate cuts, the US economy went from a Stock market bubble to a Housing Bubble.

Cheap money has resulted in

• Inflated asset prices,



• Rising raw material prices(oil, base metals, metal ores, and coal)



• An extreme out performance across emerging markets,



• Overleveraged and overvalued LBO deals



• Rising home prices in the US coupled with refinancing of home mortgages at lower rates, enabling the US consumer to spend his way out of a recession post 9/11.

• An exponential expansion in mortgage backed derivatives fuelled by a once booming US housing market.

Here's what happened>>>

Fed Rates hit a 45 year low of 1% in 2003. The US Stock Market rallied, as the Goldilocks economy(moderate economic growth : not too hot or cold & low inflation, ) continued on its way.

Through 2004 & 2005 the US Dollar staged a comeback as interest rates started to rise, only to resume its downtrend in 2006 as the US Housing market started to crumble.

High debt levels, falling US home prices, and rising interest rates have resulted in a mega catastrophe. US Consumer Confidence is low and as the economy continues to slow, the US consumer will cut back on spending. Huge cash infusions by Central Banks and bailouts by Arab and Asian investors have been unavoidable as leading investment banks are struggling to meet regulatory capital adequacy requirements. The mess in the derivative markets continues, with concerns over losses in Credit-default swaps, and many mortgage backed derivative securities now being seen as toxic WMDs.

Uncontrolled credit expansion encourages reckless consumption and excessive leverage. When the prices of leveraged & overvalued assets start to unwind, the consequences are disastrous.

So are we heading for a "Stagflationary" Bear Market in the US?

Slow economic growth, Inflation and relatively high unemployment = Stagflation
Gold has always done well in such periods, when Central Banks are unable to raise rates to combat inflation due to slowing growth.

Meanwhile, economies such as India and China are consuming increasing quantities of oil, raw materials and food grains as the standard of living across the region continues to rise. Due to their low cost advantage, Asian economies are emerging as manufacturing centres of the world, as production activities continue to shift to developing economies.

Given the dominant position of the US in global trade, the World Economy is going to struggle to decouple from the US economy if the US goes into recession.