CARTEL CAPITULATION WATCH
Wal-Mart announced disappointing retail sales news and GM reported disappointing car sale news. The combo deflated an early rally inspired by the Iraq turnover. The DOW fell 15 to 10,357 and the DOG slipped 6 to 2020. As usual, just as the US stock market looked like it would really kick in on the downside and pull quite the reversal, it suddenly stopped and drifted back up.
Yet, the worst economic news of the day came after the bell:
Washington Mutual Warns of Rate Pains
By TSC Staff
6/28/2004 4:56 PM EDT
Washington Mutual (WM:NYSE - commentary - research) warned late Monday that rising interest-rate expectations are punishing its key mortgage-lending business.
The big thrift slashed 2004 earnings guidance, citing falling mortgage-loan volumes and slimming lending margins. WaMu, as it is known, said a cost-cutting plan it rolled out late last year has yet to fully take effect, and that mortgage income is being squeezed by costly hedging programs that aim to reduce the effect of a rate rise.
The company said it expects interest rates to rise faster than it can cut costs and otherwise prepare for a tougher lending environment.
"It now appears to us that the shift in the interest rate environment in recent months, with a sharp increase in long-term rates and a related reduction in mortgage volumes, will continue through the rest of the year. The effects of these changes are likely to outpace the timing of ongoing cost reduction plans in our Mortgage Banking business," said CEO Kerry Killinger.
The company also pointed to problems in its hedging program.
"Our risk management approach does not attempt to fully hedge the effects of changes in basis spreads," said Tom Casey, Executive Vice President and Chief Financial Officer. "While basis spreads vary over time around a historical mean, a significant widening or tightening of basis spreads in any one quarter can affect net income. Our hedging results benefit when spreads are wider, as they were in the fourth quarter of 2003 and the first quarter of 2004, and will be negatively affected as spreads tighten, as they have in the second quarter of this year."
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The dollar closed down .21 to 89.01 and euro rose .29 to 121.70. So much for gold trading with the dollar.
08:30 May Personal Income reported 0.6% vs. consensus 0.5%; Spending 1% vs. consensus 0.8%
Prior Income report unrevised at 0.6%; Spending revised to 0.2% from 0.3%. PCE deflator y/o/y reported 2.5% vs. consensus 2.2%.
June 28 (Bloomberg) -- The benchmark 10-year U.S. Treasury note had its biggest drop since May 7 after a measure of inflation matched its largest rise in almost 14 years….
Demand for government debt weakened after the Commerce Department said its personal consumption expenditures index surged 0.5 percent, matching the largest rise since September 1990. The index, which is used by the Fed in its semiannual forecasts, is up 2.5 percent since May 2003. Personal spending rose 1 percent in May, after increasing 0.2 percent in April. Incomes gained 0.6 percent for a second month.
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GATA’s Mike Bolser:
Hi Bill:
A thoughtful reader (Shawn) corrected an omission on Friday's repo pool total and with today's open market operations, the corrected pool total now stands at $43.02 Billion since the Fed added $5.75 Billion in temporary repos today, June 28th 2004. All the trends are in place and the DOWs's 30-day ma green line 30-day ma has curled upwards nicely. Today the DOW is up about 80 points at this hour (11AM).
Gold has turned up recently along with the DIVG. This seems to challenge the wisdom of Refco who cautioned distance from the gold pits until the Fed settles its FOMC decision.
I'm happy to see the price rising although we still may see a surprise.
The latest phase of government intervention has taken about 30 days and this figure matches the 30-40 day transition from the three cycle brute force defense set up at DIVG=323 beginning in December 2002. Recall that 323 was the level defended when the dollar and euro were last at parity. That defense failed and gave way to a linear retreat upward until June 4th 2004 when we experienced the full force of the latest Fed counterattack. It is the transitions that sandwich the linear phase that are similar in duration and general character. we are approaching the 30-40 day transition end this week July 6th through the 10th and we should be wary of what may happen when the Fed takes us to its next phase.
At this stage it seems unlikely to me that the Fed will ever be able to hold a fixed DIVG level and therefore must settle for a rising (More precisely, retreating) monetary strategy, while it searches for more gold to sell. IF this is to be the Fed tactic then we will receive periodic ambushes.
A useful analogy is one of an aircraft running low on fuel. The pilot can opt to stay at a specific altitude and exhaust his fuel at that altitude, or he may choose to set up a reduced fuel burn rate and hence accept a glide path downward. The pilot following the latter logic would necessarily want to extend his range by choosing the optimum burn rate and glide angle in order to give himself the best opportunity to reach a safe landing place.
The crucial difference between the aircraft analogy and the Fed's gold policy is that for the Federal Reserve, there are no safe landing areas...only a delayed realization that an inescapable "crater date" exists in the future. On that date the monetary world will change forever and the acolytes of the Fed will face what Bill Bonner has correctly called a day of "Reckoning".
It is very important to begin thinking in terms of the DIVG and not in terms of the dollar price of gold. This is, after all, the valuation method used by the central bankers.
Mike
More on 990N:
Subject: A guy named "bulldog" posted this today on a forum re: 990N
I was the person who went to the floor of the Mercantile Exchange on a fact finding mission. Having studied the S&P price action in every conceivable fashion, I wanted to find out why movement on the S&P had changed so much over the last 18 months. I (and others at a large hedge fund) first noticed a significant change in the trading patterns around July of 2002. After a month, the patterns returned to normal, as the market promptly went back down. Then around September 23rd (a fed meeting), we immediately noticed the trading anomalies returned, as the market promptly went back up. This is what we observed:
1. Dow 50 declines in a hour
Irrespective of the selling pressure, the Dow would not decline much more than 50 points during any one trading hour. Once it was down that much, volume of the futures would plummet (as if program trading restrictions had been triggered). (BTW; if you look in Barron's, you will notice that all domestic investment banks have now shut their program trading operations down. I wonder why they would shut down a huge profit center? Now, the largest index arbitrage operation is now ABN Ambro.) Then, after an hour, volume & price movement would pick up again as if the collar had been lifted. So, initially we thought that the Fed & NYSE had altered the program trading collars.
2. Overnight futures
In previous years, the overnight futures action was almost always wrong. Or, at the very least, the overnight price action would return to even (close the gap). Now we have so many unfilled gaps that I have lost count. However, current trading is more like someone is trying to obtain a price goal with the least numbers of futures contracts. So, bid the price up overnight, and maintain the price by sitting on the bid. There is no intraday ebb and flow whatsoever.
3. Managing the price
Once the price has been thrown up, the price level is maintained by sitting on the bid. At other times, the price is collared by putting a huge number of bids and asks on the screen. This discourages one from getting long or short. Often these orders are pulled unfilled. However, they are an effective deterrent from entering the market one way or another. Since when is most of the price on the S&P determined overnight? Any decline that is allowed to happen from these bid levels all but impossible to trade. If you short, the "inevitable" surge back to those levels is lightening quick as all the shorts cover.
4. Jam jobs
All of this leads to the number one anomaly. The massive surges in volume we have labeled "jam jobs." Due to the lack of volatility and predictability in the S&P, the futures volume has slowed to a trickle. Thus, it has become easier and easier to maintain the price (and makes the manipulation all the more transparent). No one will short anymore for fear of the "jam jobs." This occurs when, out of the blue, when trading is slow, someone drops market order for thousands and thousands of eminis. (we call it a "volume bomb." It's a testament to how raw, and obvious, the manipulation is that we have a label for the routine. If you were actually trading the S&P, you would too. In fact, we find it very much like the movie Groundhog Day, every day the same tricks are used.) In the span of under 5 minutes, the price action will move (up, never down) several points.
The net effect of all this, is that shorting is impossible. Perhaps all of this does sound nutty, but if you are trading the S&P, you are dealing with this every single day. Rather than lazily dismissing something offhand, I encourage anyone to contact somebody who trades the S&P eminis (preferably on Globex). Then, ask them about the price action and the counterparty 990N.
5. Proof of price manipulation
The best proof of price manipulation is the price movement. We haven't had a 2% down day on the S&P in 278 trading days. Look at the change in the statistics of downside volatility:
-1.00% -2.00% -3.00% Price % Decline
Trading
Days
2004 121 11 - -
2003 250 58 13 3
7-12 03 122 17 1 0
1-6 03 128 41 12 3
2002 251 86 33 10
2001 248 67 16 4
2000 252 73 25 7
1999 252 67 15 1
1998 252 62 15 4
1997 252 61 11 2
2004 100.00% 9.1% 0.0% 0.0% % of Days
7-12 03 100.00% 13.9% 0.8% 0.0%
1-6 03 100.00% 32.0% 9.4% 2.3%
2003 100.00% 23.2% 5.2% 1.2%
2002 100.00% 34.3% 13.1% 4.0%
2001 100.00% 27.0% 6.5% 1.6%
2000 100.00% 29.0% 9.9% 2.8%
1999 100.00% 26.6% 6.0% 0.4%
1998 100.00% 24.6% 6.0% 1.6%
1997 100.00% 24.2% 4.4% 0.8%
Moreover, over the past 18 months we have had a slew of historic upside movements. Twice in the last 18 months, we have had 8 straight up days in the futures. (And up 7/8 days once.) This has not occurred once in the last eight years (other than the two mentioned). During one run, we were up 24 of 27 trading days, which occurs about once a decade since 1940. In May, the futures were up 12 of 14 days, which occurs about once every 5 years.
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