Alan's Finance Blog

Credit Card Noose Tightens in Deflation

By: Rick Ackerman, Rick’s Picks

When B of A spokesman Lawrence DiRita turned up on the evening news not long ago to assure listeners that his employer was willing to work on a case-by-case basis with troubled customers, we decided to call his bluff.  Would DiRita, formerly a high-ranking official in the Defense Department, go to bat for the borrower whose “teaser” loan from the bank was about to shoot up overnight from 0% to 12.24%?  Everyone with a credit card has been offered such a loan at one time or another, and it was once possible to initiate one at rates varying from 0% to 4%, with no additional fee for the balance transfer. Not any longer, though.  Anyone unfortunate enough to have gotten caught with a large balance when the music stopped is now paying rates of 10 percent or more to service it. And while there are still promotional rates available as low as 5.99%, a balance transfer fee of 3% to 4% effectively kicks that up above 10% annualized, since the loans are typically for 6-8 months.

If you’re in this situation and hoping the bank will work with you, don’t hold your breath. We were told that the lowest non-promotional rate available from B of A at the moment is 12.24%. The man we spoke with, who reports directly to B of A’s top brass, implied that only credit card customers with spotless records could borrow at that rate. We shudder to imagine the rate that would apply to those with spotty credit histories.

Funds Cost Nothing

Now, we don’t doubt B of A’s sincerity when they say that 12.24% is a pretty good rate for unsecured borrowing. The man we spoke with said that’s what the bank must charge in order to make a profit.  We did point out to him that B of A and a few other biggies can borrow effectively limitless quantities of money from the federal government at rates approaching zero (a fact of which he seemed unaware). However, we had to concede that soaring default rates and delinquencies were probably behind the relentless rise in teaser rates. With so many borrowers skipping out on creditors, it’s possible banks really do have to charge at least 10%-15% on revolving-charge loans to break even.

But has anyone really thought this through?  With the income and net worth of most Americans shrinking at the fastest pace since the 1930s, borrowing at nominal rates of 10%-15% equates to borrowing at real rates of 20% or more.  This is more obvious in the mortgage world, where, we predicted here years ago, a 30-year fixed-rate loan would in deflationary times such as these become a crushing burden.  Although a 5% mortgage is easy to pay off when one’s home is increasing in value every year, if the price of the home slips by, say, 3%, one’s real (i.e., adjusted for inflation) interest rate burden would shoot up to 8%.  In fact, home prices in the U.S. have fallen by 30% on average, subjecting tens of millions of homeowners to effective real-rate burdens so high that, unless inflation returns to the real estate sector with a vengeance, the loans are destined to become virtually unpayable.

Best Game in Town

Meanwhile, banks continue to offer extortionate rates to credit card borrowers because, even with default rates so high, it is still the best game in town for lenders. However, we think they are seriously mistaken if they expect default rates to decline from this point forward. We see defaults at least quadrupling before deflation has run its course. At that rate, perhaps the banks should be charging 50% on unsecured loans?

New Video Released – Why You Should Be Learning Options Now

Hi,

I’d like to personally invite you to watch an exciting video
that just came my way from the guys at Options University…

http://www.optionsuniversity.com/iscript.php?3440_A97484_21668

I reviewed the video myself, and I must say… I think you
should go there not and WATCH IT IMMEDIATELY.

Here’s why:

On this short, information-packed video, you’ll discover some
‘little-known’ but POWERFUL facts about options trading that
you may never have considered before.

See if you agree…

On this video, you’ll soon discover:

* Why options were designed to be the “Perfect Hedge” against
anything and everything else going on in the stock market (with
the proper use of options, you can PERFECTLY HEDGE your
portfolio against market volatility… EVEN IN TODAY’S MARKETS!

* The many “virtues” of options trading (yes, that’s right…
options trading is not “evil” or “dangerous” as the clueless
mainstream financial media portray… far from it, when used
the ‘right’ way…)

* How you could have used the these options advantages in these
viciously volatile markets to completely protect your portfolio
(you could have even scored some tidy “windfall profits” from
playing the precipitous fall of the financial stocks, last year)

* The 3 major advantages of options over any other type of
trading vehicle (once you FULLY GRASP and understand these
advantages, you may never want to trade stocks again… at least
not in the ways you’ve done so up until this point in time…)

* How to get your hands on the EXACT OPTIONS TRADING INFORMATION
taught to some of the highest-paid options floor traders on Wall
Street (and why this information is MUCH MORE IMPORTANT to you
NOW than it EVER was to them…)

* How a 15-year options floor trading veteran taught his
toughest student to date – his DAD – to trade options (and how
this 74-year old, thick-headed Italian is making more money in
the markets than he ever has in his life…)

* And finally… how to get your hands on some of the most
valuable (yet F.R.E.E.), accurate, no B.S. options trading
information you’ve ever seen.

Well, I hope you now see why I’m so excited about this video,
and why I wanted to get this information out to you as soon as I
heard about it.

Anyway, I don’t want to give too much away right now. To get
“the rest of the story”, you’ll need to watch the video.

Here’s the link to watch this video…

http://www.optionsuniversity.com/iscript.php?3440_A97484_21668

And by the way, there’s a special added “surprise” for you at
the end of the video…

Cheers!

Alan

P.S. This is one of the most timely and interesting videos I’ve
seen in a long time. I’ll bet you’ve never thought about options
trading like this before, and…

You’ll also discover several benefits about options trading
you’ve probably never even thought about before.

Here’s that web page again to watch the video…

http://www.optionsuniversity.com/iscript.php?3440_A97484_21668

Fed Promises Easy Money for an Extended Period

by Claus Vogt

Every few weeks the world’s most powerful and influential central bankers — those in charge of the world’s number one reserve currency, the U.S. dollar — come together in what’s called the Federal Open Market Committee (FOMC).

They discuss the economy, interest rates, financial markets and whatever else they deem important. Then they decide to set the Federal Funds Rate at a level they think is appropriate.

And last week was their week. So today I want to analyze what their decisions mean for the stock market and for you as an investor.

The Fed Statement Reassures
A Very Lax Monetary Policy …

The FOMC meets regularly to decide where to set the Federal Funds Rate.

After each FOMC meeting, the Fed releases a statement. And the one for September 23, 2009, is very telling in my opinion. Here’s its most important part:

“The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period.”

As you can see, the Fed is promising a continuation of its extremely lax monetary policy “for an extended period.” So all the recent media talk about a soon-to-begin exit strategy or a normalization of monetary policy was obviously premature. The Fed is reassuring us that there will be easy money for as far as the eye can see.

Why?

Two reasons come to mind:

First, the Fed is still very concerned about the economy … the employment situation is dire … and a double-dip recession is a real possibility.

Second, and more important, is that they know how precarious the banking situation still is. They know that the bad debt problems have not been solved … that most banks would go bankrupt if they had to implement mark-to-market rules … and that the banking system is still on life support.

This Is Important News
For the Stock Market

Since the Fed is confronted with two major problems — a shaky economy and an unstable banking system — it’s not worrying about a possible stock market bubble in the making.

Why is this so important?

Just look at the charts below. The stock market has rallied some 60 percent since the March low. But earnings are still very depressed. Hence the classic version of the P/E ratio — using twelve months trailing GAAP earnings — shot to the stratosphere!

Source: www.decisionpoint.com

Twelve-month trailing earnings as of the first quarter 2009 were a mere $6.86 for the S&P 500 making for a P/E ratio of 154. According to Standard and Poor’s, these earnings are estimated to rise to $7.51 in the second quarter, and $7.61 in the third quarter. Then they’re expected to jump to $39.35 in the fourth quarter and $43.58 in the first quarter 2010. Based on this last figure the P/E ratio will decline to 24.

Historically the normal range for this very P/E ratio — based on 12-month trailing GAAP earnings — has been between 10 (undervalued) and 20 (overvalued). Hence even if the corporate sector will see the estimated jump in earnings, the stock market is still very expensive.

Classic stock market valuation metrics show that this is a highly overvalued market. And overvalued markets can stay overvalued for a long time and even become more overvalued — as long as the Fed does not take away the proverbial punch bowl.

This means one of two things …

We’re Witnessing the Next Bubble, Or
Earnings Have to Increase Dramatically!

Fed chief Bernanke’s inflationary stance could be the fuel that ignites the next stock market bubble.

Right now I can’t rule out either one. I do, however, lean towards the first. And in reading the Fed’s FOMC statement one thing becomes obvious: If we’re on our way to a new stock market bubble the Fed will not prick it any time soon.

The September 23 statement that I cited earlier is as clear as you can expect from the Fed. Much clearer than anything Greenspan said during his long reign. His famous “irrational exuberance” speech, which was never followed by any action, is a perfect example.

Bernanke is much different …

From the very beginning of his career at the Fed he made it known that he’s a first class inflationist, and he strongly believes prosperity can be achieved by printing money. Now the Bernanke Fed is clearly reiterating this inflationary stance. By doing so the Fed is rubberstamping the current stock market rally and apparently not worrying about a possible bubble!

There is an old Wall Street saying: “Don’t fight the Fed.” I think it’s wise to heed it in today’s environment.

Best wishes,

Claus

Gold Daily Technical Outlook

Comex Gold (GC)

Gold’s recovery from 985.5 extends further and break of 1001 minor resistance argues that fall from 1025.8 has completed already. Intraday bias is flipped back to the upside for a retest of this high first. Nevertheless, note that note that 1033.9 is needed to be firmly taken out to confirm upside momentum. Otherwise, we’d expected more sideway trading below 1033.9 in near term.

In the bigger picture, rise from 681 is tentatively treated as resumption of long term up trend. Sustained break of 1033.9 high will confirm this case and should target 61.8% projection of 681 to 1007.7 from 931.3 at 1133.2 next. While some consolidations might be seen in near term before decisive break of 1033.9, downside should be contained well above 931.3 support and bring rally resumption. However, note that a break of 931.3 dampen the bullish view and suggest that rise from 681 has completed. This will in turn indicate that such rise is merely part of the consolidation pattern that started at 1033.9.

Comex Gold Continuous Contract 4 Hours Chart

Comex Gold Continuous Contract Daily Chart

Silver Daily Technical Outlook

Comex Silver (SI)

Silver’s recovery from 15.76 is still in progress and is now pressing 4 hours 55 EMA. Some more rise might still be seen but after all, risk remains on the downside as long as 17.345 resistance holds. Whole rally from 12.435 might have completed at 17.69 already. Break of 15.76 will bring deeper fall towards 15.185 resistance turned support next. However, break of 17.345 will indicate that recent rally is indeed still in progress for another high above 17.69 before completion.

In the bigger picture, whole medium term rise from 8.4 is still in progress and could probably continue towards next key resistance level at 19.55. Nevertheless, we’re not seeing a clear impulsive structure from 8.4 yet and hence, we’d treat such rise as part of the long term, wide range, consolidation pattern that started at 21.44 back in Mar 08. In other words, current rise from 8.4 is expected to be limited by 19.55/21.44 resistance zone and bring at least one more medium term fall. On the downside, break of 12.435 support is needed to confirm that rise from 8.4 has completed. Otherwise, medium term outlook will be neutral at worst even in case of deep pullback.

Comex Silver Continuous Contract 4 Hours Chart

Comex Silver Continuous Contract Daily Chart

Crude Oil Daily Technical Outlook

Nymex Crude Oil (CL)

Crude oil’s consolidation from 65.05 is still in progress and recovery might continue further. But upside is still expected to be limited well below 71.11 resistance an bring fall resumption. Below 65.05 will target 161.8% projection of 75.0 to 67.05 from 73.16 at 60.30 next, which is close to next psychological level of 60.

In the bigger picture, sustained trading below medium term trend line support solidifies that case that medium term rebound from 33.2, which is treated as correction whole down trend form 147.27, has completed at 75.0 on bearish divergence conditions in daily MACD and RSI. Further break of 58.32 cluster support (38.2% retracement of 33.2 to 75.0 at 59.03) will confirm this case and pave the way for a retest of 33.2 low. On the upside, break of 71.77 resistance is needed to invalidate this view. Otherwise, outlook will remain bearish.

Nymex Crude Oil Continuous Contract 4 Hours Chart

Nymex Crude Oil Continuous Contract Daily Chart

Natural Gas Daily Technical Outlook

Nymex Natural Gas (NG)

Outlook in natural gas remains unchanged. A bottom should be formed at 2.409 already and further rise is still expected as long as 3.635 support holds. Current rebound might extend further towards 38.2% retracement of 13.64 to 2.409 at 6.7 next. On the downside, break of 3.635 is needed to indicate that the rebound has completed. Otherwise, short term outlook will remain bullish.

In the bigger picture, medium term fall from 13.69 is treated as part of the long term consolidation pattern that started at 15.78 back in 2005. The whole consolidation might have completed at 2.409 after meeting 100% projection of 15.78 to 4.593 from 13.69 at 2.50. We’re looking at the prospect of medium term rise to 61.8% retracement of 13.64 to 2.409 at 9.38 in medium term.

Nymex Natural Gas Continuous Contract 4 Hours Chart

Nymex Natural Gas Continuous Contract Daily Chart

Commodities Strengthen as IMF Upgrades Credit Market Outlook

Crude oil price rebounds above 67 in European morning as USD retreats. IMF’s improved outlook on global credits, strong China PMI and Japan industrial output data also revive market expectations on economic recovery. In China, oil stocks plunge after the Chinese government reduced the ex-factory fuel prices.

In its semi-annual report, IMF cut its estimates for loan and investment write-downs by -15% to $3.4 trillion, suggesting improvement in global credit market and world economy. As stated in the report, ‘systemic risks have been substantially reduced following unprecedented policy actions and nascent signs of improvement in the real economy’. However, ‘credit channels are still impaired and the economic recovery is likely to be slow’. Banks’ losses on bad assets will probably increase by $470B, $420B and $140B from July 09 through next year in the Eurozone, the US and the UK respectively.

According to a survey done by HSBC, China’s manufacturing PMI slid 0.1 point to 55 in September from 55.1 in August. Despite the fall, a reading above 50 represented expansion and it’s the 6th consecutive month that the country’s manufacturing sector is in expansionary phrase. The official PMI, to be released tomorrow, is expected to have risen to 55 during the month from 54 in August.

In Japan, industrial production index rose +1.8% mom in August following an upwardly revised +2.1% increase in the prior month. On annual basis, the contraction of -18.7% was much lower than -22.7% recorded in July. Looking into the details, the shipment index for capital goods turned positive, gaining +1.9% qoq in July-August from -17% in April-June, for the first time in 2 years. This might be signaling that capex has almost bottomed as the shipment index for capital goods is usually a leading indicator for capex.

The Chinese government announced to reduce ex-factory prices of gasoline and diesel by RMB 190 a metric ton. Sinopec (0386.HK) and Petrochina (0857.HK) fell -1.4% to HK$ 6.59 and -1.6% to HK$ 8.76 respectively, underperforming -0.3% decline of the benchmark Hang Seng Index, as the cuts will hurt profit margins of refiners.

USD retreats against major currencies amid batter economic outlook as investors seek higher risks. Leading gains against the dollar were Australian dollar and New Zealand dollar. In Australia, retail sales rose +0.9% mom in August after falling -0.9% a month ago. The gain was higher than consensus of +0.5%. In New Zealand, NBNZ business confidence improved strongly to 49.1 in September from 34.2 in the prior month. Against the euro, the greenback weakens to 1.466 after rebounding to 1.453 Tuesday. The currency pair will likely record a decline of -4.7% in the third quarter, after gaining more than +5% in the second quarter.

Gold price climbs above 1000 again as the dollar plummets. No matter whether the yellow metal will close above 1000 today, it will likely record the biggest quarterly gain since 1Q2008. High gold price did exert pressure on jewelry demand. Imports by India, the world’s largest buyer, probably dropped for the 5th month in September, according to Bombay Bullion Association Ltd.

Source: Oil n Gold

Oil Fell amid Weaker-than-expected Eco Data and Inventory Builds

The energy complex ended the day with mixed performance. WTI crude oil rose to as high as 67.3 before pulling back and settling at 66.71, -0.2% as US consumer confidence index was worse than expected. The API inventory report showing crude builds further depressed oil price. For product prices, heating oil added +0.6% to 1.7 while RBOB gasoline dropped -0.6% to 1.63.

US consumer confidence index by the Confederation fell to 53.1 in September from 54.5 in the prior month as the employment situation remained poor. The labor market differential dropped to -43.6% in September from -40% in August. The measure represents the difference between the proportion of people saying jobs are plentiful has and the proportion of people saying jobs are difficult to find and the more negative the figure points to a worse job market. Historically, a decline in the difference signaled an increase in unemployment rate.

Stock markets in the US ended the day lower despite brief rebounds in early morning. Dow Jones Industrial Average slid -0.5% to 9742. S&P 500 Index fluctuated between gains and losses but eventually lost -0.2% to 1061.
After market close, the industry-sponsored API reported that crude oil inventory increased +2.76 mmb, compared with consensus of +1.21 mmb, to 340 mmb in the week ended September 25. The build was driven by surged in imports together with decline in refinery runs. Gasoline stockpile unexpected dropped -1.72 mmb (consensus: +0.84 mmb) to 212.5 mmb as demand rebounded. As usual, distillate stockpile gained, by 2.29 mmb last week, to170.7 mmb.

In the oil report to be released in US session today, the US Energy Department will probably show crude inventory built +2 mmb while gasoline and distillate stockpiles rose +1 mmb and +1.2 mmb respectively.

Gold price fell to as low as 984.7 yesterday amid USD’s strength. However price recovered and closed at 993.1, +0.1% for the day. However, others in the precious metal complex slipped with silver losing and platinum losing -0.1% and -1% respectively.

US Oil Inventory

Comparison between API and EIA reports:

API collects stockpile information on a voluntary basis from operators of refineries, bulk terminals and pipelines. The government requires that reports be filed with the Energy Department (EIA)for its weekly survey.  Oil inventories from the API and EIA moved in the same direction for over 70% of the time, using data in the past 4 years.

Source: Bloomberg, API, EIA

Source: Oil n Gold

Gold Daily Technical Outlook

Comex Gold (GC)

With 4 hours MACD crossed above signal line, an intraday low is in place in gold and some more consolidations could be seen. Nevertheless, risk remains on the downside as long as 1001 minor resistance holds. Below 985.5 support will bring fall resumption to 61.8% retracement of 931.3 to 1025.8 at 967.4 But downside is expected to be contained there and bring rebound. On the upside, above 1001 minor resistance will flip intraday bias back to the upside for retesting 1025.8 high. However, note that 1033.9 is needed to be firmly taken out to confirm upside momentum. Otherwise, we’d expected more sideway trading below 1033.9 in near term.

In the bigger picture, rise from 681 is tentatively treated as resumption of long term up trend. Sustained break of 1033.9 high will confirm this case and should target 61.8% projection of 681 to 1007.7 from 931.3 at 1133.2 next. While some consolidations might be seen in near term before decisive break of 1033.9, downside should be contained well above 931.3 support and bring rally resumption. However, note that a break of 931.3 dampen the bullish view and suggest that rise from 681 has completed. This will in turn indicate that such rise is merely part of the consolidation pattern that started at 1033.9.

Comex Gold Continuous Contract 4 Hours Chart

Comex Gold Continuous Contract Daily Chart