Housing Starts Crater, Economy Woes Tie Fed Hands, GLD Warnings, Paulson & Touradji Make Bold Gold Statements

Mid-week and the economic numbers continue to disappoint. However, equity investors should take heart and view the chart above. This is a monthly chart illustrating the direction of the US$ and the inverse relationship with the S&P500. The chart dates back to 2000, but you can see the correlation has become more intense in the last 12 months.

So, as long as this correlation holds, remember bad economic data equals good equity market performance due to continued Fed accommodation that leads to a weaker US$...

Fed's Bullard says possible Fed won't hike rates until 2012

Housing Starts Crater
The talk that housing starts were stabilizing hit a snag in October as new housing starts plummeted 10.6% to 529,000 units from 592,000. The consensus forecasted an increase in starts to 600,000...Single family starts fell 6.8% to 476,000 and is at its lowest level since May. Multi-family starts fell a whopping 34.5% as only 53,000 new units were started. Multi-family starts have never been this low since the index was created in 1959

I mentioned Monday, "Make sure your precious investment is backed by the actual metal." Below you will find an excerpt from the Gold ETF (GLD) prospectus. This same language can be found in the Silver ETF (SLV) prospectus. Take heed of these warnings. I fear in a world that has become numb to a long list of possible side effects to the drugs taken, you may view this prospectus in the same light. Don't make that mistake! These are very real warnings that could effect your financial health. Why even take the risk, when there are so many quality alternatives? Please, feel free to log onto our website http://www.rosenthalcapital.com/ for a complete discussion of said alternatives...

Gold bars allocated to the Trust in connection with the creation of a Basket may not meet the London Good Delivery Standards and, if a Basket is issued against such gold, the Trust may suffer a loss. Neither the Trustee nor the Custodian independently confirms the fineness of the gold bars allocated to the Trust in connection with the creation of a Basket. The gold bars allocated to the Trust by the Custodian may be different from the reported fineness or weight required by the LBMA’s standards for gold bars delivered in settlement of a gold trade, or the London Good Delivery Standards, the standards required by the Trust. If the Trustee nevertheless issues a Basket against such gold, and if the Custodian fails to satisfy its obligation to credit the Trust the amount of any deficiency, the Trust may suffer a loss. Read More...

...Meanwhile, the best in the business are coming our way. To Touradji and Paulson I will say, from all of us at RCM, welcome to our world!

Paulson & Co. to launch new gold fund January 1; Paulson to personally invest about $250 mln in new gold fund - Reuters

Touradji Capital Management LP, the New York hedge-fund firm that oversees about $2.7 billion, bought 2.23 million shares of Barrick Gold Corp., the world’s biggest gold producer, while selling shares in SPDR Gold Trust, the largest exchange-traded fund backed by bullion. Read More...

Investment Strategy Turns More Cautious, Existing Home Sales, Record Auctions This Week, Galleon Grief

Stock Market Investing: The Equity markets were down across the board Friday as the week ended. Last week was a week of churning and distribution, two actions I hate to see during a market advance as they often mark the end of a rally. To make matters worse the churning occurred at key areas of resistance on all three major averages: 10,000 on the DOW, 2,200 on NASD and 1,100 on the S&P 500. Investment Strategy: Turning more cautious.

With this negative week still fresh on the mind it seems appropriate to evoke the immortal words of Andy Grove, "Only the paranoid survive." and discuss three possible developments that could derail the bull.

Development One: Economic numbers that suggest recovery begin to outpace negative economic news. This leads to the perception -- or possibly, the reality -- that the Fed will reverse its stance on easy credit.

If you are a new reader I strongly advise the perusal of past posts before you begin your protest. Those of you who are familiar with my work will know the well documented relationship between bad economic numbers, easy credit, weak US$ and strong equity markets. As long as the Fed remains committed to easy credit in all its forms the bull market can continue.

However, I have witnessed a disturbing trend over the last few weeks. Good news on the economy leads to selling. This suggests to me a real fear pervades the markets with regard to the continuation of easy credit. The equity markets are trading at these lofty levels because of liquidity not reality and if the Fed-controlled gravy train of easy credit stops, then trouble will ensue. When the gravy stops dog will eat dog. What the distribution of the last few weeks may be telling us is that the big dogs are smelling trouble and are preparing.

Today's trading offers a perfect illustration of Development One. First, good earnings numbers out of Microsoft & Amazon were not able to move the markets higher. Instead, the excitement was used by the big players to distribute their holdings. Second, the following "good" economic report hit the news wires this morning, but the equity markets sold off almost immediately after the release:

Existing Home Sales Exceed Expectations
Existing home sales jumped 9.2% to 5.57 million units in September. The increase followed an unexpected decline (-2.9%) of sales in August. The consensus was expecting sales to rise by a much more modest 5.1% to 5.35 million units.

Beyond the headline sales numbers, there was another good piece of news from the data release. Distressed properties, which accounted for almost 50% of sales throughout the spring and summer, have declined significantly to only 29%. Sales of non-distressed homes make it more likely that consumers will start looking at more expensive properties as homeowners move up the pricing ladder. The increase in sales helped push the total available supply down to 7.8 months.

Development Two: A funding crisis unfolds.

Will the US$ decline in value to a point where long rates must increase aggressively for our government to continue funding its debt? How long will China and others tolerate the ruse of quantitative easing before demanding higher rates?

We obviously don't have the answer to these questions. However, this very real possibility must be respected. There has always been a high correlation between long rates and the equity markets. I can think of no better example than the crash of 1987. For four months the bond market was collapsing (rates rising) before the equity markets infamously followed.

Of course, in '87 bonds sold off because the Fed was tightening. If, however, bonds sell off even in the face of Fed easy credit policies then I hate to see the ensuing equity market response.

Record Auctions Announced...euro 1.5001...yen 91.5060 (3.411% -07/32)
Treasury will sell a record batch of bonds next week with $44B 2-yrs Tuesday, $41B 5-yrs Wednesday and $31B 7-yrs Thursday. The record levels show an increase of $1B on the 2-and-5s, and $2B on the 7-yrs. There will also be $7B reopened 5-yr TIPS going off Monday along with $29B 3-mos and $30B 6-mos. The market may get some relief as the news is over, but the high end of expectations had been for closer to $115B versus the $116B announced, so any relief may be brief.

Development Three: The high profile SEC take down of Galleon may cause a ripple effect leading to hedge fund unwinds.

Galleon had over $3 billion and now according to DJ: "Galleon is winding down all hedge funds."

Last year we all witnessed what happens when hedge funds are forced to unwind. Many of the big funds are often involved in the same trades and one unwind leads to another. There will be many denials along the way but the equity markets will speak the truth.

I will also respectfully submit to you, the readers, that the derivatives crisis is far from over. The individuals who created the credit crisis are still running the show. If you believe this statement is incorrect or feel President Obama promised you change so his cabinet must be full of new thinkers, I suggest you view the PBS Frontline documentary entitled The Warning.

The Warning brings to mind two obvious questions:

1- What will cause the next derivatives crisis? Could it be the take down of a major hedge fund that ignites the next collapse?

2- Why isn't Brooksley Born a major member of the Obama administration? If Obama was truly an agent for change wouldn't she be a must in the cabinet?

Q2 EPS, LIBOR-OIS Spreads Narrow, July Retail Sales, Initail Jobless Claims

Second quarter earnings can be best characterized as light on revenue but strong on cost cutting, leading to better than expected EPS. The more positive bottom line results have helped fuel the equity market rally over the last couple of months.

Meanwhile, Aug. 13 (Bloomberg) -- The Libor-OIS spread narrowed to a level former Federal Reserve Chairman Alan Greenspan said he regarded as “normal,” adding to evidence the freeze in credit markets is thawing. Clearly credit market stabilization has been a major driver of the equity market rally.

While the rally has been a nice reprieve from the bear market the question remains what will compel the markets higher in Q3 and Q4. With credit back to normal that driver is off the table and cost cutting/belt tightening can only work to improve EPS for a short period of time. Revenue must accelerate in the 2nd half of the year for this bear market rally to turn into a bonafide bull market.

With that thought in mind I am publishing the next two stories. If the consumer can't find a job then spending will not return and revenue will continue to be disappointing. I fear this will result in a resumption of the down trend in the back half of the year.

Of course, these are long term questions and as my Mom always says "you must live the questions; the answers reveal themselves." "Living the questions" in this case means trading the trend while keeping your eyes open and your mind alert.

ECONX July Retail Sales Disappoint
The July Retail Sales report is a disappointment and yet another reminder, in the midst of a rising stock market, that the consumer isn't all he/she used to be due to weak wage growth, depressed asset prices, and concerns about job security...

For the month retail sales were down -0.1%. Excluding autos, they were down -0.6%. Both figures were well off the consensus forecasts that called for increases of 0.8% and 0.1%, respectively. The government doesn't provide any context behind the numbers, but with broad declines in most sales categories, it is clear that consumers weren't doing a lot of discretionary spending.

There will be a tendency to dismiss the weakness as being the result of consumers delaying purchases to take advantage of tax-free holidays that got pushed into August this year. There will likely be some makeup in August, but there is still no other way to read the July data than to consider it a disappointment. To the latter point, retail sales, excluding autos, gasoline station, and building materials, which is a measurement that flows into GDP estimates, was down for the fifth straight month.

ECONX Initial Claims Still Way Too High

Initial jobless claims for the week ended August 8 increased to 558,000 from a revised 554,000 in the prior week. The current number lifted the 4-week moving average to 565,000 from 556,500. Continuing claims, in contrast, fell 141,000 to 6.202 million. That dropped the 4-week moving average for the series to 6.259 million from 6.287 million. There is cold comfort in the drop in continuing claims since it most likely reflects people losing benefits. To be sure, there isn't much hiring happening... Separately, while the trend in initial claims has been better of late, a reading north of 500,000 at this point is still downright bad and still well above prior recession levels when the 4-week average for claims was closer to the 400,000-450,000 range. The labor market is weak and these figures aren't a great portent for consumer spending activity.

Economy Not in Good Shape; Recent Changes to the Way the U.S. Treasury Tallies Demand at its Bond Auctions

News That Moves Markets

RCM Comment: O.K. we have a lot to get to today, so let's get started. First, I've put together a list of economic numbers recently released to offer more evidence in support of my pronouncement that "the economy is not in good shape".

I know this proclamation is not the favored view at the moment. You are, no doubt, reading in Wall Street rags and hearing bobbleheads on CNBC decree the end of economic hardship and the beginning of a new day. There is so much spin you would think flax is turning into gold. But, alas, that is just a fairy tale. In fact, all this spinning reminds me of a favorite childhood pastime. We have all done it. Remember when you stood in the front yard, spread your arms and spun around and around in a circle until you fell down? Now, think back, what happened? You would lay on your back and look up. The world would look different as it spun. But, in reality had anything changed? And in the end when the spinning stopped you would question whether or not your nausea was a result of the spinning or the KoolAid you were drinking.

I hope the information below will help you to avoid the KoolAid stand. As for the spinning, I can only say, enjoy the feeling if you want to but don't believe in the altered state.

Associated Press Headline: May new home sales dip 0.6 percent...

New U.S. home sales fell slightly last month, another sign that the housing market's recovery is likely to be gradual and prolonged."

Department Of Commerce News Release: click here.

Key Numbers: New Houses Sold Unadjusted: 32,000, Year Ago: 49,000, Year Over Year %: -34.69. Median Price Unadjusted: $221,600, Year Ago: $229,300, Year Over Year %: -3.36.
Last Month's Numbers: New House Sold YoY=-32.65%, Median Price Yoy=-3.36%


Census Department Durable Goods Manufacturers New Orders Down 24.5%


ECONX More than Meets the Eye in Personal Income and Spending Report
The Personal Income and Spending report produced some nice headlines, with income increasing 1.4%, spending rising 0.3% and core PCE increasing just 0.1%. The pleasing nature of the headlines is based on the understanding that consensus estimates for those components were set at 0.3%, 0.3%, and 0.1%, respectively. Additionally, the personal income increase for April was revised up to 0.7% (from 0.5%) while the spending number for April was revised to unchanged from an originally reported -0.1% decline...

There was more to the May report, though, than meets the eye. Real disposable personal income was up 1.6% in May; however, when excluding the benefits of the American Recovery and Reinvestment Act (read: lower personal taxes and higher government transfers), real disposable income was up just 0.2%. That's OK, yet it certainly doesn't have the pleasing quality of the leading headline, especially when one also takes into account that private wage and salary disbursements fell -0.2%, marking the ninth straight monthly drop in that series.

In turn, the personal savings rate increased to 6.9% from 5.6% in April, which underscores the consumer's bid to save more and spend less, which isn't the best combination when contemplating the prospects of a quick and robust recovery effort...

RCM Comment: (EXTREMELY IMPORTANT) The story above about personal spending and the story you are about to read are two egregious examples of the government's desire to spin, lie and cheat its way out of this economic crisis. The spin about personal income and spending was positive but clearly misleading as "the benefits of the American Recovery and Reinvestment Act" are the real reasons for the uptick.

In the same manner, the "recent changes to the way the U.S. Treasury tallies demand at its bond auctions" is a blatant attempt to confuse the markets and lie about the true demand coming from foreigners. This chicanery reminds me of a Ben Bernanke decision in 2006. Almost immediately after taking control of the Fed, Ben decided to eliminate the reporting of money supply as reflected by M3. He did his best to cast aspersions at the figure and claim it had no purpose. However, time has shown that he proliferated this lie to help hide the amount of US$ he was creating. Of course, the world is now catching on and China (Wary of dollar, China wants super-sovereign currency - Reuters.com), Russia and the like are calling for a new reserve currency as the value of the Greenback is faltering under the weight of Ben's creation scheme.

Ben's 2006 M3 ploy was one of the contributing factors that led us to launch our Fortune's Favor Precious Metals Fund. Our commitment to precious metals across our entire assets base is without a doubt a key reason for our success to date. Likewise, understanding the ramifications of the new U.S. Treasury bond auction reporting changes will likely be a major piece to the puzzle of success going forward.

NEW YORK, June 24 (Reuters) - Recent changes to the way the U.S. Treasury tallies demand at its bond auctions may be artificially inflating "indirect bids," a category used by investors as a loose proxy for foreign demand.

Foreign investors own more than a quarter of the Treasury market, making their continued interest in U.S. bonds of paramount importance to the market. At the very least, the Treasury's shift, made earlier this month, is confusing traders, prompting some to second-guess the apparent strong interest in recent auctions.

Indirect bids have been unusually strong of late, reaching a record 68 percent at Tuesday's two-year note sale, and exceeding 62 percent at Wednesday's sales of $37 billion in five-year notes. "We're not going to make much of that, given the information we've gotten on the rule changes," said John Spinello, fixed-income strategist at Jefferies, a primary dealer. "The indirect bids are now going to be higher given the change in procedures."

Indirect bids are defined as ones that do not go through primary dealers, large banks that do business directly with the Fed and are required to actively take part in Treasury auctions. Top officials in China (Wary of dollar, China wants super-sovereign currency - Reuters.com) and Russia have expressed unease about the growing U.S. budget deficit, slated for a record $1.75 trillion in fiscal 2009 alone. This means that traders pay extra close attention to foreign demand figures. The Treasury's changes, contained in a June 1 entry to the Federal Register, relate to what it considers a "guaranteed bid." Under the previous arrangement, once a primary dealer offered securities at a pre-specified level to its customer, that bid was considered to be the dealer's own.

The matter was technical enough to confuse even industry veterans. "We are not precisely sure what this all means," said Ward McCarthy, managing director at Stone & McCarthy Research Associates in Princeton, New Jersey. "We spoke with some very seasoned market players with decades of experience on dealer trading floors who were similarly unsure what to make of the contents of the Federal Register." The Federal Register entry can be found at http://www.gpo.gov/fdsys/pkg/FR-2009-06-01/html/E9-12787.htm

Coping with Government Sponsored Market Manipulation

RCM EDITORIAL

RCM Comment: We live in a world where markets are manipulated by governments. To argue this point is to howl at the moon. We are not conspiracy theorists; we are realists. In order to successfully manage a portfolio in this environment one must understand the playing field and the rules. There is no point in complaining about the manipulation or pointing fingers. This type of behavior is an exercise in futility. No, we must accept the situation and turn it to our advantage.

We must recognize that markets are not free to trade and therefore do not react as we would expect to certain news events. Sometimes this manipulation is a good thing. Take for example the market reaction to 9/11. After being closed for four days the equity markets surged higher with the help of massive PPT buying of S&P futures contracts. Unfortunately, governments tend to bastardize a good thing and we are now faced with a market that is rigged to suit government needs in the short term. However, you can rest assured that true market direction will prevail over the longer term.

So, our struggle is to understand the long term view but not allow the government manipulated markets to cut up our capital in the short term. We must not allow the government manipulations to cloud our judgement and sucker us into investments that have no hope of success over time. Example: the government-sponsored rally in the financials over the last 3+ months was clearly created to help the banking sector raise capital. Again, if you wish to argue this point I suggest you go down to the water's edge and scream at the tide. Massive amounts of capital were raised through the secondary markets for financial companies in the last 30 days. This is a simple fact. Now that this manipulation is complete and private capital has been sucked in where will the equity markets go? Only time will tell, but I will offer this thought process:

The economy is not in good shape.

The Fed must work to keep rates low.

The stock and bond markets have been trading in opposite directions for months.

Therefore, if the Fed focuses on supporting the bond market going forward then the equity markets may be in for trouble.

The economy is not in good shape: Proof

The weekly Railfax Rail Carloading Report still looks grim. A report from the real world

Moody's: "Sellers Beginning To Capitulate To Realities Of CRE Markets."

Moody's has released its April Moody's/REAL Commercial Property Price Indices (CPPI) update and it is a doozy: -8.6%, after what many had expected was a shooting green reading of just -1.7% in March. The problem that many don't grasp, that even Moody's has finally caught on, is that once capitulation in CRE sets in, the bottom will be torn out. Read more...

Redbook Retail Index Plunges Again

The Johnson Redbook Index is a sales-weighted year-over-year same-store sales growth in a sample of large US general merchandise retailers representing about 9,000 stores. Same-store sales are sales in stores continuously open for 12 months or longer. Read more...

I have included the story below simply for your own edification. The explanation below illustrates how the manipulation works and I hope it helps you understand and cope with seemingly incongruous market volatility.

Market Skeptics.com: Understanding the PPT and market manipulation

The PPT operation has access to unlimited funds because it was formed by the Treasury which can create money out of thin air. My guess is that the organization is structured through an offshore hedge fund established by the ESF as a front group. They do their buying and selling from perhaps the Bahamas or the Cayman Islands.

One thing we know is that they place their orders through several of the big brokerages in New York such as Goldman Sachs, JP Morgan, or Merrill Lynch. This way no one at the brokerage houses or on the exchange floors actually sees any massive buy orders from Washington bureaucracies.

The way they work the scheme is whenever the market is going too low and threatening to crash, the PPT initiates buy programs on margin for S&P futures contracts in large enough volume to check the market fall and panic short sellers into covering their short positions. This creates a "short squeeze" and explodes prices upward. Hedge funds and institutional buyers then rush into the market to buy in order to catch the rally. This extends the rally and effectively ends the potential market crash as investor mood shifts from bearish to bullish.

The rally is created in the way that lighting a match to kindling ignites a roaring fire. The S&P futures contracts are so highly leveraged that a $200 million buy can be initiated for $10 million in the PPT account with JP Morgan. A $500 million buy can be initiated for $25 million. These margins are chump change for the Treasury-ESF(Exchange Stabilization Fund)-PPT(Plunge Protection Team) operatives. As the rally proceeds, the PPT then sells their contracts back to the hedge funds and institutional buyers that follow after them. The PPT then goes to the sidelines to await the next crisis when they will need to stem a potential crash.