Currency Traders Signal Another Stock Sell Off Is Imminent Just As Business Activity Reports Rise Strongly Higher And Short Selling Plummets To Lowest Level In Three years

Financial market report for February 28, 2011.

1) … Van Rompuy prepares a new competitiveness pact, which EuroIntelligence relates is likely to be accepted by the European Leaders at the March 11, 2011 Eurozone Summit.
EuroIntelligence in subscription article The Details Of Van Rompuy’s New Pact For Competitiveness relates: “The Framework Agreement remains asymmetric and relates that  current account imbalances, will only ever necessitate adjustment by the deficit countries.”

“The new competitiveness pact is essential the old one, minus the corporation tax, and the inter governmentalism. The FT has the details of the new “pact for competitiveness”, to be unveiled shortage by Herman van Rompuy and Jose Manuel Barroso. The most important element, unchanged from Ms Merkel’s original six-point plan, is a German-imposed debt brake. But it includes an important procedural change. The European Commission would be involved in the evaluation, the idea being that an arrangement anchored solely in the European Council would not be acceptable to all member states. The proposal followed consultations with all 17 member states, and is to be agreed at the March 11 eurozone summit. The plan consists of three clusters – competitiveness, employment and public finances .The FT writes that among the competitiveness proposals, there is a monitoring system for wage and productivity levels that would force countries to lower employment costs if they rose to quickly. Gone are the proposals on wage indexing, and the harmonisation of corporate taxes.”

“The eurozone is still solving the wrong crisis. The debt crisis was not caused by out-of-control public finances, a lack of competitiveness, or wage bargaining systems. This a crisis of an excessive built-up of private sector debt in the presence of poorly capitalised banking systems with fragmented regulation. A financial crisis also happened in high-productivity countries such as the US. The main difference is the much lower quality of European banks. The eurozone is not even trying to solve the banking crisis. Also note the asymmetry: No one is ever forced to raise wage costs. This pact is design to impose German economic conditions on other countries.”

“In his FT column, Wolfgang Münchau argues that member states should veto the pact. The pact was only ever justifiable as a quid-pro-quo: Germany’s offers a large and effective European Stability Mechanism, with the ability to purchase bonds, in exchange for German-style economic policies. But Germany is now imposing so many constraints on the ESM that it is not worth it to offer anything in return. A veto would probably kill the entire deal, but that would not be a bad thing, as the EU’s crisis resolution approach has kicked off on a wrong foot. The best outcome would be a failure of this proposal, followed by a more serious effort that would actually address the crisis. The most likely outcome, as ever, is a fudge.”

UK Bank, HSBC, HBC, came under strong selling pressure.

Germany, EWG, rose strongly, displaying what may be an evening star. Siemens, SI, rose strong, showing itself to be a poster investment for the EFSF recovery led European Rally.

2) …The US Federal Reserve’s QE 2’s Seigniorage Has Failed … The Fed’s Policy Is Now Causing Inflation Destruction just as production manufacturing reports turn strongly higher.
Ben Bernanke’s quantitative easing has exhausted, as is seen in its seigniorage of distressed securities, FAGIX, Junk Bonds, JNK, topping out and 30 Year US Treasuries, EDV, and 10 Year US Government Notes, TLT, falling lower in value, turning World stocks, ACWI, the S&P, SPY, the Dow, DIA, the New York Composite, NYC, Nasdaq 100, QTEC, and the Emerging Market Stocks, EEM, all lower.  

Chart of the transportation shares, IYT, communicates they are damaged beyond repair and that the stock market will be turning lower. Confirmation comes from the three black crows in Genesee and Wyoming Railroad, GWR as well as the topping out in Air Transport Services Group, ATSG.

The chart of the Morgan Stanley Cyclicals Index Relative To The 30 Year US Government Bond, $CYC:EDV, communicates that the growth and expansion stocks have leveraged as much as they can on the seigniorage provided by the US Federal Reserves quantitative easing policies.

The chart of the HUI Precious Metals relative to the 30 Year US Government Bond, $HUI;$USB, communicates that the gold mining stocks, GDX, have used the leverage of the US sovereign debt as much as they can. But the real issue is that the gold stocks got disconnected from the price of gold by inflation destruction as is seen in the chart of gold relative to the gold mining stocks GLD:GDX: the gold mining stocks have lost their leveraging capability and can no longer serve to generate wealth as well as the real thing. Those who are promoting gold stocks at this time, usually have a reason to do so; they depend upon newsletter sales.

Inflation Destruction is now making its first appearance. Urban Dictionary relates Inflation Destruction is The fall in investment value that accompanies derisking and deleveraging out of investments that were formerly inflated by money flows to, and carry trade investing in, high interest paying financial institutions, profitable natural resource companies, and high growth companies.

The failure of Quantitative Easing is seen in that a bear stock market commenced February 22, 2011 with Steel, SLX, Solar, KWT, Homebuilding, ITB, Transportation, IYT, Biotechnology, IBB, Pharmaceutical, XPH, Small Cap Consumer Discretionary, XLYS, Semiconductor, XSD, and Coal Producers, KOL. the Small Cap Information Technology, XLKS, Networking Shares, IGN, Russell 2000 Growth, IWO, Mid Cap Growth, JKH, Home Builders, ITB, Agriculture, MOO, Transportation, IYT, Internet Retailing, HHH, leading the way lower.

QE 2 has exported inflation and induced revolutions across the globe. The Big Picture reports, Leading indicators of revolt in the Middle East and Northern Africa: corruption, unemployment and percentage of household money spent on food …. Celente reports, When the money stops flowing down to the man in the street, the blood starts flowing in the streets. The Gulf States, MES, and Africa, AFK, both traded lower today; these are now zombie investments; as is the Philippines, EPHE, where investment was destroyed as soon as QE 2 was announced.   

Chile, ECH, was a leader in quantitative easing exhaustion beginning with the fall of the emerging market countries, EEM, at the first of the year. The failure of investment in Chile, documents the end of the Milton Friedman Free To Choose Floating Currency Regime, that served to underwrite Wall Street Financialization and Yen Carry Trade investing since the early 1970s.   

QE 2 has turned toxic compromising the fundamentals for continued economic growth. And Daniel Indiviglio of The Atlantic reports 10 ways rising oil prices will endanger the U.S. recovery.

Since the announcement of QE 2, bond vigilantes have seized control of interests rates globally, and specifically the Interest Rate on the 30 Year US Government Bond, $TYX, and the Interest Rate on the 10 Year US Government Note, TNX, and have driven down the 30 Year US Government Bond, EDV, and the 10 Year US Government Note, TLT, creating a sell off in Bonds, BND, as the Federal Reserve Policy monetizes the US Sovereign Debt. The US has lost its debt sovereignty.

Monetization of debt inevitably causes currency debasement. The FX currency traders have followed on the heels of the bond vigilantes, and have successfully sold the US Dollar, $USD. Debt Deflation has even come to the the New Taiwan Dollar and the South Korean Won. Ben Bernanke’s QE 2 has caused Inflation Destruction in the once red hot Emerging Market Small Caps, EWX, India Small Caps, SCIN, and now in the Asia Tigers, that is in the Taiwan Small Caps, TWON, and South Korea Small Caps, SKOR.    

The Australian Small Caps, KROO, and the Canadian Small Caps, CNDA, being supported by the strong commodity currencies, CCX, the Canadian Dollar, FXC, and the Australian Dollar, FXA, are trading strongly.  Much can be said of Russia, RSX, being supported by a strong Ruble, XRU.

Of note the Japanese Small Caps, JSC, rose to an Elliott Wave 5 high today.

In my last several articles, I’ve warned people about being invested in the solar stocks, KWT; they fell significantly today. Quantitative easing has boosted solar stocks relative to wind stocks, KWT:FAN; now the pendulum is going to swing the other way, and solar stocks such as GT Solar, SOLR, LDK Solar, LDK, SunPower Corp, SPWRA, and Trina Solar, TSL, will be falling lower, as the mother of all bear market commences.  

Small Cap Energy Shares, XLES, manifested a lollipop hanging man candlestick; this bearish termination candlestick gives a signal that the rally in energy stocks is done and over.

The gravestone candlestick in Small Cap Revenue Firms, XLFS, signals an end to the current rally.

Nanotechnology leader, FEIC, FEI, manifested a bearish harami at the top of an ascending wedge.

Sunrise Senior Living, SRZ, soared again today displaying itself to be the poster investment of QE2; as is  Clayton Williams Energy, CWEI, and Dollar Financial, DLLR.

Utilities, XLU, jumped on today’s higher Euro, FXE, and lower 10 Year Interest Rate, $TNX, to what is likely an Elliott Wave 2 high, suggesting an Elliott Wave 3 Decline will commence soon.

A new FactorShares ETF is available. It is FSG, 2X: Gold Bull/S&P500 Bear, seen in this Yahoo Finance Chart.

Alex Kowalski of Bloomberg reports Business Activity in U.S. Grew at Fastest Pace in 20 Years. Businesses in the U.S. unexpectedly grew in February at the fastest pace in two decades, indicating manufacturing remains at the forefront of the recovery. The Institute for Supply Management Chicago Inc. said today its business barometer rose to 71.2 this month, the highest level since July 1988, from 68.8 in January. The Chicago group’s production gauge rose to 78.2 from January’s reading of 73.7. The gauge of new orders climbed to 75.9 from 75.7. The employment measure fell to 59.8 from 64.1 the prior month. Plessis reports Eurozone PMIs: up, up and away! And Bespoke Investment Group Blog reports Chicago PMI Shoots the Lights Out.

Lynn Thomasson and Nikolaj Gammeltoft of Bloomberg reports Capitulating Bears Push Short Sales to Lowest in Three Years. The biggest Standard & Poor’s 500 Index rally in more than five decades is forcing stock market bears to abandon short sales, cutting them to the lowest level since 2007 last month. Shares borrowed and sold to profit from declines dropped four straight months and represented 3.3 percent of all stock in January, according to data compiled by NYSE Euronext. Pessimists are giving up after missing the 95 percent rally in the S&P 500 spurred by the fastest earnings growth since 1994. The monthly decrease comes as individuals added $17.6 billion to U.S. mutual funds this year after withdrawing money since April. While short sales rose 2.8 percent in the two weeks ended Feb. 15, January’s low may foreshadow slower gains in equities as the pool of new investors shrinks, according to Doug Burtnick of Aberdeen, Scotland-based Aberdeen Asset Management Plc. To Laszlo Birinyi of Birinyi Associates Inc. in Westport, Connecticut, levels haven’t fallen enough to reverse gains or stop equities from climbing as the economy expands.

3) … Currency traders signal another stock sell off, coupled with a currency sell off is imminent.   
The currency leverage curve, that is the ratio of the small cap pure value shares, relative to the small cap pure growth shares, RZV:RZG, manifested a lollipop hanging man candlestick, signaling a currency will fall lower, or a number of currencies are going to fall lower. I have no crystal ball and cannot tell you if the US Dollar, $USD, will be one of these currencies. Only the currency traders know what they will sell next.   

With the announcement of QE 2, the FX currency traders have successfully been conducting a global currency war against the world central bankers and have successfully implemented competitive currency deflation, that is competitive currency devaluation, with the US Dollar, $USD, and the Emerging Market Currencies, CEW, falling in value; and a number of currencies such as the Australian Dollar, FXA, the Canadian Dollar, FXC, the Euro, FXE, and the Yen, FXY, rising in value as is seen in the Google Finance chart of UUP, CEW, FXA, FXC, FXE, and FXY and the Yahoo Finance chart of UUP, CEW,FXA,FXC,FXE, FXY.


The Euro, FXE, reset up higher into its Elliott Wave 2 Crest, manifesting a darkened candlestick.

The Canadian Dollar, FXC, rose strongly higher. I call this “loading” and suggests some type of global currency event is at hand.

The currency traders are loading for a big unload or dump of some currency or a number of currencies.The Indian Rupe, ICN, manifested the lollipop hanging man candlestick, suggesting a change of trend is at hand.  

The Swedish Krona, FXS, is a very volatile currency; it manifested an evening star candlestick. I hope those with Forex accounts went short this currency today. The chart of the Swedish Krona Yen Carry Trade, FXS:FXY, looks topped out. Sweden, EWD, rose strongly displaying what may be an evening star.    

The US Dollar, $USD, manifested bearish engulfing at support of 76.91; will it hold or will it break loose and fall lower? I have no idea. Notice on the chart how it failed to rise on February 14, 2010.

4) .. Real estate rose to an Elliott Wave 5 high.
Real Estate, IYR, rose today to an Elliott Wave 5 high.

The rise of Asset Management Company, Blackstone Group, BX, to a new high, together with a rise of Commercial Property REITs, Starwood Property Trust, STWD, Post Properties, PPS, and Equity Residential Property Trust, EQR, gives credence to the concept that the stock market as a whole has topped out.  

Retail REIT, SL Green Realty, SLG, rose to a new high.

World Real Estate Excluding US, WPS, rose to and Elliott Wave 5 high.

5) ….  Investors have exited the automobile stocks with a turn lower in the US Dollar. Investor support is absent to support investment in automobile stocks. And failing seigniorage is now the nail in the coffin for investing in the capital intensive automobile sector.  
Investors began to delverage out of Indian automobile stocks as QE 2 was announced. Tata Motors, TTM, is the canary in the stock market coal mining warning investors of inflation destruction as is seen in the chart of TTM, INP, and SCIN which all were turned down by the inflation destruction of QE2.

And investors began to delverage out of US automobile stocks in mid January 2011 immediately after
Automobile stocks, such as American Axle, AXL, Autoliv, ALV, Magna International, MGA, Tenneco Automotive, TEN, TRW Automotive, TRW, WABCO Holdings, WBC, and Johnson Controls, JCI, leading the way down.  Chart of ALV, AXL, MGA, TEN, TRW, WBC, JCI, F show disinvestment coming strongly out of the automobile stocks.

Frank Holmes, CEO and chief investment officer of U.S. Global Investors, and John Derrick, director of research of U.S. Global Investors present a pipe dream of Booming Global Auto Market Good For Many which they present in Investor Alert February 25, 2011. Such articles are much like the flights of fancy reported in the Tulip Mania in February 1637 just before the great crash in the Dutch economy. In the
investment arena there is wide range of investment science as well as flights of pure speculation.

6) … In the age of leveraging, Ben Bernanke and his QE 1 and QE 2 gave seigniorage, that is moneyness, to investments and economic growth, since the time of previous financial and carry trade collapse.  In the soon coming age of deleveraging, a Chancellor, that is a Sovereign, and a Banker, that is a Seignior, will arise to establish a new seigniorage with austerity for all.    

The topping out seen chart of Jazz Pharmaceuticals, JAZZ, with a PE of 62, communicates that the age of profitably investing in biotechnology stocks is now history. It was the seigniorage of QE 2 that enable investors to run this stock up for a final gain of 150% as seen  in the Yahoo Finance chart of JAZZ and the S&P.

The Yahoo Finance chart of JAZZ and the S&P

Bruno Waterfield in the Telegraph article Ireland’s New Government On A Collision Course With EU reports: “Enda Kenny, Fine Gael’s leader, will later on Sunday, start to form a new government, almost certainly with Labour, after full election results under Ireland’s complicated PR system come through.”

“Both Mr Kenny and Eamonn Gilmore, Labour’s leader, have promised Irish voters that they will renegotiate the EU-IMF austerity programme to reduce the burden for taxpayers and to force financial investors to shoulder some of the bank debts currently paid out of the public purse.”

“At a summit of centre-right EU leaders in Helsinki next Friday, Mr Kenny will use his position as Ireland’s new Prime Minister to beg the German Chancellor, Angela Merkel, and French President, Nicolas Sarkozy, for concessions ahead of an emergency March 11 Brussels summit to restructure the euro zone.”

“But neither the two European leaders nor the European Central Bank or EU will permit any substantial changes, despite the huge popular Irish revolt against the bailout.”

“Chancellor Merkel will tell Mr Kenny that if he wants to reduce the high, punitive 5.8 per cent interest rate charged on EU loans then Ireland will have to give up its low corporate tax rates – a measure regarded as vital to Ireland’s recovery and one of the few economic policies it has not yet handed over to Brussels or Frankfurt.”

Could Mrs Merkel arise to be The Sovereign? Perhaps so. Team Europe relates that European federalist Romano Prodi, EU Commission President said on October 13, 1999:  “We must now face the difficult task of moving towards a single economy, a single political entity .. For the first time since the fall of the Roman Empire we have the opportunity to unite Europe.”

A political and economic unified Europe, a United States of Europe, will soon be a reality as a Chancellor, that is a Sovereign, and a Banker, that is a Seignior, will arise to establish a new seigniorage with austerity for all, out of a soon coming economic and investment flameout. It will very much be a revived Roman Empire, in as much as the German people, an many others are descendants of those living in the previous world wide Roman Empire, and in as much as two European leaders Angela Merkel and Jean-Claude Trichet have received the much coveted Charlemagne Prize.


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