The tonality at the beginning of this week will be critical for the development of market tonality/sentiment…as further selling if accompanied by volume could reverse the recent significantly this bullish-trend, and a top-is most-likely in place as after Friday’s huge late day selling (possible key-reversals) looks ominous, and now the $64,000 question is will the down trend resume; or was it the result of some rebalancing, Russell-3000/2000/1000 and the BCS contagion wherein a hedge fund went belly up (extreme weakness in the transports after a FDX mini-warning and soaring crude has taken its negative toll).  This past week was a heck of a week for the bulls as news peppered the airwaves from the subprime sector....precipitated by the blowup of two Bear Stearns mortgage backed securities hedge funds...and this news spooked the markets and I believe that this is just the tip of the iceberg as the longer-term damage is far from over (but we could get a slight reprieve this week). With the market on slippery footing Congress through some gasoline on the fire (tax related issues) that most didn't envision. Add in the Russell rebalancing and Blackstone IPO and volatility was the main winner this week.  Remember folks that this past week was light on economics releases but this coming week is a event filled proverbial minefield of significant-possible market moving reports not to mention a FOMC meeting (see table below). As of the writing of this report I do not expect the Fed to change rates but there was a slight chance (before the BSC contagion) that the Fed could change their overall bias and put language in the bias statement signaling a coming rate hike at the August meeting (not very-market friendly) But after the selling we have recently seen I doubt that that happens now. There will always be cautionary tone around a FOMC meeting and this week will be no different, however after the last 4 fef-head meetings the markets have soared...a trend worth watching.

We need to watch bonds very-carefully folks  as we could be seeing a mega Tsunami in the making which could send a mega Bond-shockwave through our markets following the recent bond sell-off and corresponding rise in yields.  As any sell-off in the bond-markets this week could have serious implications for the whole economy, as rising yields will act like a fast-acting cancer for the housing market and all those trapped in ARM’s they will be resetting very soon, and over the next 3-4 years. And this type of development would clearly become leveraged into a loud cry that; **the worst is yet to be seen for housing markets. ** The recent rise in the ten-year-note during the past month is resulting in a huge strain on many who will see their Adjustable Rate Mortgages reset at levels that they can-not afford…also those homebuilders looking to reverse the current malaise will be hurt as a crackdown in subprime lending standards limits the overall pool of qualified individuals coming into the markets. We have through the data being supplied that the national median home price is poised for its first annual decline since the Great Depression, and the supply of unsold homes is at a record 4.2 million units according to the National Association of Realtors.

We could be on the verge of a bond-meltdown that could quickly turn into a very bloodily scenario. And unless the fairy god-mother of stock market/bond-market can’t wave her magical wand quick enough we could see a global meltdown as well and this situation could become a whirlpool that sucks all markets down into the proverbial cesspool and this could result in a significant bond-market bear-market lasting 1 ½ to 3 years….and it will become a cancerous event that will suck down a whole host of different investment vehicles, not to mention the housing-market, job creation and consumer confidence which will of course impact their discretionary spending ability and this could quickly bleed into the stock market and corporate profit out look, and the slow-bleed could turn into a major arterial hemorrhage. 

The FOMC meets this week, and their bias statement will be critical folks as they will surely need to step in and cut rates if the housing sector pushes the economy into recession…and they may be able to orchestrate this maneuver if they can get the Labor Department to manipulate their numbers showing a huge surge in unemployment…I have seen this type of direct economic data manipulation before. With the Fed meeting this week traders will be also be quite cautious as all indications suggest the FOMC is getting nervous here, and that they may not be able to manage the economy/stock-market as once thought.  The markets are stuck in the proverbial mud despite the recent relief-rally and subsequent sell-off that started late Thursday last week and bleed over into Friday’s market the bulls are stuck in neutral on a slippery sloped hill and the can't get any traction as we have continue to see money flowing out of the major-indexes  

We have seen throughout this bull-market-rally that we continue to see the giddy-bulls buy-buy-buy every dip and at ever junction; and if this was a resumption of another mega-leg-upward of a secular bullish trend, I would certainly expect to see consumer/investor sentiment readings off the charts, but from the recent data we are not seeing that at all. It appears that the hyping talking-butt-heads have brain washed Joe/Jane Doe into believing that uncertain global and domestic geopolitical and economic conditions do not matter, and that the historically overvalued equity prices do not matter (take out energy, brokerage/bank earnings along with the few commodity players in the SPX and the P/E jumps significantly to 32-35.  

Earning or should I say lackluster real organic earning  do not matter as earning will eventually catch up to prices…seems I heard that in 1999-2000, when they have convinced folks to ignore the looming credit bubble as they have stated time and time again.  The new fuzzy-math of wall-street due to the Fed-heads cheap & easy money policies, the carry trade and huge global liquidity…is the stock buy-back announcement as we have seen U.S. companies have bought back nearly $1 trillion in stock over the past 2½, the largest buyback boom in history.  Now is this a good thing or a smoke-screen to mask real growth issues? (I will write abut this on Wednesday.) Meanwhile the media continues to assert that the current administration has our economy completely under-control, they have convinced the same folks that they need to Spend-Spend-Spend. I must say that they have done a remarkable job of selling this so-called HUGE bullish scenario. We shall soon see if the numerous bearish ascending wedges and the deeply overbought conditions on the longer-term charts put up a wall and STOP "this irrational madness" in the days/weeks ahead. If you listen to any of the financial media this weekend you probably heard them declare the a new bull market is born again and the Bear market is officially Dead….I totally disagree as it once again appears to me as the markets are setting up for an other exhaustion topping event. 

Despite the continued pinching of the consumer, as nationwide gas prices soar this week is full of economic data that could easily be manipulated to the bullish-front to help keep a floor under the markets in this mine-field of mega-contagions; and due to manipulation from the PPT (who steps in after every 2-3% sell-off) we could easily see tradable bounce in the very near future, (most-likely it could start this week after the FED-meeting **That could last until the end-of-the month/quarter** …and I believe the impetus for the bounce will be the reversal in the bond-market (near-term) and a huge wave of buyers , that will prompt the last buying exhaustion move most likely in the high-beta heavily shorted stocks.  Fund manager could buy this so-called dip and especially focus on the winners like MA, CROX, GOOG CAT, DE, OIH/XLE SLB and the oil-service sector, INTC/MU and the Semi/Chip-patch (the Chinese ADR's) etc, and look like heroes when they mail their quarterly statements out to existing fund holders along with their attempt to entice new-monies into the system. There is little risk in buying winners in a down market and those losers from last week will start to look even more attractive for new $$$ infusions. When the markets were near their respective highs early last week it would have been difficulty to see them investing new money one week ahead of the quarter; now that they have got a dip they once again have a chance to buy the dip one more time to paint the tape and fluff up their books.

We are as I have said several times approaching the end of the quarter and I believe mutual funds and hedge funds that have been embroiled in chasing commodities, stocks and the ETF’s higher will be securing their profits and pushing the indexes higher (My guess is that they will play the mega-rotational tape-paining game…flowing out of one sector into another) and liquid stocks and ETF’s; such as the SOX, and large-cap technology players will see some increased volatility in anticipation of the window-dressing period associated with fluffing up their 2^nd quarter statements. Remember the greed principle folks, money-manager’s along with hedge-fund manager bonuses are paid quarterly, and the propensity for them to prop-up the markets with other people’s money to secure their own bonuses has always been significant.  Earnings are only two weeks away and earnings warnings have been almost nonexistent (a strange occurrence folks). The markets are expecting to see SPX earnings growth in excess of 5-6% and the whisper numbers are over 10%; hence not a very-bearish development just yet  The subprime problem is likely to keep the Fed on hold for the rest of the year even though inflation is rapidly accelerating and in need of a rate hike.

I have written about before about watching for the increase of distinct intraday manipulation….off-setting buy/sell programs (with corresponding volume spikes when (program traders) attempt to squeeze money out of the markets these manipulative players (or should I say leaches) can easily cause the market (due to light volume and low volatility) to move one way while they position themselves in a counter-trend move scenario **(example, selling off semi-chip-stocks while subsequently buying cheap calls/selling puts after the initial move…then out of no-where the upgrades begin, along with manipulated Gap-Runs which squeeze the shorts forcing them to cover, then the sell the calls and buy back their puts…I have seen this so many times during the past several months where we see out of the clear blue a buying rocket spike that is immediately reversed later in the day….created by several “black-box” trading systems to induce buying and a short squeeze…it’s the only way that they can spark liquidity in this dismal market environment that is severely lacking in real underlying liquidity…this is part of their manipulative distribution process as they spark a bullish move so that they can then sell their positions into the induced ramp….without causing a significant purge. The holds true folks when we have been seeing huge disconnected selling sprees…were buying by funds hoping to paint their books into the end-of-the quarter near the intraday bottoms once to find a manipulated rally starts after the next day’s open….we usually experience a sudden selling event where the underlying bids are quickly pulled creating a manipulated vacuum effect. Hence I’m taking a wait and see approach to Friday’s late day selling and I’m not ready yet to say that this market is toast quite yet…as I do not want to be trapped as much of the recent rally has been built of bears to quick to act and then they get burned and are forced to cover…I have seen so much manipulation due to pairs trading in energy and stocks (buy energy futures short the markets…or sell-energy futures and buy the markets) lately. So folks though my positions were bolstered by yesterday’s selling…and I am expecting a significant correction as I have written many times I must caution all new bears that one selling day does not may a trend-reversal so careful and enter shorts cautiously, and stand ready to take profits as presented, as we could see some further end-of-quarter manipulation.

 The contagions to the bullish tone as I see it; long-term are multifaceted; the recent rising bond yields are also created some significant headwinds for equities to overcome. I still see inflationary pressures building (we will get another round of data to support my conclusions or not next week) and so far according to the pro forma earnings reports that have been released we haven't seen any real significant results. We still have a slew of economic data/news releases to be released on Friday and especially next week.  We will soon see which market emotion “Greed” or “Fear” will win out. Please remember there are usually 5-bulls (participants) to every bearish investor, so the propensity for bullishness is almost always stronger! However the reason that the market drops 4-times faster then it goes up is that liquidity and lack of buyers due to fear, which can feed on itself very quickly like a plague or a quick acting cancer. So prepare yourselves for a rollercoaster ride during the next several days as the battle ensures.  Trade with caution and please protect your profits!

M&A or LBO reports on Monday could take center stage along with the existing home-housing data.... I still feel the tape action of  past several days suggests there was no bullish conviction behind the wild spikes, as the volume suggests selling-into-strength. For this week we have a nearly perfect setup for the bears to short and give the bulls one more chance to trample them a bear-trap....or the bull trade scenario a Gap/Crap on Monday and all dips are sold into. There more significant economics to cloud the landscape and the Fed meeting on the 27th/28th will start becoming a major focus. I will continue to trade whatever the market gives us and I do expect some triple digit whipsawing days on the Dow and possible 1% surges/drops this week and as such volatility could return in force. A successful reversal at this level could lead to another dramatic drop but if the bears become entrenched, then again any concentrated bull-ramp and/or a mega short-squeeze could produce a false breakout rally over the prior highs as we embark into the end of the second quarter...the question that remains to be answered is whether the greedy-bulls will try to press this rally further or start to book profits as the Dow is up 7.2%, the Nasdog 7.2%, the SPX up 5.9% and the Russell-2000 up 6.0% on the year...after last weeks selling and will greed-induced fund-managers press the markets higher and risk these profits or bookem and start to roll into bonds??? I would not hesitate to buy the breakout or short any failure. Friday's close was a nearly perfect setup for a big move in either direction...so instead of flipping a coin lets wait for the set-up...as we head into the end-of the second quarter.

Even as the widely-watched us indices advance hesitatingly and skittishly into uncharted price territory, this past week we could see that the market participants were becoming quite skittish as the systemic stresses affecting global financial markets continue….albeit they are being widely ignored; especially by the hyping talking butt-heads that proliferate the bubblevision airwaves. Since we have entered a new-world-paradigm of investing global investors need to have a bias toward reviewing and interpreting global economic data and maintain their insight of global events. As even the most conservative trader/investors need to hear this message loud and clear, "Ignore the rest of the world and their underlying contagions and you can be scorched by a thunderous thunderbolt." I have been repeating this for more than 6-months now and I sound a little like chicken-little at times….our global markets are a big place and growing very fast. and more and more are facing the kind of investment decisions we face every day; the looming question is which way will the turn. We can rest assured that many individuals in every country and culture with high intelligence, good education and a mega strong desire to achieve are out there every day competing with us in this so called global-market-place/economy. Hence it’s this globalization adhesive that has helped fund our ballooning current account; which I believe is starting to become due; as these intelligent foreigners want/desire and they are starting to demand higher returns and as such this contagion to our economy could be unraveling at the edges.  If this is the case, then the market could become embroiled in a painful scenario of a weaker USD, a weaker bond market, higher inflation and a FED unable to step in an ease. I'm not going to get up on my so called soapbox as you are probably glad to hear and rant and rave about "How Deficits Do Matter, How valuations are extremely stretched in reality, How over-extended this bull-rally is etc."... I think you've all heard these tunes before from me...hell you can even-down load them to your iPod (just kidding). I just think that sooner or later, traders and investors are going to have moment when they have to confront reality…and it will be bittersweet if not downright sour.

Folks, I hate to sound like a proverbial chicken little; but as I have written about the potential for a mega-major correction for many weeks now and since we are only a few-days/week from the start of the heart of pre-announce earnings season; what I call the “confessional-period” I have been issuing warning for several weeks now, that I believe the analysts have it dead wrong. As I have stated before, and now the empirical data is confirming, I believe many firms will be hard pressed (despite having their accountants working overtime using all the fuzzy math known to them…just to meet their restated, and downward leveraged objectives never-mind beat-them, and for many the tasks will just be overwhelming and impossible) I have mentioned many times that I believe corporations have all but exhausted their cost cutting (outside of mergers and acquisitions, where so-called “synergies” a fancy name for cost-cuts which usually come in the form of significant lay-offs), organic growth is for the most part is almost non-existent, hence the current wave of acquisitions and mergers to take out additional so-called costs…the guidance that they have been giving during this past earning season has been lackluster at best, outside of the energy, commodity and financial patch the earnings guidance has been mundane, and everyday that the dollar slips, and crude rises, and bonds continue to rise will impact adversely the bottom lines of many companies. Lets face it folks year/year and quarter/quarter, comparisons will be extremely difficult to meet/beat; coupled with the current flow of economic data which is also suggesting that corporations are having a hard time passing increased costs associated with business expenses (especially commodity costs) not to mention that I believe that we saw a significant pull-forward in demand/inventories that were created by a weak dollar and various incentive programs. Hence I believe we will soon start to see a horde of companies lining up at the confessionals and the results will not be pretty for their underlying stocks (many of which are bloated at these nose bleed levels despite the recent retracement) and the indexes/sectors wherein they reside. If this was not enough to be concerned about…please do not forget about the following contagions as well.

• We were in an increasing interest-rate, and that path could be rejoined very soon. We saw on Tuesday after the markets swooned again after the surge in bond market yields that for the first time this year, the financial markets are pricing in slightly higher odds of an interest-rate hike from the FOMC rather than a rate cut, according to data from the Chicago Board of Trade's federal funds futures. At the close on Tuesday, the futures market was pricing in a very small chance of a rate hike sometime after September. Two months ago, before a massive change of sentiment in the bond markets the futures market was pricing in two rate cuts by December….this is a 180-degreee turn folks and not market friendly at all.

• When coupled with our ballooning “Twin-Deficits” that continue to expand as far as the eyes can see the Fed will certainly find it difficult to deliver the rate cuts that the markets have priced in.

• The Dollar was on a very slippery path, downward; and could once again resume its decline and this time it could encroach into and get sucked into the cesspool…if that happens we could easily see the greenback stumble into a crash-selling mode very quickly.

• Energy prices continue to raise (crude/distillates/gasoline) …and associated costs, stripping more and more discretionary income from consumers that are already deeply in debt.

• Geopolitical uncertainty is increasing in the middle-east…and this could be heating up soon as we move into the holy-seasonal period ahead.

The 800-pound Gorilla

What will it take for the fed-heads, talking butt-heads on the various bubblevision channels and most of all the markets to understand that inflation is running rampant in our economy; we recently saw that in May that the BLS report showed.

• The CPI for All Urban Consumers (CPI-U) increased 0.6% in May, before seasonal adjustment, this level of 207.949 (1982-84=100) was 2.7% higher than in May 2006.

• The CPI for Urban Wage Earners and Clerical Workers (CPI-W) increased 0.8% in May prior to seasonal adjustment.  The May level of 203.661 (1982-84=100) was 2.8% higher than in May 2006.

• The increase so far this year was due to larger increases in the energy and food components. The index for energy increased at a whopping 36.0% SAAR in the first five months of 2007….compared with 2.9% in 2006. we saw that Petroleum-based energy costs increased at a 63.9% annual rate but hell lets ignore this contagion and it will ultimately vanish right J.

• Through the first five months of 2007, beef prices have risen 5.1%, poultry prices, 4.3%, and pork prices, 3.4% and these are the government’s pro forma numbers.

Remember folks that Inflation: is a persistent increase in the level of consumer prices or a persistent decline in the purchasing power of the dollar, caused by an increase in available currency and credit beyond the proportion of available goods and services. In this definition, inflation is the consequences of or result of (rising prices) rather than the cause. Then we have the much maligned sometimes expressed as the overall general upward price movement of goods and services in an economy, usually as measured by the CPI and the PPI. Simply put, if I utilize the pro forma reported inflation numbers as presented in the governments report what cost $100 in 1999 would cost $120.25 in 2006.  Also, if you were to buy exactly the same products in 2006 and 1999, they would cost you $100 and $83.16 respectively.  

Now getting back to issue at hand this year so far the annual rate of inflation has been running if we follow the headline numbers between 6.7% to 10.50% on an annualized basis; from the data that I have reviewed (pro forma as it is) we have seen that since January prices have risen at a 7.1% clip on the consumer level and at a brisk 10.9-11.21% pace at the producer level. By contrast, last year consumer prices rose 2.4-2.5%, while producer prices posted a mere increase of just 1.0-1.2%.   

The bulls have totally disregarded these numbers and their looming negative ramifications and implications as they continue to surge ahead immune to negative economic news in their giddy-euphoric manner that has been totally their during this continuation rally, as they display little concern about the data as presented, since they are being lured by the incessant hype to look beneath the surface to the highly hyped "core" rate of inflation number that backs out the sustaining necessities of life (food and energy). They continue to assert that the headline inflation is due mainly to rising prices of food and energy, they are somewhat right…so why should we just focus on core consumer and producer prices. As you know, these are arrived at by removing food and energy from the totals. There is little doubt that prices excluding food and energy are going up more slowly than the headline numbers hell prices of electronics are always coming down as the commodities get cheaper, also the negative contagions in housing have started to positively influence the inflation numbers as well. But for the life of me these talking butt-heads must be living in wonderland with Alice and the mad-hatter, as they are not living in the real-world, they need to get free from Rod Sterling’s the twilight-zone as anyone in the real world needs to consume food, utilize energy to go back and forth to work, heat their homes etc. and these commodities have been soaring.  I have written many time about how overleveraged in debt that most households are and how many families are getting squeezed tightly in a choke hold by soaring prices of necessities needed to live and function day to day. That's why consumer sentiment has turned south, as according to the latest reading of consumer sentiment taken by the University of Michigan showed that the sentiment index declined more than expected in the early part of this month. The index dropped to 83.7, compared to May’s reading of 88.3 as both components of the index posted large declines.  The giddy bulls and taking butt-heads on bubblevision just need to get their respective heads out of the sand as both energy consumption and food are needed on a daily basis hence if we were not seeing a manipulated fuzzy-math calculation (based on keeping cost of living adjustments artificially low etc) we should see these components more heavily weighted as they certainly have a real-life impact on people's ability to live. So if we were as logical a society as Mr. Spock was on Star Trek it would be sensible to reason that as priced increase life sustaining commodities like food and energy then there should be adjustments made as far as I am concerned as a logical economists. We have seen that crude has steadily (some time by leaps and bounds) risen from $13.00-15.00 a barrel in 1999 to approximately $65-70.00 (see chart) today a huge increase of 350-370% in just 8-years. 

Yes indeed rising energy prices especially gasoline prices have been getting all the attention by the bubblevision media, but the cost of the real life sustaining components of necessities of life “FOOD” is actually rising even more: as during the past year, food prices have increased 3.7-5.2% depending on which set of pro forma numbers you want to use and are on track to rise as much as 6.7-7.5% or greater by year's end (and these are conservative numbers). The current increase is more than double the 1.8-2.0% percent increase absorbed last year based on the fuzzy-math experts at the Department of Labor. Only the cost of health care has risen more (average costs) another important staple that way too many Americans can no longer afford….

• This past week we saw that health care costs are still rocketing hell this isn’t inflation right as according to PwC, private insurers are anticipating an average increase in medical costs by 9.9% for preferred provider organizations (PPOs), 9.9% for health maintenance organizations (HMOs)point of service plans (POSs)/exclusive provider organizations (EPOs) and 7.4% for consumer-directed health plans. This compares to the mediocre increases of 11.9%, 11.8% and 10.7%, respectively ,posted last  year.

• In 2005 (the latest year data are available), total national health expenditures rose 6.95%....two times the rate of inflation. Total spending was $2.3 trillion or $6,725 per person. Total health care spending represented 16% of the gross domestic product (GDP).  

• In 2006, employer health insurance premiums increased by a mere 7.8% again over two times the rate of inflation. The annual premium for an employer health plan covering a family of four averaged nearly $11,500. The annual premium for single coverage averaged over $4,200

From my vantage point many firms up and down the food chain are experiencing significant increases in their input costs along with manufacturing costs (energy, lighting etc) and they're only beginning to pass them on to consumers at these levels as they can not continue to absorb them stealthily.

While we have seen that most food prices are rising steadily (out pacing inflation) across the board, items related to corn have been affected the the primary reason is because increasing demand for ethanol made from corn is driving up corn prices (not to mention speculation in the futures markets but that is an other issue altogether), which farmers use to feed their poultry, pigs and cattle. The high price of corn also affects prices of everything from cereal and other products with corn as a primary ingredient (corn oil, potato chips, snacks, etc.).

We better all pray/hope and pray again that the reports indicating a dismal growing season will not be true as if we do not have a really good growing season this year, prices will continue to climb higher. But not to worry as the fed-heads do not worry about food inflation, hell I bet they do not even do their own grocery shopping as if they did they would see that eggs cost 18.8% more than a year ago, chicken prices have risen 7.4-8.0%, bread is up nearly 6.5% and beef is up almost 5.5%, milk is milk is hovering around $4 a gallon an increase of only 10-11% from last year, and milk prices are expected to rise up to 4.85-$5.00 a gallon by early fall, and this will adversely impact and affect all dairy related products. 

And now farmers are chasing corn prices higher as they devote record acreage to corn this leaving some crops in short supply…and as such these prices increase as well due to supply-demand functions; and unfortunately many of these price increases haven't even made their way into the food supply chain and many stores have been attempting too absorb some of the costs rather than passing them on to customers; and as such their margins are simply being squeezed **(hence  one reason why I have been mystified why so many food-market stocks have been rallying lately buy once again that is an other issue). I do not have rose colored glasses on folks; hence from my vantage I see no end in sight to food inflation. As I forecast that food inflation will rise this year to rates not seen since 1989-1990. Lets face it folks since food is a category that consumers can't cut from their budget (they can reduce their recreation driving, they can turn down the thermostat and put on a sweater, they can turn out the lights when not in use etc….they can forgo the D&D cup of coffee, their trips to the movies and their incessant spending on clothes, iTunes, etc can be pared back when times get tough…but families still need to eat!  

If you live in the twilight zone, or fed-head wonderland it is statistically possible to isolate food and energy from the price indexes, why I still do not understand as it is very misleading; heck when I was studying economics I was taught that any item can be viewed in isolation but that correlations and inferences from such actions are distinctly flawed; all consumer related items are very interrelated, none more so than food and energy whish are consumed/used daily. 

The next big-talking point on CNBC and the other bubblevision cheerleading channels will be wage inflation as workers will be forced to demand bigger raises and cost-of-living adjustments to close the distance due to rising cost of living. And with the labor markets as tight as they are, the likelihood of these demand being realized are very-good and then we will see that the vicious spiral will start where employers/firms will in turn attempt to pass these costs along in turn.

If you think that food inflation is just an American invention think again Food inflation is on the rise all over the world. Meat prices were up 26% last month in China, and this week we heard that McDonald's is planning on raising its prices in Japan, and Dean Foods warned that its earnings will be lower due to record milk prices in the U.S. Once again folks food prices are posting gains that are parabolic and unfortunately it appears for the most part that these price increases seem to be permanent. Surging food prices boosted China’s annual consumer price inflation in May to a 27-month high, extending a rising trend and reinforcing expectations that interest rates will go up further to curb these negative implications. Wholesale price of pork a staple in their diet rocketed a whopping 62% in May from a year earlier, according to the People's Bank of China.

 

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Where have all the quality jobs gone...and what is the impact of this contagion!!

This total lack of quality jobs being created (key word folks is quality) is a crying shame and in my opinion will be a major contagion to our long-term economic and society, health as it will act like a cancer…which will eventually eat away at the core of our economy and society’s as we fall from the greatest nation economically. We have consistently seen that the current stream of jobs being created (out side of those hypothetical jobs showing up through the birth-death model) are not involved in creation of or manufacturing of any real tangible products or goods that we use in out everyday lives. Nor are they directly related too services that are available for exportation to other countries and economies. In a very stealth manner Americans are being systematically eliminated from global significance and at an increasing alarming rate from the very production of the basic goods and services that they themselves are the largest global consumers of and those very goods that are needed to sustain their standard of living.  

Years ago when I was a young lad, I heard that outsourcing manufacturing jobs in the textile and shoe manufacturing and similar sectors was good for our economy (the proverbial free-trade premise) as these were menial and dirty jobs that were better suited for those in less developed countries to do leaving more working Americans available for those so called important manufacturing jobs (auto’s, planes, and large durable goods) and in the long run we would be able to buy these goods cheaper.  

Well that is certainly not the case any more now is it as we are now seeing outsourcing/exportation of quality jobs and the subsequent erosion of economically-sustaining jobs in hi-tech and now even defense and security manufacturing which was thought to be an area where we would never outsource. You would be hard pressed to find any large durable goods or their parts manufactured in this country at all, most auto parts are manufactured aboard and assembled here, Try to find a Computer, TV, camera, clothing, mid/low-end furniture, or major appliances not made in a foreign country. Unfortunately what we are left with are service related jobs, many of which are substandard or menial jobs to those being destroyed or exported, and their economic (positive impact) is lost. We are outsourcing manufacturing, and now technology and decent service jobs at a break neck pace and replacing them with jobs such as bartenders, waiters, janitors and greeters at Wal-Mart.  

And now we are seeing trends and objectives to out source other jobs such as teachers, insurance specialists, high-tech workers, and many banking/service related jobs as well…This has been a concerted and manipulated effort by big business and those in political power to mask the ongoing erosion of the American standard of living and eventually our way of life that we hold so darn precious…and the subsequent widening of the classes or in some respects the extinction of a class.   

It is happening at a time when American workers are seeing their real-wage/benefit packages shrinking, as workers are being asked to absorb more and more of their respective benefit-packages….also when we add into the mix that the average real wage in the US has begun to decline significantly for the first time in over a decade, and this the decline is growing rapidly as the destruction of real-supportive-wages is gaining momentum due too increased inflationary pressures, combined with a persistently poor-quality job market and in an environment where the cost of living is increasing significantly more rapidly than real compensation. Oh I know our President indicated that he has created 3-4 million jobs and that more Americans are working than ever-before…what he fails to state is that more Americans have second or third jobs than ever before as many which have lost good-quality jobs continue to experience their unemployment benefits expiring before finding adequate replacement employment, and as such they have been forced into accepting substandard (when compared to their pervious jobs) employment situations.  

Also just when you though it couldn’t get any worse we have seen that recent reports indicate that the government and American business are carrying out a wholesale attack on benefits and working conditions of the middle-lower class Americans, an attack that will in my opinion have devastating consequences in the next 14-28-months. According to the data released real wages declined in 2005, 2006 and the first 4-months of 2007 until the may report reversed the trend as the average weekly earnings rose by 3.4% however after deflation by the CPI-W (CPI-W = Urban Wage and Clerical Workers) average weekly earnings increased by a mere 0.9%, and this was before adjustment for seasonal change and inflationary pressures (use this link to check out these pressures). 

I do not want to sound anti-business or anti-capitalism, however this recent surge in corporate profits at the expense and elimination of Americans and the corresponding enrichment of a small percentage of the population (insiders and corporate leadership along with wall-street insiders…see my CEO-pay section below*), is not a sign of strength in our economy. Rather, it is a deliberate product of and a shift of wealth up the economic ladder, as only the top 1-10% are truly benefiting from the so-called Bush economic expansion as they transfer wealth from the poor to the rich once again.  

An underlying trend by corporations that is also quite disturbing now and could take on the appearance of a cancer; that will first surface in particular the airline and auto giants, is a concerted and visionary game plan/campaign to eliminate or reduce dramatically their so-called “legacy costs.” These legacy costs include health care, dental care, secured pensions, paid time-off benefits….thus eliminating and reducing a tradition of job security for workers at most of these firms; and they want to stick the American taxpayers with the burden through the Pension Benefit Guaranty Corporation. 

Remembering that the consumer is 70% plus of the economies strength or weakness of our economy, we really need to watch these factors as they begin to unfold and take their respective toll…as all of the aforementioned actions will have the affect of reducing buying power of Americans and as such will erode the consumer base of the very corporations that have taken these actions…we will have to pay the proverbial piper sooner or later.

ECONOMIC DATA

We saw this week that starts of new homes dropped by 2.1% to a seasonally adjusted annual pace of 1.47 million in May, the weakest pace of groundbreaking since January, according to the pro forma reporting Commerce Department.

However we saw that building permits rose 3% to a 1.50 million pace as authorizations for new apartment buildings and condo projects surged…this is a play on foreclosures as people will be forced to sell-hones or enter bankruptcy as they can no longer afford them. On the opposite side of the coin permits for single-family homes dropped to a 10-year low.

This mixed data showed that the housing market has a ways to go yet in wringing out their excesses. I do not yet see any progress toward the point where housing can be said to be “stabilizing” for the time being…look to enter LONG-Trades on homebuilders the end of July/August for the next substantial rally (my future trading opportunity). The starts are lackluster and declining but it is widely known that the inventory situation is horrendous, and as such when we see capitulation soon, it will be the time to buy….also this sector is in my opinion very-ripe for M&A/LBO activity.   

Construction of single-family homes weakened further during the month, while building of multifamily buildings strengthened….as starts of single-family homes dropped 3.4% to a seasonally adjusted annual rate of 1.17 million, while permits for single-family homes fell 1.8% to 1.06 million, the lowest rate in over 10 years. Starts of multifamily units rose 3.1%, while permits increased a whopping 16.5%.

Housing confidence is in the proverbial cesspool…and its getting to look like a bog….as on Monday we saw that the new survey for the outlook in the housing sector purely stunk…like Peppy La Pue (the Skunk) as the outlook for U.S. home building came in at the worst levels seen in 16 years, according to the National Association of Home Builders report. The builders' housing market index fell by two full points to 28 in June, the lowest level seen since 2/1991. According to the report the group stated that the housing market probably won't turn around until next year at best. As you are all aware I expect housing to exert a huge drag on our overall economic health during the balance of this year and through 2008. At 28, the index shows that less than one-third of builders think the housing market is doing well. Builders are concerned about high levels of unsold homes, rising mortgage rates and the continuing "crisis" in the subprime mortgage sector.

This index was at 42 just a year ago and peaked at 72 just a tad over two years ago; this is a heck of a drop. All three components of the housing index fell in June. The index for single-family home sales dropped from 31 to 29, also the lowest reading since 1991. The index for expected sales fell by two points to 39, the lowest reading since September.

The builder’s continue to report serious ramifications of tighter lending standards and their overall negative impact on current home sales as well as cancellations, and they continue to trim prices and offer a variety of incentives to work down their ballooning inventories. It's clear that the crisis in the subprime sector has prompted tighter lending standards in much of the mortgage market, and interest rates on prime-quality home mortgages have crept up considerably during the past 4-6 weeks along with long-term bond-yields. After the late 1980s-early 1990s housing slump, it took 17 years for annual housing starts to exceed the 1986 peak of 1.81 million.

American Home-owners on the brink of extinction  The housing sector is just not impacted negatively as a result of the subprime contagions it's now ballooning into a perfect storm encompassing the (adjustable-rate or ARM) contagion as well. The mortgage bankers came out with their latest survey on mortgage delinquencies and foreclosures on Thursday, and it was not pretty as it showed a small rise in the percentage of homeowners who are in the process of losing their homes because they aren't paying their required payments…no surprise for my readers. At the end of the quarter they stated that 1.28% of all loans were in the foreclosure process, up from 1.19% in the fourth quarter of last year. Foreclosure rates for adjustable-rate mortgages, or ARMs, have doubled over the past two years. This is not just the subprime borrowers, those with less than stellar credit. Even prime borrowers who opted for ARMs are in extreme trouble folks and its getting worse. The foreclosure rate for subprime ARMs has gone from 5.1% to 10.1% in less than two years; while the delinquency rate has soared from 10% to 15.75%.  For prime ARM borrowers, and the foreclosure rate has doubled from 0.8% to 1.6% in just one year. Please understand that these Prime ARMs include so-called Alt-A or toxic loans, which exploded in popularity in the past few years because they offer those so called teaser rates (or should I say pleaser…which is like feeding a heroin junkie a new exotic drug). The window is closing for ARM borrowers to refinance into fixed-rate loans. Mortgage rates have soared by 58 basis points since the end of the quarter to 6.74%. In the meantime, housing prices are flat or falling in the regions with the largest foreclosure rates.

A Contagion for BIG-ENERGY

Big oil and gas firms would see taxes increase to help offset tax incentives for alternative- and renewable-energy producers under a bill approved Tuesday by the Senate Finance Committee. The package, which would provide $32.1 billion in extended or new tax breaks over the next decade, was backed in a 15-5 vote, and is expected to be added to a wide-ranging energy bill under debate on the Senate floor (the questions is will BUSH allow it to pass). We quickly saw that oil and gas producers said the bill would undercut energy security by penalizing domestic fossil-fuel production.

In summary, the energy lost by taxing the U.S. oil and gas industry would outweigh any potential energy gained by developing alternatives," according to the American Petroleum Institute, and they stated that America doesn't have the luxury to penalize one energy source at the expense of another (sounded like a threat). The bill includes a five-year extension of the clean-energy production tax credit, as well as credits aimed at encouraging development of "clean coal" technology and incentives aimed at encouraging solar, wind and other projects. On the other side, the bill would offset expected lost revenues by repealing the deduction for domestic manufacturing activities by major oil and gas companies, while leaving the deduction in place for smaller producers. Those provisions are projected to raise $9.4 billion over the next decade. Revenue raisers also include a "severance tax" on oil and natural gas produced from leased federal lands in the Gulf of Mexico, a measure designed to collect the more than $10 billion in leasing revenues left on the table as a result of errors in leasing contracts negotiated by the Interior Department in 1998 and 1999….the measure is expected to raise nearly $10.7 billion over 10 years. 

The Senate easily approved an amendment that would allow the United States to sue OPEC under U.S. antitrust laws. The Senate voted 70-23 to approve the amendment. We had seen that the House defied a veto threat by President Bush to pass similar stand-alone legislation by a seemingly veto-proof margin earlier this year…but from what I have heard Bush has openly stated that no matter what measures are passed no one will attack big-oil or his OPEC friends while he’s still in power. We have seen that notwithstanding diplomatic and other considerations, the hands of U.S. trustbusters have been tied since the 1970s, when a federal court threw out a private lawsuit by the International Association of Machinists union that accused the 11-nation cartel of price fixing…The new amendment to the bill will, for the first time, establish clearly and plainly that when a group of competing oil producers like the OPEC nations act together to restrict supply or set prices, they are violating U.S. law.

Technical Section!!

The Dow lost a whopping 185.58 points or 1.37%  on Friday (The Dow has been up for the last 13 Fridays but evidently this was unlucky 14. Only one Dow stock was positive. Volume was so heavy at the close that the Dow was still settling out nearly 10 min after the close. The Dow dropped nearly 20 points well after the closing bell;. it was hit hard as it closed the secession at 13,360.26 as 29 of its 30 components bleed red, …on the week the Dow lost  back most of the prior week’s losses as it posted a loss of on the week of 279.22…as it almost took back all of the past weeks gains of 215.09-points….it appears that the giddy bulls were hell-bent to retest the recent relative highs…which they did but they soon lost their grip as after quad-witching the oscillators were neutral now they have a decidedly negative bias…I’m a keen watcher of money flows and volume and both are quite weak here folks, the ADX is displaying a weaker trend and the CCI appears very over-bought at these levels once again the longer-term charts have been screaming a top-is-near for several weeks now….The near-term charts are very-oversold and they indicate that we could see some additional bullishness on merger Monday. Any subsequent selling by the bad-news bears and we could quickly roll-over and retest the 100ema/sma @ 12,991/12,888 The index broke below the 20ema/sma @ 13,485/13521 respectively and this is decidedly bearish near-term....the 50ema/sma looms at 13290/13319 and we stopped right above these support on Friday, if wee see some opening weakness look for these levels to be tested..  60-minute chart….Daily Chart....Dow Weekly Chart…Dow Monthly Chart  

The SPX lost a whopping 19.63 points on Friday to close at 1,502.56, and it too appears poised to retest the recent relative trend line breech at 1474-1480 if the bulls return look for another attempt at retesting the relative highs then the possibility exists that they will attempt to assault the 1550-1555 level if the bulls can find the needed liquidity…the index lost 30.35 points on the week as it lost all of the previous week’s gains of 25.24 points …and then some....this was due to the BSC contagion mostly and as such it could just be a temporary event as we keep seeing way to many short-term reversals of late. If the bad-news-bears return in earnest on Monday, look for a retest of 1485-1490 thereafter the rising 100ema @ 1473. The charts are displaying a host of negative divergences, however the tape had continued to grind higher until the BSC contagion hit the Markets Late Thursday into Friday....not to mention the backing up of interest rates......Just as the Dow is depicting money flows and volume and both are quite weak here folks, the ADX is displaying a weaker trend and the CCI appears very over-bought at these levels once again the longer-term charts have been screaming a top-is-near for several weeks now SPX Hourly Chart     SPX Daily Chart     SPX Weekly chart      SPX-Monthly Chart     

The Nasdog lost a whopping 28.00 points to close at 2,588.96 on Friday (the weakest index of the big 3 on Friday) the Nasdog lost 37.75 points on the week…the Nasdog broke thru the Daily 20sma/ema at 2591/2593 respectively and failed to rebound over this level into the close, but the index did recover a bit into the close....the bulls would want to assault these levels than the 10ema/sma @ 2601...the bears if they return will attempt to breech the rising 50ema/sma @ 2559/2564 respectively.

• The Nasdog had rebounded nicely due to some very timely upgrades in the semi/chip group again this week and speculation of M&A activity, before the overall market malaise weighed upon it. Despite the weekly losses the Nasdog managed to hold onto 30% of last weeks gains and it was the only major index to do so....Technology is highly touted and expected to be one of the largest contributors this year to aggregate EPS growth on the SPX (I sincerely doubt it but time will tell). The Nasdog appeared up until late Thursday to be surging to new relative highs as each time is starts to slip…bang a large tier brokerage firm steps in and upgrades fundamentally weak sectors on the premise the worse is in and they the stocks can’t fall any-further…we saw this in 2001, and the nuts were wrong them but right on the near-term, as the upgrades clipped many a short trader like myself on the near-term, but on the longer-term we reaped mega profits. The Nasdog is bouncing at the top of the weekly rising wedge formation with multiple negative divergences forming on multiple time frames….when I look at the last bear market full retracement tend on the weekly/monthly charts the Nasdog has rallied back up from the lows to the 38.2% retracement at 2650+/- (just 65+/- points away and this could be the nest bullish OHR zone to be assaulted. This rally is in the bulls camp its their to press or lose. Nasdog Hourly   Nasdog Daily Chart   Nasdog Weekly Chart      Nasdog Monthly Chart