Fidelity Select Funds

[sumisu]

The Fed’s QE2 Traders, Buying Bonds by the Billions

Published: Tuesday, 11 Jan 2011 | 9:53 AM ET

By: Graham Bowley

The New York Times

http://www.cnbc.com/id/41019109//


NY Fed Bank [Getty Images]

Deep inside the Federal Reserve Bank of New York, the $600 billion man is fast at work.

In a spare, government-issue office in Lower Manhattan, behind a bank of cubicles and a scruffy copy machine, Josh Frost and a band of market specialists are making the Fed’s ultimate Wall Street trade. They are buying hundreds of billions of dollars of United States Treasury securities on the open market in a controversial attempt to keep interest rates low and, in the process, revive the economy.

To critics, it is a Hail Mary play — an admission that the economy’s persistent weakness has all but exhausted the central bank’s powers and tested the limits of its policy making. Around the world, some warn the unusual strategy will weaken the dollar and lead to crippling inflation.

But inside the Operations Room, on the ninth floor of the New York Fed’s fortresslike headquarters, there is no time for second-guessing. Here the second round of what is known as quantitative easing — QE2, as it is called on Wall Street — is being put into practice almost daily by the central bank’s powerful New York arm.

Each morning Mr. Frost and his team face a formidable task: they must try to buy Treasuries at the best possible price from the savviest bond traders in the business.

The smallest miscalculation, a few one-hundredths of a percentage point here or there, could unsettle the markets and cost taxpayers dearly. It could also embolden critics at home and abroad who say QE2 represents a dangerous expansion of the Fed’s role in the markets.

“We are looking to get the best price we can for the taxpayer,” said Mr. Frost, a buttoned-down 34-year-old in a striped suit and rimless glasses.

Whether Mr. Frost will reach that goal is uncertain. What is sure is that market interest rates have risen, rather than fallen, since the Fed embarked on the program in November. That is the opposite of what was supposed to happen, although rates might have been even higher without the Fed program.

Mr. Frost’s task is to avoid paying top dollar for bonds that could be worth less when the Fed tries to sell them one day.

Louis V. Crandall, the chief economist at the research firm Wrightson ICAP, said Wall Street bond traders were driving hard bargains. The Fed has tipped its hand by laying out which Treasuries it intends to buy and when, giving the bond houses an edge.

“A buyer of $100 billion a month is always going to be paying top prices,” Mr. Crandall said of the Fed. “You can’t be a known buyer of $100 billion a month and get a good price.”

Nevertheless, Mr. Frost and his team have been praised on Wall Street for creating a simple, transparent program. Neither the Fed nor Wall Street wants any surprises. The central bank is even disclosing the prices at which it buys.

Mr. Frost and his team work out of a small, beige corner office with arched windows that used to be a library. There, at about 10:15 most workday mornings, one of them pushes a button on a computer. Across Wall Street, three musical notes — an F, an E and a D — sound on trading terminals, alerting traders that the Fed is in the market.

On one recent Tuesday morning, what Mr. Frost and his five young colleagues did over a 45-minute period might have unsettled even a seasoned Wall Street hand: they bought $7.8 billion of Treasuries.

Mr. Frost and his team drew up the daily schedule for what the Fed calls its Large-Scale Asset Purchase program. And that program is, by any measure, large scale: through next June, these traders will buy roughly $75 billion of Treasuries a month — on top of another $30 billion it is reinvesting in Treasuries from its mortgage-related holdings.

But depending on daily market conditions, Mr. Frost can decide not to buy certain bonds if they are already in short supply.

As offers to sell Treasuries flash on a bank of trading screens, a computer algorithm works out which ones to accept. The computer compares the offers from Wall Street against market prices and the Fed’s own calculation of what constitutes a “fair value” price.

The real work is done by three traders who are referred to during the operation as trader one, trader two and trader three. They sit at a long table against the wall, tapping at seven screens.

On one recent morning, trader one was Tiffany Wilding, 26. While she reviewed the stream of offers and then the prices finally accepted by the algorithm, trader two, Blake Gwinn, 29, double-checked her decisions and trader three, James White, 29, made a duplicate of everything in case the computers crashed.

All the while, Mr. Frost stood behind his colleagues, ready to intervene — and even cancel the Fed’s purchases — at any sign of trouble.

They have their work cut out, trying to outwit the 18 investment firms that deal directly with the Fed. These so-called primary dealers — the Goldmans and Morgans of the world — employ some of the sharpest minds on Wall Street.

Mr. Frost — a Rutgers math grad who has worked at the Fed for 12 years, lives in the Borough Hall area of Brooklyn and takes the subway each day to work — is fairly well known within the dealer community. He and his team talk to the big banks most days.

The job carries great responsibility and is prominent within the Fed. But outside the Fed he and his colleagues are still seen more as staid central bankers doing a job, bankers say, not necessarily Wall Street hotshots likely to be snapped up by the likes of Goldman Sachs.

When devising the program, Mr. Frost and his team decided to focus most on buying Treasury notes with an average maturity of five to six years. That is because the yields on these notes have the biggest impact on interest rates for mortgage holders, consumers and companies issuing debt, and on banks’ decisions to lend to businesses. Over the weeks and months of the program, his purchases should drive up the prices of these securities — because they will be in greater demand — and consequently push down their yields.

The trouble is, though yields fell sharply between August and November as the markets anticipated the new program, they have risen since it was formally announced in November, leaving many in the markets puzzled about the value of the Fed’s bond-buying program.

Mr. Frost, and his boss, Brian P. Sack, insist the program has succeeded. Mr. Sack, 40, joined the Fed 18 months ago to run the entire markets group. He has a Ph.D. from M.I.T. and worked most recently for a Washington consulting firm. In 2004, he wrote a paper with Ben S. Bernanke, the future chairman of the Federal Reserve, and another economist about unconventional measures for stimulating the economy in extraordinary times — just like large-scale purchases of Treasuries.

“We didn’t know then that the Fed would be putting it to the test,” he said.

He said the Obama administration’s $858 billion tax compromise with Congressional Republicans in December complicated the macroeconomic picture.

But the biggest reason for the rise in interest rates was probably that the economy was, at last, growing faster. And that’s good news.

“Rates have risen for the reasons we were hoping for: investors are more optimistic about the recovery,” said Mr. Sack. “It is a good sign.”

This story originally appeared in the The New York Times

[sumisu]

My 2011 Outlook: The Coming Year Will Provide Many Answers

by: Bernard Thomas December 23, 2010

http://seekingalpha.com/article/243345-my-2011-outlook-the-coming-year-will-provide-many-answers

The Holidays are here, and 2011 will soon be upon us. The liquidity scare from now through year-end 2011 should be the focus of all fixed income investors. 2011 is going to tell us much. It will tell us if the EU will hold together. It will tell us if the euro can survive as a currency. It will tell us if centralized monetary policy and localized fiscal policies is a feasible model in the long-term. 2011 will also tell us what a non-bubble U.S. expansion looks like.

Europe is going to be interesting. Its problems are not going to be solved with bailout funds and strong language. Troubled countries are either going to cut benefits to its citizens, adopt pro-growth policies or leave the euro and try to devalue their way out of their problems. The list of troubled countries may be expanding. Belgium may join the PIIGS among troubled European countries. I still haven’t come with a new acronym. The bottom line is that Europeans have some difficult choices to make.

One choice which will probably not be available is continuing with their market / welfare state hybrid while being part of a common currency. The ECB can do little to help distressed countries because it can’t ease or engage in QE to help a country like Greece without damaging the economies of countries like Germany. One way to solve this dilemma would be to give the EU the authority to dictate both fiscal and monetary policy for the entire bloc, a United Stated of Europe if you will. However, that would require member countries to give up their sovereignty and adhere to rules set by a central governing body. This will not go over well among the European populace. Although its demise is not certain make no mistake, the euro is in trouble.

Closer to home, we will soon see what the economic potential of a non-bubble-fueled U.S. economy looks like. Economic data during the first half of 2011 will be positively affected by the extension of the Bush-era tax cuts and the suspension of the worker portion of the payroll tax. However, as with all temporary stimulus measures, the benefits are likely to be short-lived and less affective than anticipated. By the end of 2011, the U.S. economy will have to fly on its own power. Not all stimulus will be removed. It is unlikely that the Fed will engage in QE3, but it is unlikely to raise rates in 2011.

Long-term rates may not have far to rise in 2011. The recent rise of long-term rates is mostly a correction following a smaller than anticipated QE2 program and better growth outlook. Current long-term rates probably have GDP between 3.50% and 4.00% mostly built in. We could see a 4.00% 10-year note by the end of 2011, but maybe not much higher. If the economy cannot gain more traction, long-term rates could languish in the mid-3.00% area. In fact, Philadelphia Fed President Charles Plosser, who has been one of the more hawkish and optimistic Fed officials gave his 2011 estimate today. He forecasts that 2011 will be in the 3.00% to 3.50% area.

Fixed income investing in this environment is not that difficult, if one manages expectations. Ladder your portfolio. Resist swapping into “sexy” products or overweighting on the long end of the curve (or the short end of the curve). Invest new money on the belly of the curve (5-10 years) unless that runs counter to your goals, objectives or risk tolerances. TIPS are rich. The break even between 10-year TIPS and the 10-year treasury is 230 basis points. With inflation likely to be tamer than what the alarmists are predicting us TIPS only as hedging vehicle. Watch out for bubbles in very-low-rated bonds (low B and CCC) and a correction in investment grade industrials. Financials, insurance and, to a lesser extent, telecom offer the best values.

Investors should consider callable agency bonds, including step-ups. I also believe that corporate step-ups offer value, more than do LIBOR-based floaters. CPI corporate floaters may be a better option. Not because inflation is going to run, but because even modest increases in inflation will be greater than what occurs in three-month LIBOR (the typical benchmark for floaters) as it is joined at the hip with Fed Funds and the Fed is not budging in 2011. Not unless housing takes off, removing significant headwinds facing the economy, but that probably will not happen.

Until next year.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

[sumisu]

Fed expected to make big bond buy; what will impact be?

Updated 2h 31m ago By Paul Davidson, USA TODAY

http://www.usatoday.com/money/economy/2010-10-29-fed29_ST_N.htm?loc=interstitialskip

The Federal Reserve next week is expected to give the economy the equivalent of a B-12 shot.

But many economists question whether it will be enough to perk up a listless recovery. Others say it ultimately will lead to rampant inflation.

Based on its signals since August, the central bank Wednesday will likely announce a new round of government bond purchases to lower long-term interest rates and stimulate economic growth. It would be the Fed's most aggressive bid to rev up the economy since it bought $1.7 trillion in bonds starting in early 2009 in the financial crisis.

Two-thirds of 33 economists who provided an estimate to USA TODAY expect the Fed to buy $400 billion to $750 billion in Treasury notes or other assets. Many say the purchases will be made in the next six to eight months. Expectations that it might snap up $1 trillion or more have been dampened lately, though it's possible. The goal: drive up the prices of long-term bonds, which pushes down yields. That, in turn, pulls down rates on mortgages and other loans, spurring consumers to buy homes and cars, and businesses to invest and hire workers.

Speculation about the program in recent months already has driven up stocks and lowered interest rates. The yield on the 10-year Treasury bond fell from 2.86% on Aug. 9 — when the Fed first telegraphed its intentions — to as low as 2.38% before rising to 2.66% Thursday. The S&P 500-stock index is up 4.7%. There's a good chance rates won't move much more when the Fed announces the purchases unless it spends at least $1 trillion, says MF Global chief economist Jim O'Sullivan.

The Fed feels compelled to act because the upturn from the recession remains painfully slow. Unemployment is near 10%. Economists expect the government Friday to report that the economy grew 2% in the third quarter — not enough to keep the 9.6% jobless rate from rising. New York Fed President William Dudley last week called today's unemployment and too-low inflation "unacceptable." Fed Chairman Ben Bernanke said last month there appears "to be a case for further action."

Typically, the Fed sparks growth by trimming its benchmark short-term rate. But that's been near zero since the financial crisis. The Fed in early 2009 launched an unprecedented program — buying $1.42 trillion in mortgage-backed securities and related debt and $300 billion in Treasuries. Mortgage rates fell as much as a percentage point.

Back then, the Fed was pumping cash into markets frozen by fear. Now, both banks and corporations have gobs of cash. Yet, many homeowners don't qualify to refinance their mortgages — which would put more cash in their pockets — as their homes are worth less than their mortgages, says Paul Ashworth of Capital Economics. Businesses, he adds, "are too cautious to hire or invest."

Philadelphia Fed President Charles Plosser, a non-voting member of the Fed's policymaking committee, has said it's "difficult" to see how asset purchases will have much impact on employment.

But Mark Zandi, chief economist of Moody's Analytics says the Fed has little choice; the risk of slipping back into recession is "uncomfortably high."

Zandi estimates $500 billion in Treasury purchases would boost economic growth next year to 2.7% from 2.4%, create 250,000 jobs and trim unemployment by two-tenths of a percentage point. Brian Bethune of IHS Global Insight says it could have a bigger effect by raising investor confidence and pushing down the dollar, which boosts exports.

Some say the modest gain is not worth the risk of inflation. It will be tough for the Fed to raise interest rates to head off inflation as the economy heats up when banks are sitting on so much of the Fed's cheap money. Kansas City Fed President Thomas Hoenig last week said of the Fed's plan that "you are making a bargain, I'm afraid, with the devil."

While the Fed may well do what many expect on Wednesday, it could also:

•Adjust the size of the program. Zandi expects the Fed to leave the door open to further asset purchases if the economy doesn't pick up in six months and ultimately buy $1 trillion by mid- 2011. That could boost growth to 3% next year and cut the jobless rate by half a percentage point.

"If you're going to do something, do something big," Ashworth says.

Alternatively, the Fed could buy $100 billion of assets and decide whether to do more when it meets every six weeks. That would placate Fed inflation hawks and make it easier to shelve the program if the recovery heats up. O'Sullivan says it's unlikely: It would disappoint investors, who would sell bonds, lowering prices and raising rates.

•Signal low interest rates for a longer time. The Fed has indicated short-term rates likely would stay low "for an extended period" — a phrase widely interpreted to mean about six months. It could suggest rates would stay low even longer in a bid to further drive down Treasury yields. Bethune says it could instead drive up rates as investors anticipate inflation. Bernanke has said it could be difficult to convey the Fed's intent "with sufficient precision."

•Allow higher inflation. The Fed could signal it's prepared to let inflation exceed its target of 2% a year for a brief period since it's been so low. Higher inflation could spur consumer purchases on fears prices will soon rise and on lower real — or inflation-adjusted — interest rates. But Bethune says communicating that policy to the public would be tricky.

•Cut the interest rate on reserves banks hold at the Fed. This could prompt banks to use that money for lending instead to get a bigger return. But the rate is already quite low. Bernanke has said the effect would be "relatively small."

[sumisu]

Fed's Rosengren Warns Against Easing Too Slowly

Published: Thursday, 14 Oct 2010 | 4:04 PM ET

By: Reuters

http://www.cnbc.com/id/39674961

[sumisu]

Protecting Your IRA - Part 1: The Danger

Wednesday, July 28, 2010 – by Terry Coxon

Terry Coxon

http://www.thedailybell.com/1247/Terry-Coxon-Protecting-Your-IRA-Part-1-The-Danger.html

There is a worry that nags at many of the millions of American investors who look to their Individual Retirement Account as a source of retirement security. It keeps nagging because, while the worry is well founded, there is nothing obvious to do about it.

An IRA is a tax-free zone for accumulating wealth. Whether it is a traditional IRA (fed by deductible contributions) or a Roth IRA (withdrawals can be tax free), an IRA offers a big growth advantage -- earnings compound at a before-tax rate of return, so the value of your IRA grows faster. The result can be far more spendable cash waiting for you at retirement time.

There is now a robust political constituency supporting the generous tax treatment given to IRAs. One element is the 40 million people who have an IRA. A second element is the retail financial industry – banks, brokerage houses, mutual funds and insurance companies – for which those 40 million people add up to big business.

It's a cheery picture: amid the sea of high tax rates and punitive rules there lies an island of tax freedom protected by millions of voters and an army of well paid lobbyists. A tax haven for main street. The worry is that the haven is getting too big for its own good.

The Big Pinata

The total value of IRAs and other tax-favored retirement plans is now counted in the trillions of dollars. For revenue-hungry politicians, that looks like the Big Pinata. Will they make a grab for it?

Doing so would be a politically hazardous move, but the Government needs money, and the money has to come from somewhere. Here are some of the ways it might come from your IRA.

• Mandatory investing. The Government might require your IRA to invest some share of its assets (50%, for example) is U.S. Treasury securities. That would assure the Government a source of low-cost funding for its big deficits but would leave your IRA exposed to inflation or, in extremis, to a "restructuring" of Government debt.

• IRA bonds. Your IRA might be required to invest everything in special Treasury bonds issued for retirement plans only. This would be even worse, since the government would have a free hand to set a low, fixed interest rate and stick to it even when inflation is running wild.

• Green stocks and bonds. It's a political game, so if the politicians make a grab for your IRA, they might try to attract allies by including "green" investing as part of the package. Your IRA would be required to put part of its money into stocks and bonds issued by companies that have been officially designated as environmentally correct.

• Surtax on large IRAs. Congress once passed, and later rescinded, a 15% "excess retirement accumulations excise tax" on large retirement plans. Reviving that tax could bring the Government a lot of money.

• Integration with Social Security. The Government might reduce Social Security payments to people who are receiving distributions from an IRA.

At this point, every one of these worries is just a hypothetical. Don't be surprised if none of them ever becomes a fact. But don't be surprised if the government goes after retirement plans in some other way, something that we haven't yet thought of.

If we knew what new rules were coming, we could plan for them. But we don't. That's why the worry nags. The only way to protect your IRA from a possible future grab is to plan for the unknowable. And that's one of the many uses of a structure called an "Open Opportunity" IRA.

Open Opportunity

An ordinary IRA is sponsored by a financial institution – a bank, a mutual fund family, a stockbroker or an insurance company. Not surprisingly, it only allows you to use the investments or services the institution wants to promote. You do get the tax deferral that is at the heart of an IRA – a very good thing – but you don't get investment freedom. And the investments your IRA is permitted to buy are left in the hands of the IRA custodian the sponsoring institution has selected.

An Open Opportunity IRA changes all that. It doesn't just stretch the envelope of investment choices, it breaks out of it.

With an Open Opportunity IRA, the custodian you select holds just a single asset -the shares in a limited liability company (LLC) that you manage. You deal with the custodian just once, when you set up the structure and roll your IRA assets into it. From there on, you are in charge.

As Manager of your IRA's LLC, you open a bank account for the company wherever you want. The checkbook sits in your desk draw, and you are the only one who signs. You also can open a brokerage account for the LLC and give the buy and sell orders. But that's only the beginning of the possibilities. Acting as Manager of the IRA's LLC, you can:

• Buy gold coins and store them however you think fit – in safe deposit box at your local bank, in a Swiss depository or in a mayonnaise jar in the back of your refrigerator. You decide.

• Buy real estate, for appreciation or income

• Attend auctions and buy foreclosure property (as Manager of the LLC, you have full power to act quickly)

• Buy and rehabilitate dilapidated houses

• Buy tax liens for high yields

• Lend on well-secured second mortgages – another way to earn high yields

• Go into the equipment-leasing business

• Invest in intellectual property (copyrights, patents, software) and collect royalties

• Buy an apartment in Buenos Aires or a farm in New Zealand

• Own and earn royalties on patents, copyrights and other intellectual property

Because the LLC is inside your IRA, there are a few restrictions on what it can buy, but there aren't many. So the list here is just a list of examples.

Investment freedom (the fatter returns you can earn when your hands aren't tied) is a strong reason for rolling an ordinary IRA into an Open Opportunity IRA. In addition, making that move may be the best way to protect against any surprise change in the rules.

reedom and Protection

We don't know what the new rules might be, but we do know that out of 40 million IRA owners, only a few tens of thousands have an Open Opportunity IRA. Because this minority is so small, there is an excellent chance that the new rules would be written without considering how Open Opportunity IRAs might slip through.

And the new rules very probably would be aimed at harvesting easy-to-value, easy-to-sell liquid assets (stocks, bonds, cash), because that's the form of 99.9% of all wealth in IRAs. So your Open Opportunity IRA would have another survival advantage by owning difficult-to-value, difficult-to-sell, illiquid assets – such as real estate, equipment, tax liens and private loans.

There is a further safety advantage you can achieve with an Open Opportunity IRA. Regardless of the underlying investments, it is possible to ship all of your IRA's value to another country. I'll cover that topic in Part II – Getting Your IRA Out of Town.

[sumisu]

Prechter's Deadly Bearish Big Picture:

The 7-Year Crisis Cycle Explained

by Robert Prechter, President, Elliott Wave International | June 18, 2010

http://www.financialsense.com/Experts/ewave/2010/0618.html

[sumisu]

Dow Slumps 3.6%: "We Are On Schedule for a Very, Very Long Bear Market," Prechter Says

Posted May 20, 2010 05:12pm EDT by Aaron Task in Investing

http://finance.yahoo.com/tech-ticker/dow-slumps-3.6-%22we-are-on-schedule-for-a-very-very-long-bear-market%22-prechter-says-492864.html?tickers=^DJI,^GSPC,^IXIC,^RUT,^VIX,IWN,TLT

The global selloff in stocks accelerated Thursday, sending the Dow down 3.6% to 10,068 while the S&P 500 lost 3.9% to 1,071.59 and the Nasdaq shed 4.1% to 2,204.

All major U.S. averages are now down for the year and at least 10% below their 2010 highs, meaning the downturn has officially entered "correction" territory.

Unfortunately (for bulls), there's much more selling ahead, according to Robert Prechter, president of Elliott Wave International and author of Conquer the Crash.

"We should be in for [another] week or two of pretty serious selling," Prechter says. "They'll be bounces along the way...but I think this should last a long time. We should be on schedule for a very, very long bear market period."

In the near-term, the veteran market watcher predicts a "dramatic increase in volatility," beyond what's already occurred. The CBOE Volatility Index (VIX) rose another 30% today and is now up about 180% from its late April lows.

Notably, today's selling occurred despite a rally in the euro amid reports of central bank intervention. Joe Brusuelas of Brusuelas Analytics says, "The capitulation in today's market has more to do with the unwinding of the easy money [carry] trade on commodities," which fell again today, with notable weakness in energy and palladium.

Meanwhile, Treasury prices continued to benefit from the "risk aversion" trade with the yield on the benchmark 10-year note falling to 3.21%.

Broken Record or Market Sage?

Other than to say "a long way down," Prechter wouldn't say how much further he thinks the market will fall, suggesting a repeat of the 1930-32 scenario when "extremely sharp rallies" kept investors interested and "feeling like a bottom [was] forming."

Anyone familiar with Prechter knows he's been predicting doom for a long time so it's tempting to dismiss his latest warning -- a veritable repeat of what he said here in February. But he's not a perma-bear and did turn bullish ahead of the bottom in March 2009.

More dramatically, in 1978 he co-authored Elliott Wave Principle - Key To Market Behavior, which predicted a great bull market similar to the 1942-1966 rally. By his own admission, Prechter underestimated the extent of that historic rally, which ran from 1982-2000 and saw the Dow rise 1,500% from 777 to 11,723.

Prechter says the market has spent the past 10 years building a "major head and shoulders" top from those 2000 highs, even though they were exceeded in 2007. Ultimately, he expects a "corrective mode that's going to retrace virtually the entire" 1982-2000 bull market.

"The best place for most people to be is in cash" and equivalents, he says. "You want maximum liquidity until this thing blows over."

Editor's note: We did NOT interview Prechter because the market was tumbling; today's appearance was scheduled earlier this week. Sometimes it's better to be lucky than good...

[sumisu]

Dollar Free Ride

by RYAN J. PUPLAVA, CMT | march 29, 2010

http://www.financialsense.com/Market/wrapup.htm

The U.S. dollar has enjoyed a free ride since Europe’s economic troubles with Greece. Sovereign debt downgrades had encouraged assets to begin leaving the European region causing the euro to drop. The euro zone’s current account balance fell pretty strongly in January. The balance fell to a deficit of 16.7 billion euros (unadjusted) from a revised 9.8 billion euro surplus in December. Representing 57.6% of the U.S. dollar index, the euro has helped cause the U.S. dollar index to rise from 74 in December 2009 to a high last Thursday at 82.24. This represents a retracement of 50% of the U.S. dollar’s drop since March 2009.



Greece’s budget deficit had reached 12.7 percent of gross domestic product in 2009 according to Bloomberg. With a number of downgrades on Greece’s debt rating, Greek bonds risked losing their eligibility as collateral at the European Central bank (ECB). Credit default swaps began rising to crisis levels and predatory funds began seeking other prey in Portugal, Italy, and Spain.

Credit Default Swaps

Source: Bloomberg

Last week, European leaders agreed to a proposal that would mix loans from the International Monetary Fund and loans from each euro-region country based on its stake in the ECB. Most of the loans would come from Europe. The proposal is only to act as a last resort should Greece run out of capital raising options.

Today, Greece offered seven-year bonds at a yield nearly five times the premium of similar Spanish bonds. The bond issuance would raise 5 billion euros. According to a Bloomberg article, Greece “must raise 53 billion euros this year, 15.5 billion euros of it by the end of May”. Greece’s ability to finance its funding needs throughout the rest of the year may still weigh in the balance, but the IMF and ECB backing is a step in the right direction to shore up financial stability in Europe.

The U.S. dollar’s rise is namely a euro phenomenon

If you look at the U.S. dollar’s other relationships, the rally loses less of its significance. Since the U.S. dollar index began rising in December, the U.S. dollar has been relatively flat versus the Japanese Yen (13.6 percent of the dollar index).



Over the same time period, the U.S. dollar has lost 3.4 percent of its value versus the Canadian dollar (9.1 percent of the dollar index).



Looking at another commodity-led currency like the Australian dollar, we can see that the Australian dollar has also been flat versus the U.S. dollar since December 2009. A flat Australian dollar is no small thing after rising nearly 50% versus the U.S. dollar since March 2009.



With credit defaults swaps falling in Europe and Greece shoring up its funding needs, the rally in the U.S. dollar index may be nearing a top for the time being. One of the first signs I look for in a reversal is a divergence between the Relative Strength Index (RSI) and price. Divergence occurs when price reaches a new low or high but the RSI does not. Looking at the U.S. dollar index, I can see some bearish divergence between peaks in the RSI during February versus now. Another warning sign of a possible trend change I like to look for is whether price can reach trend channel extremes. We can see here that the dollar looks to be reversing short-term without reaching the top of the trend channel.



Elliott Wave analysis is another form of charting that can help see the forest for the trees. Generally, the direction the market wants to move unfolds in 5-wave sequences (3 actionary waves in the direction of the trend divided by two corrections). Since the U.S. dollar index has risen to a new high in March, we can tell that the current move in the dollar has established at least 5 waves. There’s a possibility for an extension (like last year’s move in the dollar down) but that typically only happens in rare occasions of intense momentum. Once a motive mode finishes (five waves in a relative direction) then a corrective mode sets in. If wave 5 has topped here, then the U.S. dollar could be looking at a corrective mode straight ahead.



There are a number of “green lights” on the U.S. dollar that still hold bullish conditions that remain until broken. As each indicator reverses, a trend reversal will be made more credible.

*The bullish trend channel is intact since December

*The RSI is in a bullish shift until it caps at 60 and confirms a reversal with a break below 40

*The 13 versus the 34 exponential moving averages have not crossed into a sale yet

*The 50-day smooth moving average is rising below price

*The 200-day average is now rising

*MACD is positive

While the dollar has rallied in the past four months, it is largely a euro phenomenon. That phenomenon is based on a sovereign debt crisis concerning Greece’s ability to refinance its debt. For now, that crisis is beginning to wane as credit default swaps have dropped since February 4th, but Greece has a long road up ahead to refinance 53 billion euros in debt. It would be a good idea to continue watching Greece’s debt issuance throughout the year and the resulting effects on the U.S. dollar index if you’re invested in dollar denominated commodities, such as gold, that tend to fall when the U.S. dollar is rising.

Ryan Puplava, cmt
Registered Representative

Copyright © 2010 All rights reserved.

[sumisu]

U.S. Government Debt, U.S. Budget Deficit & Analog Swing Charts of the S&P Composite

BY ron Griess | march 23, 2010

http://www.financialsense.com/Market/griess/2010/0323.html

The following chart shows Gross Federal Debt and the "Debt Ceiling" at the end of February, 2010.



The following chart shows Gross Federal Debt and its 1 year, 5 years and 10 years rate of growth. The February, 2010 rates of growth are: 1 year - 14.37%, 5 years - 10.03% and 10 years - 8.05%.



The following chart shows Gross Federal Debt as a percentage of Nominal GDP.



The following chart shows the U.S. Federal Budget deficit at the end of February, 2010.



The following chart shows the U.S. Federal Budget deficit as a percentage of Nominal GDP. Using annual statistics, the record deficit was 13.00% in 1945. Using quarterly statistics, the previous record was 6.57% for the 3rd quarter of 1975.



We have drawn weekly charts of five previous market bottoms and overlaid each with the market bottom of the week ended March 6, 2009.

1938 and 2009



1942 and 2009



1974 and 2009



1982 and 2009



2003 and 2009



Ron Griess


Copyright © 2010 All rights reserved.

contact information

Ronald L. Griess | The Chart Store, Inc. | 235 South Adams Street, Westmont, IL 60559
Direct 630-663-9059 | Toll Free 800-245-0571

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A Brief Market Update

BY TIM W. WOOD | january 29, 2010

http://www.financialsense.com/Market/wood/2010/0129.html

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Yield Curve Steepest Since 1980; Hard Times Ahead in 2010

BY MIKE SHEDLOCK | december 10, 2009

http://www.financialsense.com/Market/wrapup.htm

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A Brief Update on Equities and Gold

BY TIM W. WOOD | october 23, 2009

http://www.financialsense.com/Market/wrapup.htm

The bullish Dow theory trend change that occurred in association with the advance out of the March 2009 low still remains intact. Cyclically, the advance out of the March low also still remains intact. Intermediate-term, equities are overbought and I do see weakness on the horizon. The key to this materializing will be the downturn of my intermediate-term Cycle Turn Indicator.

Longer-term, my research continues to tell me that this is still a bear market rally within the context of a much longer-term secular bear market. Robert Rhea, the great Dow theorist of the 1930’s wrote:

“Bear markets seem to be divided into three phases: the first being the abandonment of hopes upon which the final uprush of the preceding bull market was predicted; the second, the reflection of decreased earnings power and reduction of dividends, and the third representing distressed liquidation of securities which must be sold to meet living expenses. Each of these phases seems to be divided by a secondary reaction which is often erroneously assumed to be the beginning of a bull market.”

From a Dow theory perspective, I continue to view this as the rally separating Phase I from Phase II of what should ultimately prove to be a very long and very ugly secular bear market. I totally realize that this may be a difficult concept to grasp, but this comes as no surprise to me. In 1929 the Phase I decline carried the market down into the November 1929 low. From that low the market rallied into April 1930. As I read the writings of that period it is obvious that they too found it hard to believe and the politicians of the day tried desperately to convince the masses, and probably themselves, that the bear market was over. But, in spite of the efforts to hold things together and in spite of the propaganda spread by the politicians of the day, the bear market resumed and ultimately found its low after an additional 86% decline into the Phase III low in 1932.

During the secular bear market of 1966 to 1974 the Dow theory warned that the rallies into the 1968 and 1973 highs were bear market rallies. Yet, few believed this and again the politicians and media tried to convince the world that the decline was over. Ultimately, the secular bear had his way and the final Phase III low came in December 1974 after a 46.58% decline from a new recovery high in January 1973. It was at the December 1974 low that Richard Russell announced in his December 20, 1974 Special Report that “We are finally in the zone of Great Value.” It was then in Mr. Russell’s January 24, 1975 letter that he gave the hurdles that had to be bettered in order for Dow theory to confirm a primary trend change. The benchmarks were then bettered on January 27, 1975 and in Mr. Russell’s February 5, 1975 issue he made the official call of the Dow theory bullish primary trend change.

The key to Mr. Russell properly calling this low, from my eyes, was that in spite of the propaganda and erroneous media reports throughout that period, Mr. Russell understood the Dow theory, and more importantly the phasing and value aspects of Dow theory. As a result, he was able to navigate that great bear market and to recognize the bear market bottom when it appeared. The same disciplined approach was used by George Schaefer during the 1950’s and 60’s to navigate that great bull market. Before that, Robert Rhea used the Dow theory to call the 1932 bear market bottom and William Peter Hamilton before that to call the 1929 top in his famous editorial in the Wall Street Journal titled “A Turn In The Tide." My point here is that Dow theory can guide us this time around as well if we have the ears to listen to what it’s telling us.

I have discussed the phasing of this bear market with Mr. Russell. I explained to him that based on my read of the Dow theory that the March 2009 low appears to have only marked the Phase I low and that the ongoing rally should ultimately prove to separate the Phase I from Phase II of the ongoing secular bear market. Mr. Russell agreed with my assessment at that time and to date I’m not aware of anything that has changed this assessment.

From a value perspective, history shows that the dividend yield and the P/E will be roughly at par at true bear market bottoms. As an example, I show that the yield on the S&P at the 1932 low was 10.5 with a P/E just under 10. At the 1942 low the yield was 8.71 with a P/E of 7.3. At the 1974 bear market bottom I show the yield on the S&P to have been at 5.9 with a P/E of 7.24. Even at the 1982 low the yield was 6.2 with a P/E of 6.9. At the March 2009 low I show the yield on the S&P to have been at 3.58 with a P/E of 24, which has historically been considered overvalued. At present, I show the yield on the S&P to be 1.99 with a P/E of 144.83. Yes, that is right. The current P/E, based on Generally Accepted Accounting Principle, is one hundred forty four. The historical P/E ratios at the previous lows were also calculated using Generally Accepted Accounting Principles, so these numbers are consistent. If you are seeing any other number showing much lower P/E’s it is because it is a George Orwellian phony bologna calculation. If the S&P were to trade with a GAAP P/E of 20, which has historically been considered overvalued, it would be at 150. If the S&P were to trade with a P/E of 15, which has historically been considered to be fair value, it would trade at 113. My point here is that at the March low the P/E and the yield were no where near par and thus the market did not reach levels in which true secular bear market bottoms are made. Plus, with the spread between the current P/E and the yield at an historic 142, the market is grossly overvalued. This will ultimately be corrected with the Phase II and Phase III declines. If you have not read my article on Bull and Bear market phasing I urge you to read the August 14th Market Observation.

As for gold, I reported here in the October 9th Market Observation that gold was in uncharted waters and that I believed that the 9-year cycle was stretching. In light of the recent advance above the March 2008 high, which marked the 9-year cycle top, current developments suggest that perhaps the 9-year cycle is not stretching and that perhaps it did bottom in October 2008. If so, we truly are in uncharted waters. As of this writing, gold remains positive as the bear market rally separating Phasing I from Phase II of the ongoing secular bear market continues.

Tim W. Wood

Copyright © 2009 All rights reserved.

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Fidelity Select Wireless (FWRLX)

The investment seeks capital appreciation. The fund normally invests at least 80% of assets in securities of companies principally engaged in activities relating to wireless communications services or products. It may invest in securities of foreign issuers and may invest a significant percentage of assets in a single issuer. The fund is nondiversified. [overview from MSN]

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Fidelity Select Utilities Portfolio (FSUTX)

The investment seeks capital appreciation. The fund normally invests at least 80% of assets in securities of companies principally engaged in the utilities industry and companies deriving a majority of their revenues from their utility operations. It may invest in securities of foreign issuers and may invest a significant percentage of assets in a single issuer. The fund is nondiversified. [overview from MSN]

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Fidelity Select Transportation (FSRFX)

The investment seeks capital appreciation. The fund normally invests at least 80% of assets in securities of companies principally engaged in providing transportation services or companies principally engaged in the design, manufacture, distribution, or sale of transportation equipment. It may invest in securities of foreign issuers. The fund is nondiversified. [overview from MSN]

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Fidelity Select Telecommunications (FSTCX)

The investment seeks capital appreciation. The fund normally invests at least 80% of assets in securities of companies principally engaged in the development, manufacture, or sale of communications services or communications equipment. It may invest in securities of foreign issuers and may invest a significant percentage of assets in a single issuer. The fund is nondiversified. [overview from MSN]

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Fidelity Select Technology (FSPTX)

The investment seeks capital appreciation. The fund normally invests at least 80% of assets in securities of companies principally engaged in offering, using, or developing products, processes, or services that will provide or will benefit significantly from technological advances and improvements. It may invest in securities of foreign issuers. The fund is nondiversified. [overview from MSN]

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Fidelity Select Software & Comp (FSCSX)

The investment seeks capital appreciation. The fund normally invests at least 80% of assets in securities of companies principally engaged in research, design, production, or distribution of products or processes that relate to software or information-based services. It may invest in securities of foreign issuers and may invest a significant percentage of assets in a single issuer. The fund is nondiversified. [overview from MSN]

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Fidelity Select Retailing (FSRPX)

The investment seeks capital appreciation. The fund normally invests at least 80% of assets in securities of companies principally engaged in merchandising finished goods and services primarily to individual consumers. It may invest in securities of foreign issuers and may invest a significant percentage of assets in a single issuer. The fund is nondiversified. [overview from MSN]

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Fidelity Select Pharmaceuticals (FPHAX)

The investment seeks capital appreciation. The fund normally invests at least 80% of assets in securities of companies principally engaged in the research, development, manufacture, sale, or distribution of pharmaceuticals and drugs of all types. These companies may include, pharmaceutical companies and other companies involved in the research, development, manufacture, sale, or distribution of drugs, including companies that facilitate the testing or regulatory approval of drugs. It may invest in securities of foreign issuers. The fund is nondiversified. [overview from MSN]

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Fidelity Select Paper & Forest Prod (FSPFX)

The investment seeks capital appreciation. The fund invests at least 80% of assets in securities of companies principally engaged in the manufacture, research, sale, or distribution of paper products, packaging products, building materials (such as lumber and paneling products), and other products related to the paper and forest products industry. It may invest in securities of foreign issuers. The fund is nondiversified. [overview from MSN]

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Fidelity Select Network & Infrastructure (FNINX)

The investment seeks capital appreciation. The fund normally invests at least 80% of assets in securities of companies principally engaged in the development, manufacture, sale, or distribution of products, services, or technologies that support the flow of electronic information, including voice, data, images, and commercial transactions. It may invest in securities of foreign issuers. The fund is nondiversified. [overview from MSN]

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Fidelity Select Natural Resources (FNARX)

The investment seeks capital appreciation. The fund normally invests at least 80% of assets in securities of companies principally engaged in owning or developing natural resources, or supplying goods and services to such companies, and in precious metals. Natural resources include precious metals, ferrous and nonferrous metals, strategic metals, hydrocarbons, chemicals, paper and forest products, real estate, food, textile and tobacco products, and other basic commodities. It may invest in securities of foreign issuers. The fund is nondiversified. [overview from MSN]

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Fidelity Select Natural Gas (FSNGX)

The investment seeks capital appreciation. The fund normally invests at least 80% of assets in securities of companies principally engaged in the production, transmission, and distribution of natural gas, and involved in the exploration of potential natural gas sources, as well as those companies that provide services and equipment to natural gas producers, refineries, cogeneration facilities, converters, and distributors. It may invest in securities of foreign issuers. The fund is nondiversified. [overview from MSN[

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Fidelity Select Multimedia (FBMPX)

The investment seeks capital appreciation. The fund normally invests at least 80% of assets in securities of companies principally engaged in the development, production, sale, and distribution of goods or services used in the broadcast and media industries. It may invest in securities of foreign issuers and may invest a significant percentage of assets in a single issuer. The fund is nondiversified.

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Fidelity Select Medical Equip & Systems (FSMEX)

The investment seeks capital appreciation. The fund normally invests at least 80% of assets in securities of companies principally engaged in research, development, manufacture, distribution, supply, or sale of medical equipment and devices and related technologies. It may invest in securities of foreign issuers and may invest a significant percentage of assets in a single issuer. The fund is nondiversified. [overview from MSN]

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Fidelity Select Medical Delivery (FSHCX)

The investment seeks capital appreciation. The fund normally invests at least 80% of assets in securities of companies principally engaged in the ownership or management of hospitals, nursing homes, health maintenance organizations, and other companies specializing in the delivery of health care services. It may invest in securities of foreign issuers. The fund is nondiversified. [overview from MSN]

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Fidelity Select Materials (FSDPX)

The investment seeks capital appreciation. The fund normally invests at least 80% of assets in securities of companies principally engaged in the manufacture, mining, processing, or distribution of raw materials and intermediate goods. These materials and goods may include, for example, chemicals, metals, textiles, wood products, cement, and gypsum. It may invest in securities of foreign issuers. The fund is nondiversified.

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Fidelity Select Leisure (FDLSX)

The investment seeks capital appreciation. The fund normally invests at least 80% of assets in securities of companies principally engaged in the design, production, or distribution of goods or services in the leisure industries. It may invest in securities of foreign issuers and may invest a significant percentage of assets in a single issuer. The fund is nondiversified. [overview from MSN]

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Fidelity Select IT Services (FBSOX)

The investment seeks capital appreciation. The fund normally invests at least 80% of assets in securities of securities of companies principally engaged in providing information technology services. These companies may include those that provide data processing, consulting, outsourcing, temporary employment, market research or database services, printing, advertising, computer programming, credit reporting, claims collection, mailing, and photocopying, typically on a contractual or fee basis. It may invest in securities of foreign issuers. The fund is nondiversified. [overview from MSN]

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Fidelity Select Insurance (FSPCX)

The investment seeks capital appreciation. The fund normally invests at least 80% of assets securities of companies principally engaged in underwriting, reinsuring, selling, distributing, or placing of property and casualty, life, or health insurance. It may invest in securities of foreign issuers. The fund is nondiversified. [overview from MSN]

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Fidelity Select Industrials (FCYIX)

The investment seeks capital appreciation. The fund normally invests at least 80% of assets in securities of companies principally engaged in the research, development, manufacture, distribution, supply, or sale of materials, equipment, products, or services related to cyclical industries. These companies may include companies in the automotive, chemical, construction and housing, defense and aerospace, environmental, industrial equipment and materials, and transportation industries. It may invest in securities of foreign issuers. The fund is nondiversified. [overview from MSN]

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Fidelity Select Industrial Equipment (FSCGX)

The investment seeks capital appreciation. The fund normally invests at least 80% of assets in securities of companies principally engaged in the manufacture, distribution, or service of products and equipment for the industrial sector, including integrated producers of capital equipment, parts suppliers, and subcontractors. It may invest in securities of foreign issuers. The fund is nondiversified. [overview from MSN]

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Fidelity Select Home Finance (FSVLX)

The investment seeks capital appreciation. The fund invests at least 80% of assets in securities of companies principally engaged in providing mortgages and other consumer loans and related services associated with home finance. These companies may include, for example, mortgage banking companies, real estate investment trusts, government-sponsored enterprises, consumer finance companies, savings and loan associations, savings banks, building and loan associations, cooperative banks, commercial banks, and other depository institutions. It may invest in securities of foreign issuers. [overview from MSN]

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Fidelity Select Health Care (FSPHX)

The investment seeks capital appreciation. The fund invests at least 80% of assets in securities of companies principally engaged in the design, manufacture, or sale of products or services used for or in connection with health care or medicine. It may invest in securities of foreign issuers. The fund is nondiversified.[overview from MSN]

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Fidelity Select Gold (FSAGX)

The investment seeks capital appreciation. The fund normally invests at least 80% of assets in securities of companies principally engaged in gold-related activities, and in gold bullion or coins. Gold-related activities may include exploration, mining, processing, or dealing in gold, or the manufacture or distribution of gold products such as jewelry, watches, and gold foil and leaf. It may invest in securities of foreign issuers. The fund is non-diversified. [overview from MSN]

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Fidelity Select Financial Services (FIDSX)

The investment seeks capital appreciation. The fund normally invests at least 80% of assets in securities of companies principally engaged in providing financial services to consumers and industry. These companies may include commercial banks, savings and loan associations, brokerage companies, insurance companies, real estate-related companies, leasing companies, and consumer and industrial finance companies. It may invest in securities of foreign issuers. [overview from MSN]

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Fidelity Select Environmental (FSLEX)

The investment seeks capital appreciation. The fund normally invests at least 80% of assets in securities of companies principally engaged in the research, development, manufacture, or distribution of products, processes, or services related to waste management, pollution control or reduction, conservation, improving the environment or other environmental concerns. It may invest in securities of foreign issuers. The fund is nondiversified. [overview from MSN]

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Fidelity Select Energy Service (FSESX)

The investment seeks capital appreciation. The fund invests at least 80% of assets in securities of companies principally engaged in the energy service field, including those that provide services and equipment to the conventional areas of oil, gas, electricity, and coal, and newer sources of energy such as nuclear, geothermal, oil shale, and solar power. It may invest in securities of foreign issuers. The fund is nondiversified. [overview from MSN]

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Fidelity Select Energy (FSENX)

The investment seeks capital appreciation. The fund normally invests at least 80% of assets in securities of companies principally engaged in the energy field, including the conventional areas of oil, gas, electricity, and coal, and newer sources of energy such as nuclear, geothermal, oil shale, and solar power. It may invest in securities of foreign issuers. The fund is nondiversified. [overview from MSN]

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Fidelity Select Electronics (FSELX)

The investment seeks capital appreciation. The fund normally invests at least 80% of assets in securities of companies principally engaged in the design, manufacture, or sale of electronic components; equipment vendors to electronic component manufacturers; electronic component distributors; and electronic instruments and electronic systems vendors. It may invest in securities of foreign issuers. The fund is non-diversified. [overview from MSN]

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Fidelity Select Defense & Aerospace (FSDAX)

The investment seeks capital appreciation. The fund normally invests at least 80% of assets in securities of companies principally engaged in the research, manufacture, or sale of products or services related to the defense or aerospace industries. It may invest in securities of foreign issuers. The fund is nondiversified. [overview from MSN]

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Fidelity Select Consumer Staples (FDFAX)

The investment seeks capital appreciation. The fund invests at least 80% of assets in securities of companies principally engaged in the manufacture, sale, or distribution of consumer staples. It may invest in securities of foreign issuers. The fund is nondiversified. [overview from MSN]

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Fidelity Select Consumer Discretionary (FSCPX)

The investment seeks capital appreciation. The fund normally invests at least 80% of assets in securities of companies principally engaged in the research, development, manufacture, distribution, supply, or sale of industrial products, services, or equipment. It may invest in securities of foreign issuers. The fund is nondiversified. [overview from MSN]

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Fidelity Select Construction & Housing (FSHOX)

The investment seeks capital appreciation. The fund normally invests at least 80% of assets in securities of companies principally engaged in the design and construction of residential, commercial, industrial and public works facilities, as well as companies engaged in the manufacture, supply, distribution, or sale of construction and housing products or services. It may invest in securities of foreign issuers. The fund is nondiversified. [overview from MSN]

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Fidelity Select Computers (FDCPX)

The investment seeks capital appreciation. The fund normally invests at least 80% of assets in securities of companies principally engaged in research, design, development, manufacture, or distribution of products, processes, or services that relate to currently available or experimental hardware technology within the computer industry. It may invest in securities of foreign issuers. The fund is nondiversified. [overiew from MSN]

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Fidelity Select Communications Equip (FSDCX)

The investment seeks capital appreciation. The fund invests at least 80% of assets in securities of companies principally engaged in the development, manufacture, or sale of communications equipment. Emerging communications are those which derive from new technologies or new applications of existing technologies. It places less emphasis on traditional communications companies such as traditional telephone utilities and large long distance carriers. The fund may invest in securities of foreign issuers. It is nondiversified. [overview from MSN]

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Fidelity Select Chemicals (FSCHX)

The investment seeks capital appreciation. The fund normally invests at least 80% of assets in securities of companies principally engaged in the research, development, manufacture, or marketing of products or services related to the chemical process industries. These companies may include companies involved with products such as basic and intermediate organic and inorganic chemicals, plastics, synthetic fibers, fertilizers, industrial gases, flavorings, fragrances, biological materials, catalysts, carriers, additives, and process aids. It may invest in securities of foreign issuers. The fund is nondiversified. [overview from MSN]

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Fidelity Select Brokerage & Investment (FSLBX)

The investment seeks capital appreciation. The fund normally invests at least 80% of assets in securities of companies principally engaged in stock brokerage, commodity brokerage, investment banking, tax-advantaged investment or investment sales, investment management, or related investment advisory services. It may invest in securities of foreign issuers. The fund is nondiversified. [overview from MSN]

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Fidelity Select Biotechnology (FBIOX)

The investment seeks capital appreciation. The fund normally invests at least 80% of assets in securities of companies principally engaged in the research, development, manufacture, and distribution of various biotechnological products, services, and processes and companies that benefit significantly from scientific and technological advances in biotechnology. These companies may include, companies involved in the research, development, or production of pharmaceuticals, including veterinary drugs. It may invest in securities of foreign issuers. The fund is nondiversified. [profile from Yahoo]