oil tycoon T. Boone Pickens updates

Many traders have been wondering about oil tycoon T. Boone Pickens. For the past six month's he's been making crude calls that have been some of the worst calls made this year. A trader sent me this:

Reuters
Pickens funds down about $1 billion this year: report
Wednesday September 24, 7:14 am ET

(Reuters) - Texas oil magnate T. Boone Pickens' hedge funds have lost around $1 billion this year, including $270 million of personal losses, The Wall Street Journal said.

One fund focused on energy stocks was down almost 30 percent through August, the paper said adding that a smaller commodity-focused fund is down 84 percent.

"It's my toughest run in 10 years," the paper quoted Pickens as saying.

Key levels updates

We had our largest ever bank failure in U.S. history go down tonight and the story has been completely ignored by the markets... clearly the markets are focused on this bailout fiasco and will be paralyzed and panicked until it's either passed or we find out what the actual details of the plan are. If we go through the trade day this morning and throughout tomorrow without any kind of comfort from DC the markets could be a mess.

From the AP wires:

NEW YORK - JPMorgan Chase & Co. Inc. came to the rescue of Washington Mutual Inc. Thursday, buying the thrift's banking assets after WaMu was seized by the Federal Deposit Insurance Corp. in the largest failure ever of a U.S. bank. This is the second time in six months that JPMorgan Chase has taken over a major financial institution crippled by bad bets in the mortgage market.

The deal will cost JPMorgan Chase $1.9 billion, and the bank said in a statement it planned to write down WaMu's loan portfolio by approximately $31 billion. JPMorgan Chase, which acquired Bear Stearns Cos. last March, also said it would sell $8 billion in common stock to raise its capital position.

Here the key levels. Keep in mind when I'm posting these and that any piece of news or rumor could totally change the ballgame.

Key downside levels:

1.4621
1.4602
1.4574
1.4552
1.4528

Key upside levels:

1.4689
1.4721
1.4755
1.4784
1.4815

I wanted to add that I'm not buying the USD. I will not short the euro. I've bought the dips today and this evening and will stick to that game plan for now. All of these events happening are very bad for the USD and if the market does as it should do we should expect to see the USD sold-off.

Trade Team Update

Well it looks like we've ended the day exactly where we started yesterday... the euro's in the same spot, there's no bailout bill passed, the market's continue to panic and speculate, and the erratic moves continue across the board in all markets.

As far as the bailout plan goes, it appears as if congress has made some progress on the fundamental aspect of the plan but it seems clear the Republicans are not sold will drag this process out.

That may have more to do with the fact Republican voters are pressuring their legislators much more than Democrat voters. This makes sense because of the Republican view on government intervention, but the longer this painful process keeps the markets in limbo, the longer it's going to take to return to order.

There's very little concensus on exactly how the bill will affect the markets, especially the EUR/USD because we don't really know the details of the plan and the argument for it being USD+ or USD- can be made. There just happens to be a much better argument on the USD- side when you take the situation as a whole in light of the U.S. fundamental landscape.

Speaking of fundamentals, the data continues to prove my view that the fundamentals of the USD are getting worse, not better. New Home Sales fell to their worst levels in 17-years. The average new home price fell in August by 11.8% to $263,900. That was the biggest one-month drop on record. The median home price was down 5.5% to $221,900. These kind of numbers are pointing to a possible negative print on the next GDP...

Here's what I would really like to know... with home prices continuing to fall and inventories continuing to rise, how in the world can the Fed and Treasury properly price the mortgage-backed securities they intend on purchasing from the banks?

Under the plan as we know it, the market will not get an opportunity to price the mortgage assets, the Fed will do this and then attempt to sell the assets back to the market for a profit. I believe this plan can be done but what I do not understand is how these assets can be valued when the physical asset that is supposed to give the paper its value is declining every 30-days?

I just don't believe an asset can be price-fixed by the government nor can the asset be properly valued while the product that is giving that asset its worth or lack thereof is unstable and is on a downward trend.

There is no bottom in housing and I see no signs of a bottom. Unless I've missed it or I'm completely off in left field, I just cannot understand how these banks, the government, and potential buyers can value a mortgage security whose worth is based on the health of the housing market and the prices of homes.

And that really gets to the bottom of why I do not believe the plan, as we know it, is actually going to solve any problems in the housing market. It's not going to stop foreclosures, it won't stop home prices from plunging and inventories from staying at elevated levels.

Credit markets are siezed up and there won't be much relief there. Every morning the central banks are injecting liquidity to ease LIBOR and to keep credit flowing. I'm not convinced this bailout will solve those issues either because in my view, it all still goes back to the housing market issue in the U.S.

U.S. and Europe:

At this point I don't believe we'll have the bailout bill passed tomorrow. Just a few moments ago this came over the wires:

Sen. Shelby says that he does not believe there is an agreement, still opposed to the bailout 9/25/2008 5:00:26 PM

The fight will go on as these legislators juggle the political pressures, constituent pressures, and pressures from Wall St. and the other central banks.

Europe needs this bailout just as bad as the U.S. does. A few days ago I told you the big European banks came crawling to Paulson to get a piece of the bailout money. Well, now we find out that European banks are leveraged as much as 50 times.

There is a catastrophic meltdown waiting to happen within the European banking system. I made this call at least three months ago and I'm sticking to it because I do not believe every single overleveraged European bank can escape unharmed.

If Europe doesn't get a piece of this taxpayer money they better have a clever Plan B. Fundamentally, I'm calling the Eurozone in recession. Europe's overall growth situation has been plunging too far to the downside and the challenges moving forward are mounting, especially as the fundamental landscape of the U.S. continues to crumble

The Eurozone has contracted for four straight months now. Compared to the U.S., Europe does not have a total disaster in the housing market, but there are certain sectors within EU countries like Ireland and Spain where the housing bubble has burst and they are suffering many of the same affects seen in the U.S. housing market. It's a very bad situation in certain pockets of Europe but gets little media attention because of the mess across the Atlantic.

Growth, production, and manufacturing are all falling at there fastest levels in Europe in over five years. GDP may print negative for Q3 and Q4. There's growing pressure on Trichet to cut rates immediately. Add in the high probability of a large European bank failure and you have your recipe for why the euro can't gain any real traction against the dollar.

Today's Initial Claims printed well below market expecations and further show the jobs market is in recession and will keep shedding jobs throughout the rest of 2008. I believe we'll end up having twelve straight months of negative growth and the unemployment rate should rise to over 6.2% in the near-term.

If the credit and money markets do not accomodate the business and corporate and manufacturing sectors, companies will be forced to layoff employees in order to fight for their lives.

Employees will be the first to go in order to cut costs and reduce benefits. There may be wage pressure as employees will seek higher wages to pay for elevated food, fuel, mortgage, and general living costs.

If these issues with credit, housing, employment, and the consumer persist even just a few more weeks I think that could spoil this year's holiday spending season. I think we could see anywhere from an 8% to 10% decline in holiday spending in the U.S. A decline of that magnitude would put serious pressure on the economy and the USD.

Bottomline is, there's a lot of really bad crap that could go down between now and the end of the year. This is going to make trading very complicated and stressful. I'm not into the doom and gloom stuff, but these are real issues happening in the U.S. and Europe and I think we need to be aware of what's happening.

EUR/USD:

The only big data we get tomorrow is the Michigan Sentiment which should print USD-. Tomorrow could very well be chaotic. It's the end of the week and the end of the last full week of trading in September. Add the drama with the bailout plan and the panic on Wall St. and we're likely in for more volatility between now and market close.

I think the euro took a hit on some profit taking that started around the 1.4730 level. Gold had a rough day and crude didn't do much to support the euro.

Even though the euro continues to get rejected on the topside, I still do not feel comfortable buying dollars right now and would rather take my risks buying the euro on the dips. If we can stay supported above the 1.4660 level I believe we can make a run to the 1.4850 level. On the downside it's important that the euro maintain support above the 1.4545 level.

Speaking of risks, that's exactly what this market is right now -- a giant risk. Putting a penny into this market under these conditions is basically a gamble... you're playing scratch-off's at the 7-11...

Some traders have been mentally abused by this market. I don't really see conditions getting any better or more normal any time soon. Reason being is because the herd still needs to be thinned.

The global money-markets are highly overleveraged and their equity has run dry and it's time for a worldwide margin call. The traders that are not overleveraged are the ones learning a priceless lesson that will result in good profits once conditions stabilize.

Things will get back to normal. This is not the Great Depression Part II. But I tihnk the markets still need to purge themselves. The unproductive are the ones that get zapped from the market... those banks that were leveraged 40 times and were upside down on their assets couldn't anymore. They were unproductive because their hands were tied, their accounts were tanking, and their ability to produce was taken away from them.

So I think in order for markets to find equilibrium the herd will need to be thinned even further. This afternoon a broker sent an email promoting some thing where you could open a mini account with as little as $25.

There's nothing wrong with a $25 mini account if that's your risk tolerance, but the advertisement looked desperate to me. I'm sure FX brokers would like to fill the herd right about now...

If you're taking the risks of trading this market use smart risk management because things could change at any moment based on a piece of news, a rumor, or an announcement.

I will not buy the USD at all. I'm not ruling out downside testing but if I take a trade, I will buy the euro because I think we can go back up to the 1.4800+ level and it's possible to do it tomorrow as long as market conditions are working as they should.

I will try to post some key levels later. Be smart going into the weekend. If the bailout bill isn't passed on Friday it could be passed over the weekend and cause chaos on Sunday. Something has to get done and has to get done soon.

Expect the unexpected.

Trade Team Update

As the debate in DC and the panic on Wall St. rages, all markets have basically come to a grinding halt today. Volumes on global exchanges are near non-existent and the liquidity within the FX market is at severely diminished levels.

Bailout:

Overall, I do not think today's testimony did much to comfort the legislators who are under pressure from their constituents to tell the Fed and Treasury to screw off while trying to manage the pressure Bernanke and Paulson are putting them under to get this bill passed ASAP.

This may just be political grand-standing, but I get the sense that DC lawmakers are not sold on the main facets of the plan and this is why almost every lawmaker asks the same questions:

1. Why does it have to be $700 billion?
2. Why does the Treasury have to buy toxic assets at prices higher than the true market value?
3. What exactly will happen if the Treasury doesn't get authorization to access all $700 billion?
4. How will the bailout fix the housing market?

Will the bill be passed into law by Friday? No, I don't think so but I believe DC and the Fed are eager to give the markets something they can hold on to and work with in the time being.

Bernanke:

Bernanke made some very interesting comments today... comments we need to consider as FX traders.

Bernanke's claim is that if this bill doesn't get passed that unemployment will rise rapidly, access to credit would completely dry up, growth would come to a standstill, the housing market would suffer, and Wall St. would take billion-dollar hits.

Excuse me Ben, but haven't those issues been happening for at least the past 16 months? I remember not too long ago the unemployment rate was comfortably under 5.0%... where are we at now?

Other idiotic comments included Bernanke saying this bailout plan would not cause any inflation and that inflation would continue to moderate over the medium-term. I almost fell out of my chair when I heard that. They must have stopped teaching at Princeton that creating debt and printing money, and adding currency to the money-supply is the true cause of inflation...

When questioned about how this creation of debt would affect fiscal issues and deficit issues, Bernanke threw Paulson under the bus... his response was that Paulson's Treasury was responsible for handling those deficit issues and it wasn't the Fed's concern.

Bernanke did say that the $700 billion bailout would, and I quote, "add difficulty to the economy and fiscal health". Great, so he admitted it after throwing Paulson under the bus and passing the buck his way.

What could end up hurting the euro is Bernanke's comments on rates... he basically said current interest rates are artificially low and that they would rise sooner than later... the dollar bulls enjoyed hearing that comment today.

Paulson:

Paulson failed once again at selling his plan. We did get an interesting confession from Paulson... he said, "A rescue plan was studied over a period of months, hoped it would not become necessary; did encompass small banks as well as larger institutions".

A period of months? Wait a minute... just a few short weeks ago Paulson was saying the fundamentals of the U.S. economy are sound and that our banking and financial sector was sound.

If that was the truth why would they have started this process months ago while telling the markets everything is A-OK? You can see what kind of crap we're dealing with here... lies, cover-ups, politics, glad-handing, and a whole bunch of BS.

The Solution:

Many traders have asked me what I would do in this situation and what the solution is. I don't have the brains, the arrogance, or the wisdom to answer that question.

But, traders are asking so I'll going to throw an idea out there anyway...

I hate to say this, but I do believe government involvement is required. But, only to get the process started and not any more involvement than putting the wheels in motion of handling the toxic assests and selling them back to the market.

I think it is wrong for the Treasury to basically write a multi-billion check to Wall St. in exchange for all of their near-worthless assets. Those assets aren't totally worthless and this is where I think the government can come in to act as an "auctioneer" of these assests.

Under the current plan, the Fed and Treasury price these assets at what they believe they're worth. This is price-fixing. Price-fixing is not going to solve the issue because these assets need to be valued by the market and not price-fixed by the government.

In order for the Treasury to eventually sell these assets back to the market, only the market can decide what they are worth and not the Treasury. The Treasury wants to use the free market to participate in solving the issue, but the free market can't do what free markets do if the assets are pre-priced by the government.

That is one of my biggest issues with this plan and why I think it's potentially disasterous to go about it that way. In my view, I think the Treasury can ease the equities and securities markets and comfort the credit markets by stepping in to orchestrate an auction type situation where the free market could value the mortgage-backed securities (MBS) and then the Treasury could facilitate the transaction between the seller and the buyer.

The Treasury could then set-up an escrow facility to minimize the risk and give comfort to the markets that the government is in control of the risk and that the free market is in control of deciding prices. The Treasury could collect a small transaction fee or maybe charge 1 point per transaction.

That's a very primitive and simple plan. I don't have an economics degree so that idea may not even be workable. But the bottomline is, the Fed and Treasury almost have to be involved, DC has to back the plan, and the taxpayer exposure and debt burden needs to be kept at the absolute rockbottom minimum.

If the Treasury creates billion of dollars worth of debt, it's going to hurt securities and both of those factors are USD-. If the Treasury does a bailout job and can do it significantly cheaper than $700 billion, both of those factors are USD+.

For every $12 dollars the Treasury gets in taxpayer money, $1 goes to paying debt holders back for buying our securities. Under the Treasury's plan, at least $700 billion worth of new debt will need to be created, the defecit level will be raised to over $11 trillion, and because of economic conditions taxes cannot be raised. Plus, fewer securities will be purchased by foreigners.

I think you can see the risks there...

Tomorrow:

Home sales fell 2.2% vs. an expected fall of 1.6%. Home sales are down 10.7% year-over-year. There's a 10.4 month supply of unsold homes which is an improvement but still at recessionary levels.

Median home sales are continuing to plunge, falling 9.3% year-over-year. This is the largest plunge in the data's recorded history. The dollar should be paying a price for this data. It didn't today but that doesn't mean it won't in the near future.

Tomorrow we get a ton of data... New Home Sales, Initial Claims, Durable Goods, and a bunch of Feds speaking all over the place. Fundamentally I have no real views for tomorrow. I can make an argument for the data to be USD+ or USD-. It may not even matter if the market's are focused on this bailout bill or we have big moves in commodities or a potential breakdown in Treasuries or a surprise event.

Basically, there's a crapload of stuff happening right now and these issues and potential events can change the market in the blink of an eye. The trends can change with every passing rumor that market manipulations want to throw out to the wolves.

EUR/USD:

The longer the euro stays in this range between 1.4600 and 1.4720, the closer we get to making a bigger and more exagerrated move. I'm still very cautious on buying the USD.

It's frustrating to see the euro running out of steam up at these levels and there's certainly room to correct more, but what I know about these issues on Wall St, with the USD fundamentals, and issues happening with Treasuries, I see risk on the dollar and I do not want to be caught should the market make a sharp move against the dollar.

The euro is not without its own risks. The pressure growing on Trichet to cut rates and the possibility of a large European bank failure make the euro a risky trade. Basically both currencies suck.

The euro is still showing bullish signs within the price action but the upside momentum is sporadic and is preventing it from holding onto gains. The lack of decent buying liquidity is also a factor weighing on the euro and no one can predict if and when this buying liquidity will return.

Today's low (ask) was on my downside key level of 1.4611 and so far that level is proving to be solid support after several tests at the close of NY and start of Asia.

This whole bailout plan is nothing but USD-. Why the market isn't burning the dollar at the stake doesn't make much sense to me but we have to play the hand we're dealt.

The 1.4611 level is still very key right now. A sustained break there shold send us down to test 1.4580 and then potentially to the key 1.4550 level. I still have longs at 1.4555 and will hold those open for now.

We need to make a sustained break of the 1.4730 and then the 1.4790 levels in order to even think about getting above the 1.4800 level at this point. Maybe now that the testimonies are over the markets can refocus on the the tasks at hand and we'll see more volatility. This is what I'm expecting.

As always, use strict risk management and do not overleverage.

buffet updates

This move by Warren Buffet to invest $5 billion into Goldman Sachs is a total game-changer I think. It already caused a Japanese bank to announce an investment into Goldman.

I believe we see Wall St. rally tomorrow based on this news. This announcement by Buffet is huge. He's pulling a JP Morgan move and it's very smart and will certainly be welcomed and applauded by the Fed, Treasury, and the lawmakers in DC.

I would expect the Nikkei to rally and Wall St. to rally tomorrow which means volatility in the yen crosses and likely for the euro.

Trade Team Update - - 9/23/08

Most all markets were relatively quiet today, a lot quieter than I expected them to be. I guess global market players were busy watching the Fed and Treasury testify in front the lawmakers and were left confused by the political grand-standing we saw in DC.

Circus comes to town:

I don't really like the circus too much, it's kind of weird to me but I did enjoy today's circus on Capitol Hill. The clown car brought in Bernanke, Paulson, and Cox to testify before a Senate banking panel. Some of the politicians hit the Fed and Treasury hard, I was surprised.

Several Senators ripped up the plan and basically called it unworkable. Paulson's clause to give him free reign in decision making was challenged. Most Senators offered an alternative that made much more sense and wouldn't cost nearly $700 billion.

The idea is to tackle the issue a piece at a time and work through it sensibly and economically instead of creating a mass amount of debt and a mega burden being placed on the taxpayer at a time when the taxpayer (consumer) has gone into survival-mode.

From the wires:

Senator Dodd: Draft legislation from Treasury is unacceptable in current form - Insists it remains possible to get lawmakers to pass the plan before the November election if changes are made. 9/23/2008 2:34:05 PM

Senator Shelby: Reiterates that Congress will not rubber stamp the Treasury plan, will consider alternatives 9/23/2008 2:34:37 PM

As I said, I do not believe this program will get signed this week. The Senators overall displayed very strong concern and showed a real lack of faith in Paulson and Bernanke.

Paulson never expected this fight. He's up against the ropes and he's not pushing the plan through as easily as he expected. He has no real answers to offer and keeps repeating the same lines about how the plan must get signed this week in order to save Wall St. from Armeggedon. DC isn't buying it.

Paulson did more stuttering and circle-talking than selling. Bernanke was way more comfortable and more forthright with his answers. Bernanke said in very plain terms that the cost could exceed $700 billion and that the plan "might turn a profit, but couldn't be sure". At least he was honest about that...

Bernanke also made it clear risk was on the taxpayer. Bernanke painted a different picture of the bailout compared to that of Paulson. Paulson is a spaz and he's not doing a very smart job selling this to the lawmakers.

I think Paulson's in for a bigger battle tomorrow. Our favorite politician, Ron Paul, will get a shot at the goon squad and it should be at least entertaining. I really hope Ron hammers the Fed on this plan.

We knew there was going to be a political battle and we're seeing it play out in real-time. I do believe the legislation gets passed eventually, but it won't come easy. Americans are bombarding their legislators with calls and emails and telling them not to let the Treasury have the $700 billion. People are really pissed and are pressuring their representatives.

Stay tuned...

EUR and USD Risks:

Today I was talking with a respected trader and wanted to relay our conversation... we were talking about the EUR/USD and the risks on the pair -- equal risks on the euro and the dollar. This is food for thought type stuff, but issues that must be considered as we draw close to the extremely volatilie October through December session.

One of the equal risks is that of a rate cut. The Fed and ECB are both in positions to cut rates. The ECB has a slight advantage over the Fed and is not as likely as the Fed to cut, but there's a high enough probability the ECB gets forced to cut in the near-term.

How would the market handle a dual Fed and ECB cut? I can't answer that question because it will put us in unchartered waters. And speaking of unchartered waters, the EUR is also at risk because we've yet to have a real fundamental or financial disaster in Europe.

The market has not had to deal with a failure or a large downside shock out of the Eurozone. I'm still very much concerned about a larger European bank failure and what that could do to the euro.

Paulson has urged the ECB to enact a similar bailout plan for European banks. And as I said yesterday, we know Credite Suisse, UBS, and a few other big European banks have come to the Treasury for a piece of the $700 billion. Does Paulson know a failure is probably going to happen in Europe?

Look at this comment that came over the wires today:

EU Bank Supervisory: EU financial system exposure to LEH and AIG are somewhat muted 9/23/2008 1:52:18 PM

Lets read between the lines... this dude is not saying Europe's financial system isn't exposed to risk from those companies. So, if he's not saying there's no exposure, then he's probably saying there is exposure, especially when you read the last part of his comment about the exposure being "somewhat muted".

The question is, we know they are at risk, but what does "somewhat muted" in liquid cash terms?

I think any signs of weakness or some big downside surprises in the euro fundamentals, or a shocking bank failure, or a surprise move by the ECB cannot be ruled out and taken off the table. Those are valid risks and just another reason why we cannot establish a clear trend under current market conditions.

Bernanke made a comment this afternoon that was related to an issue I've been talking about with bonds. He said something about not knowing how the credit rating agencies would look at the U.S. debt. Two seconds later the euro started moving up and made an 80 pip retracement in under an hour. That's a miniscule example of what the euro would do if a bond downgrade were to happen.

Fundamentals:

Most of today's euro data was worse than expected and shows further proof that growth is weak in Europe. Today's Home Price Index showed that home prices dropped a dramatic 5.3% y/y in July. We are not close to a bottom. The bailout will not fix these housing issues, it won't stop foreclosures, and it won't create easier access to credit.

Bernanke said that if the House doesn't pass the bailout plan the U.S. "might" go into recession. We're already there based on what we've seen in the housing, consumer, and jobs sectors. Forget this "two negative quarters of growth" textbook crap. We're not in the Great Depression, but overall economic condition points to recession. The fundamental landscape is worse now than when the euro was at 1.6000. Europe is not far behind...

Fundamentally, we have another big day with the circus show part II. We get German IFO and the Eurozone's Current Account. I don't expect any big downside surprises with tomorrow's euro data.

Existing Home Sales is the big piece of data in addition to Crude Inventories. I have mixed view on the home data. Mortgage apps have been stabilizing and based on some reseach I believe we could see a print at expected or even above. I would be more surprised to see a strong downside number.

Obviously the big event is on Capitol Hill. I really hope this next group of politicians hammer Bernanke and Paulson on two fundamental issues that don't sit well with me...

1. Allowing foreign banks to get a piece of the bailout money.
2. Adding credit card debt and student loans to the bailout plan.

EUR/USD:

The euro retraced just as we expected. Our low today hit my 1.4621 downside key level to the pip and held before moving up after Bernanke's credit comments.

I'm not ruling out further downside testing and I have not taken any new longs above the 1.4550 level. I'm short from up at these levels above 1.4720. I mostly sat on the sidelines today and may do the same tomorrow if the markets behave the way they did today.

Now is not the time to get impatient about trading. With this bailout plan potentially getting signed into law at any moment, the whole ballgame could change in a matter of seconds. I don't want to get caught up in that kind of risk and chaos.

If the Asian markets are quiet we may see some decent ranging during Tokyo. I expect to see the volatility pick up after London and we'll hopefully get a better idea of the markets at that time.

1.4660-1.4680 is a key area to watch along with 1.4620 and 1.4580 levels on the downside. There's some decent resistance ahead of the 1.4730 and 1.4775 levels.

Today's key levels worked out well so I will post more later on. Be smart with your trades and your risk management.

Key Levels

Right now we're in the expected downside retracement from the 1.4860 level. We do have some more room to drop but there's downside resistance within the real time price action currently.

With more normalized market conditions, I'm going to post some key levels to watch. News or panic trading could certainly affect these numbers, but we'll see how they hold up.

Key downside levels:

1.4752
1.4727
1.4684
1.4666
1.4621

Key upside levels:

1.4838
1.4856
1.4883
1.4918
1.4944

I don't see any reason we can't make another attempt at sustaining a break of the 1.4800 level sometime before London opens. The 1.4760 level is initial key support. There should also be a battle between the 1.4680 and 1.4700 level should we drop that low.

Tomorrow's events in DC could play havoc on the markets, especially if no confidence is instilled in the markets and the panic trading continues.

A few traders have asked who I would recommend reading to get other points on the current situation facing the markets.

Here's my no-BS list:

John Mauldin

Mauldin is the only commentator/analyst I read. Where my analysis might be the art of the market, he's got the science. He's a trader too and he does his homework.

Financial Times

I prefer to stick to the news that comes over my newsfeed because it is what it is... they don't have copywriters manipulate the data or the delivery of the data.

But I like the FT when I want to see how certain events are being reported. I don't trust any newspapers, but FT stands out.

Trade Team Update - - 9/22/08

It finally felt like the good old days today... you remember those days when the euro would kill the dollar, gold and crude would go up, the Dow would get hammered, and treasuries would sell-off... now you can see why I've been saying there's a tremendous amount of risk on the USD right now.

The EUR/USD moved over 400 points bottom to top today, which is the single biggest gain by the euro against the dollar since 2001. Crude was up over 16% today marking its best gains in history. Gold was up over $35 and the Dow closed down over 370 points.

The 10-year yield has been skyrocketing and bond prices are falling dramatically. We are seeing a continuation of panic trading as money flows are pouring out of securities and into the safety of gold.

I think everybody is buying gold... the central banks, the conspiracy-theorist goldbugs, hedge funds, daytraders, and institutional players. At one point crude was up $25 today. Today was the last day of the October crude contract and going into the final two hours the bulls ambushed the bears and put on a short squeeze. It was certainly a beautiful move and one unlike we've ever seen.

I believe all of this is stemming from the continued uncertainties surrounding the Treasury bailout plan and the political tensions that are beginning to rise. There will be no comfort for the markets and little respect for the USD during this process and while the markets are left in limbo waiting for facts and the actual legislation to be signed into law.

One of our senior FXI members posted an article by these people called the London Forex Blog and these folks are already calling the Treasury's plan an "absolute success". This is irresponible commentary in my opinion. I caution all traders to beware of this mindless rhetoric.

Obviously smart money doesn't agree with with this London group. If smart felt the same way then gold, crude, and the USD Index would not be sitting where they're at now. I told you yesterday that these issues could send commodities and the USD Index to very dark and scary places... I think we saw some of this today.

We do not even have full disclosure of the entire plan, let alone government approval to carry it out. It may not even happen this week. Here's what Senator Reid said:

"A rubber stamp of the market rescue plan will not be tolerated, Congress taking situation seriously and necessity for legislation."

Senator Shelby says he:

"Has concerns that the Treasury rescue plan is not workable or comprehensive; wants to explore alternative solutions. More discussion is needed and not swift passage of the current plan."

Neither Democrats or Republicans are 100% sold on the bailout. I may be wrong but I believe Paulson submitted a measly 3-page report outlining the entire plan and basically expecting the Senate and House to pass it in a day or two. I don't believe we'll even see it completed this week.

We don't even know the market value of the assets the Treasury is offering to buy from the holders of the toxic MBS's. As I said yesterday, there are a lot of unanswered questions and too much speculation for the markets.

The markets have no confidence and this is why we see keep seeing extended and exaggerated moves almost every 24-hour period. An unconfident market is ill-liquid, and the brave money will use what liquidity they have to move their positions to into profits.

Tomorrow:

The euro will be tested tomorrow as we get consumer data out of France and manufacturing and services data out of Germany and the Eurozone. Fundamentally the euro has very weak to the downside. I haven't found a whole lot of evidence to show a strong turnaround the past 30-days, so we may see EUR- data.

If this price action momentum sustains into London and we get strong EUR data I expect we move up again.

But the real risk is with the testimony of Bernanke and Paulson. Each goon will be testifying before a different government committee and I would expect the exchange between Bernanke, Paulson, and the politicians to get heated at times.

These testimonies could cause quite a bit of volatility in our market and within the global markets. I can't stress that this is a high risk event. Any mispeak or confusing rhetoric could send the markets into panic selling again.

The other issue is that both Bernanke and Paulson know they're in front of the entire world markets, everyone will be watching and looking for clues. If they want to, they will use the opportunity to manipulate the markets. If the Fed and Treasury have gone back to being uninterested in a strong USD, they will not stop themselves from making commentary they know will weaken the dollar. If they want to prop the dollar up they will do this as well. Be prepared for anything.

EUR/USD:

Right now some of the upside momentum has eased but the risk is still clearly on the USD at this point. This move on the has more to do with gold's strength and the lack of confidence market players are feeling.

The euro is not suddenly getting strong overnight because the fundamental and financial problems in Europe haven't magically disappeared.

I've been waiting months for a big European bank to fail and the failure hasn't materialized. Today we discovered that UBS, Credite Suisse, and a few other big name banks have come to the Treasury with their hand's out, asking for a piece of the bailout cash.

It's not fun having to borrow from others, so if these European banks supposedly have no exposure to the same issues Wall St. banks have, why would they go to the Treasury for bailout money?

It's been great seeing the euro move up, but my concern remains on the possibility of a European bank failure going down soon. If this were to occur, I think there would be a run on European banks, the images would get broadcast all over the world of the nervous pensioners beating on the doors of their village bank, demanding their savings. That would put a hurting on the euro.

As far as the USD is concerned, all of these events on Wall St., the planned bailout, and the mass exodus out of Treasuries is very USD-. If commodities keep running and the market keeps buying crude and gold on dips, the euro should keep moving up towards the 1.5000 level this week. Strong EUR fundamentals will help the upside momentum.

After running a solid 400 points I would expect to see some retracement over the next 12-hours at some point. Price action is currently not showing a whole lot of retracement but things can change fast under these market conditions.

Be smart with your entries and your risk and be advised tomorrow could be extremely volatile.

EUR/USD Weekly Outlook 9/21 thru 9/26 2008 part 2

EUR/USD:

This week will start with a lot of questions that are unanswered. In reality, nothing has been fixed. The government has dropped a nuclear bomb on the markets and will take the responsibility for cleaning up the mess and rebuilding. Politics have become part of the equation. Banks will still fail, Wall St. will still panic at times. More jobs will be lost and more turmoil will hit the economy.

I don’t like to get emotionally caught up in panic, rumors, and speculation about anything extreme happening, but I do believe the USD fundamental landscape is in worse shape now then when the Fed stopped cutting interest rates. In the near-term I expect the unemployment rate to continue rising, job losses will stay at elevated levels, manufacturing should remain to the downside, and growth should remain non-existent.

I don’t care what the GDP numbers tell us, the U.S. economy is not growing and expanding. Those strong growth numbers we saw this summer were the result of the stimulus program. The next round of GDP data in the next quarter should be USD-. There is little access to credit right now. LIBOR is stressed and banks are hesitant to lend.

The U.S. economy will only truly begin to recover when the housing market finds a bottom, home values stop falling, inventories drawdown, and potential buyers get easier access to secure credit. I do not see a housing turnaround happening the rest of 2008.

The euro made a nice dip early Friday morning but as the market regained some of its sanity, the dollar bulls began covering their short positions and euro bulls returned with strong buying to drive the euro back up towards the 1.4500 resistance level.

All markets have been disjointed while this mess on Wall St. plays out. On Friday I finally saw some order in our market and I saw some proper price action behavior. Everything the Fed and Treasury are proposing is USD-. If the market decides to respond the correct way, we should expect to see the USD sold-off across the board.

As you know, the market’s not being behaving properly the past few weeks and I believe this is mostly due to the intervention and manipulation we’ve seen from the central banks and the utter lack of liquidity. If the big money movers decide to test the waters and do the right thing by selling the dollar, we will see the EUR/USD make its way back to the 1.5000+ level. A bottom should be in at the 1.3880 level and we should begin making higher lows and testing higher highs – if the markets do the right thing.

This doesn’t mean I’m closing from euro shorts from the 1.5800 and 1.5600 levels, but it does mean I’m going to take risk by buying the euro on dips and make an attempt to play the “logical” side.

I really don’t have much to say about the EUR/USD until the market opens, and I have adequate time to watch the price action and run my numbers. London will change the ballgame this morning as will NY and Wall St. money flows. So, be advised conditions are likely to be volatile, exaggerated, and we could see erratic price swings as the markets work through this mess.

Trading:

My view is clear: these events on Wall St., the government’s bailout plan, and the current fundamental health of the U.S. economy are all USD-.

On Friday I began scaling out of my USD long positions. My GBP/USD short at 2.1105 was closed at 1.8304 on Friday. All other dollar long positions in other pairs were closed for profits. I will not close my euro shorts from 1.5600 and 1.5800, they will remain open but I may begin closing euro shorts from 1.4600 and lower.

If you’re still holding short EUR/USD at 1.6010 and higher, you may want to consider taking some profits… maybe close a portion of the trade and lock in that tremendous ROI. I know some of you are still patiently holding, now you may be the time to reward your patience.

I will take risk on the euro long side. Last Thursday I gave strong warning against USD long positions on any of the majors. This warning remains even though we could see the euro test the 1.4300 level or lower. I believe there is now more risk on the dollar than on the euro even though the euro’s fundamentals remain weak.

I’m not really a yen trader, but watch out for those pairs. As these issues on Wall St. and on all global markets persist, the yen crosses will keep going schizo and the volatility will remain heightened. Trading any of the yen pairs is well beyond the realm of my risk tolerance and I urge strong caution there.

The best thing to do is keep a level head and not go into panic mode. It’s not the end of the world and these markets will eventually work themselves out no matter what. Most of you should not even be trading under these conditions. The risks are extremely high. What should may not always be what is.

I do not think the entire global financial system is collapsing and I do believe the markets will work toward equilibrium in the weeks ahead. None of this has come unexpectedly and we knew it would be ugly. Markets will be disjointed, volatile, and ill-liquid for at least the short-term.

I expect trading conditions this week to remain extremely difficult. As I said, I do not believe anything has really been fixed, but we’ve just seen a lot of political maneuvering and manipulation in order to calm the irrational and panicked market participants.

Expect the guerilla warfare conditions to continue this week. The games between the banks and brokers and retail traders will surely stay at criminal levels. Nothing can be done about this. Some brokers are worse than others, but they will all be playing games.

The fields are ripe to run stops this week… on both sides of the EUR/USD. As the central banks calm the markets I believe we’ll see more players come back, big time and smalltime players alike. Some risk will get put back on the table and we should see some higher liquidity levels.

Trading won’t be easy but it’s not impossible to pullout profits from this market. Many here have been doing it week in and week out despite the chaotic conditions. Traders here have reported ROI of 5% or more per week. Not only are those traders beating Wall St., they are beating impossible odds.

Be smart tonight and this week. Use strict risk and money management and do not overleverge. If you can be disciplined to do just that much, you will not only survive this market, you will come out of this mess better than when you went into it.

EUR/USD Weekly Outlook 9/21 thru 9/26 2008 part 1

USD:

Is the great dollar bull run of 2008 over? Possibly, but in my view, it never existed and was mostly smoke and mirrors. The dollar’s unstoppable run the past ten weeks, in my opinion, was manufactured by the Fed and ECB. Here’s why I believe this to be true.

First, look at the timing of the dollar’s rise. It happened while market participants were on summer holiday and the markets were completely ill-liquid. The field was ripe for harvest and the odds were in the Fed and ECB’s favor to manipulate the dollar during this timeframe. While Europe was on a seven-week holiday and the rest of the financial markets were focused on Wall St., the Fed and ECB used verbal and physical intervention to push the USD Index up and drop commodities. In fact the ECB started the gold sell-off which helped fuel the dollar’s run.

Do you remember our good friend Jean-Claude Juncker from the ECB? Do you remember how he shocked the markets three weeks ago by saying “the euro is overvalued in real terms”? He said that two times and both times he used that verbal intervention it pushed the EUR/USD down several hundred points. I do not believe it was pure coincidence he made those comments right before the U.S. financial markets melted down to the point they did last week.

The Fed and ECB knew all along what Wall St. would come to. Both central banks knew the government would have to take the entire U.S. financial system into receivership. And they knew what this was going to do to the dollar – destroy it. I’m not ruling out the possibility of more manipulation because this mess could ultimately send the USD Index and gold to places that are very dark and scary.

At this point we do not have full disclosure on the Fed and Treasury’s plan to save the financial system and to bailout Wall St., and to stop the housing market from collapsing. Basically, the U.S. government is going to buy bad mortgage assets, take on the risk, fund the programs with taxpayer money, and overtime re-price and resell these almost worthless assets to banks and financial institutions for a higher premium than what they are worth now.

For example, if Lehman Brother’s is only able to get $0.20 on the dollar for an asset, the Fed may be able to get $0.40 on the dollar. Then the asset is in the hands of another creditor, the original debt holder is off the hook for the worthless paper, the Fed makes a small profit, and everybody’s happy. That’s how it’s supposed to work, but the fact government is handling this delicate operation means it could be a disaster.

The Treasury says the plan will cost $700 billion and last a minimum of two years. The Treasury is raising the national debt ceiling to $11.3 trillion from its current level of $10.6 trillion. I put the cost at $1 trillion minimum. This is $1 trillion we don’t have and $1 trillion that will be created out of thin air. Debt must be created by the Treasury and sold to foreign investors. I’m not convinced that will happen right now, but more on that later.

We joke about the Treasury’s “printing presses”. It’s not a joke anymore because the presses will run. Bernanke and Paulson will have to inflate the money supply. You know what that means… inflation. That is the true definition of inflation – printing money – adding money to the economic system. We won’t really know how much money the Treasury prints because we don’t get M3 from the Fed.

But it makes sense now that we saw a season of dramatic deflation because the central banks knew we were headed into a prolonged period of inflation caused by flooding the money supply with a worthless currency. And that is the exact reason why I say the dollar’s bull run could be over.

Only further manipulation can prop the dollar up now. This is economics 101. This is the epitome of what Austrian economics teaches us. The Fed and Treasury’s programs and the money it’s going to take to run them are inflationary and suck the value right out of the dollar.

The dollar should be slaughtered. Gold should steadily rise. Foreign investment in U.S. debt instruments should continue to decline. More banks should fail. More panic should ensue in the weeks to come. And, in a perfect world, the dollar should be sold-off. Will it happen the way it “should”? Only the markets can decide the fate of the dollar… and if the dollar does get heavily sold-off I would expect to see more intervention.

Politics:

Politics are now coming into play and that’s a very bad thing. We are going to see some political battles over this plan to completely bailout the entire U.S. financial sector. Republicans and Democrats will battle and each party will use this disaster for their own political advantage.

The involvement of politicians means it will cost the taxpayers more money, it will be mismanaged, and it may even decide who the next president is. Both McCain and Obama are already using the issue to gain political leverage.

Last Thursday McCain said he would have fired the chairman of the SEC and on Friday he said he would not bailout Wall St. McCain better be sure all of his constituents and supporters and political allies feel the same way he does before he keeps running his mouth…

There are only two politicians in DC that I trust to do the right thing – Ron Paul and Jim Bunning. Paul and Bunning are the only two that understand free market capitalism and the problems with fiat currencies, inflated money supplies, and big government. They will be ignored during this process even though they are the only two voices of reason in DC.

Both Obama and McCain will fail miserably at their jobs as it relates to the economy and fixing the financial system. It’s a losing situation for both candidates. McCain knows as much about economics as I know about multivariable calculus (I never made it past algebra 1.2). McCain believes interest rates should be at 0.00%. Enough said.

I’m not real clear on what Obama thinks about the situation or what his plans are to fix it if he’s elected because he never says anything that makes sense. He talks in circles but you never get a definitive answer on anything. What I do know about Obama doesn’t give me any comfort that he has a clue.

McCain has a few big name corporate CEO’s and business people are aligned with him, but that doesn’t mean much to me. Warren Buffet is aligned with Obama… that doesn’t mean much to me either. No matter what, we’re in for a painful political war that will drag on while Wall St. continues to go from euphoric to schizophrenic and back again.

Bonds:

For weeks I’ve been talking about irregularities with U.S. bonds. I’m getting extremely concerned about bonds and it gives me just another reason to believe the dollar’s run could be over. When Paulson announced his bailout plan at the end of last week, bond yields shot up, prices dropped, and money flows poured back into equities.

This is a problem. The bailout plan is going to need heavy money flows going into bonds and not necessarily into stocks. We know that in July foreign buyers of bonds dried up to almost nothing. This is terribly USD-.

There are some very smart bond traders and very smart strategists in the bond market. I have to think they see what I see, which is a potential collapse of certain U.S. bonds and or the possible default by the Treasury.

Right before the big bailout plan was unveiled, panic-money poured into the 3-month T-Bill driving the yield to almost negative. I’ve never seen anything like that, it was shocking. But now that Wall St. is saved, money is going into equities and out of securities. The other issue is that I think the foreign view on the U.S. will be downgraded while this mess in the financial sector gets political and continues to drag on.

The U.S. government relies on billions of dollars of foreign money to buy debt in order to feed the deficit and keep the lights on in DC. If we see panic in the bond market or a collapse or the Treasury defaults, the dollar is going to take a whipping unlike anything we’ve ever seen.

As a currency trader I usually only focus on bond yields but now the prices matter because if the yields keep flying up that means the prices are dropping. If the prices collapse, we have issues. If we see a panic collapse with treasuries or treasuries get downgraded or the Treasury defaults on debt re-payments there will be a violent dollar sell-off. The central banks could try to intervene against that but the point to understand is any of those events would be highly USD-.

Fundamentals:

The data on the books this week is only going to serve to further complicate the issues were dealing with right now. We get a lot of growth data out of Europe. The bulk of this week’s fundamentals will come out of the U.S. as we get key housing, consumer, growth, and inflation data. Overall, I’m not expecting to see strong USD+ data this week.

Let’s not forget the fundamental landscape is not in great shape either. We’re still going to have a battle of to see whose data is worse, the USD or the EUR. But more important than this week’s data are the numerous speeches we get from the Fed and ECB this week.

The markets will be watching and listening for any clue, sign, or signal from the Fed and ECB on future monetary policy. Many believe the ECB will be forced to cut rates by at least 50bps before 2008 is over. I expect this speculation to ramp up as the pressure is put on the central banks to provide cheap money and easier access to credit.

We hear from Trichet, Bernanke, and Paulson this week. We also hear from several ECB’s plus we get Fed speeches from Fisher, Plosser, Warsh, Bullard, Lacker, and Evans. Bernanke and Paulson will be on Capitol Hill testifying.

updates

Once again the Fed and Treasury is propping up the dollar as news starts to emerge about this new plan to take on all the billions of dollars worth of bad assets from financial institutions.

The dollar may continue to gain on this news and especially as details are released. But take note, when the government used this plan in the late 1980's to bailout the Savings and Loans the U.S. taxpayers lost almost $80 billion on that deal...

Equities should rally on this news and the euro, gold, and crude may find themselves back under pressure.

Trade Team Update

The chaos and carnage continues... market events were happening so quickly today that if you blinked you probably missed the latest development. What we're dealing with is a global-wide lack of liquidity and pure panic seizing market participants.

In today's update I'm going to give you my best "hillbilly economist" perspective on today's events... I never went to school for finance or economics, I'm a very simple person so the best I can offer is a simple view on these markets.

Wall St.:

The Dow closed up over 400 points today. The Dow literally went on a 400 point run when a rumor hit the markets right before Wall St. closed shop for the day.

I call it a rumor because that's exactly what this is, a rumor, it's not been verified by the Fed or Treasury. The rumor is about a new government bailout program where either the Fed or Treasury sets up a depository for the banks and financial institutions to dump their bad mortgage debt, their overleveraged mortgage backed securities (MBS), and these institutions can concievably take those bad debts off their books and put them on the government's balance sheet for an extended period of time.

This is a disasterous plan in my view. This bailout puts the taxpayer at risk, it adds default risk to the government's balance sheet, it adds downside pressure to the deficit, and relieves the overleveraged lenders of their responsibilities to clean up the mess they got into. We're talking about hundreds of billions of dollars of bad overleveraged debt going under the obligation of the U.S. taxpayer.

But Wall St. loved it... they bought the rumor, but they may have to sell the fact. I think there will be a few lawmakers that are going to take the Fed and Treasury to task on this plan, at least I'm hoping they do because this is one of the worst ideas I've heard yet.

If you trade the yen pairs be on guard for how the Asian equities markets react this evening. We could see heightened volatility within the yen crosses tonight and early tomorrow morning.

Central Bank Manipulations:

Early this morning the Fed, ECB, BOE, SNB, BOJ, and BOC tag-teamed to pump $180 billion into the markets. Not $180 billion of their own respective currencies but $180 billion USD.

Here's how this works... Europe, UK, Switzerland, Japan, and Canada take USD from the Fed and in return give the Fed their own currencies. Then, those central banks auction off the USD in their own money markets.

I've been telling you for over a week now that there's a vicious demand for the dollar and I'm not seeing any pullback on this ferocious demand for U.S. dollars. Today's tag-team liquidity injection prove this to be true.

Global banks are hoarding cash... like stuffing it under the mattress kind of thing. Banks are not lending. When banks don't lend interest rates go up. LIBOR goes up and these high USD interest rates and strong demand for the dollar keeps the EUR/USD stronger to the downside.

Now as soon as news hit the wires of this liquidity injection the dollar was sold-off. This is a great sign in my view. Not only did the $180 billion bring down the USD interest rates it caused a strong euro rally. Maybe the markets are finally getting the idea...

All of this is nothing but USD- no matter how you slice it. As I explained yesterday, the Treasury creates a product to sell -- this product is called debt -- what gives this product re-sale value is the full faith and gaurantee of the U.S. government to honor the debt obligation with points paid.

By selling debt products the Treasury can print money. The Fed gets their money from the Treasury. The NY Fed coordinates with the Treasury to ship varying amounts of dollars to the regional Fed banks who then distribute it in their district.

The other aspect is what we've seen this week where the Treasury will "manufacture" billions of dollars worth of "products" to sell to central banks and lending institutions. The lenders get "risk free" assets to put on their books and the Treasury creates money it can't afford to pay back with interest.

Finally, the other aspect is that the Treasury will accept collateral from banks to lend money to and then after a specified period of time the cash is returned to the Treasury with points paid.

No matter how you slice it, it's a flawed system and it's all USD-, and I really hope that market participants realize how much these actions by the Fed and Treasury are devaluing the dollar over the long-term.

Commodities:

Gold certainly enjoyed the news as it went on a near unstoppable run above my key $910 level. The commodity was unable to hang on to gains and as soon as the last batch of bailout news hit the wires, gold sold-off hard.

Crude made a cameo appearance above the $100 level but was sold-off and has been hovering around the $98 level. I believe as long as we stay above the $88 level crude can make a few more attempts at sustaining a break above the $100 level.

There's still not a very strong correlation between the EUR/USD and commodities right now. It's there a bit, but not strong during normal market conditions. I believe there may be a gold contract expiring tomorrow.Nonetheless keep an eye on gold and crude tomorrow.

Tomorrow:

Today's jobless claims were crap and very USD-. The only event on the books tomorrow is German PPI which should print showing a decline in producer inflation.

As far as the euro goes, I still see bullish signs within the price action. We did have another choppy day but it was somewhat more orderly today than it was yesterday, which is another good sign.

At this point I have to stay very cautious of the dollar. I don't like these events that are happening and each one are strongly USD-. The problem is that nobody is buying euros. I don't see a strong dollar right now like I did even just last week.

I see the market not having an appetite for euros and I see a lot of panic trading. Making problems worse is the complete lack of liquidity in the market. This is the worst I've ever seen and it makes finding a trend and picking levels almost impossible.

Anybody who is banking daily profits and not taking losses is beating all odds and should be commended.

The bullish signs of the euro continue to show in the price action and it's been good see crude and gold make upside gains. I don't trust anything right now so that means my trading is limited and conservative.

If you are shorting the euro or buying the dollar on any other pair I would use good risk and money management. Things are happening by the minute in these markets and the price swings should be expected to continue.

Going back to this liquidity injection issue, I'm expecting to see another tag-team event go down during London or early NY tomorrow morning. Watch those LIBOR rates as they will give you great clues. LIBOR has been a tremendous indicator for me this week while the money markets are in turmoil.

I still have the 1.4500 level as a resistance area. 1.4350 level is one to watch for signs of the euro deciding to make an extended move in either direction. 1.4200 level should hold decent support under current market conditions.

Be smart with your trades and do not overleverage.

Bond Trouble

I'm watching the bond market extremely closely now and I see that the U.S. 3-month T-bill is trading with a yield of 0.0456%. The 3-month T-bill is about to collapse and the 6-month T-bill is right behind it.

If the yields on the major bonds like the 2-year, 10-year, and 30-year continue to plunge we could be looking at an emergency Fed rate cut situation happening.

As I said earlier, do not get into new dollar long positions. Stay out of the dollar. I am not letting EUR/USD shorts that are in profit go into drawdown, I have +1'd all profitible shorts that are in this market range.

Trade Team Update

Just when you think you've seen it all... another historic day in the markets as gold closed up over $90 marking a single-day gain of 11%. This is an unprecendted move unlike the markes have ever seen.

What happened to gold? That's the big question on trader's minds as we close out the day... in my view that's a move rooted in pure panic buying. It's not even a fundamental move, it's a strong emotional reaction to what's happening in the U.S. financial system.

But there was one piece of news that hit the wires this morning that gave gold the fuel it needed to run all the way up to the $865+ level. And this piece of news ties directly into something I talked about a few weeks ago. From Standard and Poor's securities rating division came these comments:

Pressure is building on the AAA US sovereign rating, notes the ratings remain stable - says the AIG bailout weakens the US fiscal profile, the AAA rating must be earned, its not guaranteed

Pressure building on the 2-year, 10-year, and 30-year Treasury debt? Ratings not guaranteed? I called this issue in the 8/24/08 EUR/USD weekly outlook:

I believe it’s possible the Treasury might have to tell debt holders that the Treasury can’t pay and may have to offer some kind of buyout for pennies on the dollar. When I say debt holders I’m specifically referring to buyers of U.S. debt – bonds. I’m talking U.S. government issued bonds.

One of the reasons bonds are called securities is because they are considered “no risk”. The U.S. government has never once defaulted on paying a debt holder. If budget deficit or monetary reasons somehow for some reason prevent the Treasury from meeting their debt payment obligations the effect on the dollar would be disastrous and could even start a military conflict. I only give this less than a 10% probability of ever happening, but it’s something I’ve thought of anyway.

It was a crazy call at the time but now that we have the S&P ratings agency telling the markets pressure is mounting on the spectacular AAA rating on U.S. debt was a real wake-up call to the markets.

Nobody listens to me but they listen to players like S&P and when S&P comes out with comments like that it's only natural to see "safe-haven" buying of gold. It has to be that way.

Let me be clear -- if U.S. debt gets downgraded it's very likely we'll see the single biggest move ever against the dollar. That being said, if the U.S. either defaults on debt or has to enact some kind of deferred payment plan not only will the USD die we could be looking at an international incident leading to a world war. No, I'm not a conspiracy theorist, I don't get into that crap but I'm telling you what's going to happen should this issue with U.S. treasuries keep unfolding in a negative way.

A trader commented today that I "have no idea about anything". Well, I called the post-Labor Day meltdown of the financial system and referenced this issue with bonds. So, keep throwing hate and I'll keep working harder to predict and forecast moves in these markets that nobody else will make or even thinks of.

Wall St.:

The Dow was massacred today losing another 450 points. Wall St. is an absolute mess. AIG stockholders are well on their way to seeing their stock zeroed out. Morgan Stanley was on the hot seat today, selling off hard. You might recall just a few short days ago Morgan was at the bargaining table to supposedly help bail-out Lehman Brothers.

As of this afternoon Wachovia was putting together a bail-out plan to save Morgan Stanely. This is madness. And this mess on Wall St. is not going away anytime soon. This proves the Fed and Treasury are putting on another smoke and mirrors act and using big household Wall St. names as props to bail-out our entire financial system.

The Fed nationalised AIG and the U.S. taxpayers are on the hook for at least $85 billion. Oh, and guess what, the U.S. taxpayers now own the popular English football team Manchester United! I love it... how's that for some irony! Go Chelsea!

Some rough numbers show the Fed has put out over half a trillion dollars of taxpayer money in Wall St. bail-outs starting with Bear Stearns all the way to where we're at today. I believe that number is higher because I know the Fed makes backroom deals with these firms to sweeten the pot.

The Fed is in trouble and they are running out of cash in their reserves. The Fed's reserved are so low that the Treasury had to create a $40 billion debt auction this afternoon. Basically, the Treasury is going to create $40 billion worth of debt out of thin air and then sell this debt.

The proceeds from the sale of magical debt will be given to the Fed. It's amazing how the central bank can avoid securing credit and liquid cash like normal people do. Now do you see why the Fed is unconstitutional and will be the ultimate financial demise of America?

These debt auctions will get more frequent and will get even bigger. Watch.

EUR/USD:

The crazy thing is that all these events and issues are terribly USD-. The Wall St. bail-outs, the printing of money, the creation of debt, the pullback in foreign investment, the expanding Trade Balance and Current Account, the sharp decline in growth, the increase in unemployment... all USD-.

Our financial and economic condition is worse now then when the Fed first started cutting interest rates. It's worse now then when they stopped cutting interest rates and started getting hawkish about inflation.

Right now inflation is not the top economic priority as it was a few months ago. We're in a period of massive delfation with commodities unwinding and the dollar rocketing up the USD Index.

Inflation is an issue but price pressures have dropped dramatically since July. The real inflation issue is going to arise in a few months because real is the creation of money without the backing gold. Real inflation is created when the Treasury runs the printing presses and adds physical currency to the money supply through the creation of credit and debt. It's a flawed system and now the system is sick and has no one but itself to cure the illness.

The euro made strong gains today. With what's happening in the bond market, on Wall St., and with our continually weakening fundamentals I must urge strong caution against holding USD long positions.

It's a fact the dollar has been on a historic run, especially against the euro. The dollar has just beat the crap out of the euro and it's showing few signs of letting up.

In a "normal" world the EUR/USD should be above the 1.5000 level right now based on what's happening within the financial and banking system in America. A few weeks ago we spoke about the Fed needing the dollar to be strong knowing a meltdown was on the way.

So for me and my trading, I'm going to do whatever I can to keep my positive open euro shorts from going into drawdown. If the market decides to come back to earth and realize what a mess the Fed is making and that the USD printing pressures are working 24/7, market players could send the euro up rapidly. You don't want to be caught in a move like that.

The market correlated variables are in shambles. All correlated markets have broken down and are operating with minds of their own. Today the euro was slightly correlated with crude and the Dow, and then it finally tried to catch up with gold. Tomorrow it could be a different story.

Tomorrow we get the Philly Fed Index and Initial Claims. I don't expect to see USD+ data from either one of those. It may not even matter. We could have a new catastrophe to deal with in the markets tomorrow and the fundamentals may not even matter.

I literally cannot count on or trust anything right now in these market conditions and season of extreme volatility and risk. The only thing that can be trusted is our own instincts and trying to keep an advantage on the markets.

The euro made a nice run, but I don't exactly trust it yet. Today's move had a lot to do with profit-taking on euro longs. That run up from the 1.4100 level to the 1.4300 level showed some big profit-taking within the price action. But there is serious risk with adding new shorts because of the financial turmoil.

No trader can trade on "hope". That's not part of the equation, but it is my hope that the market finally realizes what a mess the dollar is in and the powers that are proping up the dollar can no longer hold the euro back from crushing it. I don't think the manipulation can go on forever.

If you're trading, use strong risk and money management with your trades. We've seen wild moves this week and they could get even wilder before the week's closed out.

Be smart.

Trade Team Update

Another day, another bail-out... we might as well cover the latest news first... the biggest potential failure of all, AIG, was bailed-out this evening by none other than our good friend Hank Paulson. And just a reminder, Paulson said he wouldn't be putting the taxpayers at risk by bailing out AIG.

This bail-out won't be referred to as a bail-out but don't be fooled. The government is brokering an $85 billion loan to keep AIG afloat and they are taking control of 80% of the firm.

There's not a private sector firm on earth that has the money to save AIG. All of the details are not out yet, so I don't have much to say, but I believe the shareholders are going to get screwed on this bail-out and of course the taxpayers are at risk and under added burden.

Fed:

As you know by now the Fed held rates at 2.00%. That was expected by us here. We put out the no-cut call on Sunday and never flip-flopped even when Fed Funds Futures showed a 100% probability of a cut and just about every talking head was calling a 50bps cut.

The idea that the Fed could cut rates was driven by pure emotional reactions to the volatility of the markets and the meltdowns we had on Wall St. yesterday. Now is not the time to get caught up in these speculations and predictions.

Everyone voted to hold rates steady. That's what saved the euro from a massive sell-off. If the hawk Fisher had voted for a cut again I think the market would have hammered the euro, but all voters were on the same page.

The FOMC statement was tempered with dovish and hawkish rhetoric. The Fed was hawkish on inflation but as we can all see, there's a major round of deflation happening in the real-time as commodities continue to collapse.

The Fed was dovish on growth, as expected. There were no real surprises in the FOMC statement and Bernanke didn't give the market any special reason to buy up dollars.

I'm sticking to the call that the Fed is going to hold rates steady through the rest of the year unless we get some major catastrophe on Wall St. Speaking Wall St., they weren't happy with Bernanke's decision but they'll get over it. The fact that the Fed held rates has no real negative impact on Wall St.

TIC:

One of the pieces of the puzzle came together today. The data that shows foreign money flows into Treasury debt instruments during the month of July was only $6.1 billion vs. $55.0 billion expected. That's some of the most abysmal data I've ever seen. I thought it was a typo when it came over the wires. And the total TIC Flows were -$74.8 billion vs. $40.0 billion expected.

This is one of the explanations for why the USD has had to rapidly appreciate. Starting when? Mid-July. I don't think that's a coincidence at all. Without foreign investors funding the deficit and the U.S. government through buying bonds, the dollar would have to be strengthened in order to cover that major hit.

Now things make a whole lot more sense to me after finally getting the July TIC data. Bottomline is, that data is terribly USD- and I'm shocked the market hasn't responded, but I can understand why with everything else melting down.

It would be cool if the market could take a look at this TIC data and understand what a vulnerable spot this puts the USD in.

Tomorrow:

Yes the madness will continue tomorrow as we get Housing Starts, Building Permits, and Crude Inventories. I have found some signs within my research that indicate we could see a USD+ print on the homes data.

Crude Inventories is anybody's guess. Over 92% of all energy production in the Gulf is shutdown right now. Ten platforms are offline. And the last I heard, there was still at least one oil platform adrift and unaccounted for. Be advised this data should cause added volatility.

The fundamentals may not be the only factors the market is responding to tomorrow, so be prepared for that.

EUR/USD:

If you're even trading the pair, you're definately taking some big risks. There are no real established price patterns, trends, or strong support and resistance zones being established.

The euro was quickly rejected out below the 1.4100 level but I'm not calling that a clear sign of support. The price action is erratic and not at all behaving the proper way. This morning it took a 50 pip nosedive in under five seconds. Never saw that before.

As for my trading I'm just taking quick hits on the market and attempting to limit market exposure under these extreme trading conditions. I don't need to be sidelined but the risk management is imperative.

All market correlations have gone out the window. Crude continues to plunge and is showing no signs of stopping. I still believe we can see the $88 level or lower on crude. Gold has been doing well and lending support to the euro. If gold's support gives way and corrects it would likely bring the euro down with it.

Wall St. will continue to weigh heavy on our market and on the EUR/USD. The Dow finished the day up 140 points but this doesn't mean it will have a strong day tomorrow. We still have to get all the details from the Fed on AIG. It could be a wild ride. The bulls may get some control playing off this AIG news... we'll find out tomororw.

The euro has shown some bullish signs the past few hours but this could easily change once we get into later Tokyo and then when London enters the market.

If you're trading, be smart with your trades and manage your risk with precision. Do not overleverage or get greedy.

update #2

Conditions are deteriorating rapidly... Asian equity markets are getting slaughtered and crude is under tremendous pressure. Gold is also selling-off. We're seeing extreme risk measures being taken by the markets right now.

The issue with AIG is coming to the meltdown point. Moody's has downgraded AIG and should the firm fail to raise at least $75 billion they could be facing bankruptcy by Wednesday and this would cause catastrophic shocks across all markets in all corners of the globe.

It's my understanding the Treasury is trying to broker a bridge loan deal to help AIG stay solvent... more like a "bridge loan to nowhere". Keep you eye on this situation...

I forget to mention this in the update, but in addition to the FOMC we have several key fundamental events... out of Europe we have CPI, ZEW and out of the U.S. we have CPI, Core CPI, and TIC.

I've not done any normal research on those events as I'm focused on the FOMC and trying to keep pace of what's happening within the markets. But be aware we do get that key data throughout the morning and we have potential to see market reactions.

Trade Team Update - - 9/15/08

Looks like just another boring, routine day in the markets...

This I can say, I now know what it's like to trade the GBP/JPY... with the euro making a 400-point top to bottom move in addition to recovering about 200 points in the middle, once again we see unprecedented and historical volatility and it's only Monday.

I warned you last night there would be chaos today but I honestly never expected to see the depth of these price swings. For today's update I'm going to first cover the most important aspects of what's going on with Wall St. as it directly relates to trading and the EUR/USD. Then of course we'll hit the FOMC as there's no bigger event this week.

Wall St.

When the Dow closes down over 500 points, you know it probably wasn't a great day... overnight Lehman Brothers, one of the largest investment banks on earth went bankrupt. The Treasury basically forced another mega investment bank, Merrill Lynch, into finding a buyer. That buyer was Bank of America.

Meanwhile, Lehman's stock price dropped 95% today and is basically zeroed out. The other meltdown occured with AIG which I believe is the largest insurance house on the planet. I know they have assets of $1 trillion.

AIG is actually the most critical of them all because if they fail the affects would be catastrophic and on a global scale whereas the global-wide affects of Lehman and Merrill are not quite as much.

AIG begged the Treasury for $70 billion and was turned away. Now why did the Treasury turn away AIG yet rescue Bear Stearns? I think the Treasury's balance sheet is incapable of taking on AIG's risk. Plus, the Treasury knows there's more failures to come in the next few weeks. So, what Paulson is doing is using his powers to broker a deal between Goldman Sachs and JP Morgan to hook AIG up with $70-$75 billion.

Here's the problem. If AIG doesn't secure that funding by Wednesday their securities rating will get downgraded. That's a big problem because banks and institutions are holding billions worth of AIG bonds and if those bonds get downgraded it reduces their value and that value reduction will cause a nasty chain reaction across all markets. I think this story is to be continued...

Wall St. equities closed below some key levels and unless the Fed does something Wall St. wants, it could be another ugly day. Keep an eye on the Nikkei tonight to see how Asia is handling the Wall St. debacle. Expect more volatility with the yen pairs. I urge extreme risk management if you are trading the yen crosses under these chaotic conditions.

This I can tell you -- all of these solvency and liquidity and writedown issues are rooted in exactly one thing: housing. When the U.S. housing market was on fire due to loose lending standards and tons of easy money from the Fed, these banks got greedy and overleveraged themselves thinking the good times would keep on rolling...

When housing started to take a sharp turn in early 2007 I think the losses snowballed on the financial industry. Housing has fallen so sharply that it's only served to wipe-out these firms almost overnight. We are talking about investment houses that have been in existance for over a century getting wiped clean in a matter of months.

Wall St. will not heal until the housing market heals. These investment banks and commercial banks and financial institutions will remain at highly probable risk of complete failure as long as house prices continue to drop, inventories continue to go up, foreclosures continue to rise, and we get through the next round of ARM raises.

The housing market must find a bottom in order for the bear market on Wall St. to get off the ground and get back in the fight. I see no bottom in housing. I see no sustainable signs of a housing bottom forming, and as long as the jobs market continues to contract I do not see housing finding a bottom and making gains.

Crude and Gold:

The EUR/USD and commodities were very disjointed today. Gold had a total mind of its own. Overall gold had a strong afternoon which gave the euro quite a bit of support to test back over the 1.4300 level which has been rejected thus far.

Yesterday I gave a crude target of $95 which was hit. I am still targeting a move to the $88 level. I think at certain points today crude and the euro were correlated but it didn't last long. Crude also has a mind of its own and that market is totally wacked right now. I just do not see the sell-offs stopping because it's too easy to make the money shorting it.

Of course, the FOMC could easily cause extended moves in commodities tomorow, so be on the look out for this as well.

FOMC:

Tomorrow's FOMC is by far the most important and critical so far this year. The FOMC could massacre the markets based on their rate decision and rate statement. Tomorrow holds a risk level of 10 out of 10... the trading conditions will be extreme. And the price moves may not make a bit of sense.

The probabilities for tomorrow have changed in less than 24-hours. Just a few days ago there was almost no expectation for another Fed rate cut. In fact, the probabilities were showing a Fed rate hike as their next move.

As of this afternoon, Fed Funds Futures was running a 66% probability of a 50bps cut tomorrow. I'm shocked to even consider that. 66% is not a a high probability but high enough to make you think twice.

I forced myself to watch CNBC today and there was overwhelming support for a 50bps cut tomorrow from the various commentators and guests. I also heard 25bps and 100bps cuts. They all presented a compelling case. A few said there would be no cut.

I cannot call a rate cut for tomorrow. There are two dissenting rate cut voters on the FOMC. They voted for rate hikes at the last meeting. Unless Bernanke forces them to vote for a cut I do not see those hawks doing a 180.

A rate cut wouldn't exactly solve some of the issues plauging Wall St. and plauging the consumer. A cut in the Fed Funds Rate doesn't really make credit for consumers any cheaper or easier to access. It may help the business sector, but overall a rate cut won't solve issues.

I could see the Fed cutting the discount window rate by 50bps or more. That would make sense to me. I'm not ruling out a Fed Funds rate cut. I don't see it happening but that's great if it does happen.

If the Fed does cut I don't think it would be any less than 50bps. If they are going to use up more rate cut ammo they will probably want to make a statement to the markets.

Of course the only thing we need to worry about is how the rate cut will affect the EUR/USD. Well, in a normal and logical world, a rate cut would be a terrible thing for the USD and would send the EUR/USD up a minimum of 200 points and likely much more.

As you know, nothing has behaved normal and logical the past nine weeks. I could see the markets interpreting a rate cut as a good sign for the economy and for the U.S. financial sector and this would instill confidence in the USD. Or, the other explanation would be that a rate cut showed continued market strains and the "safe-haven" money flows continue into the USD.

This FOMC event will be huge and will likely cause strong volatility. Should the Fed do the right thing and hold rates, the other key will be the FOMC statement. If the Fed follows their current trends, they should stick to the hawkish rhetoric on inflation and remain dovish on economic conditions.

With these newest developments on Wall St., the Fed may not want to say anything to spook the markets. Bottomline, I'm ready to see the unexpected and illogical happen should the Fed cut. If the market decides to do the right thing and hammer the USD, that will be great too.

EUR/USD:

The price swings we saw today were unprecedented as far as I know. It was very interesting to watch but not very interesting to trade in. The price action is not behaving with much order and it's really not possible to even know to be a bear or bull.

The euro is still showing some bullish price action signs just like it did last night before it ran up to 1.4480. Overall my trade will be very conservative, especially as we get close to the FOMC decision. I don't want to see my trades getting bounced around from profit to negative every three seconds.

1.4188 is still a very key downside level as well as 1.4350 being a key upside level. Trying to establish any levels in between is pointless as there are so many improbable factors influencing the Forex market right now.

The best thing to remember is the extreme risk in the markets right now. I do not encourage any traders to add new entries right now unless you plan on managing them very tightly. Unless it's a hedge trade feeding you equity, take your money and run...

We could see some movement after Tokyo opens depending on what kind of volatility is happening on the Nikkei. Be smart with your trades and practice strict risk management the next 24-hours.

EUR/USD Weekly Outlook 9/14 thru 9/19 2008

Once again we have a volatile and chaotic week set before us… this week marks “round ten” between the heavyweights EUR and USD. The first nine rounds have belonged to the USD and the new champ is poised to continue commanding the fight.

That being said, there is risk on the USD and this risk goes by the acronym FOMC. But before we get into that, there are a few issues we need to cover and be mindful of, especially at the start of the week.

There are going to be three big issues to deal with between now and Tuesday’s FOMC… those issues are how the market intends on responding to the Lehman debacle, fallout from Hurricane Ike (economic impact), and of course issues within the commodities market.

Lehman:

As I commented last week, I still believe a multinational response will be needed to rescue Lehman in addition to the Treasury playing a role, even if it’s behind-the-scenes and kept secret from those not in the know and diminutive players like you and I. I don’t really care what happens to Lehman, their stockholders, or their reputation. My only concern is how the deal will affect the EUR/USD. Based on current trends I have to believe almost any deal is going to be USD favorable.

As of the writing of this commentary no official deal has been announced but I expect to hear something around Tokyo’s opening or before Wall St. opens on Monday. Paulson likes doing Sunday evening announcements to help his friends in Asia, so we may hear something soon.

The reason I believe the market will take the news favorably and USD+ is because this deal will just give the markets another false sense of hope and euphoria thinking that even though the Treasury can’t do a direct bail-out, they can use their unbridled powers to create a magical bail-out solution. They should start calling Hank Paulson “Walt Disney” because Paulson’s got a great skill for bringing fantasy to reality and influencing people to believe even their wildest dreams can come true if you just wish hard enough.

My hope is that the markets do the correct thing and punish the USD which should be the end result of this fiasco. Whether or not the markets behave the proper way is something no one can predict.

Ike:

Ike was catastrophic but at this point the damage and economic impact is still being estimated. There are no official numbers but I expect this to be quite a costly hurricane. The only thing we need to be concerned with is how the storm affected crude and gasoline production.

I’ve been getting conflicting reports on how Ike damaged the oil rigs and refineries. The U.S. Minerals Management Service said there were two confirmed reports of drilling rigs loose in the central Gulf of Mexico. Some refineries are reporting they’ll be shut down for nine days. Shell said they are already sending staff back to their crude operations.

The power outages could be an issue for the oil producers and refineries. Here in Tennessee I’ve already seen gas jump $1 or more per gallon and we have gas stations that have either run out of gas or are rationing just like in the Richard Nixon days before I was even born. I’m not sure how long this price gouging will go on for but it’s caused an uproar with consumers here in my neck of the woods.

Crude and Gold:

Last Sunday I promised crude would hit $100 during the week, which it did on Friday. Crude could be extremely volatile this week as we find out the state of the oil industry in Texas and as crude traders respond to this week’s USD and crude fundamentals.

Now if the USD fundamentals and FOMC continue to support the dollar this will only serve to put further downside pressure on crude and gold and this is certainly a valid risk for this week. As long as these conditions persist I see no reason why we can’t test below $95. Of course, the Fed could change the course of things very easily on Tuesday.

FOMC:

Although we have a week packed with key growth, consumer, production, employment, and inflation data, nothing is bigger than the FOMC this week. The past two weeks this idea of the Fed cutting rates again has been gaining steam.

The advocates and proponents of another Fed cut say Bernanke will cut at least another 25bps sometime between Tuesday and the end of the year. Other more wishfully-thinking rate cut proponents are saying the Fed will cut 50bps. And then there’s even a few saying the Fed will lop off another 100bps… we’ll put those folks in the delusional category for now.

I’m unable to make a rate cut call for Tuesday. The last two FOMC rate meeting saw two dissenting votes and although crude prices have come down and inflation fears have dialed back I do not see those two dissenters, who are known hawks, reversing their vote and opting for a rate cut. Unless all FOMC members are being forced to vote for a cut, I do not see Bernanke getting the support he needs to make it happen.

I expect to see rates held at 2.00% and I expect to see a relatively hawkish-toned FOMC statement. Besides the fact that the Fed manipulates data, they are extremely lagging with their monetary policy decisions. I’m not sure the massive deflation we’ve seen the past few weeks is going to be enough to cause the Fed to declare an end to their “war on inflation”.

The Fed should be dovish on the employment sector and that could certainly put some pressure on the USD. If the Fed talks up the retail or GDP sectors I’m not sure the market will buy it. Last week we saw evidence that the stimulus checks have run their course through the economy and will no longer contribute to over-inflating the retail sales and GDP data.

Now if the FOMC does pull a surprise cut, depending on the size of the cut, you can expect the market to move against the dollar. But, we’ll further discuss the FOMC and probabilities in Monday’s update.

EUR/USD:

At this point it is looking as if the euro will open higher on your broker’s platform than where it closed on Friday. Don’t forget the Forex market never closes and trading goes on between banks at all hours of the weekend.

Although our brokers closed us at 1.4218 on Friday, this weekend’s trading has moved the euro up at this point. If you’re one of the so-called “gap traders” exercise some caution and be smart with your trades because as you know we have many issues going on right now and we could see some heavy volatility and price swings between now and London’s open.

On Friday I warned not to add any new euro shorts and not to allow any euro shorts to fall into drawdown. I have to stick with this call at least until London opens. If the market does decide to slide down, so be it. But as for me and my trade plan, I cannot add new euro shorts and I have to manage my open euro shorts to prevent them from falling into drawdown.

Last Thursday we indicated some bullish signs had returned to the euro, mostly within the real-time price action. I will be continuing to look for these signs as we open up and trade through London. 1.4188 remains a very important key level. If we go back down to sustain a break of 1.4188, it leaves the door open to test as low as the 1.3818 level.

A sustained break above 1.4188 opens the door to test above the 1.4300 level. Be advised there’s quite a bit of resistance above 1.4350, so we’ll be watching the real-time price action and moves in commodities to keep a clear view on where we go.

These looming events we spoke about earlier will keep trading complicated. I think once we get passed the Lehman issue, we can then better focus on the FOMC for Tuesday and we can get a better view on where the market wants to take the EUR/USD.

As things further develop tonight I will update as things change and evolve. You know the drill – use strict risk and money management. Be extremely careful when our brokers open our platforms to the market. There’s been a tremendously amount of volatility and price swings already and it could easily persist once us retail players enter the game.

There’s blood in the water, the sharks are circling, and you can count on some serious attacks tonight and throughout this week… be smart with your trades… don’t take those knee-jerk trades and stay away from the revenge trading. Dumb money doesn’t make money.

Trade Team Update

Although the EUR/USD hit a 1-year low and the USD Index sat comfortably above the key 80 level, this was minor news compared to moves with commodities, equities, and copious amounts of gossip, speculation, and conjecture on the fate of Wall St.

The Dow was a mess today... early this morning futures were down and this put an intense amount of pressure on the yen crosses with the weakness in the EUR/JPY putting downside pressure on the euro. Adding to the euro pressure was more gold sell-offs, crude staying weak to the downside, and more USD euphoria as it was looking like the Treasury was going to bailout Lehman Brothers.

Long story short, the euro basically followed the Dow around today as rumor after rumor hit the markets about who was going to change Lehman Brother's diapers. You can read the rumors elsewhere if you're interested, I won't waste time on that.

It's my opinion that Lehman is unable to secure a buyer and the Treasury has stepped in to use their powers to find an international player to bailout Lehman. It will likely be a major player in Asia, the Middle East, or a some combo of both. You can count on the Treasury offering some special "backroom" incentives to sweeten the deal and prevent Lehman from collapsing.

The Treasury has used up their bailout ammo. There's no financial institution America that has the capital or resources to bailout Lehman. Word that Bank of America was going to do it is ridiculous in my opinion. BOA can't afford it plus they have their hands full with Countrywide.

So, we'll look for word of an international player to step in and we may hear this announcement at any moment. As far as how the EUR/USD responds, your guess is as good as mine. It should be USD-, but I'm not counting on logic to prevail.

Fundamentally it was another battle of worsts between the U.S. and Eurozone today. The winner was the Eurozone even though the euro didn't beat up on the dollar. Our already abysmally weak Trade Balance got even more abysmal today. How the dollar can continue gaining with a bleeding Trade Balance defies sanity.

Today's jobs data was crap. The labor market is in a full-fledged recession and has been since January. The jobs sector is in shambles and there's absolutely no light at the end of that tunnel. Retailers and sellers of discretionary goods are going to have a depressing Christmas this year based on the state of the jobs market.

The Import Price Index was heavily USD-. It printed well below market expectations and shows a rapid decline in high prices. Dovish members of the FOMC will really like that piece of data.

While we're on the subject of the a negative dollar, this piece of news came over the wires a few minutes ago:

"(US) Reportedly, the US gov't is mulling putting the GSEs $5.2T of debt into the federal budget - The report notes that a conclusion has not been reached."

This is shocking. That's the most USD- negative rumor I've heard all day. If the Treasury is allowed to add further burden on the U.S. taxpayer by holding them responsible for all $5.2 trillion of their fellow taxpayer's mortgages I can't possibly imagine how the market will be unable to respond negatively to the dollar.

In a logical world this move should hammer the dollar but as you know we're not operating under logical conditions right now...

Tomorrow:

We have a huge day to close out the week. Eurozone Industrial Production which is likely to print at or below expected. The big data is U.S. Retail Sales and the Michigan Sentiment. Based on my research I have to believe the retail data will print with an upside surprise. Those are my expectations.

Be advised that the EUR/USD may not be most the under control of the fundamentals. There are other bigger and stronger factors at play as we've mentioned above. For example, if crude finally cracks that $100 level that may have a strong pull on the euro.

Speaking of crude, we have to keep an eye on Hurricane Ike as it's on a bee line to the Texas refineries and is expected to hit the Houston area hard. Houston is a very important energy center and financial hub. It also floods very easy so if Ike does what it's expected to do it could get nasty and good push commodities up.

EUR/USD:

As of the writing of this update I have no plans to add any new euro shorts. Price action and order flow show a demand for euros this evening and these price action patterns are on the bullish side and something I've not seen in quite some time.

So now I need to keep watching and see how things play out because it's been awhile since I've seen the euro show bullish signs. I don't want to see any euro shorts go into drawdown at these lower levels. I will not let that happen.

With the level of heavy euro shorting that's been non-stop for the past few weeks we know there are a ripening harvest of stops sitting right above the 1.4050 level and higher.

Tonight or tomorrow would be a great opportunity to run those stops and allow the brokers to add to their netcaps and help make their weekly reports look good. Just some food for thought...

That being said, at this point I am not looking to take any euro longs. I need to see some real confirmation that this strong downside momentum is easing and that market players have returned to buy the euro.

Tomorrow's Friday so expected heightened volatility and wild price swings as we close out the week. If the Treasury doesn't announce their Lehman bailout plan tomorrow, they may hit the markets with the news on Sunday right before Tokyo opens. I guess it all depends on how fast they can broker a deal.

I didn't take a single trade today and I may not take one tomorrow in order to keep strict risk management on my accounts. For me it really all depends on how the price action is responding and how things play out on Wall St.

You know the risks that are in the markets right now, so please use strict money management under these extreme conditions.