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.