Labor Report Review
CIGA Eric

Despite economists’ expectations that the unemployment rate would climb well into the economic recovery, the percentage of unemployed, job-seeking Americans fell 0.3 percentage point in January to 9.7 percent, its lowest point since August 9.7%

Who are they kidding – 9.7%? MOPE only works if you do not investigate.

Job Creation Histogram (JCH): Net Nonfarm Payrolls Added/(Lost) less Civilian Labor Force Added/(Lost), 12 Month Average:

The jobs creation histogram reveals the BS factor. Obviously, the data has been revised. Check out shadowstats for an explanation. Laziness at the keyboard does not imply a personal affiliation with them.

9.7% more like north of 20%. That’s slightly greater than 1 in 5 without a job. Thus, the Administration’s talk of another job stimulus bill.

Civilian Unemployment Rate:

Source: bls.gov
Source: shadowstats.com
Source: finance.yahoo.com

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The Big Flush
CIGA Eric

We have had a very good washout of stale longs which is healthy and had some traders, including myself, thinking that the worst of open interest drop off was over, but today’s action flushed another wad of them out. China and India will be pleased.

Dan’s sharp observation about open interest was important. C-wave advances, while slightly different in terms of structure when starting, come in waves of three/two since 2001. That is, three up thrust and two down thrusts of open interest during the advance.

The 2005-2006 and 2009-2010 C-waves, illustrated below, started from an extremely negative net long position, in excess of -50%, by the commercial traders. Thus, these waves are studied for comparison.

Gold London P.M. Fixed and the Commercial Traders COT Futures and Options Net Long As A % of Open Interest:

Clearly, the cycle of three up and two down is revealed. The big flush comes after the second up thrust in open interest during the advance. The "big flush" came in February 2006. The weak hand were flushed hard. Gold fell more than 4% from $568.75 to $545.80 under guise of some economic end-game MOPE.

Gold London P.M. Fixed and the COT Futures and Options Open Interest Stochastic Weighted Average:

Similar to 2006, the "big flush" has once again taken out the weak hands under the guise that the budget crises within the Euro Zone are more troublesome than those within the US Union. To that end-game spin, I say believe what you want.

The upward revaluation of gold in all fiat currencies is the mechanism for defeating the debt implosion that comes at the end of an economic cycle.

One up, one down, two up, two down. After that is three up.

Source: jsmineset.com

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Jim,

For Disheartened CIGAs, remember the old trader’s adage:

"Fundamentals always win in the end."

The US dollar’s fundamentals are appalling. It is exactly as you say, "the rest is just noise."

Regards,
CIGA Pedro

Jim,

This is a sad but revealing tale regarding the politicians all feeding from the trough and voting according to how much money they got from banks.

Regards,
Harry Schultz

Volcker and Reform Defeated
The Former Fed Chairman Offers A History Lesson, Congress Skips the Class
By DAVID WEIDNER
FEBRUARY 4, 2010, 3:18 P.M.  ET

Wall Street reform died this week.
It died Tuesday before the Senate Banking Committee from unnatural and illogical causes: the finance lobby, obstruction, fear-mongering and plain ignorance.

Rarely does financial history offer a living, breathing voice of reason in crucial times, but listening to Paul Volcker spell out his plan for reform was such an event. Too bad for all of us, his prescription for reform will be discarded like loan underwriting standards for a multi-family home near Las Vegas.

The former chairman of the Federal Reserve hit the committee like a ghost of banking past — and future — leaving the rule that bears his name on the doorstep of Capitol Hill. His plan is not a pure return to the dreaded Glass-Steagall days, but to those in Congress who are lining up to kill the plan, it may just as well have been that and more.

Mr. Volcker’s testimony was at once a brilliant articulation of the structural dangers of Wall Street as it stands and a forceful warning. He clarified the most controversial part of the rule, the ban on proprietary trading for commercial banks.

A bank "trading for its own account, it will almost inevitably find itself, consciously or inadvertently, acting at cross purposes to the interests of an unrelated commercial customer of a bank," he said in prepared testimony.

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Volcker Rule vs. Basel Proposals
Gregory Lyons, co-chair of the Americas Financial Institutions Group at Debevoise & Plimpton, compares the Vocker Rule and Basel Proposals

Sen. Shelby asked Mr. Volcker if there was any evidence proprietary trading contributed to the financial crisis and pointed out that Lehman Brothers and Bear Stearns Cos. were not commercial banks. Then he suggested that unilaterally imposing the rule in the U.S. market would handicap U.S. institutions globally.

Mr. Volcker did not have a compelling answer on the first point and seemed to stumble when pressed by Sen. Shelby on how regulators would measure "excessive growth" in bank liabilities. It’s like "pornography, you know it when your see it," Mr. Volcker said.

He also conceded that in order to keep U.S. banks competitive, the same restrictions would need to be adopted overseas.

There’s more to it than that, of course. When it comes to proprietary trading and the recent financial crisis, big banks did get hit by their trading desks.

In the fourth quarter of 2008 J.P. Morgan reported $1.1 billion in losses due to mortgage-related exposures and weak trading results in credit-related products. A single Merrill Lynch trader lost $120 million on bad currency bets alone contributing to $13.8 billion loss for the firm in its last three months before being acquired by Bank of America Corp.  Citigroup Inc. lost $600 million in the third quarter of 2007 on its fixed-income desk.

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Birth/Death Model Discussion
CIGA Eric

Blame the birth/death model (BDM) for the revision. Built on years of research, the model’s key assumption is fairly simple: most of the time jobs created at new companies make up for losses at companies that close.

An nice review of the birth/death model for those that have followed the employment report here and jsmineset.com.

In addition the commentary, many have suggest the BDM, as one of it’s strengths, catch job creation that tradition collection methods miss during economic inflection points. In other words, it misses job losses, or overstates job creation, at the end of a business cycle.

The following chart illustrates the tendency to continue understate job losses by continue to forecast job creation during economic decelerations.

Birth/Death Model:

Also, while the BDM was forecasting job creation in 2008 and 2009, it was doing so as business, consumer, real estate, home equity, and other line of credit for small business start-ups had peaked in 2008.

Breakdown of Total Bank Credit for all US Commercial Banks:

I submit that a model with such limitations, or assumptions with a clear bias should be left unused. This assumes, however, that this bias provide no inherent value to the employment data.

In a world run by spin and MOPE, I would not make such an assumption.

Source: bloomberg.com

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COT Notes
CIGA Eric

The big flush continues

Gold London P.M Fixed and the COT Futures and Options Open Interest Stochastic Weighted Average:

COT Table:

Look who’s fading the decline in both the Euro and equities. Beat the grass to startle the snakes. Yell fire in a crowded movie theatre. Take your pick. Both stampede the masses in a predetermined direction.

Watching long bonds and U.S. dollar closely.

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