FX Update: Market shrugs its shoulders at positive data

The sour mood on Wall Street deepened today, despite bright spots in corporate earnings and the robust US growth and other data. Bonds rallied strongly and currencies fell into their normal swing of things in these market conditions: the USD and JPY were sharply stronger against the broader market. The turnaround in the JPY was the most pronounced development on the day after all of the positive US data failed to put a dent in the bond market. USDJPY's break higher through the previous high of the week - which was also at the weekly pivot - failed to hold and EURJPY was smashed lower again as EuroBund yields scraped close to a new six-week low.

Today's action is a very powerful signal that the market wants to ignore the good news for now and a warning bell on sentiment. The only out here for the optimists is that the action was mostly due to end of the month fixing action, a bit of a thin argument, though it could certainly have aggravated volatility somewhat.

Technical and other Developments
USD - a big confirming follow up day after the dollar index rose above the 200-day moving average in recent days. The immediate target may be something like 1.3750 in EURUSD, an old flat-line area of interest. From a Fibonacci perspective, the next big level of interest is the 1.3480 (0.618 of the huge wave from below 1.2500 to above 1.5000). The University of Michigan confidence number was higher tahn expected and the Chicago PMI was the highest since late 2005. The employment component surged to 59.8 in Jan. from 47.6 in Dec. - the first reading above 50 for the cycle.

EUR - looking weak against the USD and JPY onslaught, but actually firming in this more generalized risk averse environment. This makes some sense, as the the EU was out backing up Greece implicitly, despite the headlines mostly suggesting that Greece would be left in the lurch. Spain was also out today with its own attempt to rein in spending with a "radical austerity budget" as the FT called it.

JPY - as mentioned above, a false break higher for USDJPY, though the reversal wasn't particularly large, so the immediate outlook remains ambiguous. Elsewhere, the JPY's move stronger, and it seems the currency will continue to make gains as long as investors continue to seek safety in already low-yielding government debt. JPY bulls better beware, however, as FinMin Kan was out today asking the Bank of Japan to do more to counter deflation. "We'll work together with the Bank of Japan to take a comprehensive and powerful approach to overcome deflation."

CHF - there was no official confirmation from the SNB, but today's action looks suspicious and the SNB may have been actively intervening today as EURCHF zipped higher after posting strong new lows below 1.4700 today. USDCHF slammed up through 1.0600 on the day, very firmly underlining the break of the big 1.0500 level as seen in the chart below.

GBP - broke the 1.6000 psychological barrier after 1.6080 outright support (now resistance) gave way this  morning. GBPUSD support focus shifts to 1.5833 and then 1.5709, the low since June of last year.

AUD - felt serious pain on the day on the full frontal assault on risk appetite. AUDUSD confirmed the takeout of the recent support levels and the focus now switches to the 4 month low around 0.8735 and then the 200-day moving average (currently at 0.8530).

Looking ahead
Next week is a busy one and Monday is the first day of a new month. Both US ISM's and the January employment are on tap from the US. The RBA meets next Tuesday. Norges Bank meets on Wednesday and the BoE and ECB are up on Thursday. The Canadian Employment report is also up on Friday next.

Have a great weekend and be very careful out there!

FX Closing Note: Market holds its Breath

Market action today:
After a close like we saw last Friday, one might imagine that the market would do one of two things: 1) pick up where it left off and continue to meltdown after risk takers suffered a weekend nervously pondering their positions, or 2) decide that the huge dip - the worst point drop in some of the major equity indices since last March in some cases - is a great timing opportunity for going long risk. Instead, we get neither - simply a day of the market holding its breath and twiddling its thumbs. The fact that risk bulls are still cowed enough that they haven't rushed into to buy the market tilts the odds a bit against their favor, perhaps.

The USD, JPY, EUR and AUD went pretty much nowhere by the end of today's trading, much in line with stocks and bonds doing the same. The biggest move on the day was sterling, which pulled strongly higher and took back considerable lost ground against the EUR, once again testing that key 0.8700 in EURGBP. GBPUSD resistance was also blasted away even as the USD was relatively stable elsewhere. A catalyst for the action was tough to come by....

Chart: GBPUSD
GBPUSD rallying strongly on the day after a steep sell-off of late. The retracement level (0.618 Fibo of the recent downwave) and the 55-day moving average are the key resistance here. As long as these hold, the default outlook is relatively bearish.

Existing Home Sales
As we mentioned this morning in our outlook for the US New Home Sales later this week (New Home Sales usually have a higher concentration of new home buyers), the housing market activity would likely dip in December due to the anticipated expiry of the first time home buyer incentive. It is surprising, therefore, that the market was at all surprised by the large drop in existing home sales to the approximate level last September.

A renewal of the home buying tax incentive has been in place since it "expired" on the first of December, and the renewal included a one-time tax break for all homebuyers (who have owned their homes for at least five years, whereas the original incentive was for first time buyers only), we are likely to see a strong resurgence in the data already in January, when the weather turned milder and when new buyers might have started responding to the new incentive. The eternal question is how much these incentives are cannibalizing forward demand - which we won't know until the May data, since the home buying tax credit incentive expires at the end of April.

Looking ahead
Have a look at this morning's preview of the rest of the week's data for a rundown on the major event risks coming up for the rest of the week.

A note on weekly pivots
A couple of the weekly pivots were in play today - here we note the levels for these pivots this week as they may serve as a turning point if the USD fails to rally. Remember also that the dollar index has been pushing at its 200-day moving average, so a strong close for the greenback would take out this key resistance level. We're finely balanced on a fulcrum here, it seems.

Weekly pivots this week:

• EURUSD - 1.4194  (right at the high today)
• USDJPY - 90.50
• EURJPY - 128.17 (within a couple of pips of the day's high)
• USDCHF - 1.0380 (minor break attempt today did not succeed)
• GBPUSD - 1.6218 (taken out by today's rally, but as pointed out above, more interesting levels await here)
• AUDUSD - 0.9090 (served as resistance today)
• USDCAD - 1.0477
• Be careful out there.

Little-known NYC firm to run China's Huge new Lottery Boom

Dear Reader,

 

There’s been an exciting development in the global gambling industry recently... and it could easily double your money this year.

 

Put simply, the Chinese government has just passed a new law allowing lotteries to operate across the entire country... expanding China’s gaming markets for the first time in decades.

 

Experts estimate China’s new lottery market could generate as much as $600 BILLION a year. (That’s 10-TIMES bigger than the U.S. lottery market, currently the world’s largest.)

 

Even better, a little-known New York City company just landed an exclusive 15-year contract with the Chinese government to run this huge lottery boom.

 

Take a look at the details below...

 

Sincerely,

Brian Hunt

Editor in Chief .

Little-Known NYC Firm Lands 15-Year Contract
To Run China's Biggest Lottery Expansion

"When you add up all the new business
[this company] has gained over the last few
weeks, you'd think it won the lottery."
~ Investor's Business Daily
From the Desk of S&A Analyst Braden Copeland
Friday, January 15, 2010

Dear Reader,

I've uncovered an opportunity that could begin your new year with a quick 100% gain.

A few months ago - on July 1st, 2009 - the Chinese government approved a new gambling law, allowing lotteries to operate across the entire nation... expanding China's gaming markets for the first time in decades.

In a country that's "home to the most fanatic gamblers," as the New York Times reports, that means just one thing:

If you're an early investor in the lottery business, you're set to make a killing.

According to Peking University researchers, China's lottery is estimated to grow into a whopping $150 BILLION industry, thanks to this new law.

That's almost 3 TIMES the size of the U.S. lottery market, which is currently the world's largest.

It's also equivalent to the economic output of entire countries such as Egypt and New Zealand!

And that's a conservative estimate.

David Green, a gaming expert at PricewaterhouseCoopers, says the market could potentially be as big as $600 BILLION per year.

But the most incredible part is, one little-known New York City company just won an exclusive 15-year contract with the Chinese government to run the biggest legalized lottery boom in history.

The amount of money at stake here is incredible.

This U.S. firm started operations in China full swing last quarter...

In just 4 months, it raked in more than $100 million in profits... with much, much more to come.

I believe this stock could easily DOUBLE your money within the next 6 months.

But as I'll show you, gains of 1,000% or more are possible.
How can I be so sure? Well...

It's happened before
This isn't the first time a new gambling law has been passed in Asia.

And certainly not the first time you could have made a fortune riding the wave of profits that almost always follows the passage of such laws.

For example, in 2002, a tiny independently governed region off the southeastern cost of China legalized casino gambling for the first time in its history.

You've almost certainly heard of it: Macau.

What you may not know is that, within just a few short years, Macau overtook Las Vegas as the most profitable gambling destination in the world.

When one of the first casinos – operated by U.S.-based Las Vegas Sands – opened in May 2004... a phenomenal crowd of 30,000 folks clamored to get in.

90% of them traveled from mainland China. Just to experience a new and exciting gambling phenomenon.

"You can set up 10 Macaus and you still won't saturate the market because there are just too many people," says Sheldon Adelson, CEO of Las Vegas Sands.

Adelson's Macau casino was so profitable, it recovered its initial cost of $330 million within the first 11 months of operation.

"That's unheard of," says David Green, a gaming expert at PricewaterhouseCoopers. Returns like that aren't at all common in the casino business.

Since Macau's new gambling law was passed, the money has been spreading like wildfire.

Each day, around $27 million flows into the tiny city.

And for U.S. investors who got in on the Macau trend early, the payouts were simply astounding...

542% gains in ONE day
Las Vegas Sands (NYSE: LVS) was one of the first American firms to set up shop in Macau after the government legalized gambling.

You could have made 320% gains if you'd got in after the company's December 2004 initial public offering.

Wynn Resorts (Nasdaq: WYNN), another American company that opened a profitable casino in Macau, could have made you 1,325% gains in just 5 years.

Melco International, a Macau casino stock, shot up as high as 1,700% after the new law was passed.

Hong Kong-listed Shun Tak Holdings, a Macau-focused conglomerate, more than quadrupled since December 2003.

And incredibly, in November 2004, the shares of a little-known technology company called Cyber On-Air Group skyrocketed 542% in one day after it announced plans to invest in a hotel-casino project in Macau.

My point is, there's one trend that's been a surefire investment bet over the past few years, no matter what has happened to the stock market...

Every time a new gambling law is passed in Asia, investors have made a fortune.

And Macau isn't the only place you could have seen phenomenal gains recently...

A once-in-a-lifetime opportunity to
make 1,350% gains
The government in Hong Kong, another independently governed region in Asia, authorized something unprecedented last April:

Lottery games through the Internet and mobile phones.

If you had been paying attention, you would have noticed that a tiny Internet company called VoDone Limited moved immediately to take advantage of this new legislation.

VoDone launched a "lottery channel" on its website, attracting millions of enthusiastic Asian gamblers.

The tiny stock – listed on the Hong Kong stock exchange – shot up 300% in ONE month... and could have made you 1,350% gains in 7 months.

Incredible, isn't it?

Something similar happened in neighboring Thailand as well...

After years of tightly enforced bans on gambling, the Thai government decided to pass a new law allowing online lotteries last year.

A company called Loxley moved in to cut a deal with the government.

If you had been following the story, you could have banked 228% gains on the stock, right after the deal was announced.

And then there's the story of a small British company called PartyGaming...

In 2008, they introduced new online poker games in Asia Pacific countries like Singapore, Taiwan, and the Philippines... after months of waiting for the right government approvals.

If you had taken a stake in this penny stock, you could have watched your shares TRIPLE in just 6 months.

I could go on. But you get the idea...

Every time a new gambling law has passed in Asia, big gains followed like clockwork.

Right now, thanks to a new Chinese lottery law... and a little-known American company that moved in early to take advantage of the coming boom...

You have another historic opportunity to make a fortune off Asia's gambling craze.

And this time, I anticipate the gains could be even bigger, because of one key factor...

60-Times bigger than Macau?
When I was in China recently, I saw something no one had prepared me for.

It wasn't the booming economy. Or the jungle of brand-new skyscrapers. Or even the sheer number of people.

No. What amazed me most was how almost every ordinary Chinese person was crazy about gambling.

Every third storefront along the city streets has guys sitting out front playing cards and other betting games... with a pot of cash in the center.

And that's how I knew China's new lottery story could be HUGE.

Because, as you might guess, only wealthy Asians can travel to Macau, to indulge their gambling craze in fancy casinos.

Even with Internet games and mobile phone lotteries – like in Hong Kong, Singapore, and Thailand – only the relatively rich have access.

But China's new lottery is unlike anything the global gaming industry has ever seen...

With the introduction of lottery tickets and new types of instant games sold in almost every local store... even the average Chinese with just a few yuan to spare is a potential customer. 

And I'm not the only one who thinks this is big...

"It will be dramatic," says Gary Newman, head of Global Lottery Corporation, a Las Vegas-based lottery technology provider.

Andrew Gellatly, editor of London-based journal Gambling Compliance, calls China "the new frontier of the global lottery industry."

And as I mentioned, David Green of PricewaterhouseCoopers estimates the market could potentially be as big as $600 BILLION per year.

That's almost 60-TIMES bigger than Macau!

Bigger than any of the gambling opportunities we've seen in other Asian countries.

Here's why this could be important for you:
Right now, one New York-based firm has the lead in capturing a big chunk of China's legalized lottery market.

This U.S.-listed company has secured a 15-year contract with the Chinese government to supply "instant-win" lottery tickets in every region of the country.

(These instant-win tickets are very similar to the scratch-off tickets you see in nearly every convenience store here in the States.)

The firm has set up a state-of-the-art, multimillion-dollar facility – the first of its kind in China – to produce lottery tickets.

And just to show you how much demand they anticipate, the facility is equipped to produce 4 billion instant tickets per year...

And the company recently said in a press release that they anticipate "adding another four billion of ticket printing capacity [to] meet existing demand in the market."

In other words, they plan to churn out 15,000 lottery tickets every minute of the day.

Here's why I think this stock is a safe bet to double your money in 2010...

How a small New York firm struck
a deal with the Chinese Gov't
Put simply, this little-known company is an innovator in instant lotteries.

Although most people have probably never heard of it, the company produces instant scratch-off tickets and promotes new lottery games across almost every state in America.

For example, they recently created a very successful "scratch and sniff" game for a famous candy company, to help increase Christmas sales.

But its success in the U.S. is nothing compared to the possibilities for growth in China... which is just beginning to expand its lottery market.

This New York company was smart. It moved into China in 2007, when almost no one was paying attention to the lottery industry.

The company's American executives gradually made important contacts in the Chinese government's gaming commission... going so far as to start a 50% joint venture with a local government-backed gaming firm.

Not surprisingly, in 2009, when the government issued a new gaming law - opening up China's lottery market for the first time in decades - the firm was already poised to benefit.

Thanks to its first-mover advantage, this New York company secured access to lottery ticket sales in 22 provinces across China.

But the most important thing for you to know is this:

This U.S. firm provides something the Chinese have never had before: new, innovative instant scratch-off games.

And as we've seen before, every time there's been an exciting new gambling phenomenon in Asia, savvy investors have had a chance to see incredible gains.

Conservatively, I estimate you could bank a quick 100% gain over the next 6 months with this U.S.-listed stock...

And I think you could make 2 to 3 times more money over the next few years, as China's lottery booms.

But as you saw with Macau and Hong Kong, gains of 1,000% or more are not out of the question.

If this sounds like something you'd like to get in on, the full details are in a Special Report I've just prepared, called: How to Profit From China's Biggest Lottery Expansion.

If you're interested, I'd like to rush you a copy immediately, absolutely free...

Get the "inside" story
My name is Braden Copeland.

I've been working closely with Porter Stansberry for the past year on one of Stansberry & Associates' most successful research advisories.

It's called the Inside Strategist.

I spend the majority of my time combing through company 10-Ks, annual reports, Bloomberg data sets, and technical stock charts.

But the truth is, the only way I come across truly breakthrough investment stories is by being on the "inside" of a major opportunity.

For example, I saw China's gambling phenomenon first hand on a recent research trip.

If I hadn't spent the time, energy, and money to investigate the full story, I would never have found the opportunity I just told you about.

When I visited Shanghai, Shenzhen, and Guangzhou I made it a point to talk to folks on the ground. I visited factories... spoke to the workers and management teams... took notes and pictures.

When I got back, I looked into China's new gambling law. I researched the small U.S.-listed company that won an exclusive 15-year contract to run China's biggest private lottery.

And when I made inquiries about company insiders, I noticed they were loading up on the company's stock like I'd never seen before.

My point is, to get the "inside" scoop on a major investment opportunity, it's not enough to simply analyze stock charts and read analyst reports.

Sometimes you need to travel, to see things first hand. Sometimes you need to have the right "insider" connections.

That's how my colleagues and I at S&A Research have made some of our biggest gains in the past:

• For example, back in 2005, Steve Sjuggerud received information about a penny stock that had made a mammoth gold discovery in Canada. He followed up by traveling to Vancouver and meeting with the company's CEO to get the inside story.
It resulted in 919% gains for subscribers... one of the best performing plays we've ever seen at S&A.
• In 2008, in the middle of the financial meltdown, Porter received some pertinent information from a trader at Fannie Mae. He dug into the story and figured out that Fannie Mae and Freddie Mac were going to zero. Some subscribers made as much as 2,000% gains thanks to Porter's prediction.
• Last year, my colleague Dan Ferris traveled to a remote village in Western Newfoundland to get the inside story on a mining stock. He met with and followed a 12-man exploration team.
His on-the-ground reporting resulted in 321% gains... and still climbing.
• And just last month, our in-house energy expert Matt Badiali went all the way to Papua New Guinea to get the details on a world-record natural gas discovery. His recommendation resulted in a quick 10% pop in just days, with potentially hundreds of percent more to come.

As you can imagine, over a decade in this business, we've developed a vast network of sources and contacts all over the world.

That's why Porter decided to create an entire advisory research service centered on the idea of tracking and using "inside" information.

And last year, he hired me to helm this service.

The best recommendation of my career
Inside Strategist is a weekly advisory newsletter that tracks all the information we receive from experts with "inside" knowledge of an investment situation.

We often travel to get the full story. We interview company insiders and industry experts. We also constantly monitor SEC Form 4 documents and track what company insiders are buying and selling.

The most important thing for you is our track record...

In 2008, the stock market was down 37%. Here's a snapshot of what our winners looked like:

• 100% on Chesapeake Energy (in 2 months)
• 100% on Williams Companies (in 2 months)
• 64% on Regions Financial (in just 6 days)
• 100% on Smithfield Foods (in just 2 weeks)

Last year, we saw big gains in a number of sectors, like:

• 63% on insurance firm Conseco (in 1 month)
• 85% on building company Centex (in just 28 days)
• 104% on tech firm VeriFone (in 6 months)
• 56% on auto supplier Dana Holding (DAN) (in 1 month)

But I believe the China gambling opportunity I just told you about could do much, much better. It could be the best recommendation of my career.

As I said, the full details are in my Special Report: How to Profit From China's Biggest Lottery Expansion.

I'd like to rush it to you free of charge. In exchange, I only ask that you try a subscription to the Inside Strategist for 90 days.

Now, there are several companies you can hire on Wall Street that will track what company insiders are doing... and monitor Form 4 documents for you.

The best service we know that does this costs $20,000 a year.

Inside Strategist doesn't cost nearly that much. In fact, our service costs less than a subscription to the Wall Street Journal.

But the big difference is, thanks to our vast network of contacts and our on-the-ground reporting, we can do something none of these other firms can do...

Which is access and track information that never even shows up on SEC documents.

Let me show you what I mean...

Double your money, thanks to
the ultimate gold insider
One of our most trusted contacts happens to be one of the richest and most successful gold traders in the world.

But he doesn't run a mutual fund or hedge fund, so his trades and personal holdings are not mainstream information.

You may have heard us mention his name before: John Doody.

Well, John just alerted us to an opportunity that could double your money... on a very unique gold stock.

Why should you care?

Put simply, Doody tells us he went from being an economics professor at a small college in Massachusetts, earning $40,000 a year... to making over $5 MILLION just by using a simple strategy he invented for picking gold stocks.

According to him, this strategy has made 390% gains over the last decade, even as the S&P 500 dropped 40%...

Which is why, he now spends his time sailing his yacht between his condo in Florida and his vacation pad in the Caribbean.

In other words, he has enough money to retire luxuriously and never work again.

John's gold picks have done so well, Barron's has profiled him numerous times, saying his strategy works "spectacularly."

Bottom line: when John Doody calls us with a new gold stock idea, we listen.

Back in July 2009, John gave us information on three small-cap mining firms.

Two of them shot up as high as 57% and 32% shortly after we recommended them. (And still have a long way to go.)

The third, a tiny firm called European Goldfields, gave Inside Strategist subscribers a chance to bank 85% gains in just 5 months.

Just the other day, John called us about a fourth. This one, he tells us, could rack up even higher gains...

Unusual Mexican gold opportunity
John Doody's latest recommendation has an unending share of profits in a huge new gold mine in Mexico.

The mine is set to produce about 500,000 ounces of gold. The revenue from this is estimated be about $1.5 billion, easily putting it in the big leagues.

But the best part is...

Instead of owning and operating a big, expensive mine... this firm simply collects royalties on the gold sold every year – which it then passes on to shareholders.

The company doesn't actually do any of the mining work itself. Another larger mining firm operates the mine.

In fact, this tiny company has so little overhead, it only employs 17 people.

Along with the huge new mine in Mexico, this royalty company owns interests in 20 other mines...

"Given what they have in their pipeline," John told us, "the company said they could see the order of $160 million in royalty revenues. That's almost $4 a share."

Very simply, John believes that thanks to the revenues from the new mine in Mexico, this company could pay out HUGE dividends this year. Not to mention, the stock could easily DOUBLE from here.

We just put together John's research in a Special Report called: An Easy Double Thanks to the Ultimate Gold Insider.
Inside, we share with you exactly what company John is recommending (and how to buy it).

In addition, you'll get the full details on a second gold stock that John thinks should see significant gains in the next few months – anywhere from 60% to 160%.

I'd like to give you access to this report free of charge... along with the report I told you about earlier, How to Profit From China's Biggest Lottery Expansion.

To get access, I only ask that you try a subscription to the Inside Strategist for 90 days.

Let me quickly tell you a little more about our investment philosophy – and this letter – so you can decide if it's right for you.

What we can do for you
You can't possibly know everything going on behind the scenes in the market. No individual in the investment world is that connected...

That's where Porter and I (and our network of connections) come in.

Because of Porter's unique position as the founder of a publishing company with subscribers in over 100 countries, he has access to a number of insiders – across different countries, markets, and sectors.

And my experience as founding partner of a $1 billion commercial real estate firm... as well as venture capitalist for a music band with a platinum debut album and founder of a successful motorsports business... make us a formidable investment research team.

Very simply, we don't miss much.

In the pages of the Inside Strategist we use our expertise and connections to help our readers see huge gains in a number of ways:

• We often travel all over the world to ferret out investment opportunities. Being on the ground... seeing things first hand... and talking to the people involved helps us get the "inside" story.
• Often, our contacts inside various companies will alert us to great buying opportunities.
For example, a buddy of Porter's is the CEO of a pharmaceutical company. Thanks to a conversation Porter had with this gentleman, S&A subscribers had a chance to make 207% on a biotech stock called Elan.
• We have a lot of friends with 20, 30, even 50 years of experience investing in their particular fields, whether it's oil exploration or gold mining.
  
  Like our friend John Doody, who just recommended two gold stocks he thinks could easily double.
• Sometimes, we find the biggest gains by monitoring insider buying and selling at various companies. We keep track of literally hundreds of promising companies every week.
  
  But, we don't recommend them until we've seen a firm commitment from insiders to put their "money where their mouth is." We've had a lot of these types of plays recently, like our recent recommendation of Chimera Investment Corporation (CIM), an investor in mortgage securities.

Matthew Lambiase, the CEO of Chimera, had just ponied up about $300,000 to buy his own stock on the open market.

Like clockwork, within a few weeks, the company raised its dividend, reported 50% higher earnings... and watched its stock spike over 50%.

And we went along for the ride.

Think he knew something the rest of us didn't?

I do.

We recently found another company in a similar situation...
A decision from the gov't could
make you 50% gains
This Pennsylvania firm supplies a one-of-a-kind substance useful in cleaning contaminants in things like municipal water systems.

As you might guess, the company's major clients are municipal governments and giant utilities.

In other words, big contracts from the government often boost this company's share price tens of percentage points higher.

Normally, you and I would never be tipped off before such an event occurs.

But here's the thing...

Recently, a major insider at the firm TRIPLED his stake in the company, buying $500,000 worth of stock. An unusual move, to say the least.

Even better, the company recently announced that it is waiting for an important decision from the Department of Commerce.

Frankly, I think the news will be good. Why else would this insider triple his holdings in such a hurry?

Clearly, he has a good feeling about the company's future.

According to my calculations, you could bank a quick 50% gain on this play within the next few months.


Here's how to get started...

To get started right away, Subscribe Now

Braden Copeland
Editor, Inside Strategist
January 2010

Commodities Slip on Elevated Credit Risk Concerns + Indepth Analysis on Palladium Market

Decline in commodity prices accelerate in European session as sovereign default concerns in Greece intensify ahead of a speech by Juergen Stark, a ECB member, later today. Investors worry about the deteriorated financial situation in Greece will be spread to other European countries and eventually damp economic recovery. Capitals have been flowing out of risky-assets to the dollar and the yen. The euro slumps to 1.4165, the lowest level since August, 2009, against USD.

While the market anticipates Stark will deliver a pessimistic outlook on the Eurozone's economy and Greece's fiscal deficits, Managing Director Dominique Strauss-Kahn said the Greek issue is a serious problem but it would not lead 'to the fragmentation of the euro zone'.

However, it's uncertain how big the cost would be so as to survive in the credit crisis and a big hit on the euro seems to be imminent.

WTI crude oil price slides to 77.9 while gold also dips to 1129. PGMs also retreat on profit-taking with platinum and palladium losing -0.77 and -0.8%, respectively.

Palladium price outperformed platinum price by around +50% in 2009. We expect palladium will continue to perform better than platinum this year, despite a smaller degree, as the former is more highly correlated to global economic recovery and financial markets.

Last year, palladium probably recorded a surplus of 655K oz, according to Johnson Matthey's estimates. In fact, the metal has been running is surplus since 2001. However, the demand/supply is getting better as there are signs of increasing demand for palladium-rich autocatalyst and more avenues for investing in palladium. Moreover, possible depletion of Russia stockpiles should tighten the supply side.

While also in the PGM group, demand structure for palladium is different from that of platinum. In 2009, autocatalyst consumption contributed around 45% (a percentage similar to previous years) while jewelry took up only 9.7%, of total palladium demand. Palladium autocatalyst demand (-12%) did not drop as much as platinum (-35%) while increase in palladium jewelry demand (+7.6%) was also significantly lower than platinum (+79.5%).

Despite the fall, palladium autocatalyst demand has been comparatively resilient. In Europe, introduction of scrappage schemes in many countries stimulated sales of the smallest, cheapest vehicles which are mostly gasoline-fuelled and thus boosted the market share of the gasoline engine and supported palladium demand. At the same time, average palladium content in diesel catalysts and particulate filters has also increased, thus offsetting demand reduction.

In 2010, with recovery in global auto production expected, palladium demand for use in 3-way (gasoline) catalytic converters should rise in the US, Japan and China. The early stages of the Euro 5 light duty emissions rules will drive additional filter fitment on new vehicles in Europe, boosting palladium demand as well as platinum demand since many of these filters will contain some palladium.

Investment demand took off in 2007 and contributed 3.8% of total palladium demand in that year. Growth in demand accelerated in 2008 and 2009 and is expect to rise further this year.

While South Africa is the largest platinum producer, Russia's production in palladium is around 50% more than that in South Africa. Supply in palladium probably dropped -1.8% last year due to a -2.7% decline in Russian production despite +4.1% rise in South African production. Depletion of Russian government stockpile is imminent and this will great shrink global supply.

FX Closing Note: Volatility evaporates in US session

Market action
The momentum worked up in the Asian and European sessions failed to follow through into the US session today. Most development in markets elsewhere reversed sharply today: equities rushed higher after challenging the lowest levels since the first trading day of the year ahead of the US open and are even looking for their best gains since that day as well, and bonds consolidated after swooning earlier on the UK inflation data. In FX land, the USD was pushed back from its highest levels on the day vs. the commodity currencies and lost some ground on its best levels vs. the Euro as well.

BoE's King: no inflation worry just yet
The Bank of England's King was out giving a speech at a university today that threw a bit of cold water on the latest very high inflation data when he said that "undesirably low" money supply will prevent the inflation threat. "Provided monetary growth remains well under control - and remember at present it is undesirably low - inflation should return to target in the medium term." This is certainly putting a brave face on things in light of the very high inflation data out of the UK, so Mr. King better hope that he is right. Remember that the BoE minutes from the last meeting are up tomorrow. GBP backed off a bit against the Euro on this development and after nearly touching the very interesting 0.8700 level in EURGBP.

US Housing Survey a downer
The US NAHB Housing Survey, which measures present sales, sales expectations in the next six months, and foot traffic of prospective buyers at new homes registered another drop in January, vs. the improvement expected. This was the lowest reading since June and is more than a bit disappointing considering the renewal and expansion (to home buyers who have owned their home for more than five years vs. only first-time home buyers in the first iteration) of the legislation through the end of April 2010. Optimists can hope that the unseasonably cold weather in December and early January contributed to the poor reading.

Technical developments
The market was rather low on technical developments today. The bearish GBPUSD reversal looks a bit less compelling than it did this morning, though it is still worth consideration. CAD and AUD fought back somewhat on the strong equity session in North America, the dovish BoC meeting and unsupportive interest rate spreads notwithstanding. Elsewhere, EURUSD's close right on the 200-day moving average sets up an interesting test of whether we are ready to break into a new wave of the downtrend here. USDJPY looks perhaps the most interesting, after a new low on the year was rejected in today's trade ahead of the key 90.00 level. This creates a more emphatic line in the sand for the bulls than previous rally attempts.

Chart: EURGBP
A tremendous sell-off of late on the Cadbury deal and then today's high inflation data. Meanwhile, interest rate fundamentals have hardly changed. Now that the cat is out of the bag on the Cadbury deal, should we look for some GBP consolidation? Note that 0.8700 is an interesting support area ahead of the longer term low down at 0.8400.

Looking ahead
Watch out for the US weekly confidence data out at 2200 GMT today - last week saw a tremendous drop. Anything other than mean reversion (a jump of 2 or 3 points this week vs. -6 last week) is certainly a point of concern. Last Friday's initial January Michigan confidence data was virtually unchanged from its December level. Australia confidence data is up in Asia tonight, and important inflation data - Canada's CPI and US' PPI are in focus in tomorrow's North American session for bonds and therefore also for the JPY, as we look to whether USDJPY can stage a renewal of the rally here.

China Guided Yields Higher Again, Commodities Did Not React

Crude oil trades within a narrow range of 78 and 78.7 in Asian session. Sideways trading is expected to continue until European or even NY sessions when more economic data will be released. The People's Bank of China guided its benchmark 1-year bill yield higher for the second time this month to cool down growth in loans. However, the market did not react much on it.

China's central bank sold one- year bills at a yield of 1.9264%, up +0.08% from last week. This is the second time in a month the PBC guided the 1-year bill yield higher. Reports showed that property sales in China surged +75.5% yoy to RMB 4.4 trillion in 2009 while property price rose +7.8% yoy, the fastest in 18 months, in December. The Chinese government has been worrying about asset bubbles and began tightening last week by raising open-market yields and raising required reserve ratio for bank deposits.

On the macro side, BOC rate decision is the focus of the day. However, we do not expect any change in the central bank's monetary stance. The BOC will likely decide to keep the overnight rate unchanged at 0.25% and reiterate 'conditional on the outlook for inflation, the target overnight rate can be expected to remain at its current level until the end of the second quarter of 2010 in order to achieve the inflation target'.

Industry-specific data will be API's inventory which will be released after market close. Another week of huge stock-builds should resume recent correction in energy prices.

PGMs have clearly taken over gold and silver as the darlings of precious metal buyers. While platinum contract rallies to 1637, up +2.6% from Friday's close, palladium contract jumped +3% to 461. Both contracts reach highest levels in one and a half year.

According to ETF Securities, holdings of platinum and palladium rose +0.15% and +2.81%, respectively, on January 18 from January 8.The newly launched US ETFs boosted investment demands.

FX Update: Risk aversion from Friday so far not contagious

Market Comment
Asian and European markets are seeing no follow through on the risk aversion from the US session on Friday, which saw the sharpest drop in equities so far this year, as it appears the rest of the world wants to believe that was merely a bit of profit taking that settled in ahead of a three-day weekend

CHF and JPY: market deaf to central bank comments
The CHF remained strong vs. the market despite the SNB's Hildebrand from an article over the weekend, in which he indicated his belief that the SNB must move "carefully and gradually" to normalize rates since the threat of deflation can not yet be ruled out.   Mr. Hildebrand was also out complaining about the franc's strength, as he promised to "resolutely prevent" any "excessive" strength. The market completely ignored these comments, a further sign of franc strength.  The market also ignored comments from the BoJ's Shirakawa, who was out promising to "maintain an extremely accommodative financial environment." Apparently, the bond market speaks louder than the BoJ at the moment, as the JPY will likely remain resilient as long as bonds continue to rally.

AUD strength - enough already?
Aussie's strength vs. the broader market is reaching unsustainable levels soon, on our view, though with the current bubble mentality in China and in risk in general, it is hard to find a catalyst for Aussie weakness. Still, the contrarian can point to the positioning in the US futures market, which shows AUD longs at a record high since May 2008, which was within a couple of months of the top in the Aussie before its remarkable fall during the late 2008 risk meltdown. Some kind of pivot point may be in the wings for the currency in the weeks ahead considering such extreme positioning.

Charts: AUD and AUDUSD
AUD has reached new highs vs. the rest of the G-10 (below shows the Aussie vs. an evenly weighted basket of the rest of the G-10) - even higher in this instance than it was in the summer of 2008.

AUDUSD has snapped back strongly from attempts to take out last week's lows overnight. Fibonacci followers will note the 0.618 retracement level of the sell-off wave from Friday's mini-meltdown in risk coming in around the highs for today. If those levels are taken out, the focus shifts to the double top resistance points at 0.9330 and 0.9407.

Looking ahead
The US session should see little volatility as markets are closed today for a public holiday. For the rest of the week, we have a fairly light load of event risks on the economic calendar (the US calendar is especially slow this week) as corporate earnings reports from Q4 are likely to receive the most attention. Below are the highlights from the economic calendar:

• Tuesday: UK Dec. CPI and RPI, Germany Jan. ZEW Survey, Canada's BoC meeting, US Jan. NAHB Housing Survey, BoE's King to Speak, US Weekly ABC Consumer Confidence
• Wednesday: Australia Jan. Consumer Confidence, Germany Dec. Producer Prices, UK BoE Minutes, Canada Dec. CPI, US Dec. PPI, US Dec. Housing Starts and Building Permits
• Thursday: New Zealand Dec. PMI, New Zealand Nov. Retail Sales, China Q4 GDP and Dec. Retail Sales, Industrial Production, etc., European Preliminary Jan. Manufacturing and Services PMIs, US Weekly Jobless Claims, US Jan. Philadelphia Fed, US Dec. Leading Indicators
• Friday: UK Dec. Retail Sales, Canada Retail Sales

Economic Data Highlights

• New Zealand Dec. Housing Price Index fell -0.9% MoM vs. +0.2% in Nov.
• New Zealand Dec. House Sales rose 15.2% YoY vs. +41.5% in Nov.
• UK Jan. Rightmove House Prices rose +4.1% YoY vs. +1.7% in Dec.
• Canada Nov. International Securities Transactions out at 10.54B vs. 5.25B expected and 5.95B in Oct.

Upcoming Economic Data Highlights

• Japan Dec. Consumer Confidence (0500)

Is Now the Time to Buy ?

Dear Subscriber,

Gold is now down about 6% from it's high, as I write this. Has it finished it's "correction," or will it go even lower?

I can't say for sure. But I can tell you that before you buy a single ounce of gold, you should read geologist Matt Badiali's report on his favorite way to buy gold right now.

See below for the full write up...

Good Investing,

Brian Hunt

Editor in Chief.

Why Chinese Gold could pay 500% MORE than U.S. Gold over the Next 2 Years 

Read Full Story Here

FX Closing Note: Risk pulls back ahead of long weekend

Market action
As we suspected might happen, risk decided to turn tail later in the day ahead of the 3-day weekend in the US. The lead story give credit for the decline was an earnings report from JPMorgan that showed it retail banking unit performing worse than expected, including a revenue shortfall. JPMorgan's CEO Dimon, who has become somewhat of a guru as his bank was one of the best performing houses through the 2008-09 crisis, was also very cautious in his outlook for coming quarters. In better news in the financial sector, Bank of America reported the lowest level of credit card delinquencies in over a year, though broader credit card delinquency measures are not showing an improving trend as B of A's improvements may have more to do with the hatchet man hired to take over the consumer finance division. JP Morgan is setting aside an extra $1.9 billion to cover consumer loan losses. To get an idea of the general profit taking mentality, Intel, yesterday's hero with its stellar earnings for Q1, fell some 3% on the day.

But there was little collateral damage from the contraction in risk evident in the North American  session. The JPY edged back towards the strong levels already established before the session, and the USD was a bit stronger, but commodity currencies took the news well and merely consolidated in orderly fashion. It's appears that the currency markets need a bit more fire and brimstone from the other markets to react with wider swings. FX volatility has been rapidly contracting since the first of the year.

Chart: EURUSD
The bellwether EURUSD was sharply lower on the day. It appears the 21-day moving average is an important one to determine whether the pair is in a bearish or bullish stance. Tactically, bearis still need to prove themselves with a close below this average, though we are already back into the previous range. Meanwhile, on a more strategic basis, the bears need to take the action below the almost-tested 200-day moving average to trigger a longer term bearish view on EURUSD.

Canada's FinMin Flaherty on the wires
Today, FinMin Flaherty said private spending has rebounded strongly in Canada and that he is watching the housing market carefully after existing home sales rose to a record level in December. The average price of existing homes rose 19% from a year before. That is an almost bubble-like increase. He almost shrugged his shoulders at the weak dollar, saying that "We always worry about fluctuations in the dollar that are volatile, but I think that the reality is that we're going to be faced with a relatively weak US dollar." This apparent lack of concern may be helping to keep the pressure on USDCAD, which remains surprisingly low (a modest bounce on the day) despite today's risk aversion and further pressure on the price of crude.

Looking ahead
To reiterated, US markets will be closed on Monday. Next week is a slow week on the US calendar, with PPI and Housing Starts on Wednesday and the Hilly Fed on Thursday the only highlights. The Bank of Canada meets to decide on rates next Tuesday and it will be interesting to hear what the bank has to say about the current strength of the loonie. The key for JPY crosses and whether USDJPY is ready to resume its rally ahead of the 90.00 level is the direction in interest rates after this week's successful bond auctions. And then we have endless earnings reports rolling in throughout the week.

CHINA DRIVES ANOTHER BIG BULL MARKET

China needs coal. That's the theme of today's chart, which displays the past seven years' of trading in shares of Yanzhou Coal, one of China's largest coal producers.

You see, despite any lip service China gives toward climate change, the country is coal crazy. China's coal consumption increased by more than 200% from 2000 to 2008... and the country generates around 75% of its electricity from the stuff. This incredible demand is driving a huge bull market in companies like Yanzhou...

After a suffering a huge decline in last year's credit panic, Yanzhou has enjoyed an amazing recovery... and now sits at an all-time high. Shares are up 11-fold since 2003.

Yanzhou's rise represents one of our favorite long-term investment trends: Determine what China needs, and sell it to them. One of the "no brainer" ideas here is fuel... the basic and essential need of a modern economy. If China wants to keep its economy racing higher, it's going to require incredible amounts of coal, oil, natural gas, and uranium to power the engine. Yanzhou is a shining example of this trend at work.

Asia Is Going to Make Investors Rich with This Commodity

Asia Is Going to Make Investors Rich with This Commodity

By Matt Badiali.

Energy investors need to remember three things to make incredible returns in the coming decades:

Asia, Asia, and Asia.

Asia is going to make energy investors rich. Specifically, India and China will. And more specifically, they'll make folks rich in natural gas. I know you've heard the "billions of people need this and that resource" argument before, but hear me out...

From 1997 to 2007, China's total energy consumption rose from 38 quadrillion British Thermal Units (BTUs) to 76 quadrillion BTUs... roughly equal to 74 trillion cubic feet of natural gas. However, coal supplied 75% of that energy, while natural gas contributed a scant 2%.

Japan and South Korea already consume trillions of cubic feet of imported natural gas per year. India became a net importer in 2004. China became a net importer of natural gas in 2007... and that's not going to change. The country wants natural gas to supply about 7% of its energy needs by 2015. Even if China's energy consumption remained flat (and it won't), it would need to add 5 trillion cubic feet of natural gas from somewhere.

The problem is, China produced just 2.7 trillion cubic feet of gas in 2008. To add 5 trillion cubic feet of supply, the country must TRIPLE its production... or look elsewhere. But it'll face a lot of competition for natural gas in Asia.

In 2008, China, India, Japan, South Korea, and Taiwan imported a combined 5.5 trillion cubic feet of natural gas. China's natural gas imports are up 53% from 2008. India's natty imports are up 23%. Annual growth in global demand jumped from 7.5% in 2009 to a predicted 17% in 2010.

While coal and oil are still huge parts of the Asian energy picture, natural gas is becoming the "new" fuel of choice around the world.

ExxonMobil is the smartest oil company on the planet. It's also the best energy investment house on the planet. ExxonMobil's people know the facts on natural gas. They plan to supply that soaring demand. ExxonMobil is participating in several giant liquefied natural gas (LNG) projects in the Asian sphere, including the giant Gorgon project offshore Northwestern Australia.

The entire Gorgon complex contains about 40 trillion cubic feet of natural gas reserves. That's why China's interested. PetroChina agreed to buy 100 billion cubic feet per year from the project for 20 years. The estimated value of the deal is around $41 billion.

But natural gas isn't just a big boy's game. Asia needs so much gas that companies of all sizes are getting into the act. There are junior companies listed on the London Aim Exchange, the Toronto Venture Exchange, and the Australian Stock Exchange. Mid-cap energy companies are also poking around the region.

One thing every energy investor must understand: The age of natural gas is dawning around the world, even if it's still dormant here in the U.S.  

We need to position ourselves to profit from that demand. At the very least, we should own shares of major oil companies like ExxonMobil, which is positioning itself to profit from Asia's voracious demand. But the sweet spot will be finding small companies in the right places.

At the Resource Report, my plan is to find the most promising juniors – companies looking to discover energy supplies for China. With great teams working in far-away places, a few of those companies will make investors rich...

Good investing,
Matt.

This Could Crush Stock Market Valuations

This Could Crush Stock Market Valuations

Simply put, the U.S. government is facing a staggering amount of unfunded liabilities in 2010... around $3.5 trillion to be exact. As I described in my commentary on the Greenspan/Guidotti rule, the only way the government can make the interest payments on this debt (a good deal of which has been acquired in the past 12 months) is by printing money.

This money printing will continue to debase the dollar... and will drive our creditors to demand higher and higher rates of interest. If you haven't read this piece, please know it's one of the most important things I've ever written. It's imperative that you understand what's happening.

This situation is, without a doubt, the single most important financial trend in the world. It will not only affect the bond market, it will come to greatly affect the stock market, too.

You see, what most people don't understand about the huge bull market in stocks over the last 30 years is that it was mostly funded by debt and powered by falling interest rates.

Earnings were driven by growth in GDP, which was fueled by the greatest expansion in public and private debt in history. Keep in mind, over the last 30 years, America went from being the world's largest creditor to the world's largest debtor. At the same time, the interest on our debts fell every year, nearly in a straight line. This is the best recipe you can script for soaring asset prices.

Consider how these factors worked in your own neighborhood. As interest rates fell, more people could afford a bigger mortgage. And as more credit became available, more people were competing to buy homes. Prices rose. Rising prices allowed more credit to become available. As more credit was available, interest rates fell more. The cycle continued.

In the stock market, falling interest rates increased earnings because companies spent less maintaining their debts. At the same time, consumers had more money to spend. Not only did earnings rise, but more importantly, the value of equities rose in terms of earnings multiples.

When interest rates are very high, fewer investors are interested in stocks. But as interest rates fell, more and more investors had to buy stocks to earn an acceptable rate of return.

Rather than trading for 10 times earnings or less, stocks began to trade at 20 times earnings or more. At the peak of stock valuation in 2000, the S&P 500 was trading at almost 45 times earnings. Today, the valuation is still high – around 20 – because interest rates are still very, very low. If interest rates on U.S. bonds go to more than 10%, stock market valuations will plunge. At the height of the last interest-rate cycle in the early 1980s, the S&P 500 traded at around seven times earnings.

It will happen again. But right now, few people believe it's possible. It's instructive to note who does think this risk is real...

Hedge-fund billionaire John Paulson says he no longer trusts the dollar as his reserve currency and has put a huge amount of his fortune into gold. The world's biggest bond investor, Bill Gross, recently posted this on his website: "We caution that the days of carefree, check-writing leading to debt issuance without limit or interest-rate consequences may be numbered for all countries."

And in August, Warren Buffett himself wrote an op-ed to the New York Times warning about inflation:

The United States economy is now out of the emergency room and appears to be on a slow path to recovery. But enormous dosages of monetary medicine continue to be administered and, before long, we will need to deal with their side effects.

For now, most of those effects are invisible and could indeed remain latent for a long time. Still, their threat may be as ominous as that posed by the financial crisis itself... the Treasury will be obliged to find another $900 billion to finance the remainder of the $1.8 trillion of debt it is issuing. Washington's printing presses will need to work overtime.

He told CNBC the government's efforts to paper over the banking crisis "are potentially very inflationary... worse than the 1970s inflation." 

As a stock investor, what should you do to prepare? I'd avoid conventional growth stocks... the kind that carry P/E multiples in the 20-40 range. Contracting multiples are particularly hard on these sorts of stocks. They have the most value to shed. Make sure to own the best businesses you can find... stalwarts like Verizon and Johnson & Johnson. Ideally, you'll want to buy them for less than 10 times cash flow (a metric similar to earnings).

Also... you'll want to skew your stock holdings toward commodities, like energy and precious metals. These sectors do well when inflation is rising, when the government bond market is correcting, and when earnings multiples in the stock market contract.

Good investing,

Porter Stansberry

The market action in equities today was on the zany side, with markets first moping about the implications of Google possibly pulling out of China at the open, only to rocket higher later in the day on positive outlooks from other companies. Banks somehow managed to do well despite the threatened fees on the largest banks by the Obama administration. In other markets, the US Treasury auction of 10-year notes went very well, with a bid to cover at the highest level since last July, but yields nonetheless settled several bps higher on the day as risk appetite found its stride in the US equity trading session. As for commodities, huge builds in US crude oil and product inventories saw crude prices collapsing under 79 dollars per barrel before they recovered into the close in line with risk appetite elsewhere.

The FX reaction to the proceedings was rather muted: EURUSD took out stops in Europe on the high side before the market began to fret drastically wider spreads on Greek debt ahead of tomorrow's ECB meeting, which must see Trichet formulating new rhetoric on how the ECB plans to address this situation. GBP also benefited relative to the weakness in the Euro. Curiously, both NOK and CAD ignored the precipitous fall in crude oil and rallied later in the day, perhaps on hopes that the recovery in the gold price today and risk appetite elsewhere are leading indicators.

The Fed's Beige Book was hardly interesting reading, with a larger number of Fed districts now reporting signs of improving economic conditions, though the weak employment picture remains rampant. Comments on the holiday spending season suggested that 2009 saw an improvement on 2008, but was "far below" the rate of spending for the 2007 holidays. 2008 results certainly offer a low bar as the world was undergoing a traumatic shock last year during the holidays, so a lack of a strong rebound is a testament of still very weak consumption patterns. The official Advance US Retail Sales results are set for release tomorrow - with only a modest increase expected.

Technical and other developments
USD - the USD Index is closing the day lower, though it has recovered from the worst levels on the day, which actually represented new three-week lows. 

EUR - relatively weak today after recent attempts at consolidation. Tomorrow's ECB likely sets the stage for the next couple of weeks.

Chart: EURUSD
EURUSD failed to maintain altitude at new multi-week highs today as tomorrow’s ECB meeting looks like the trigger for either another attempt higher for a larger consolidation scenario toward 1.4800 or for a fall back into the recent range.

CAD - is the market seeing something we are not? Suddenly, risk appetite seems far more important than interest rate spreads or a steep crude oil sell-off. An ugly reversal on the daily candlesticks today that sets a higher bar for CAD bears.

GBP - rallying supposedly on the Guardian article about inflation we discussed this morning - but real rate expectations have hardly budged, leading us to believe that some of the action, especially in EURGBP, is about position adjustments ahead of the ECB meeting tomorrow and possibly a reaction to the bounceback in bank stocks today.

Looking ahead
Watch out for the Australian employment report tonight. Our unscientific guess is that the risks are skewed to the downside with this report. In the past, this indicator often shows a tendency toward wide month to month oscillation. The last three months in a row have been relatively strong, so a downside surprise, simply on data noise, would seem more likely than a tremendous upside surprise.

FX Closing Note: Risk appetite continues to wilt

US equities attempted a small comeback today after yesterday's depressing kick-off to the corporate earnings season, but other earnings news streaming in today failed to generate enthusiasm and they dumped lower into the close. Adding to the negativity may be the Obama administration's announcement that it is considering levying a special tax on banks that were bailed out in an effort to cut the fiscal deficit and recoup some of the cost of the bailout. This is clearly an attempt at damage control from public outrage as the big banks are soon set to announce their bonuses .

Significantly, commodities also joined the risk sell-off. Crude oil sold off as warmer weather is sweeping across the US again after a recent cold snap that saw temperature records falling across the nation. Gold plummeted more than twenty dollars today as an official at China's CIC sovereign wealth said that gold is too expensive and stated that the lows are in for the USD.

China is increasingly worried about its potentially overheating economy and announced another credit constriction attempt by raising bank's reserve requirements today.  A debate is raging concerning the degree to which the Chinese economy faces a bubble in asset markets. Not so long ago, the impressive Jim Chanos weighed in on the issue (the famed short seller believes China is in a bubble state), while a Forbes article out yesterday specifically rebutted Chanos' claims. None other than the famous China cheerleader Jim Rogers has also put down Chanos' claims, saying that Chanos is a China neophyte that couldn't spell China 10 years ago.

Technical and other developments
USD - the USD was rangebound vs. the Euro and slightly weaker vs. the pound, but saw reasonable gains against the higher beta risk currencies. The performance was actually relatively solid considering the successful conclusion of the latest US treasury auction and the market likely expecting that tomorrow and Thursday's auctions of 10-year and 30-year debt will also go well. (By the way here's a handy link that shows the dates for upcoming treasury auctions, an important thing to track this year with all of the heavy public issuance.

AUD - looking very shaky suddenly on the move to risk aversion and the sharp sell-off in gold. Further downside is certainly a possibility if risk continues to turn tail, which would abort any full attempt by AUDUSD to have a go at a double top. Thursday's employment report is a big test of the situation as well.

Chart: AUDJPY
JPY crosses very much in focus at the moment with bonds rallying and risk selling off. Friday's hanging man in AUDJPY wasn't much of a signal for yesterday's action, but today saw a very steep sell-off. Interesting that this sell-off comes after an attempt at attempt at a new 15-month high.

JPY - swooped sharply stronger across the board on the trifecta of weak commodity and equity markets (and therefore weak higher risk currencies) and strong bond markets. USDJPY is fast approaching a key support area we mentioned in this morning's report at 90.00.

EUR - is performing relatively well as it has become a bit more negatively correlated than previously with risk appetite - rising sharply vs. the AUD, for example, over the last couple of days.

CAD - pulls higher through the weekly pivot at 1.0375, an interesting swing level for the rest of the week. Short term vulnerability in CAD with combination of sharp energy market consolidation

NOK - we finally see a bit of a rally in EURNOK with oil dumping today - it would seem short term risk remains to the upside, though we have to watch out for Thursday's ECB meeting.

Chart: EURNOK
EURNOK nodded its head at the oil sell-off over the last couple of days, further short term upside may be in order here as the sell-off has been long and persistent and we are headed into a major inflection point on Thursday with the ECB meeting.

Looking ahead
Some interesting vibes coming from the intermarket action today, where risk looks a  bit shaky all of a sudden after day after day of upside in equities. It would seem that the potential for volatility expansion is high. This would play most to the Aussie and Kiwi's detriment. Be careful out there as always.

FX Closing Note: CAD cries Wolf

Market action
The greenback remained on a weak footing for most of the NY session, as US treasuries tread water and equities sold off and then rebounded slightly. The JPY firmed on weaker risk appetite and finally noticed firmer Euro Bund prices that it ignored in the European session. CAD was the day's weakling as the Bank of Canada's David Wolf came out with a number of CAD-negative broadsides and as oil prices cooled sharply after posting new 15-month highs today.

Technical and other developments
USD - generally lower today, but most losses occurred in Asia, with no real follow through in later trading. AUDUSD is less than a figure off of its low for the cycle as this throwback rally is doing a full test of the top of the old rally, it seems, after all of the Fibo retracements have failed to contain the rally for long. Fitch said that it saw long term risk ("by second half of decade") of pressure on US's AAA rating if the US didn't do something to address its budget deficit over the next 3 to 5 years.

CAD - the Bank of Canada's Wolf said in a speech today that housing market strength in Canada is "striking", that a housing revival is "desirable" and that it is "premature" to suggest that the housing market is in a bubble even if must be monitored. Mr. Wolf said that it was premature to raise rates now. "If the Bank were to raise interest rates to cool the housing market now - when inflation is expected to remain below target for the next year and a half - we would, in essence, be dousing the entire Canadian economy with cold water, just as it emerges from recession." This helped USDCAD reverse from its new multi-month lows.

Chart: USDCAD reversal
CAD was lower across the board today on the oil price decline and Wolf comments. The bullish candlestick comes in just ahead of the old lows for the cycle and may be followed up with more upside in the coming sessions barring a renewed spike in oil.

GBP - lost ground on the Euro again and is closing up close to recent resistance levels. A new downleg for the pound in store here?

Chart: GBPJPY
GBPJPY made an ugly reversal and close on the day (bearish shooting star and outside day, as the JPY sell-off has taken a breather on bond markets that have steadied of late. If risk aversion gets nervous on the first earnings reports in coming days, JPY crosses could see some further consolidation lower.

JPY - bonds are flashing a bit of a warning light here as bonds are continuing to consolidate. The reversal today in the likes of EURJPY and GBPJPY even more so, looks rather compelling for some possible short term strength in JPY (downside for JPY crosses).

CHF - responsed very little to the SNB's warning on intervention. Later, the CHF was a bit stronger as the SNB's Hildebrand

said that if interest rates are kept at the current rate for too long term, it would create problems and that the SNB has begun to withdraw liquidity.

NOK - It would seem that EURNOK is at risk of consolidating on the reversal in oil prices, though the correction there may need to pick up the pace to add serious pressure on NOK after today's higher than expected inflation data. NOK managed to make a comeback after a spike lower early in the NY session

Looking ahead: Earnings season upon us
Besides the usua US corporate earnings are very much the focus with Alcoa traditionally kicking off the earnings season today. Stories abound on whether equities are fairly priced at present and to what degree corporate earnings will improve. The coming couple of weeks will be important for the asset markets as equity traders determine how comfortable they are with the expectations priced into the market relative to the earnings reports rolling in and companies' guidance.

Another question we have for the shortest term is how much the market is willing to bid up EURUSD ahead of Thursday's ECB press conference...

Be careful out there.

The Nine Chinese Men Who Control the Fate of America

 The Nine Chinese Men Who Control the Fate of America

Nine politicians in China control the fate of the United States of America.

I'm not kidding. The implications are scary. Let me explain...

These nine men are the Standing Committee of the Communist Party of China. They control the value of China's currency. 

Fortunately, it's easy to forecast what a politician will do... He will do whatever it takes to keep his job.

The story is remarkably simple...

In China, the goal of these nine politicians is to keep the Communist Party in power. The way to accomplish that goal is for the masses to stay employed. Right now, China keeps the people working by exporting cheap goods. In order to make sure those Chinese goods stay cheap, the Standing Committee sets the currency exchange rate artificially low. And that is the crucial part of the story...

How do these nine politicians keep the exchange rate low? They buy U.S. dollars. Importantly, these nine men don't just sit on stacks of dollar bills... They invest those dollars in U.S. Treasury bonds.

It's gotten out of hand. China owns nearly $1 trillion worth of U.S. debt. China's holdings have increased dramatically every year... They've grown nearly tenfold since the end of 2000: 

China*	Treasury Bond Holdings
2000	$99 billion
2001	$127 billion
2002	$166 billion
2003	$209 billion
2004	$267 billion
2005	$350 billion
2006	$451 billion
2007	$529 billion
2008	$804 billion
2009	$941 billion
*includes Hong Kong

And China's soon-to-be trillion dollars of U.S. government debt is not the end of the story. It's the beginning...

In order for other Asian countries to compete with China, they have to artificially keep their own exchange rates low. And that's exactly what they're doing. They're doing it the same way China does... They're buying mountains of U.S. Treasury bonds, too.

At this point, foreigners now own half of the U.S. Treasuries outstanding (of the ones that are not held by the U.S. government). And they're buying more... Most importantly, there's enough demand for U.S. debt from foreigners that the U.S. government can finance its deficits for years to come... all by simply selling Treasury bonds to foreigners.

Would you lend money to the U.S. government at 3.5% interest for 10 years? I sure wouldn't. I really can't name anyone who thinks 3.5% in government bonds is a good deal. The foreigners aren't buying to earn 3.5% interest. They're buying to keep the value of their currencies down.

India is an interesting example... Earlier this year, when India spent $6.7 billion buying gold from the IMF, it was all over the news. What WASN'T reported was that India bought far more U.S. Treasury bonds than gold. India has increased its stake in Treasuries by over $22 billion since last summer – increasing its Treasury bond holdings more than 200%.

So, yes, there's a mountain of demand for U.S. dollars – Treasury bonds – from all over the developing world. The important thing is demand will last. It will last as long as the nine men on China's Standing Committee don't change their minds.

So what does all this mean?

It means the U.S. dollar will not crash right now. 

Most investors believe the U.S. dollar is about to crash. But the facts are clear... The dollar has ready buyers of hundreds of billions of dollars worth of Treasuries. While the dollar might lose ground against gold, the reality is, no other paper currency has a tailwind of hundreds of billions of dollars of buying waiting in the wings like the U.S. dollar does.

Eventually, the dollar bears will be right. The U.S. will have to face all its debt one day.

Good investing,

Steve.