Value of Perfect Information

1. The International Monetary Fund could offer Italy between EUR400 billion and EUR600 billion in financial support to give Italian Prime Minister Mario Monti a window of 12 to 18 months to enact reforms sufficient to restore waning market confidence in Italy’s ability to repay its debt, Turin daily La Stampa reported Sunday, citing IMF sources.

2. German Chancellor Angela Merkel and French President Nicolas Sarkozy are planning more drastic means – including a quick new Stability Pact – to fight the euro zone sovereign debt crisis…..Euro-zone countries are weighing a new plan to accelerate the integration of their fiscal policies, people familiar with the matter said, as Europe’s leaders race to convince investors they can resolve the region’s debt crisis and keep the currency area from fracturing

3. The European Financial Stability Facility may insure bonds of troubled countries with guarantees of between 20 percent and 30 percent of each issue to be determined in light of market circumstances. The proposal to attach guarantees of up to 30 percent of future EFSF bond issuances’ worth may create a threefold expansion of the 440 billion-euro ($583 billion) fund.

Runner-up! Black Friday retail sales up 7%

Update 7:30 p.m. EST.

The good news continues…

The biggest bond dealers in the U.S. say the Federal Reserve is poised to start a new round of stimulus, injecting more money into the economy by purchasing mortgage securities instead of Treasuries. Fed Chairman Ben S. Bernanke and his fellow policy makers, who bought $2.3 trillion of Treasury and mortgage-related bonds between 2008 and June, will start another program next quarter, 16 of the 21 primary dealers of U.S. government securities that trade with the central bank said in a Bloomberg News survey last week. The Fed may buy about $545 billion in home-loan debt, based on the median of the 10 firms that provided estimates.

Follow Euro trading here:

http://www.sgxniftydowfutureslive.com/index_files/DOWFUTURES.htm

http://www.forex-markets.com/quotes.htm

http://www.kitco.com/ Scroll to bottom for exchange rate.

http://www.xe.com/

To see how FTSE will open go here:

http://www.igindex.co.uk/

or here:

http://www.financialspreads.com/public/

The falling U.S. Dollar … is it a good or bad event?

A dropping Dollar is considered an advantage for U.S. firms that trade internationally.

But, could a falling Dollar turn into a U.S. confidence crisis?

The answer is Yes.   While a falling Dollar is good for U.S. exports, there is a point where a good thing could turn ugly.

Take a quick look at today’s Dollar chart and  you will see where that point is.

Where we are now …

Note that the Dollar is now below its 74.21 support level … and there are no more supports until it gets down to 71.31.   So now, the Dollar should continue to fall and that will be good for our stock market and for exports.

However, as the Dollar starts to approach the 71.31 level, glee will turn to worry as investors start to wonder if the Dollar and can make a double bottom (at 71.31)  … or if it will plunge below that support and go into free fall.

It is very hard for anyone to imagine the Dollar not holding that double bottom, but if Congress doesn’t wake up soon, stop trying to satisfy lobbyist, and start making decisions for its citizens and economy, then the Dollar will judge them harshly.

USDX Chart courtesy of www.StockTiming.com

Some mixed messages come out of this week’s CFTC Commitment of Traders Report. Below are six charts with my best estimate of what the data is telling us. The three key takeaways are

• Commercial traders appear positioned for further bond weakness

• Commercial traders are reducing net short positions implying copper weakness

• Retail traders are positioned for further USD weakness, implying USD strength

Bonds

Looking purely at the relationship to 30 year yield and the SPX, this chart implies that further bond weakness (lower price higher yield) would be a positive for the SPX. This cannot be taken purely at face value though. There are many implications to a weakening bond market beyond this chart. Still, the data below would imply continued equity strength.

Bonds – Commercial Net

Commercial positions continue to move towards a more net long in the face of 30 year weakness.  At face value this chart would imply further bond weakness to come.  It’s important to note though that commercial positions are approaching a 52 week high.

USD – Commercial Net

This is a tough one to read.  The commercial trader position is net long and matches that of the prior 52 week high.  It is very possible their net long position grows but considering this position relative to the prior 52 weeks, it is quite possible they begin getting more short which would imply USD strength.  The USD has bounced off key support which would further argue for a reversal to a more short commercial net position.

USD – Commercial VS Retail Net

This next chart is that of the non reporting positions versus commercial positions.  Non reporting (retail) are relatively short versus prior times in the year so there is fuel for a short squeeze in the USD.  Hard to make any definitive call though.

Copper – Commercial Net

This is a rather interesting chart.  Copper caught a nice bid the past week yet the commercial traders are not buying it (literally).  They appear to be getting more net long (this  chart is inverted for comparison sake) which would imply pending copper weakness.

Copper – SPX VS Commercial

Nothing too definitive can be drawn here other than a word of caution for the SPX as commercial positions appear to becoming more net long (chart is inverted for comparison sake).

Only question is which direction?  Check out this narrowing wedge which has some more time to play out.  The bond market appears as confused as the equity markets.

The USD (per the DXY) is too looking set for a more immediate break out and based on the chart pattern, odds favor down but based on the COT report commercial traders may in fact be ready for an upward breakout. The red line below is a trend line that goes back to 2008 with four successful tests.

A great session on Friday in which our TMS system took 1256 points from our GBP.USD sell signals! Our members have been on the right side of the dollar’s upside moves and the falling knife aka recently as the ‘Euro’ has been shorted nicely by us.

Dow Four Hour Chart

In light of the recent Euro slide we would have liked the U.S. markets to have moved lower after all they have been in close synchronisation lately. The Four Hour chart shows what we’re currently watching. The story is simple – the 11,000 Dow mark is the line in the sand and if we get a four hour candle close below this number then expect the markets to slide a lot lower. We warned you all that the U.S. markets would slide soon, warned you all the dollar will start to rally when the others found it hard to express the words dollar and rally in the same sentence. We said the decline for the Euro would soon materialise and it did! 1200 points lower from the high printed at the start of THIS month!

We also stated how a Santa clause rally may not occur this year! So of course we might rally but mark our words 10000 before year end is not that much of a big move. TWO days of 200 point declines and we will be in the zone!!! Either way, simply look the blue line above. The Nasdaq100 was lagging at the open but now is firmly taking charge. If this stories continues and we are able to get a candle close below the blue line then expect a pure bloodbath.

Euro Four Hour Chart

We patiently waited with our TMS short signals and have caught over 2000 points in line with recent declines. It is totally Pertinent for us to say ‘we told you so’ because to put it simply – we did!

You’ve seen the charts where we got our sublime TMS sell signal at the top and now you can see the pace of the decline against the rise. We might be due a bounce but overextended action in these circumstances can get even more overextended! 12600 – 12800 is still probable and the falling knife could well take out 130 although the lower end of the declining channel meets at 130 so you could expect a psychological bounce at this area.

The U.S. markets haven’t fallen in line with the advance they shared with the Euro in September/October. Do be cautious as the Dow Jones can simply catch up within a few sessions and then you’ll see ugly patterns all over the place!

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On the surface, sure, all looks well. To even talk about a double dip right now will get you banned from CNBC (which isn’t a bad thing for your credibility). Before people go ahead and call mortgage gate a non issue, bank health a non issue, macro economics as rebounding, check out the headline from October 5, 2007 (yes 2007).

Nonfarm payrolls rose by 110,000 last month — including 73,000 in the private sector — very close to expectations of a 113,000 gain in total payrolls.

The S&P 500 highs were on October 8, 2007. What happened after that? Subprime was NOT contained. Financials having declined for 5 months were a leading indicator of the indices. The economy was not doing a goldilocks dance as Kudlow so proudly declared each night. This is all in the back drop of a weakening dollar and rising commodity prices.  Seems quite familiar to our current environment.

Bonds spreads continue to reach new highs per the chart below (courtesy of Calculated Risk and the Atlanta Fed)

Riots in Greece and Ireland and don’t forget those “rumors” of Berlusconi having yet another affair with a 17 year old apparently moving up Italian CDS rates.  In the dash for trash the EUR v  USD perhaps it’s time to start selling the EUR.

The DXY’s (US Dollar Index) rally faded after the FOMC (Federal Open Market Committee). Closing price-action confirmed follow-through from Tuesday’s bearish engulfment pattern. The latest consolidation break-down has now directed dollar bears towards key trendline support near the 76 handle. A decisive close above the 20-day MA at 77.20 is required to stabilize the current bout of selling pressure.

The Yen was the clear loser of the day, prompting intervention rumors by the MOF (Ministry of Finance). The USD/JPY accelerated through stops after confirming a higher low above Tuesday’s high. Clearing the 20-day MA is the next obstacle and doing so would expose the key JPY82 region. Only above this key pivot suggests a more meaningful rally is in store.

The EUR/USD continues to extend gains since breaking out of a triangular consolidation pattern. From an Elliot wave perspective, the completion of the corrective fourth wave has now triggered the terminal fifth wave. While EUR1.4186 is a significant technical level, it is too early to determine whether the fifth wave extension will be a mere throw-over.

In the meantime, the currency markets will have to keep an eye on the S&P 500. The index is nearing a confluence of Fibonacci levels in the 1202/1203 region. A rejection at this pivot could set the stage for the DXY to complete impulsive weakness.

Bulls are celebrating ISM Manufacturing and Services reports showing expanded growth (above 50 is expansion, below contraction). Looking inside the report shows some troubling signs though, primarily prices paid. As the USD has continued to get slammed the past few months, input costs have continued to rise. In this current economy, producers do not have pricing power on non essentials to pass along those higher prices. The result is their margins have been and will continue to get squeezed. To combat tighter margins, employers will begin laying off “non-essential” employees. New Orders in both reports have shown increased strength which is certainly a good sign for future ISM reads but is this solely due to the weak USD helping exports? Just like the EUR/USD was going to parity back in the summer, everyone is talking the end of the USD right now as the reserve currency. At some point that may very well be true but a reversal in the USD will put pressure on future ISM reads. Sovereign debt concerns have not passed, just kicked a little further down the road. Dec. 7 is national run on the bank day in France, which has now spread to a handful of other countries all as a result of austerity and another form of protest (important to remember EU banks are leveraged 10 times US banks). Don’t be so quick to favor the EUR over the USD. Both currencies are bad but it’s a lesser of two evils scenario right now.

So the ISM manufacturing and services both were positive signs for future growth of the US economy but need to be taken in context of what is driving them.