Debt Ceiling Debate Updates: Congress Has Until August 2 To Raise Debt Limit

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Boehner, Obama and Reid (
This post will provide updates on the debt ceiling debate, mainly links to articles and press conference videos until the day of reckoning occurs. Congress has until August 2, 2011 to raise the debt limit or they run the risk of defaulting on their debt not paying
important bills (*see comment below). Either way, the markets will probably use debt ceiling updates as catalysts. On July 21, S&P said there was a 50-50 chance that they'd downgrade U.S. Treasury debt. Mohamed El-Erian of PIMCO also thinks it is a possibility.

"If an agreement is reached to raise the debt ceiling but nothing meaningful is done in terms of deficit reduction, the U.S. would likely have its rating cut to the AA category, S&P said." (Reuters)

"The U.S. government may lose its AAA credit rating even if lawmakers reach a plan to avoid a default, said Mohamed A. El-Erian, whose Pacific Investment Management Co. is the world’s largest manager of bond funds." (Bloomberg)

Monday July 25, 2011

*Harry Reid's plan vs. John Boehner's "Cut, Cap & Balance" plan (Bloomberg)

"Boehner’s two-step plan would raise the U.S. borrowing limit by up to $1 trillion, with larger spending cuts, and require a new vote on more reductions before an additional $1.6 trillion debt-limit increase next year. It could be voted on in the House within two days. Obama and Senate Democrats oppose a short-term extension, which could lead to another debt standoff next year. 

By contrast, Reid’s proposal would cut $2.7 trillion in spending and give Obama the full $2.4 trillion in additional borrowing authority he seeks, enough to get through the 2012 elections."

Speaker Boehner's response to Obama's address (, 7/25/2011)
President Obama's statement to the nation on the debt limit (, 7/25/2011)
House Speaker John Boehner's news conference (, 7/25/2011)
Senator Harry Reid's news conference (, 7/25/2011)
No endgame in sight as debt default looms (Reuters)

Daily Technical Analysis Report By MIG Bank (7/25/2011), EUR/USD, USDX Charts

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Today's daily technical analysis report has been supplied by MIG Bank, the first forex broker in Switzerland to become a Swiss bank. Click here to read the full report on their website.

The report embedded below includes technical analysis on EUR/USD, the US Dollar Index, GBP/USD, USD/JPY, USD/CHF, USD/CAD, AUD/USD, GBP/JPY, EUR/JPY, EUR/GBP, EUR/CHF, Gold and Silver. I also embedded their special study on CHF/NOK.

EUR/USD, US Dollar Index (MIG Bank)
Daily Technical Report
25 July, 2011
EUR/USD: Extended rebound stalls into key resistance 1.4400-1.4419.
  • EUR/USD’s extended rebound (from its bullish reversal pattern near the200-day MA), has stalled into key resistance zone between 1.4400-1.4419(76.4/78.6% Fib level).
  • Our outlook remains neutral/bearish, while price holds beneath key resistance at 1.4578. Failure into these levels will keep bearish risks on for a resumption of the downside pattern breakout, offering an accelerated impulsive (wave 3) into 1.3750/1.3659 (2 yr uptrend/61.8% Fib-Jan 2011 rise), thereafter squeezing further conservative trend-followers into our initial objective at 1.3370.
  • Only a sustained close above 1.4578 will lead to a reassessment of our long standing bearish view, opening a potential extended recovery into previous key resistance at 1.4711/30.
  • Inversely, the US dollar index is now holding steady around key support at73.50. We expect this level to hold (as the last point of defence), where a potential oversold bounce could develop."

Nasdaq 100 (QQQ) Pierced Resistance On Friday, Future Below It Monday Morning (NQU11)

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If we're going to see one more "risk rally" in the months ahead, there needs to be a market leader. On Friday I saw that $QQQ, or the Nasdaq 100 Index ETF, pierced through May and early July ceiling resistance (59.32). But, tonight, with the ongoing debt ceiling feud, the E-mini Nasdaq September 2011 Future lost 0.85% and moved back below that key resistance level (2,422). It is now down 0.66%. In my opinion, the Nasdaq 100 looks the best on a technical basis when compared to the Dow, S&P, Transports and Russell 2000. So we'll see if it can lead the market here, or confirm a top.

PowerShares QQQ (Nasdaq 100 ETF) - Courtesy of OptionsXpress

E-mini Nasdaq September 2011 Future (Courtesy of OptionsXpress)

Is There One More Market Rally Ahead? (Links - 7/23/2011)

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Exclusive: John Paulson says bets were too aggressive - (Reuters
  • He's trimming his net long position to 50% from 81%;
  • Moving away from bank holdings with heavy mortgage exposure;
  • and increased his bet that the euro currency would fall as a hedge against further fallout from Europe's debt crisis"

Felix Zulauf on the inevitability of further crisis in Europe (Credit Writedowns)

"In the short run, Felix says, the plan, as we've seen, allows investors to exhale and markets to rally. But once the touch of euphoria plays itself out, the omens are anything but bright."

FX Concepts’ Taylor Sees One More ‘Risk Rally’ Before Recession Takes Hold - (Bloomberg)

Bob Janjuah: Euphoric In The Short-Term, Apocalyptic In The Longer (Zero Hedge)

Howard Marks on the U.S. Debt Ceiling: Oaktree Capital Commentary - "Down to the Wire" - (MarketFolly)

Resource Limitations 2: Separating the Dangerous from the Merely Serious, July 2011 (By Jeremy Grantham, founder of GMO Capital) - (GMO LLC)

Goldman's Complete Summary Of The European Council Decisions - (Zero Hedge)

I’m Gonna Tell You How It’s Gonna Be… "A chilling head-fake sell-off followed by new highs for equities." (The Reformed Broker)

Read these reports..

"Strategic Investment Conference: Luminaries In Finance Presentation Series: Part 2 - David Rosenberg" April 2011 - (Zero Hedge)

"Strategic Investment Conference: Luminaries In Finance Presentation Series: Part 1 - Gary Shilling" April 2011 - (Zero Hedge)

Video of Michael Burry On Bloomberg's RiskTakers (I Was 100% Confident)

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Courtesy of Business Insider (read more there)
Former hedge fund manager Michael Burry, who was profiled in Michael Lewis's book "The Big Short", was featured on Bloomberg's
RiskTakers a few days ago. I embedded the video after the jump. The picture with him and the black swans is from his 2007 ("I told you so") investor letter. He returned 472% for his investors in eight years (2000-2008). If interested, read his original thesis on his big subprime mortgage short at "A Primer on Scion Capital’s Subprime Mortgage Short - November 7, 2006".

Burry didn't give any investment calls in this video, but in an interview last year on Bloomberg TV he said was bullish on gold, small asian tech, farmland with water on site and distressed, special situations in real estate. I'm not sure if the same holds true today. Below are a few quotes from the video:

"Ironically, I'm in this book, 'The Big Short,' but I'm not a big short. I don't go out looking for good shorts. I'm spending my time looking for good longs. I shorted mortgages because I had to. Every bit of logic I had led me to this trade and I had to do it. And I had to pull back on equities, because I saw what was coming I thought would affect everything."

"I tried to raise a fund, Milton’s Opus (being Paradise Lost) to just do this because I wanted to do it in big size, but I couldn’t get it going. And the urgency came from my belief that I can’t be the only one thinking this. Somebody will see it and when they do, spreads will blow out wide. I want to get it on when it’s cheap."

"My positioning with my investors had always been from the beginning, I need 3-5 years. I saw the time clock. I knew when it was going to happen. We just needed to make it through to that period. And that was a hard sell when it moved against us initially"

"Even when there was the investor rebellion and even when we had these difficulties in ’06, I was 100% confident when it was going to happen and I would tell people: just wait. We’re on the cusp, 2007, it will happen."

"I was actually 100% confident. I thought it was a sure thing. Because basically those mortgages started going bad by late 2005 and 2006. They started going bad early."

Updates On Oslo Bomb Attack, Utoya Island Gunman (Videos)

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Amateur footage showing aftermath of bombing
Courtesy of Channel 4 News, below is amateur video footage showing wreckage from a bomb that hit the Office of the Prime Minister and set fire to the Norwegian Oil Ministry in Oslo, Norway. According to
Reuters, the bomb killed 7 people and shortly after a gunman opened fire at a youth camp at Utoeya Island, which is north-west of Oslo. UPDATE: See Reuters and RussiaToday videos below.

"A bomb ripped through Oslo's central government district on Friday and a gunman dressed as a policeman then opened fire at a youth camp on a nearby island, killing at least 17 people altogether." (Reuters at Yahoo News)

Update: "A gunman shot dead at least 80 youths at a summer camp of the ruling Labour Party on Friday, police said" (Reuters)

Norway death toll may rise to 98, police say. A man named Anders Behring Breivik was arrested (Reuters)

European Council's Statement On Greece's 109 Billion Euro Loan (EFSF), EUR/USD Charts and Articles

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Source: The Council of the European Union
EUR/USD and stocks rallied yesterday on news that EU member states and the private sector would provide 109 billion euros of low interest financing to Greece to "fully cover the financing gap". The private sector will contribute 37 billion euros. Look how EUR/USD reacted to this news in the chart below. It is currently trading at 1.43841. I embedded the statement and linked to articles after the jump. EFSF = European Financial Stability Facility.


EURUSD Trend From 6/2010 (FreeStockCharts)
We reaffirm our commitment to the euro and to do whatever is needed to ensure the financial stability of the euro area as a whole and its Member States. We also reaffirm our determination to reinforce convergence, competitiveness and governance in the euro area. Since the beginning of the sovereign debt crisis, important measures have been taken to stabilize the euro area, reform the rules and develop new stabilization tools. The recovery in the euro area is well on track and the euro is based on sound economic fundamentals. But the challenges at hand have shown the need for more far reaching measures.

Today, we agreed on the following measures:


1. We welcome the measures undertaken by the Greek government to stabilize public finances and reform the economy as well as the new package of measures including privatisation recently adopted by the Greek Parliament. These are unprecedented, but necessary, efforts to bring the Greek economy back on a sustainable growth path. We are conscious of the efforts that the adjustment measures entail for the Greek citizens, and are convinced that these sacrifices are indispensable for economic recovery and will contribute to the future stability and welfare of the country.

EURUSD July 21-22, 2011 (FreeStockCharts)
2. We agree to support a new programme for Greece and, together with the IMF and the voluntary contribution of the private sector, to fully cover the financing gap. The total official financing will amount to an estimated 109 billion euro. This programme will be designed, notably through lower interest rates and extended maturities, to decisively improve the debt sustainability and refinancing profile of Greece. We call on the IMF to continue to contribute to the financing of the new Greek programme. We intend to use the EFSF as the financing vehicle for the next disbursement. We will monitor very closely the strict implementation of the programme based on the regular assessment by the Commission in liaison with the ECB and the IMF.

3. We have decided to lengthen the maturity of future EFSF loans to Greece to the maximum extent possible from the current 7.5 years to a minimum of 15 years and up to 30 years with a grace period of 10 years. In this context, we will ensure adequate post programme monitoring. We will provide EFSF loans at lending rates equivalent to those of the Balance of Payments facility (currently approx. 3.5%), close to, without going below, the EFSF funding cost. We also decided to extend substantially the maturities of the existing Greek facility. This will be accompanied by a mechanism which ensures appropriate incentives to implement the programme."

"5. The financial sector has indicated its willingness to support Greece on a voluntary basis through a menu of options further strengthening overall sustainability. The net contribution of the private sector is estimated at 37 billion euro."


Daily Technical Report By MIG Bank (July 21), Look at Gold Charts

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Today's technical analysis report has been supplied by MIG BANK, the first forex broker in Switzerland to become a Swiss bank. Click here to read the full report on their website.

The report includes technical analysis on EUR/USD, US Dollar Index, GBP/USD, USD/JPY, USD/CHF, USD/CAD, AUD/USD, GBP/JPY, EUR/JPY, EUR/GBP, EUR/CHF, Gold and Silver. Their gold charts were interesting today. I couldn't embed their report today, but you can view the PDF here.

Gold Charts 7/21/2011 (via MIG Bank)

Sharp correction expected beneath trigger level at 1588/82.
  • Gold price activity remains fragile after its recent sharp correction. The move followed an unprecedented rise of 10 consecutive higher closes, which also triggered multiple exhaustion signals (notably DeMark™ Combo/Sequential). SEE our trade alert for more details.
  • With such explosive moves (upside or downside), it is critical the market confirms a reversal beneath a filtered price/time trigger point. Watch for a sustained DAILY close beneath our trigger level at 1588/82.
  • In terms of the big picture, this move is also taking place within the apex of a 12-year exhaustion pattern (illustrated on the weekly log chart), which has also developed a unique long-term DeMark™ exhaustion signal.
  • Downside risk favours an initial move into key support at 1577.57 (02nd May peak) and 1558.25 (22nd June high). Meanwhile, a sustained close above 1620 will lead to a reassessment of this view.
  • Gold’s COT liquidity indicator (net long positions) is also squeezed within a tight range (as Gold continued to make push to record highs on lower volume). At this stage, the risk remains for a downside breakout which would unlock over 1.5 years of sizeable gold long positions."

Gary Shilling Sees 20% Drop In House Prices and New Recession In 2012

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Source: The Daily Ticker (Yahoo)
Gary Shilling, President of A. Gary Shilling & Co., who predicted the first housing and economic recession in 2006 (watch Shilling on Kudlow & Company on 11/27/2006 below), thinks home prices will drop by another 20% and cause a new recession in 2012. He discussed housing with Jeff Macke on The Daily Ticker on
July 13, 2011.

Shilling believes excess inventories will cut house prices even further:

"The problem is that there are just too many excess inventories. We estimate that there are 2 to 2.5 million excess housing unit inventories over and above the normal working levels, and that's a lot. We normally build about a million and a half houses a year. Getting rid of those excess inventories, if you look at what's happening in terms of household formation and new housing being built, it will probably take 4 or 5 years, and that's plenty of time for this excess inventory to depress prices. Excess inventories are the mortal enemy of prices. We're looking for another 20% decline in house prices."

When asked if housing was already priced in, Shilling said:

"If we have the 20% decline, which would bring us back to the long term trend inflation adjusted on house prices. If we have that, and I think that's likely, and markets often overshoot on the downside by the way so it may be a conservative estimate, the percentage of mortgages underwater by our calculations would jump from 23% now to 40%, and at that point........"

Ray Dalio Sees 10 Year+ Deleveraging Period With Money Printing; Soros, Gartman..

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Hedge fund manager Ray Dalio, founder of Bridgewater Associates, was interviewed by The New Yorker and at the end of the article Dalio gave some pessimistic views on currencies and economic growth going forward. He thinks "late 2012 or early 2013 is going to be another very difficult period". But what does Dalio think about the reflation trade going forward (equities and commodities)? This is important...

Now that the slowdown appears to have arrived, Dalio thinks it will be prolonged. “We are still in a deleveraging period,” he said. “We will be in a deleveraging period for ten years or more.” 

“There hasn’t been a case in history where they haven’t eventually printed money and devalued their currency,” he said. Other developed countries, particularly those tied to the euro and thus to the European Central Bank, don’t have the option of printing money and are destined to undergo “classic depressions,” Dalio said.

Read the full story at The New Yorker

Iran Opens Oil Bourse - Harbinger of Trouble for New York and London? - Guest Post

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Iranian Rial (Wikimedia Commons)
Guest post by John C.K. Daly for

Iran Opens Oil Bourse - Harbinger of Trouble for New York and London?

The last three years of global recession have dealt a major blow to American capitalist ideas trumpeted throughout the world on the value of "free markets." Wall St has been revealed as a form of casino economy, with the bankster insiders gambling with other people's, and eventually, the government's money in the form of bailouts. As the Republicans in Congress, scenting victory in the 2012 presidential elections, hold a gun to the Obama administration's head and rating agencies consider downgrading U.S. government bonds in light of Washington's possible defaulting, many ideas around the world that previously seemed implausible because of the dominance of the U.S. economy are garnering renewed interest.

Not surprisingly, many of these concepts originate in countries not enamored with Washington's influence, perhaps none so more than "Axis of Evil" charter member Iran, which has seen its economy hammered by more than three decades of U.S.-led sanctions. Now Iran is working a program, that, if it succeeds, could help undermine the dollar's preeminence as the world's reserve currency more effectively than a Republican filibuster.

Iran's sly weapon against the Great Satan's currency? An oil bourse on Kish Island in the Persian Gulf, which has now begun selling high-grade Iranian crude oil.

Moody's Places 5 Aaa States on Review For Possible Downgrade Due To U.S. Sovereign Risk Vulnerability

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Moody's Investors Service - July 19, 2011



New York, July 19, 2011 -- Moody's Investors Service has placed on review for possible downgrade the Aaa ratings of the states of Maryland, New Mexico, South Carolina, Tennessee, and the Commonwealth of Virginia. In connection with Moody's July 13 action placing the Aaa government bond rating of the United States on review for downgrade, Moody's announced that it would assess the ratings of Aaa-rated states to gauge their sensitivity to sovereign risk. The review actions affect a combined $24 billion of general obligations and related debt.

Should the U.S. government's rating be downgraded to Aa1 or lower, these five states' ratings would likely be downgraded as well. Moody's will review the ratings of the five states on a case-by-case basis and announce any rating actions within seven to ten days following a sovereign action.

Daily Technical Analysis Report By MIG Bank (July 19, 2011) - Guest Report

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Today's technical analysis report has been supplied by MIG Bank, the first forex broker in Switzerland to become a Swiss bank. Click here to read the full report on their website. The report embedded below includes EUR/USD, US Dollar Index, GBP/USD, USD/JPY, USD/CHF, USD/CAD, AUD/USD, GBP/JPY, EUR/JPY, EUR/GBP, EUR/CHF, Gold and Silver.

EUR/USD, US Dollar Index
19 July, 2011

  • Bullish engulfing targets key zone between 1.4282-1.4325.
  • EUR/USD triggered a bullish engulfing today that targets key resistance zone between 1.4282-1.4325 (14th July high/61.8/66% level). We remain negative, expecting current upside probes to fail into the latter zone.
  • Our short position continues to favour a resumption of the downside pattern breakout, offering an accelerated impulsive (wave 3) into1.3700/1.3659 (2 yr uptrend/61.8% Fib-Jan 2011 rise), thereafter squeezing further conservative trend-followers into our initial objective at 1.3370.
  • A sustained close above 1.4325 would trigger a move into 1.4405/20. Only above here offers meaningful upside recovery into 1.4578 (05th July peak).
  • Inversely, the US dollar index still needs to hold above 76.36 (23rd May high), to confirm a multi-month base pattern for an extension into 77.01and 78.03 (50%/61.8% Fib-Jan 2011 Decline), then 79.00 (objective).

BNY Mellon's Simon Derrick Sees Euro/Dollar In Low 1.30s By Year End

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BNY Mellon's Simon Derrick on BloombergTV
Bank of New York Mellon's Chief Currency Strategist, Simon Derrick, told Bloomberg's Oliver Joy on July 11 that EUR/USD could see the low 1.30s by year end. It is currently trading at 1.41. Here are a few points he made during the interview. Watch the 11:57 minute Bloomberg TV video after the jump.
  • In 2-3 months time, there is a "very real prospect" that there won't be a Greek bailout in place, and Greece won't get the next tranche of cash from the IMF and EU.
  • Uncertainty drives investors out of Euros and risk assets, "and back into the funding currencies, the US Dollar and the Yen, and also into the ultimate safe haven currency which is the Swiss Franc."
    EUR/USD (
    He's betting on a trend breakdown
  • "If there were a quick resolution for Greece, I feel fairly certain that there'd be a reasonable rally for the Euro."
  • Important secondary issue related to China and the end of QE2: "Over the course of the last 12 months, one of the main forces driving the Euro higher, despite the Euro crisis, has been the recycling of reserves by countries like China. The stronger the reserves flow into those countries, the stronger the diversification at the margins, the higher the Euro's got. At the moment there is a concern that maybe China is going to have a slowdown during the second half of this year. And particularly coming at the same time that QE2's dissipating in the United States, there is a belief that less money will be flowing into those markets." (which means less recycling into Euros, or support for the Euro)
  • Outlook for EUR/USD at year end: "We've been actually bearish for quite a while now. Our belief really from about February of this year was that this summer would see a turning point for the Euro, and that we would see a more risk averse, more soft patch for growth taking place in the second half of the year. So we've pretty well been bearish; the only question is do we need to revise down our targets even further from where they currently are. My belief we'll probably end up with targets in the low 1.30s for Euro/Dollar by year end." 

Germany's 5Y Credit Default Swap Makes New 2-Year High (64 bps)

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German 5Y CDS (CDBR1U5:IND at made a new 2 year high yesterday at 65.61 basis points. I'm not sure what to make of it, but look at the snapshot of the chart going back to 2008. During the financial crisis German 5Y CDS hit a high of 91 bps.

Source: Bloomberg

Gundlach Has 10% In Cash, Hussman Sees Topping Process, Taylor Sees EURCHF At Parity, Rosenberg...

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Wall Street (Source: Jpellgen on Flickr)
Links for 7/18/2011

Gundlach Leads Bond Funds Boosting Cash (

"“We are looking for a more severe down move in prices, for a better level to buy,” said Jeffrey Gundlach"

“Gundlach, the chief executive officer of Los Angeles-based DoubleLine Capital Inc., said in a telephone interview that he has 10 percent of the fund’s assets in cash, about five times what it usually holds. He views a move in the 10-year Treasury yield above 3.5 percent as a buying opportunity."

David Rosenberg (Gluskin Sheff) Explains "Why We Should Be Worried" (Zero Hedge)

Rosenberg on CNBC: We Are One Small Shock Away From a New Recession (Pragmatic Capitalism)

Swiss Franc Is Most Expensive Currency as Taylor Sees Euro Parity (BusinessWeek)

“The Swiss franc looks like it will go to par with the euro,” said John Taylor, founder of FX Concepts LLC in New York, the world’s largest currency hedge fund." (hat tip ZH)

Watching GLD/SPY Ratio, Down 16% From March 2009 S&P Low - 7/18/2011

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GLD/SPY (see below)
I'm watching the GLD/SPY ratio at the moment, or Gold/S&P 500 in ETF form. With the ratio at 1.18 (as of 7/15/2011), GLD/SPY is close to testing 2010 resistance at 1.20. As you already know, Gold and the S&P 500 have rallied hard over the past two and a half years on the reflation trade and "breadth thrust" after the financial bailouts. But it is interesting to note that GLD/SPY is down 16.42% from the March 2009 bottom on the S&P (see chart #2).

The first chart (as seen above) shows more than two years of sideways action after the ratio put in a blow off top at 1.41 in early 2009. I'm wondering if GLD outperforms SPY going forward, even if they both go down in tandem. It depends if the ratio can take out 2010 resistance in the sideways channel and stay on the uptrend line from 2007. If GLD underperforms SPY in the near term and breaks down, there is still a major uptrend line to test when using the 2000 and 2007 lows. If GLD/SPY gets above 1.20, it could be ready to test the 1.41 high (imo).

When looking at the last two recessions, GLD outperformed SPY during the 2000-2003 and 2007-2009 periods. Not only are the Euro and US Dollar looking ugly at the moment due to fiscal crises, some economists and analysts are predicting a new recession in 2012. Treasury yields and Eurozone solvency are probably the wild cards for gold and currencies in my opinion. What do you think. GLD by itself is in a strong ascending channel using the uptrend from 2008. GLD looks strong at the moment, but it also looked strong in the second half of 2007 before it peaked at 100 and lost 30% in 2008. When that happened, the GLD/SPY ratio chopped around between 0.64 and 0.85. See charts below of GLD/SPY, GLD:SPY performance and GLD.

S&P: U.S. Ratings Placed On CreditWatch Negative, 50% Chance of Downgrade In 90 Days (10Y, 30Y UST Charts)

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30Y T-bond Price (see larger view below)
Standard and Poor's put United States of America's 'AAA/A-1+' Ratings on negative watch today. This comes after Moody's put 
US's Aaa Government bond rating on review for possible downgrade yesterday. Will 10 year Treasury notes and 30 year bonds make new highs? LOL. See charts after the jump.

"United States of America 'AAA/A-1+' Ratings Placed On CreditWatch Negative On Rising Risk Of Policy Stalemate Overview


• Standard & Poor's has placed its 'AAA' long-term and 'A-1+' short-term sovereign credit ratings on the United States of America on CreditWatch with negative implications.

• Standard & Poor's uses CreditWatch to indicate a substantial likelihood of it taking a rating action within the next 90 days, or in response to events presenting significant uncertainty to the creditworthiness of an issuer. Today's CreditWatch placement signals our view that, owing to the dynamics of the political debate on the debt ceiling, there is at least a one-in-two likelihood that we could lower the long-term rating on the U.S. within the next 90 days. We have also placed our short-term rating on the U.S. on CreditWatch negative, reflecting our view that the current situation presents such significant uncertainty to the U.S.' creditworthiness.

Bernanke: If U.S. Defaults On Its Debt We'll See A Major Crisis (Video, 7/13/2011)

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Ben Bernanke, Chairman of the Federal Reserve, presented the Fed's "Semiannual Monetary Policy Report" to the House Financial Services Committee yesterday, which included their economic outlook and position on monetary policy (see below). When asked during Q&A what would happen if the debt ceiling wasn't raised on August 2 and the US defaulted on its debt, Bernanke said:

"Clearly if we went so far as to default on our debt it would be a major crisis because the Treasury security is viewed as the safest and most liquid security in the world. It is the foundation for much of our financial system and the notion that it would become suddenly unreliable and illiquid would throw shockwaves through the entire global financial system" (At 57:18 in the CSPAN video below)

In his testimony, Bernanke said if there is another threat of deflation, the Fed could provide additional stimulus. Read his full testimony and watch the Q&A session after the jump.

"However, given the range of uncertainties about the strength of the recovery and prospects for inflation over the medium term, the Federal Reserve remains prepared to respond should economic developments indicate that an adjustment in the stance of monetary policy would be appropriate.

On the one hand, the possibility remains that the recent economic weakness may prove more persistent than expected and that deflationary risks might reemerge, implying a need for additional policy support. Even with the federal funds rate close to zero, we have a number of ways in which we could act to ease financial conditions further."

Moody's Places US Aaa Government Bond Rating on Review for Possible Downgrade

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Total Federal Government Public Debt (St. Louis Fed)
Uh oh... From Moody's today:

"New York, July 13, 2011 -- Moody's Investors Service has placed the Aaa bond rating of the government of the United States on review for possible downgrade given the rising possibility that the statutory debt limit will not be raised on a timely basis, leading to a default on US Treasury debt obligations. On June 2, Moody's had announced that a rating review would be likely in mid July unless there was meaningful progress in negotiations to raise the debt limit.

In conjunction with this action, Moody's has placed on review for possible downgrade the Aaa ratings of financial institutions directly linked to the US government: Fannie Mae, Freddie Mac, the Federal Home Loan Banks, and the Federal Farm Credit Banks. We have also placed on review for possible downgrade securities either guaranteed by, backed by collateral securities issued by, or otherwise directly linked to the US government or the affected financial institutions.


Daily Technical Analysis Report By MIG Bank (July 13, 2011)

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Today's technical analysis report has been supplied by MIG Bank, the first forex broker in Switzerland to become a Swiss bank. Click here to read the full report on their website.

The report embedded below includes EUR/USD, USDX, GBP/USD, USD/JPY, USD/CHF, USD/CAD, AUD/USD, GBP/JPY, EUR/JPY, EUR/GBP, EUR/CHF, Gold and Silver.


Breaks out of triangular consolidation.
  • EUR/USD has resumed its bearish activity and has broken out of the all important triangular consolidation pattern.
  • The move follows last Friday’s worse-than-expected NFP figures which paradoxically pushed the US dollar higher, as market sentiment refocused back onto risk aversion and a flight to traditional quality/safe haven assets.
  • Our short position favours sustained weakness to unlock an accelerated impulsive (wave 3) into 1.3670 (61.8% Fib-Jan 2011 uptrend). Only a sustained close above 1.4653 and most importantly 1.4711/30 will lead us to re-evaluate.
  • Inversely, the US dollar index has broken above 76.36 (23rd May high), to confirm a multi-month w-shaped base pattern for an extension into 7701 and 78.03 (50%/61.8% Fib-Jan 2011 Decline).
  • Further upside scope is also being supported by increased long positions on our COT liquidity, which has been positive for the last 6 weeks."

Moody's Downgrades Ireland to Junk (Ba1), Ruins FOMC Minutes Rally (Dow Chart, EUR/USD)

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Moody's downgraded Ireland's credit rating yesterday to Ba1 (junk) and completely ruined the '
FOMC Minutes' spike in the Dow. There are interesting forces affecting the markets right now. At 4:08a EST, EUR/USD is up 0.34% at 1.40520.

Yesterday (7/12/2011), EUR/USD pierced through the 200 day moving average, hit an intraday low of 1.3872 and almost touched the major uptrend line from 2010. Since then EUR/USD regained the 200DMA, but be prepared for any unexpected negative catalysts out of the Eurozone. In my opinion, the 200DMA and uptrend line are important support levels that need to hold to prevent a structural breakdown in EUR/USD. I'm wondering how the US Dollar and Treasuries start pricing in the August 2, 2011 debt ceiling deadline. My futures widget says E-mini Dow (YUM11) is up 57 at 12,470. Risk on? Below is more information on the downgrade from Moody's Investors Service.

FOMC Minutes vs. Ireland Downgrade 
Dow Industrials via
"Frankfurt am Main, July 12, 2011 -- Moody's Investors Service has today downgraded Ireland's foreign- and local-currency government bond ratings by one notch to Ba1 from Baa3. The outlook on the ratings remains negative.

The key driver for today's rating action is the growing possibility that following the end of the current EU/IMF support programme at year-end 2013 Ireland is likely to need further rounds of official financing before it can return to the private market, and the increasing possibility that private sector creditor participation will be required as a precondition for such additional support, in line with recent EU government proposals.

As stated in Moody's recent comment, entitled "Calls for Banks to Share Greek Burden Are Credit Negative for Sovereigns Unable to Access Market Funding" (published on 11 July as part of Moody's Weekly Credit Outlook), the prospect of any form of private sector participation in debt relief is negative for holders of distressed sovereign debt. This is a key factor in Moody's ongoing assessment of debt-burdened euro area sovereigns.

Some FOMC Members Considering QE3 If Economic Growth Too Slow (FOMC Minutes, Dow Chart)

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Industrial Average Intraday 7/12/2011
When the June 21-22 FOMC Minutes were released yesterday, the market initially spiked when traders saw the possibility of QE3 ("additional monetary policy stimulus"). I quoted the portion below from page 8 of the released (see below). The market then crashed intraday when Moody's downgraded Ireland to junk (Ba1). More on that in my next post. Quantitative easing during the next bear market will be interesting to watch, when that day comes.

"However, many members saw the outlook for both employment and inflation as unusually uncertain. Against this backdrop, members agreed that it was appropriate to maintain the Committee's current policy stance and accumulate further information regarding the outlook for growth and inflation before deciding on the next policy step. On the one hand, a few members noted that, depending on how economic conditions evolve, the Committee might have to consider providing additional monetary policy stimulus, especially if economic growth remained too slow to meaningfully reduce the unemployment rate in the medium run. On the other hand, a few members viewed the increase in inflation risks as suggesting that economic conditions might well evolve in a way that would warrant the Committee taking steps to begin removing policy accommodation sooner than currently anticipated." (source: Federal Reserve)

John Hussman: The Federal Reserve is Leveraged 55.6 to 1 (July 7 Fed Balance Sheet)

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In John Hussman's new weekly market comment titled "A Wile E. Coyote Market", he mentioned that the Federal Reserve's balance sheet is leveraged 55.6 to 1 ($2.87 trillion assets / $51.7 billion capital). Read his thoughts about the market as well. If interested, I embedded the Fed's July 7 statistical release after the jump.

Fed Balance Sheet (July 7) - See below
"Unlike 2010, there appears to be little latitude for a robust fiscal or monetary response to the weakening in leading economic measures. Not that we would view any of those responses - aside from facilitating debt restructuring - as promising in any event. Before contemplating a round of QE3, the hawks on the Fed are likely to ask what benefit QE2 provided to the real economy, aside from Fed sponsored speculation, market distortions, and commodity price inflation.

Moreover, as of Wednesday July 7, the Fed's consolidated balance sheet shows $2.87 trillion in assets, versus $51.7 billion in capital, for a leverage ratio that is now up to 55.6-to-1. This isn't getting any better, and is far beyond where Bear Stearns, Lehman, Fannie Mae or Freddie Mac were at just prior to their respective insolvencies. Of course, nobody is going to shut down the Fed just because it is approaching technical insolvency, but we ought to recognize that anytime interest rates rise, the interest being paid on Treasury debt is quietly being used to cover the Fed's capital losses."


10Y Italian-German Bund Spread Spikes to 2.44, Spain-Bund Spread Testing High! (Chart, Link Fest)

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10y Italian-German Bund Spread (Bloomberg)
Both the 10-year Italian-German bund spread and Italian 10-year government bond yield keep making new highs after breaking above resistance levels (read my previous post on 6/24/2011:
10 Year Italian-German Bund Yield Spread Makes New High; Watching Spain - Chart). The Italy-Germany 10Y Spread is at 2.44, up 31% in about a month (from 1.85), and the 10-year Italian government bond yield closed at 5.27, up 9.5% from 4.81. German bonds are considered a safe haven for investors.

On 6/19/2011, I tweeted that a breakout looked possible when looking at the chart and jokingly said the Italy-Bund Spread ETF was in play. There isn't an ETF available for the 10-year Italian-German Bund spread (there are now futures), but BUNT:ITLT, the 3x German Bund/3x Italian Bond ETN, increased 16% in about a month on very low volume (chart below). BUNL:ITLY is the ratio without leverage. I don't trade European Govvies, I am strictly looking at charts available on and StockCharts. The sovereign debt crises in Europe affects other markets, banks and currencies (EUR/USD, EUR/CHF etc.).  Here is the amount of Italian debt outstanding in Euros from the Bank of Italy. Total Debt/GDP as of 12/31/2010 was 119%. See trends at (Dipartimento de Tesoro).

  • Outstanding Government Bonds as of 30/06/2011: € 1,582,700.50 million
  • 10y Italian Government Bond Yield (Bloomberg
  • Public Debt as of 31/12/2010: € 1,843,015 million

European government bonds and bund spreads (links) have been volatile because of rolling default and contagion risk. On July 2, Greece got a $17 billion lifeline from the ECB/EU/IMF that will last them a few months, and last week Portugal was downgraded to junk by Moody's and its bond yields, credit default swaps and bund spreads made new highs. The 10-year Irish-German Bund spread keeps making new highs and the 10-year Spanish-German Bund spread is testing the 6/24/2011 high at 2.84 (chart below). European markets are the most interesting to watch right now.

New Bill Will Allow 1,000 Investors Before Going Public (H.R.2167 - Private Company Flexibility and Growth Act)

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SecondMarket Participant Growth (Q2 Update)
In SecondMarket's Q2 2011 Business Update, I read that Barry Silbert, CEO of SecondMarket, testified before congress in May about changing a law that requires private companies to go public after exceeding 500 shareholders. On June 14, 2011, the "Private Company Flexibility and Growth Act (H.R.2167)" was introduced "to amend the Securities Exchange Act of 1934 to change the threshold number of shareholders for required registration under that Act" to 1,000. Could this have a major effect on the public equity markets if passed? What happens to high frequency trading if liquidity gets pulled from the NYSE and Nasdaq?
"In May, I was invited to testify before the House of Representatives Committee on Oversight and Government Reform about the negative impact of the so-called 500 Shareholder Rule on US businesses. The rule compels private companies to become public reporting companies once they have more than 499 shareholders and $10 million in assets at the end of the calendar year. Participating in the hearing was an amazing experience and a tremendous opportunity to discuss the 500 Shareholder Rule with prominent members of both political parties. The reaction to my testimony was almost entirely positive and I walked away encouraged by the bipartisan support. 
A few weeks after the hearing, there was an exciting breakthrough: “The Private Company Growth and Flexibility Act” was introduced in the House by Rep. Schweikert (R-AZ) and Rep. Himes (D-CT). Specifically, this bipartisan bill would modernize the 500 Shareholder Rule by increasing the threshold from 500 to 1,000, while also exempting employees and accredited investors from the count. We’ve been promoting these changes for several months as the current rule restricts private companies’ ability to readily access capital, retain existing employees and hire new ones." [continue reading at]

Follow the bill at

BLS: U.S. Adds 18,000 Jobs In June, Unemployment Rate At 9.2% (Misses Consensus Estimates)

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Unemployment Rate, Nonfarm Payroll Employment Trends (
This morning the Bureau of Labor Statistics reported that jobs in June increased by 18,000, below the
105,000 consensus estimate. The unemployment rate increased to 9.2%, which was higher than the 9.0% median estimate and up from 9.1% in June. Jan Hatzius, Chief U.S. Economist at Goldman Sachs, predicted an increase of 125,000 jobs and Joe LaVorgna, Chief U.S. Economist at Deutsche Bank, predicted 175,000. The charts above show employment trends.

Government jobs declined by 39,000 in June (Federal employment declined by 14,000) while health care (ambulatory employment increased by 16,500), leisure and hospitality jobs saw gains. Below are excerpts from the BLS report, read it in full with tables after the jump.

The Employment Situation – JUNE 2011

"Nonfarm payroll employment was essentially unchanged in June (+18,000), and the unemployment rate was little changed at 9.2 percent, the U.S. Bureau of Labor Statistics reported today. Employment in most major private-sector industries changed little over the month. Government employment continued to trend down."

"The number of unemployed persons (14.1 million) and the unemployment rate (9.2 percent) were essentially unchanged over the month. Since March, the number of unemployed persons has increased by 545,000, and the unemployment rate has risen by 0.4 percentage point. The labor force, at 153.4 million, changed little over the month. (See table A-1.)"

Distressed Volatility Now Optimized For Smartphone Devices

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Press Release:'s mobile site is now optimized for smartphones, courtesy of Blogger's mobile template creator. The picture below shows what it looks like on the iPhone using Safari. The mobile template cuts off the sidebar widgets to make the blog load faster and converts Adsense gadgets (or in-line blog ads) to mobile Adsense ads automatically. Thanks Blogger...

Portuguese Bond Yields, CDS, Bund Spread Make New Highs On Junk Rating [UPDATE]

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Portuguese 2Y Note Yield Spikes 21% to 15.66
Continued from my previous post a few hours ago:
Moody's Downgrades Portugal to Ba2 (Junk); Yields, Spreads, CDS Not At New Highs (Yet). Well, it happened. Portuguese government bond yields, 5Y CDSs (credit default swaps) and the 10Y Portuguese - German bund spread made new highs this morning after Moody's downgraded Portugal to junk. EUR/USD is getting killed (1.43165 -0.98%).

Portuguese 2-year Yield = 15.64% (closed at 14.63% on 6/27)
Portuguese 5-year Yield = 15.02% (closed at 14.15% on 6/27)
Portuguese 10-year Yield = 12.43% (closed at 11.68% on 6/27)
Portuguese 5-year CDS = 916 bps (closed at 841 on 6/27)
10-year Portuguese-German Bund spread = 9.46% (closed at 8.79% on 6/27)

Bruce Berkowitz On St. Joe's Investigation, Says Buying Back Shares If Price Moves Lower

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Bruce Berkowitz (Fairholme Fund)
Bruce Berkowitz, manager of the Fairholme Fund (FAIRX), spoke with Bloomberg's Eric Schatzker yesterday on St. Joe Co.'s SEC filing that named him and Fairholme in a formal investigation. View the SEC filing on my previous 
post. He said "there is not a lot new here, except for I was named and Fairholme was named in the discussion, strictly in regards to our 13D position.” Berkowitz said he wants to buy more shares if the price moves lower. His fund already owns 30% of the company. I embedded the Bloomberg video after the jump. Below are a few quotes from the interview.
"It was my decision as the Chairman of St. Joe to put that 8K out, because we have a buyback program in place. We have a desire for the shareholders to benefit. And if the stock is going to be pushed down for whatever reason, by whatever articles that have been out there for the past three years, I want the company to preserve its ability to buy back shares on the open market… To preserve that ability, the public must know everything and the shareholders must know everything." 
$JOE symmetrical triangle! - FreeStockCharts
"The main reason again is, is for whatever reason the price of St. Joe goes down, I want St. Joe to have the ability to buy back shares for the benefit of our shareholders."
By the way, JOE put options were active yesterday in pretty decent size. Someone might be protecting downside risk after this. Or is Berkowitz selling puts?

3065 December $15 puts traded with 398 open (hat tip @optionsizzle); 1529 September $16 puts traded with 187 open; 468 September $15 puts traded with 216 open; 1746 July $19 puts traded with 919 open; 689 July $18 puts traded with 246 open, and 327 July $17 puts traded with 31 open. I uploaded the July, September and December JOE Option chains on Flickr (via Google Finance). The chart above shows that JOE is trading in a multi-year symmetrical triangle and getting closer to judgment day. Click the chart for a larger view.

EUR/USD, EUR/CHF Chart Watch 7/6/2011 (Euro, Dollar, Swiss Franc)

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Below are EUR/USD and EUR/CHF short and long term symmetrical triangles, descending channels and support levels to watch (charts courtesy of In my opinion, 1.43 (or 1.42816 is the 11/2010 blow off top) is a very important support level to hold. If it busts through that level, EUR/USD could test the first and second symmetrical triangle support levels. If you look at the long term chart though, you will see that EUR/USD is still in a rising trend. Watch out for interventions by central banks like China. EUR/CHF is in a nasty downtrend and 1.18 is the recent low. See more charts after the jump (click for larger view).

Moody's Downgrades Portugal to Ba2 (Junk); Yields, Spreads, CDS Not At New Highs (Yet)

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Portugal 5Y Note Yield (Bloomberg)
Moody's downgraded Portugal's credit rating to Ba2 (junk) and had a negative outlook. It seems like Portuguese government bond yields and credit default swaps were already pricing this in (*Update: never mind, now they are pricing in the downgrade. Rates made new highs this morning (2Y yield +29% at 16.74). The Moody's report was released after the 7/5 close. See updates
here). According to quotes on today, the Portuguese 5Y CDS closed at 775 bps, down from 841 bps on 6/27; Portuguese 10Y Note Yield closed at 11.02%, down from 11.68% on 6/27; Portuguese 5Y Note Yield closed at 13.16%, down from 14.15% on 6/27; the 2Y Yield closed at 12.94%, down from 14.63% on 6/27; and the 10Y Portuguese-German Bund spread closed at 8.01, down from 8.79 on 6/27. I couldn't find the 5Y spread on I'm assuming if there is near-term default risk, like Greece last week, these rates will move even higher. No? Greek 2Y notes yield 26%.

EUR/USD and EUR/CHF fell hard last night on perhaps the negative S&P announcement about banks rolling Greek debt, or speculating on more problems in the Eurozone. EUR/USD is currently trading at 1.44515, up from the low of 1.43972 last night. Maybe China stopped buying Euros, or the Dollar is getting a bid based on a second half recovery in the U.S. Also, with QE2 over, do Treasury yields and asset prices move higher or lower. And what happens with the debt ceiling? All of these reactions will affect Dollar.
Lagos, Portugal via Flickr

So what happens next. Do all of these countries get bailed out by the ECB, IMF and EU with steep austerity bills? Simon Johnson, who was chief economist at the IMF in 2007 and 2008, and currently a prof at MIT, thinks Italy is the next Domino to fall (Bloomberg View). This article I found at Daily FX warns about Spain and Italy and potential contagion risks ("yet the real danger to the euro is contagion risk to Spain and Italy, and the next steps could decide the euro’s fate over the medium term."). Here is today's Moody's announcement:

Moody's downgrades Portugal to Ba2 with a negative outlook from Baa1

London, 05 July 2011 -- Moody's Investors Service has today downgraded Portugal's long-term government bond ratings to Ba2 from Baa1 and assigned a negative outlook. Concurrently, Moody's has also downgraded the government's short-term debt rating to (P) Not-Prime from (P) Prime-2. Today's rating action concludes the review of Portugal's ratings initiated on 5 April 2011.

Daily Technical Report By MIG Bank (July 5, 2011) - EUR/USD, EUR/CHF, GBP/USD, USD/JPY, Gold, Silver...

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From now on I will be embedding technical research reports courtesy of MIG Bank on my blog. View the embedded PDF file after the jump. This report includes EUR/USD, GBP/USD, USD/JPY, USD/CHF, USD/CAD, AUD/USD, GBP/JPY, EUR/JPY, EUR/GBP, EUR/CHF, US Dollar Index, Gold and Silver. Enjoy!

Today's technical analysis report has been supplied by MIG Bank, the first
forex broker in Switzerland to become a Swiss bank. Click here to read the full report on their website.

EUR/USD (Source: MIG Bank)
Reactionary bounce under pressure into resistance at 1.4550/67.
  • EUR/USD’s reactionary bounce is losing momentum as it comes under pressure into key resistance at 1.4550/67 (a confluence of both the multi-week triangle pattern ceiling and 76.4%/78.6% Fib-08th June price swing).
  • We watch for this area to cap recent bullish gains for a return back into the lower boundary of this critical triangle pattern. Key downside trigger levels remain at 1.4148 (38.2% Fib-Jan 2011 uptrend) and 1.4000 (psychological).
  • A sustained close below 1.4000/1.3970 (Psychological/May swing low), will accelerate this impulsive (wave 3) into 1.3903/1.3895 (50% Fib/200-day MA), thereafter shifting prior upside trend-followers back into 1.3670 (61.8% Fib-Jan 2011 uptrend). Only a sustained close above the ”Trichet high” at 1.4653 and most importantly 1.4711/30 will lead us to re-evaluate.
  • Inversely, the US dollar index still needs to extend its recovery above 76.36 (23rd May high), to confirm a multi-month w-shaped base pattern for an extension into 77.01 and 78.03 (50%/61.8% Fib-Jan 2011 Decline). Further upside scope is also being supported by increased long positions on our COT liquidity, which has been positive for the last 4 weeks."

EUR/USD, EUR/CHF Look Weak, Broke Near-Term Support (Charts, News)

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EUR/CHF (Yellow) v. EUR/USD (White)  July 4-5 (click to view) 
The Euro is making major moves overnight. Happy belated Independence Day to my U.S. readers. EUR/USD (Euro/U.S. Dollar) broke the July 4 floor and actually just made a new low. EUR/CHF (Euro/Swiss Franc) broke through the floor as well and is testing immediate support as I write. During the past two weeks I charted out a major EUR/USD descending channel to watch, and it looks like it failed technically at the
upper bound of the channel (resistance). Interesting news I found:

ECB Will Continue to Accept Greek Debt (Financial Times)
"The European Central Bank will continue to accept Greek debt as collateral for loans unless all the major credit rating agencies it uses declare it to be in default, said a senior finance official"... 
Greek fiscal survival vital for euro zone: FinMin (Reuters)

FOREX-Euro backs off 1-month high on dollar short squeeze (Reuters)
* Short squeeze in the dollar pulls euro off 1-mth highs
* Expected rate hike by ECB to keep euro dips shallow
S&P Selective-Default Risk for Greece 'Surmountable,' HSBC Says (SF Gate/Bloomberg)

Spain next candidate to request major aid package, say London bookies, Italy next (Merco Press)

Ratings agencies playing hardball on Greece: Nowotny (Reuters)

Moody's: $540 Billion In China Local Government Debt Unaccounted For Understates Bank Exposure

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qianmen 3.3 (3rd time this road has been rebuilt in the last 2 years)
Road Construction in China via Tricia Wang (Flickr)
Moody's reported today that China's National Audit Office may have understated total local government debt by $540 billion, which could affect banks if these loans go sour. On June 27, China's NAO released a report that said $1.3 trillion of total local government debt outstanding ($1.7 trillion) was funded by banks, but China's Central Bank said there was $2.2 trillion in local government debt outstanding. Read more about about the NAO report at
NYT. In addition to this hidden $540 billion, this is going on:

"In its report Monday, the national audit office said it had found many irregular activities. For instance, many local governments were using “unreal” or illegal collateral to secure the loans, the report said, and some of the money they borrowed was funneled into the stock and property markets. At other times, the auditor said, the local governments were “overestimating the value of the collateral” — which was often tied to land values." (NYT, 6/27/2011)"

If all else fails and there's a hard landing in China (as Soros says), the People's Bank of China will just print more renminbi right? Marc Faber thinks so. Here is today's announcement by Moody's Investors Service (7/4/2011):

Beijing, July 05, 2011 -- Moody's Investors Service says that the potential scale of the problem loans at Chinese banks may be closer to its stress case than its base case, according to an assessment that the rating agency conducted following the release of new data by China's National Audit Office (NAO).

St. Joe Co. 8K Filing Mentions Private Investigation By SEC (JOE)

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Source: T2 Partners VIC Slides 
This shouldn't come as a surprise. In an 8K filing on January 10, 2011, St. Joe Co, a homebuilder in Florida, said the SEC was "conducting an informal inquiry" on their land impairment practices (read: 
SEC Conducts Inquiry Into St. Joe's Land Impairment Practices). A new 8K was filed on July 1, 2011 that said there was a private investigation on a variety of matters for the period beginning January 1, 2007. We'll see what happens with this.

Both David Einhorn (Greenlight Capital) and Whitney Tilson (T2 Partners), who are publicly short the company (unless this has changed), believe there should be large land impairment charges. They think $JOE is worth $7-$12/share based on the value of their timberland holdings. The stock is currently trading at $20.87 and hit a low of $18.31 in June.
"Item 8.01 Other Material Events. 
The Company previously disclosed in January 2011 that the Securities and Exchange Commission (the “SEC”) is conducting an informal inquiry into the Company’s policies and practices concerning impairment of investment in real estate assets. On June 24, 2011, the Company received notice from the SEC that it has issued a related order of private investigation. The order of private investigation covers a variety of matters for the period beginning January 1, 2007 including (a) the antifraud provisions of the Federal securities laws as applicable to the Company and its past and present officers, directors, employees, partners, subsidiaries, and/or affiliates, and/or other persons or entities, (b) compliance by past and present reporting persons or entities who were or are directly or indirectly the beneficial owner of more than 5% of the Company’s common stock (which includes Fairholme Funds, Inc., Fairholme Capital Management L.L.C. and the Company’s current Chairman Bruce R. Berkowitz) with their reporting obligations under Section 13(d) of the Exchange Act, (c) internal controls, (d) books and records, (e) communications with auditors and (f) financial reports. The order designates officers of the SEC to take the testimony of the Company and third parties with respect to any or all of these matters, and the Company is cooperating with the SEC."