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The Ex Ante Factor: Often Early, Never Wrong?

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As we approach the Labor Day recess and finish off the summer to get ready for the end of year trading pattern the market is leaving us in a very familiar spot. We have bounced nicely off the FNM/FRE bailout lows in what is setting up to be either a bear bounce only to collapse or the beginning of a big bull run towards the old highs. We can't be sure which path the market will take but anticipate the move to be large either way. As you plan your set-ups keep in mind that sentiment and emotion remain intense and the market will try to screw which ever side is the largest leaning the wrong way.

The credit market debacle and subsequent de-leveraging of financial company balance sheets has seen many casualties. The world's biggest banks, broker dealers and hedge funds were brought to their knees. Those of us who have been subscribers to TTC have had the benefit of unbiased technical analysis that has kept us all off the wrong side of the market and many have profited nicely.

When we warned of the technical breakdown of BSC stock in 6/07 and potential fallout from one of Wall Street's biggest credit trading operations on the whole market we had no idea that the de-leveraging they sparked would eventually bring our financial system to the brink of collapse. We did, however, consider the ramifications of the credit bubble bursting and effects of collateral liquidation on asset values that had been supported by this massive supply of easy money. Throughout the end of 2007 and beginning of 2008 we were looking for a top in the euro (dollar low) and in commodity prices and falling bond yields as de-leveraging brought upon deflation leading to a premium for cash. We were early on our dollar/commodity trade as these markets took the early top tickers on one last parabolic advance. Now that these markets seem to be turning we have to consider what they could be telling us about the big picture and prepare our portfolio accordingly.

Ironically this week as energy prices and metals were tumbling with the dollar rallying the CPI came out at the highest level since 1991 at around 5% on the headline. Back then were in a similar situation coming out of a housing recession, a banking crisis and mounting job losses but with much different treasury yields with the 10YR closer to 8% not 4% as we have today. In our opinion the 10YR is the most efficient market discounting mechanism and believe today it is doing a masterful job, giving us a map of the macro economy. At the beginning of this year we noted that as commodities were parabolic and the dollar making new all time lows the 10YR yield barely budged and was sitting near the 4% level. How could we be experiencing this massive inflation with bond yields near their lows?

We believe the bond market never took the inflation bait for a reason and is thus telling a much different story of prolonged credit and collateral deflation. Perhaps the commodity markets took prices to a level in order to finally break the consumption binge and the bond market has been preparing for the aftermath. Now that commodities are reversing and the dollar is firming these markets could be confirming what the bond market was saying all along. The consumer is tapped out and will be forced into a period of increased savings and decreased borrowing. We expect bond yields to remain low and eventually fall as financial institutions continue to de-lever and find little demand for money. There is not an interest rate level that will support leveraged investment in falling asset prices and we believe yields must fall further to encourage buyers and put a floor under the housing market and other leveraged assets. Money was free for the entire real estate and credit boom and we think the market will need to make money free again.

Friday the 10YR yield tested it's FNM/FRE July lows while the S&P traded just shy of recent highs 8% higher than those July lows. Is the next chapter in this cycle the 10YR yields falling therefore propping up multiples or is the banking system in for another round of equity evaporation? We have no idea but we do know that throughout the end of 2008 and into 2009 we will see a fascinating display of macro market movements among the 4 major asset classes. We will be following Dom's un-biased technical expertise and adjust portfolio exposure and risk accordingly.

Next week we will look for a bounce in commodities and a reversal from a high in equities and the dollar. We will be paying close attention to the reaction out of the bond market. The 10YR could carry equities on its back if the yield continues to fall and we think the economy needs much lower yields prior to any pick up in consumer spending. That said we are in unchartered waters and will need to rely on forward looking technical analysis in order to navigate. A rising 10YR yield would indicate that either demand for credit and risk is returning or we are about to witness another round of inflationary pressure. These are indeed interesting times.

TTC has been quite busy trading since we closed our doors to new retail membership and paused the regular free weekly updates. But coming soon, and for a limited time only, TTC will reopen for new members while space is available. Beginning Saturday August 30 until September 8, or until available spaces are filled, TTC will be accepting new members.

Because we take the quality of our service very seriously, we strictly limit membership and work to develop members' trading skills. Having noticed an improvement in our current membership, most of which are professional, institutional traders, we will accept a limited number of new retail members for one week only. TTC does not issue trade signals because we teach you how to trade. We don't spoon feed you because we teach you how to take care of yourself. So, whether you're a novice trader who wants to get better, or a more experienced pro that's wants to share what they've learned and go to an even higher level in multiple markets and timeframes, TTC is the place for you. Stay tuned for further updates with information on how to join.


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