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Our bearish outlook heading into this week proved accurate as U.S. equities traded sharply lower. We caught a glimpse of “No Mo POMO” in action. Not surprisingly, without POMO money from the Federal Reserve propping up stocks, the market behaved poorly. As Lee Adler of the Wall Street Examiner warned last week, “Normally, even with QE [quantitative easing], we’d expect some pressure to show up either in the stock or bond markets around such a large settlement. It should be a lot more ‘interesting’ without QE. This will be the first real test of the market without it since last August.” (Stock World Weekly, July 10, p.11)

Europe is facing its own challenges. The European Debt Crisis of the Twenty-first Century, “The Black Debt,” continued spreading across Europe like the plague. (Originating in China, the Black Death swept through Europe from 1348 to 1350, killing 30% to 60% of the population.) Our modern era’s fiscal contagion may be less lethal, but it still threatens to tear apart the economic fabric of the Eurozone by unraveling a complex arrangement of debt owed between member nations and eroding confidence in the continued viability of the Euro as a currency. The magnitude of the collateral damage to other countries is not known, but given the black box nature of the derivatives market, it is likely substantial. (See e.g. Derivatives Cloud the Possible Fallout From a Greek Default)

Uncertainty surrounding Greece’s second aid package and the role of private creditors in future funding, prompted Fitch ratings service to cut Greece’s credit rating down three notches, to CCC. Fitch contends that default is “a real possibility.” Greek 10-year yields increased to 17.10%. As fear of contagion spread, Ireland’s 10-year yields rose to record highs of 14.13%, and Italian and Spanish 10-year yields climbed to 5.63% and 5.86% respectively. (Italian, Spanish Government Bonds Fall After Italy Auction, Austerity Vote.)

On Thursday, hoping to prevent the third largest economy in the Eurozone from succumbing to the debt pandemic, the Italian Senate approved a $68Bn package of tax hikes and spending reductions. Finance Minister Giulio Tremonti compared Europe’s problems to the Titanic, warning “not even first class passengers will be saved.” (Italy

Dow Jones 12,480 (-1.4%)

S&P 500 1,316 (-2.1%)

NASDAQ 2,790 (-2.4%)

NYSE 8,227 (-2.2%)

Russell 2000 829 (-2.8%)

Oil 97.37 (+1.0%)

Gold 1,594 (+3.2%)

THIS WEEK’S NEWSLETTER:

MANDARIN MONDAY MELTDOWN - AGAIN!Stocks plummet as Dollar soars

TREASURY TUESDAY - WHAT A COINCIDENCE - CAPITAL FORCED INTO TBILLSFOMC Minutes hint at QE3

WHICH WAY WEDNESDAY - WHEREFORE ART THOU QE3?Dollar drops as Bernanke warms up to more easing

JOBLESS THURSDAY - BERNANKE GETS 2ND CHANCE TO GIVE US HOPEMood changes as Fed tries to say it didn’t really mean more easing

FINANCIAL FRIDAY - EU STRESS TESTS AND US DEBT MESSU.S. Debt ceiling talks continue without resolution as deadline looms

THE WEEK AHEAD

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slashing budget to fend off debt crisis) Compared to Greece’s €329Bn debt (143% of its GDP), the sheer s i ze o f I t a l y ’s €1.84Tn debt (119% of it’s GDP) is ominous. (See chart to right.)

The U.S. has not been spared the Black Debt. The August 2 deadline for raising the debt ceiling, b e f o r e u n f u n d e d obligations come due, is looming. Republicans and Democrats are battling o v e r t a x h i k e s a n d spending cuts . Whi le Democrats are demanding a “balanced approach” of both spending cuts and tax increases, Republicans are refusing to consider tax hikes. Tensions have been escalating. Senate Majority Leader Harry Reid (D) declared House Majority Leader Eric Cantor (R) was “childish” and “shouldn’t even be at the table.” Senator Chuck Schumer (D) complained “if Eric Cantor decides everything, I fear we’ll be in default.” Republicans countered with accusations that President Obama is “demagoguing” the debt talks. (Debt ceiling talks grow more tense) Salon reported that House Majority Leader Eric Cantor has a glaring conflict of interest. “He's the GOP's chief debt ceiling negotiator. He's also invested in a fund that will skyrocket if there's a default.”

Economist Michael Hudson argues that there is no real need to raise the debt ceiling. Rather than slashing social security, medicare and other social support programs, we could cut military spending, end Wall Street bailouts, claw back outrageous profits and bonuses, and raise taxes on the top 0.1% ultra-wealthy elites. (Deficit Deal Deception)

Moody’s and Standard & Poor’s issued warnings on U.S. debt as a result of the impasse over the debt ceiling. On Wednesday, Moody’s placed the

U.S. bond rating “on review for possible downgrade.” Standard & Poor’s warned of a 50% chance that it would also downgrade U.S. debt. On Friday, S&P declared it might downgrade a large part of the U.S. financial sector, including the Depository Trust Company, multiple Federal Home Loan Banks, Farm Credit System Banks, and Fannie Mae and Freddie Mac. Peter Niculescu, a partner at Capital Markets Risk Advisors, surmised, “S&P is firing a warning shot, saying the entire financial clearing system is in question.” (S&P threatens downgrade of U.S. financial companies)

As legislators wrangled over plans for the budget deficit, Ben Bernanke testified at the semiannual Monetary Policy Report to Congress. During Wednesday’s appearance before the House of Representatives Financial Services Committee, Bernanke declared, “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.” He claimed the Fed “remains prepared to respond should economic developments indicate that an adjustment of

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m o n e t a r y p o l i c y w o u l d b e appropriate.” (Bernanke’s Prepared Testimony for Congress)

Hints about another round of QE sent a jolt of hopium into the veins of the stock market, while the Dollar quickly fell in reaction to the threat of more money printing. Unfortunately for stocks, the rally was short-lived. Bernanke delivered an antidotium on Thursday, quickly distancing himself from his statement on Wednesday. He reiterated his previous position that further easing is off the table, for now, barring a major downturn in the economy. (Bernanke Tries To Walk Back Market’s Expectation For QE3 On Day 2 Of Testimony, Stocks Give Up Gains).

Thus, the stock market, now a mutant offspring of the Federal Reserve and federal government, got whipped around by Dr. Bernankenste in th i s week. But miss ion accomplished. As Lee Adler writes, “The Fed and Treasury have, with the help of the Europanic, succeeded at Job One, keeping yields down during big long term auction weeks, mostly at the expense of the stock market.”

We have reviewed several trade ideas from earlier issues of Stock World Weekly in the box above and on the next page.

I n D e c e m b e r, w e h a d anticipated that stocks and commodities would do well as a result of QE2. On December 12, 2010, we presented two trade ideas based on going long DBC (DB Commodity Index ETF) and FAS (Direxion Financial Bull 3X Shares). Details of the original trade ideas and how they worked out are in the inset box on the next page. We also have details on Pharmboy’s trade idea on MNTA from SWW March 13, 2011, below.

From SWW, March 20, 2011

FLASHBACK

“I was interviewed by BNN Tuesday and they were "shocked" that we

were buying on Tuesday – especially that we were buying HIT ($47 entry), GE ($19.20 entry) and SHAW ($31.50 entry on Monday)... So many ways to win on this trade – why not?” - Phil, (SWW, March 20, 2011, p. 7)

As of July 17, HIT is $61.98 (up 32%), GE is $18.41 (down 4%), and SHAW is $26 (down 17.5%). SHAW was up well over 20% ($39.91) in May. Once a stock moves up over 20%, we set very tight stops, trying not to give up more than 20% of our profits. In SHAW's case, the move in April to $39.43 was up $7.93 from the original entry. We’d set a stop at 20% of that gain, or $1.59 lower. So a pullback to $37.84 would trigger a stop, resulting in a 20% gain! This is an example of why, quite often, it makes sense to take a 20% gain off the table or at least have a mental stop loss.

“

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In Stock World Weekly, March 13, 2011 (p. 11), we presented a trade idea from our resident biotech trader Pharmboy. Pharmoby described a bull call spread on Momenta Pharma (MNTA), combined with the sale of a put: “The Jan 2012 $10/15 bull call spread is approximately $2.40 (buying the $10 call and selling the $15 call) and 100% in the money. Also selling the $12.5 put for $2.10 or better makes a total cost of $0.30 for the position.” MNTA was trading at $14.17 at the time.

Results? MNTA is now at $19.51. Our net cost was $0.30 (price of the bull call spread minus proceeds from selling the put). As of the close of markets on Friday those positions were worth $2.50, a gain of 830%. (The put can be bought back for $1.20. The call sold can be bought back for $6.70, and the call bought can be sold for $10.40.)

From SWW, December 12, 2010

FLASHBACK

“Last Friday (December 3), we had two high-reward trade ideas featured

in the main post. The first one was the FAS April $20/25 bull call spread at $2.70 (now $3.20), selling the April $21 puts for $2.55 (now $1.75) and that net $0.15 spread is already net $1.45 - a pretty good gain (833%) for a week.  Our other upside hedge was DBC and again I liked April for a simple play to just buy the $27 calls for $1 (now $1.10) as well as the more complex spread of the short 2012 $22 puts at $1.10 (now $1) to offset the cost of the 2012 $26/30 bull call spread at $1.40 (now $1.50).  That one is still playable if you need an inflation hedge and the LACK of commodity performance during this week-long stock mania is what still gives me pause. Keep in mind that I do think this is all BS, but now we have support lines to play off and, as you know, losing 3 of 5 is a signal to flip bearish again for sure!” - Phil

Phil followed up on that trade idea this week: “The FAS trade was, of course, a home run with FAS finishing at $29.28 on April 15, which gave us $4 on the $20/25 bull call spread. The short puts expired worthless for a 2,566% gain off the net $0.15 investment. DBC hit $31.17 on April 15 so the $27 calls finished at $4.17, up 317% but it's the 2012 $26/30 bull call spread, now $3 and the short 2012 $22 puts, now $0.20, can be taken off the table for net $2.80 for a net of $6.97 back in our pockets off the original net $0.70 investment (up 895%). As inflation (so far) this year has been much less than 895%, let alone 2,566%, we would have to call both of those trades successful inflation hedges and congratulations to Stock World Weekly readers who played along!” 

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Stocks were down sharply on Monday. The Nasdaq lost 2%, the S&P lost 1.8% and traders lost confidence as the Black Debt Plague of Europe dominated the financial news again. The European markets dropped, and the U.S. Dollar soared to a high of 76.5 during the day.

According to the Wall Street Journal, “the cost of insuring peripheral sovereign debt surged to record highs” suggesting that markets are expecting some form of default on Greece's sovereign debt. “Italian and Spanish bond yield spreads over safe-haven German bunds Monday soared to their widest levels since the inception of the common currency, approaching a threshold viewed as unsustainable by the markets as concerns grew that a potential Greek default could engulf larger economies.” (Italian, Spanish Yields at Record Highs) Michael Darda, an economist with MKM Partners in Stamford, Connecticut noted, “Spain and Italy are nearly five times the size of Greece, Portugal and Ireland and carry nearly four times the volume of debt. Thus, they are a much larger threat to the integrity of the Eurozone itself.” (European markets plunge as debt crisis worsens)

European stocks had a terrible week as fears of fiscal contagion spreading to Italy and Spain intensified. According to Jean Borjeix, partner at Paris-based Platinium Gestion, “Markets are too expensive considering the risk. It is impossible to

take the same risk for the market as we did before 2008 because now we have a public debt problem. We are not in the same environment, so it is not possible to price today at the same level.” (European Stocks Post Biggest Weekly Retreat Since March)

One bright spot was that Monday’s Treasury auctions went off well, as yields on 10-year notes dropped to 2.92%. Lee Adler warned last week (p. 10), “It will be an especially tense standoff this week, because on Friday, the market must settle $66 billion in net new notes and bonds. That in itself could be enough to light the fuse” sending yields upwards. Instead, the markets experience a mini-panic that helped corral investors into the “safety” of Treasuries.

Mandarin Monday Meltdown - Again!

“Now, as in the summer of 2010, we are beginning to drift back to the lower end of our channel

(our -2.5% lines) with the occasional run-ups on pretty much any rumor that QE3 is just around the corner. Unless we break BELOW our -5.0% marks, I doubt we’re going to get a QE3 intervention any earlier than we did last year, which was at the September Fed meeting in Jackson Hole. (See chart on Friday’s page.)

“The problem is that, this time, we have already run-up in anticipation of QE3 – over and over again! Also, as mentioned in our weekend reading, we are at a point of diminishing returns on QE programs. So the Fed is going to have to come up with something bigger and better than just a plan to buy another Trillion in TBills to accommodate our brand-new $17Tn debt ceiling.  - Phil

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The markets declined on Tuesday and the five major indexes we track lost further ground. Moody’s downgraded Irish debt to Ba1 from Baa3, dropping it out of the range of “lower medium grade” debt and into the unfortunate realm of “non-investment grade speculative.” Moody’s outlook on the ratings remained negative.

Release of the FOMC minutes revealed that some members of the Fed are willing to consider additional QE if economic growth remains too slow to make progress in reducing unemployment. Phil surmised, “[This] is nice bullish bone for the dogs - if it can’t move stocks higher, it’s not a good sign.” As it was, the minutes gave the markets a mild albeit short-lived mid-afternoon boost. Mark Gongloff noted, “The market could also focus on the hawkish group described in this section of the minutes: ‘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 FOMC ‘taking steps to begin removing policy accommodation sooner than currently anticipated.’ But the stock market is populated by optimists, unlike the bond market, which is totally unmoved by this news, which is not news at all.” (Fed Minutes Show Predictable Divide on QE3, Stocks Assume This Means More QE3)

China’s economy expanded at an annual rate of 9.5% in the April-to-June quarter, slightly lower than the 9.7% first quarter reading, but ahead of the 9.4% anticipated by economists. Analysts welcomed the data as countering expectations for a hard landing. According to Global Insight, “We expect gross domestic product growth deceleration to continue in the second half, though the slowdown is unlikely to be severe.” (China economic growth slows to 9.5%)

The ICSC-Goldman Store Sales report was better than expected showing same-store sales growth up 5.5% year-over-year (Y/Y). Phil wrote,

“Of course a little inflation isn’t stopping the unstoppable US consumer as ICSC Retail Store Sales are up 0.4% for the week and up 5.5% year over year.  The strength in sales is attributed to demand for seasonal goods tied to hot weather and back-to-school sales but it seems a bit early for back-to-school (I’m a parent) so I’d have to say the truth is that they haven’t got a clue why sales are picking up despite weakening Consumer Confidence.”

Tuesday’s Redbook report revealed strong same-store sales, growing 5.4% Y/Y, and Thursday’s Commerce Department Retail Sales report showed sales up by 7.9% Y/Y, excluding motor vehicles. However, the good news in the retail sector was tempered by Tuesday’s NFIB Small Business Economic Trends report, which dropped one-tenth of a point (0.1) in June, settling at 90.8 - solidly in recession territory. While June may have marked the second anniversary of the recovery, small business owners are not optimistic. “Poor sales” continue to be the #1 problem for small businesses. The percentage of small business owners expecting higher real sales fell by 3 points to a net 0% (seasonally adjusted), which is 13 points below January’s reading. (Small Business Optimism Stagnates)

Treasury Tuesday - What A Coincidence - Capital Forced into TBills

“Despite Asia’s poor performance and Europe’s terrible open, the run up in the Dollar to 77 early this

morning looked like our typical 3am trade. I sent out an Alert to Members at 3:40 am suggesting we go long on the Dow Futures (/YM) over the 12,400 line (contracts pay $5 per point) and on the Nasdaq Futures (/NQ) over the 2,350 line (contract pays $20 per point) as the Dollar (/DX) fell below 77... The early bird may get the worm but we’re busy making enough money for a gourmet breakfast!” - Phil

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The stock market was up on Wednesday, bouncing back after Monday’s sharp declines, and the Dollar dropped sharply. Expectations of addit ional quant itat ive eas ing were reinforced by Bernanke’s testimony before the House Financial Services Committee. Bernanke comments were widely interpreted to mean that he is increasingly receptive to the idea of a third round of easing, QE3, notwithstanding his apparent resistance to the idea just last month. The power one man, Bernanke, has to move the markets is staggering. (Bernanke Says Fed ‘Prepared to Respond’ If Stimulus Needed)

The inverse correlation between the Dollar and the Dow reasserted itself this week, but not strongly. Other factors influence the moves of both, and the relationship is not cause and effect (see the INDU versus UUP chart above). The Dollar popped sharply on Monday, going as high as 77.2 on Tuesday, before dropping all the way down to 75.4 Wednesday, when the stock market staged a bounce back rally.

The Euro popped after Fitch Ratings gave its approval of Italy’s €40Bn deficit-reduction p l an , wh i ch i t f ound con s i s t en t w i th stabi l iz ing I ta ly’s credit prof i le. F i tch explained, “The sharp rise in Italian and other

Eurozone government bond yields...reflects a crisis of market confidence in the European policy response...rather than deteriorating sovereign credit fundamentals.” (Fitch gives thumbs up to Italy’s austerity plan)

This positive news on European debt was countered by an announcement by Moody’s placing the Aaa bond rating of the U.S. gove rnment on r ev i ew f o r a po s s i b l e 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... Moody’s considers the probability of a default on interest payments to be low but no longer to be de minimis.”

Which Way Wednesday - Wherefore Art Thou QE3?

“That was a VERY nice rally – and a good opportunity to get more cash!  (Notice a theme to

my comments?)” - Phil“

“Keep in mind, this rally has 100 Dow points to go just to get the Dow back to Friday’s close

(12,660) so don’t be impressed with less. (The S&P was 1,344, Nas 2,860, NYSE 8,411 and RUT 852).

At the moment, we’re not even getting a 50% bounce off this morning’s bottom and Friday’s close was way below Thursday’s. It’s very easy to give us a "rally" by tanking the Dollar and floating rumors of MORE FREE MONEY but, for now – it does nothing to change the greater reality.” - Phil

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The markets reverted to a downward trend on Thursday. Hopes of another round of quantitative easing were dashed when Bernanke backed away from his earlier statements which were widely interpreted as signals that more easing would be on the way soon. (Bernanke Pumps Brakes On QE3 Talk In Second Day On Capitol Hill)

The U.S. Department of Labor reported that Initial jobless claims dropped by 22,000 to a seasonally adjusted 405,000 in the week ended July 9. This is the lowest number since mid-April, and below expectations of 420,000. Continuing Claims were up 15,000 to 3.73M.

Moody’s and Standard & Poor’s both issued warnings that the U.S. may have its credit rating slashed if the current budget impasse is not quickly resolved. Moody’s put the U.S. on review for the first time since 1996 citing concerns that the debt ceiling won’t be raised in time to prevent a missed interest or principal payment on outstanding bonds and notes. (Moody’s Downgrade Warning Adds Pressure on U.S. Debt Deal)

The U.S. Bureau of Labor Statistics released the Producer Price Index report for June, which showed core PPI inflation rising from 0.2% in May to 0.3% in June. Energy prices declined 2.8% after climbing 1.5% in May. Phil noted, “A 3% drop in Crude Goods and a 2.4% drop in Food Prices masked some VERY NASTY inflation everywhere else – it’s that Core PPI that the Fed uses to pretend inflation is in check and now that’s growing at a 3.6% annual pace and energy and food are already up 20% in the "non-core.” EconMatters similarly concluded, “this  latest set of BLS inflation numbers seems to indicate  the actual catch-up and pass-through of higher input costs from the producer to  the consumer side is a l r e a d y t a k i n g s h a p e . T h e r e c e n t economic,  employment indicators  and consumer sentiment basically have given QE2 an 'F' on the report card...QE3 should never  even have been brought up in any kind of monetary policy discussion. (U.S. Economy: R.I.P. Deflation)

Jobless Thursday - Bernanke Gets 2nd Chance to Give Us Hope

“We got nothing useful from Bernanke yesterday. But that’s not stopping the futures from running the Dow up 100

points off of Wednesday’s bottom. We’re back to that kind of BS market where you go long at the close (or after the close), and then short after the morning pop, because the data (reality) is TERRIBLE, but the manipulation is so rampant that it’s reliable.  

“Fortunately, we have our 5% rule as a guide, and we haven’t had to change these charts in months (see Friday’s page). The market is obeying our ranges perfectly. These are the same lines we’ve been using since last November as the market is right where we predicted it would be for Q2 earnings.” - Phil

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“As Abraham Lincoln once observed, you can fool some of the people all of the time and all of the people some of the time and, as PT Barnum pointed out – we just need the fools with money. That’s what the oil market is all about because fools and their money are soon parted and the lack of regulation, dark pool trading and blatant manipulation make this the World’s longest running (and most costly to society) con game in history. Still, if Da Boyz at the NYMEX want to pretend they want 185M barrels of oil at $98.50 or higher for delivery next Thursday – we will be thrilled to sell it to them!” - Phil

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The stock market moved higher on Friday. Citigroup reported second-quarter profits rising 24% to $1.09 a share, beating expectations. J.P. Morgan also released an upbeat earning report with second-quarter profits up by 13%. It beat estimates and revenues reached an all-time high.

The Empire State Manufacturing Survey General Business Conditions Index for July came out Friday morning and was not encouraging. The headline number was -3.76. Numbers below zero indicate month-to-month contraction in business conditions. While better than June’s awful reading of -7.8, July’s number indicates that conditions for manufacturers remain challenging. There was some good news buried in the report - shipments were in positive territory at +2.2 versus June’s reading of -8.0. Employment was also in positive territory at +1.1, but far below June’s reading of 10.2.

The University of Michigan Consumer Sentiment Index showed consumer spirits continuing to erode. The Index fell to 63.8, a greater than two-year low and a steep drop from the 71.5 level reported in June. Expectations declined to 55.8, a level indicating widespread pessimism over the economic outlook. The gloomy outlook of consumers was reinforced late Friday evening when Goldman Sachs released a report downgrading its expectations for the U.S. Economy. It cut its estimates for real GDP growth in Q2 and Q3 to 1.5% and 2.5% respectively, down from 2% and 3.25% previously. Goldman also said it expects the unemployment rate to come down “only modestly” to 8.75% at the end of 2012. (Panic at the White House? Gloomy Goldman Sachs sees high unemployment, possible recession)

Phil was busy with oil-based trade ideas this week. He posted several ideas on our Seeking Alpha, Facebook and Twitter pages. (Two based on /CL Oil Futures and USO did very well and can been seen in the chart on the next page.)

Financial Friday - EU Stress Tests and US Debt Mess

“We had 185,000 NYMEX contracts to work with so plenty for everyone and, as per our June 1

plan to break the NYMEX speculators by using their own crooked game against them. This is a PSW trade idea we share with everybody.  And why not? The speculators gang up to screw the American people. It’s only fair that the American people return the favor by calling their bluff! 

“We called their bluff right on schedule at the 10:30 am Natural Gas inventory announcement, and it was a slam dunk for our futures players as well as our option traders, who picked up 250% ($500 turns into $1,750) in just 4 hours! That’s a full day’s work, don’t you think?

“Even a stock trader could have done well as USO plunged from $38.70 to $37.20 (4%) right on our schedule. But we were after bigger fish as those 185,000 NYMEX contracts took a $647,000,000 hit so plenty of profits to share for all of our readers. And THAT is how you punish the speculators – with the only thing they care about in this world – Money! We can stop the con game by playing the con game so congratulations and thanks to all the wild and crazy people who participated in this experiment in social engineering, something I like to call profit with a purpose!” - Phil

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Friday’s Levels7/15/11

FRIDAY

5% UP

2.5% UP

MUST HOLD

2.5% DOWN

5.0% DOWN

Dow S&P NAS NYSE Russell

12480 1316 2790 8227 829

12810 1365 2877 8694 856

12505 1333 2809 8487 835

12200 1300 2740 8280 815

11895 1268 2672 8073 795

11590 1235 2603 7866 774

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As the clock ticks down to the impending August 2 deadline for lifting the debt ceiling, negotiations between the White House and Capitol Hill are growing increasingly tense. Lawmakers and the President attempt to arrive at a compromise that will inevitably satisfy no one . Pre s i den t Obama, pu sh i ng f o r a combinat ion of spending cuts and tax increases, reached out to the American public during his weekly radio and Internet address, declaring, “We have to ask everyone to play their part because we are all part of the same country. We are all in this together.” (Congress seeks debt solution, Obama goes to public)

Obama has embraced some measures that members of his own party deeply oppose, including proposed reforms to Medicare, while the Republican opposition has taken a hard line against any tax increases. Portraying the crisis as being a result of Washington’s political culture, Republican Senator Orrin Hatch op i ned , “Wash ing ton ha s c on s i s t en t l y demonstrated that it cannot control its urge to spend.” (Debt limit crisis: what’s happening today) Will Hutton at the Guardian writes, “For

months, Republicans have used their new majority in the House of Representatives to block any move to lift the artificial cap on the amount the US government can borrow. If by this Friday they still refuse – insisting on up to $4 trillion of spending cuts, excluding defense, and no tax increases as the price of their support – then the US will be unable to service its public debts. The biggest economy on Earth will default...

“But the Democrats cannot agree to the Republicans' absolutist d e m a n d s , i n p a r t because the arithmetic of deficit reduction does not work without tax increases and cuts in defense spending, in p a r t b e c a u s e t h e y passionately believe that with taxes the lowest for 50 years, the US's rich should share in the pain and in part because in any human exchange there is an element of horse-trading.” (What hope is there for us if America is driven to the brink of meltdown?)

The Week Ahead

“We’re getting bigger moves up after hours than we had during the day! That’s good because that

puts on a show for Asia and gets them to buy, and then the EU comes in and buys, and then we open higher on Monday, and then the Boyz can sell all the crap they bought today at higher prices before they pull the rug out. THAT’s my prediction for next week!” - Phil

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Financia l economist and historian Dr. Michael H u d s o n w a s r e c e n t l y interviewed by Bonnie Faulkner on Guns N Butter. When Ms. Faulkner asked his opinion of where the U.S. economy is headed, Mr. Hudson replied,

“The economy’s going under because Wall Street and investors realize that it’s a done deal. That Mr. Obama is going to succeed in pushing the economy m u c h f u r t h e r i n t o a depression. We need the depression in order to cut living standards and labor by 30 percent. We need a depression in order just to lower the wages of America and to have an excuse – of course, a depression is going to make the budget deficit even larger and the solution to the depression has already been written up, just like the invasion of Iraq was all written up before 9/11, the solution is going to be that the government is going to sell off its land, whatever is in the public domain.

“The American government is going to look just like Greece and just like Ireland. They’re going to be told, ‘The states can’t pay, there’s no federal revenue to share with Minnesota or Wisconsin or the city of Chicago. They’re going to have to sell off their roads, sell off their streets, sell off their infrastructure, sell off their public utilities, sell off their business. The government will sell whatever it has, the Postal Service, to essentially buyers who will now borrow the money from the banks making a huge new market for banks and investment bankers, in privatizing and cutting up what used to be the public domain and turning it over to the wealthiest 10 percent of the economy. So people realize yes, the class war’s back in bus ines s . We’ re go ing in to a

depression. We’ll buy back all these stocks after they go but meanwhile, the game’s over. Let’s grab what we can and just bail out. And that’s what’s happening now.”

Ms. Faulkner: “What is your assessment over the current debate in Washington concerning the raising of the debt ceiling? This debate seems to be taking place between the Obama administration and the Republicans without much input from Democrats.”

“It’s a good cop-bad cop deal, a charade that they’re both playing. The Republicans are playing the role of the bad cop, saying, ‘You have to not raise taxes on anybody, no progressive income tax at all, no closing of the tax loopholes, not even a prosecution for income tax fraud. And by the way, we can get a lot of money if we just give a tax holiday to all of the companies and the individuals that have been keeping their money offshore. Let’s just free wealthy people from taxes altogether and that will help recovery.’ So they’re being sort of the bad cop so Obama can pretend to be the good cop and say, ‘Hey, boys, let me at least do something. You know, I’m willing to cut back Social Security, I’m willing to take over

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really what was a George Bush program, but you have to let me get a little bit of revenue somewhere.’ And at the very end the Republicans will say, ‘Oh, okay, you can throw us into the briar patch.’, and they’ll give something and they’ll essentially get their program and Obama will have sold out his constituency.”

Ms. Faulkner: Would a U.S. default send interests rate soaring and if so, what would be the economic effect?

“An interest rate wouldn’t matter if you default. I mean, if you tell me I can write you an IOU but you’re not going to collect, I’ll give you 20 percent. What does it matter if you default? No, it wouldn’t send interest rates soaring at all. It wouldn’t have any effect at all. This is all a just pretend argument to create the crisis to give Mr. Obama the opportunity to do what politicians do – to sell out h i s cons t i tuency to h i s campa ign contributors on Wall Street. He’s going to go down as a Herbert Hoover, or rather a Warren Harding probably. He’s going to go down as the man who brought on the depression that the Republicans never could have gotten away with. Only a Democrat posing as a left-winger could support the anti-labor, anti-wage, pro-Wall Street policies that his advisors have been pressing. And there again, that came out in the New York Times interview with Sheila Bair.”

Ms. Faulkner: I see. So this is a charade put on for public consumption, the business of a possible debt default.

“It is to create the illusion of a crisis. No politician or Wall Street really likes a crisis but what they do like is the illusion of a crisis to create a pretense for introducing a solution to the crisis that actually makes fortunes for them all. And the way in which Obama resolves the non-crisis of the budget limit is going to make fortunes for Wall Street – and impoverish the population for the next decade.”

Ms. Faulkner: So this is a way of getting away with all of this?

“Yes.” (Wall Street’s Euthanasia of Industry)

In spite of all the tension, drama and political posturing on Capitol Hill, we currently believe that some kind of a deal will be worked out prior to August 2, and that it is highly unlikely that the U.S. will actually default on its debt obligations. We remain moderately bullish on stocks for the long term, but bearish in the near term. Consequently, we are more likely to look for bearish trade ideas than bullish trade ideas early next week.

One bearish trade idea comes from Phil, and is based upon expectations that the Nasdaq is likely to go down next week.

In case your portfolio is needing a bullish play to offset your bearish positions, we like a bullish trade idea from Pharmboy.

As always, be careful out there!

“ I ’m s t i l l l i k ing SQQQ, Aug $22/23 bull call spread is $0.55 now and you can sell the $21

puts for $0.50 for net $0.05 on the $1 spread.” - Phil“

“Ariad (ARIA) has an mTOR in the clinic with Merck (MRK). The compound has stellar data, and

the NDA should be filied soon with the FDA. ARIA was recently upgraded with a price target by Jefferies of $16. We have been in ARIA since it was in the mid-$3s at PSW, and I still like it.

For an options strategy, I like the January 2012 $10/15 BCS coupled with the sale of the $10 puts for a net debit of $1.” - Pharmboy

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Monday 18 Tuesday 19 Wednesday 20 Thursday 21 Friday 229:00 AM: Treasury

International Capital7:45 AM: ICSC-Goldman

Store Sales7:00 AM: MBA Purchase

Applications8:30 AM: Jobless

Claims

10:00 AM: Housing Market Index

8:30 AM: Housing Starts

10:00 AM: Existing Home Sales

9:45 AM: Bloomberg Consumer Comfort

Index11:00 AM: 4-Week Bill

Announcement8:55 AM: Redbook 10:30 AM: EIA

Petroleum Status Report

10:00 AM: Philadelphia Fed Survey

11:30 AM: 3-Month and 6-Month Bill Auctions

11:30 AM: 4-Week Bill Auction

10:00 AM: FHFA House Price Index & Leading

Indicators10:30 AM: EIA Natural

Gas Report

11:00 AM: 3-Mnth, 6-Mnth, 52-Wk Bill Announcements

11:00 AM: 2-Yr, 5-Yr and 7-Yr Note

Announcements1:00 PM: 10-Yr TIPS

Auction

POMO DAY($2.5 - $3.0Bn)

4:30 PM: Fed Balance Sheet and Money

Supply

POMO DAY($0.5 - $1.0Bn)

Next Week’s Economic Calendar

Note: The material presented in this commentary is provided for informational purposes only and is based upon information that is considered to be reliable. However, neither Philstockworld, LLC (PSW) nor its affiliates warrant its completeness, accuracy or adequacy and it should not be relied upon as such. Neither PSW nor its affiliates are responsible for any errors or omissions or for results obtained from the use of this information. Past performance, including the tracking of virtual trades and portfolios for educational purposes, is not necessarily indicative of future results. Neither Phil, Optrader, Oxen Group or anyone related to PSW is a registered financial adviser and they may hold positions in the stocks mentioned, which may change at any time without notice. Do not buy or sell based on anything that is written here, the risk of loss in trading is great.

This material is not intended as an offer or solicitation for the purchase or sale of any security or other financial instrument. Securities or other financial instruments mentioned in this material are not suitable for all investors. Any opinions expressed herein are given in good faith, are subject to change without notice, and are only intended at the moment of their issue as conditions quickly change. The information contained herein does not constitute advice on the tax consequences of making any particular investment decision. This material does not take into account your particular investment objectives, financial situations or needs and is not intended as a recommendation to you of any particular securities, financial instruments or strategies. Before investing, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.