SmartChart/Cycle Update Tuesday 11-02-2010

Bias:
 DI: SELL per the INTRADAY guidelines
 Key numbers:
Intraday Break Point: Buy above 1182 sell below 1182, special attention to 1178
 Cycle: current reading is 281 Cycle Stage: SELL
 POMO: November 1, 4 and 8, REFERENCE:

Pre-market:
Premarket talks about those items that directly affect what we will be doing each day in the market.
Premarket has NOTHING to do with macro economics.

http://www7.nationalacademies.org/ocga/testimony/gathering_storm_energizing_and_employing_am
erica2.asp

http://www.cnbc.com/id/39785253

http://www.bizjournals.com/charlotte/blog/power_city/2010/10/duke-energy-ceo-still-bearish-on.html

ELECTION TIME and FOMC Wednesday

It is widely expected that the FED will announce QE2 on Wednesday. In what form, in what amount, in
what manner will the funds be distributed is yet to be determined.

Since October 13th the market has put in more doji days than ever recorded before in a one month
period. The market is at a decision point, needs a PULLBACK of 5 to 7% and yet refuses to budge before
the election.

There is a sell signal below 1178 on the daily but frankly price just steadfastly REFUSES to close below
that level…so far, despite all other signals saying that it should begin to correct. Why? It’s the simple
promise of FED money…and a lot of it.

The basic game plan is buy what the fed buys; they have the money.

There are few macro items that are screaming CORRECTION: a) commodities are now filtering high
prices thru the PPI b) the sectors that make up the SP500 have topped out, they have zero room to
move c) volume remains at 1/10th prior levels near these highs and shows no intention of going higher.

If the fed is smart they will announce a period of REST before QE2 begins.

james

1 James M Edwards 602.441.4303

2 James M Edwards 602.441.4303
Market Outlook:
Trading Outlook is concerned with intermediate and long term macro economics. It has a bearing on
INTERMEDIATE and LONG TERM thinking.

http://www.cnbc.com/id/39785253

http://www.bizjournals.com/charlotte/blog/power_city/2010/10/duke-energy-ceo-still-bearish-on.html

All I can say is I’m HAPPY I took the time to research exactly how Ben and treasury manage this market.

A Primer on Quantitative Easing: What Is It and Will It Save the

Economy?
By Hans Wagner
Created 10/29/2010 - 18:28

Quantitative Easing (QE) is a hot issue. But even though the term is used frequently by
journalists, analysts and investors, most people are only repeating what they heard
someone else say.

Let's see if we can shed some light on QE: the challenges the Fed is facing, the actions
it's likely to take, and what an investor should do to prepare.

The upcoming announcement from the Federal Reserve will be one of the most
important in recent months. The question is what you should do to be ready when the
news is announced.

Some Basics
Quantitative easing is a strategy employed by a central bank like the Federal Reserve to
add to the quantity of money in circulation. The premise (which is largely theoretical and
untested) is that if money supply is increased faster than the growth rate of Gross
Domestic Product (GDP), the economy will grow.

To understand the rationale behind the strategy, it helps to look at the basic relationship
among GDP, money supply and the velocity of money.

In general, GDP equals money in circulation (M) times the velocity of the money through
the economy (V):

GDP = M * V

Velocity is the speed at which money passes through the hands of one person or
company to another. When money is spent quickly, it encourages growth in GDP.
When money is saved and not spent, the GDP of the country slows.Today, one of the

3 James M Edwards 602.441.4303

problems the United States faces is people and companies are saving their money and
paying down debt instead of spending it. When people spend less and save more, the
velocity of money falls and drags down economic growth.

Through quantitative easing, the Federal Reserve will try to counteract falling velocity by
increasing the money supply. It has two primary tools with which to do it.

The first way the Fed manages money supply is via the federal funds rate. Banks with
excess reserves can lend money to other banks that need additional reserves before
closing their books for the day. The federal funds rate is the interest rate the banks
charge each other for these overnight transactions.

The Federal Reserve sets the federal funds rate. As one of the most important interest
rates in the world, it is widely quoted in the press.

The current fed funds rate is between 0% and 0.25%. Essentially banks can "borrow" at
a very low rate of 0 – 0.25%, making their cost of funds very low. Theoretically, this
should encourage banks to lend funds to individuals and businesses at higher rates -- if
they can borrow at 0% and lend to someone else at more than 0%, they make money.

The second tool the Fed uses is the open market operation (OMO). The Fed uses
OMOs to buy or sell securities that banks generally own -- mortgages, Treasury bonds,
and corporate bonds. When the Federal Reserve buys securities, they trade the security
for cash and increase the money supply. When they sell securities back to banks, they
decrease the money supply.

In the past, the Federal Reserve has not resorted to this approach to manage the
supply of money in the economy. But starting in 2008, it started buying large amounts
of mortgage-backed securities (MBS) and Treasuries in order to add more money to the
economy and help stabilize the banks.

Where We Are Today

Since the Federal Reserve has lowered the fed funds rate to 0 – 0.25%, banks have
access to cheap money. The Fed was hoping that access to cheap money would
encourage the banks to lend to their customers at reasonable rates. But it hasn't been
that easy. The Fed has run into two problems.

First, many companies and individuals are afraid to borrow. They lack confidence in the
economy. They prefer to save their cash and pay down existing debt. This
phenomenon is reflected in the rising savings rate and the falling level of consumer and
corporate loans. Not only has money supply not increased, but increased saving has
slowed the velocity of money through the economy.

4 James M Edwards 602.441.4303

Second, banks are afraid to lend because they're afraid they won't get it back. Should
the company or individual run into financial difficulty, the bank may be stuck with a loan
loss. So instead of investing in loans, the banks are turning back around and buying
high-quality securities like long-term Treasury bonds. Today, a 10-year Treasury is
paying a yield of around 2.5%. With a cost of funds of 0.25%, this gives the bank an
interest rate spread of 2.25% -- a very nice profit with almost no risk.

All of this means the Federal Reserve's attempt to stimulate the economy with low short
term rates is not achieving its desired goal. The economy remains in slow growth
mode.

And relatively high long-term Treasury yields (when compared to 0% short-term yields)
have perversely created an incentive for banks to stop making loans except to the U.S.
Treasury.

How Will Quantitative Easing Help?

The Federal Reserve recognizes that banks are using very cheap short-term money to
purchase longer-term securities and pocketing the difference in interest income. So the
Federal Reserve has decided it wants to drive down longer term rates and remove the
incentive to buy Treasuries.

If the Federal Reserve buys enough 2-year, 3-year, 5-year and 10-year Treasuries, they
force an increase in their prices. And bond prices are inversely related to bond yields:
when prices go up, yields go down. A lower yield means banks cannot make as much
money using the overnight money at 0 – 0.25% and buying long-term Treasury bonds,
since the yield on those bonds will be pushed lower and lower.

The hope is the banks will then be encouraged to lend more, thereby stimulating the
economy.

The Bottom Line

Most people expect the Federal Reserve to announce they will add another $1 trillion in
new money to the economy by buying Treasuries. I don't think the Fed will go that far
that soon. Announcing a large number commits the Fed to buying that many Treasuries
and it doesn't give it the flexibility it needs to adjust the program as its effects ripple
through the economy.

Rather, I believe the Fed will announce it stands ready to purchase 2, 3, 5 and 10-year
securities in blocks of about $100 billion a month. The exact makeup will depend on the
Fed's view of where it can get the biggest benefit for the money spent.

By carrying out the quantitative easing over a series of months, the Federal Reserve
allows itself some flexibility to adjust purchases based on updated forecasts of the
economy. It also allows the Fed to communicate its intentions over time, cutting down
on the number of surprises inflicted on the fragile economy.

5 James M Edwards 602.441.4303

If the Federal Reserve buys $100 billion of intermediate-term Treasuries each month, it
will place downward pressure on the interest rates of the Treasuries they purchase. But
because the Fed has already telegraphed its intentions to the market, rates have fallen
significantly in anticipation of the official quantitative easing announcement. Therefore,
we are likely to see a brief move up in longer-term rates as bond traders close out their
profitable positions.

After the initial shake out in the stock and bond markets, it's certain that economist will
continually monitor the economy to gauge QE's effectiveness. If the program is
encouraging more lending, the economy should start to grow faster. But if lending does
not pick up, it is telling us borrowers and/or lenders lack confidence in the future and are
unwilling to compromise their balance sheets. If this happens, the economy will remain
in slow growth mode.

Fed Chairman Ben Bernanke is sure to make regular announcements on the state of
the program. If he indicates they will buy more Treasuries in the future, it means the
economy is not responding as well as he hoped, and he wants to add more money to
the system. If he suggests the Fed will reduce purchases, it indicates his belief that
quantitative easing is working and the economy is improving.

As far as trading, the short-term downside vastly outweighs the upside, if only because
of uncertainty. If you are a short-term trader, you might want to move to cash to avoid
the inevitable volatility that will ensue, as this is a sell on the news event.

If you are a longer-term investor, be sure to add some downside protection to your
portfolio. You may also want to own some longer-term Treasuries, since the whole
point of QE is to drive up the price of those specific securities. Don't be prepared to hold
them forever, though. At some point (hopefully), the economy will grow again and bond
prices will come back down.

This round of quantitative easing will be studied for years. We are in uncharted territory
and the risks should not be underestimated. Capital preservation is important to
success. Take steps to reduce your risk until we have a better idea of the longer term
effects of this next round of QE.

6 James M Edwards 602.441.4303

Comments:
Comments are concerned with news links, commentary from other sources and any other news worthy
item(s). It deals with what can change the macro economic landscape; with what is brewing under the
surface.

7 James M Edwards 602.441.4303

8 James M Edwards 602.441.4303
Standard CFTC disclaimer:

The risk of loss in trading commodities can be substantial. You should therefore carefully consider
whether such trading is suitable for you in light of your financial condition.

The high degree of leverage that is often obtainable in commodity trading can work against you as well as
for you. The use of leverage can lead to large losses as well as gains. In some cases, managed
commodity accounts are subject to substantial charges for management and advisory fees. It may be
necessary for those accounts that are subject to these charges to make substantial trading profits to
avoid depletion or exhaustion of their assets.

The disclosure document contains a complete description of the principal risk factors and each fee to be
charged to your account by the commodity trading advisor ("CTA"). The regulations of the Commodity
Futures Trading Commission ("CFTC") require that prospective clients of a CTA receive a disclosure
document when they are solicited to enter into an agreement whereby the CTA will direct or guide the
client's commodity interest trading and that certain risk factors be highlighted. This disclosure document
will be provided via electronic mail or hard copy upon request to any interested parties. This brief
statement cannot disclose all of the risks and other significant aspects of the commodity markets.
Therefore, you should examine the disclosure document and study it carefully to determine whether such
trading is appropriate for you in light of your financial condition.

The CFTC has not passed upon the merits of participating in this trading program nor on the adequacy or
accuracy of the disclosure document. We are required to provide other disclosure statements to you
before a commodity account may be opened for you.

Written by James M. Edwards

602-441-4303

James85306@cox.net

Please do NOT redistribute the letter.

9 James M Edwards 602.441.4303

Duke Energy CEO still bearish on recovery | Charlotte Business Journal

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Charlotte Business Journal - by John Downey
Date: Friday, October 29, 2010, 2:51pm EDT - Last Modified: Friday, October 29, 2010, 2:59pm EDT

Power
Duke City
Energy CEO Archives
Jim Rogers says power sales
are a leading indicator for the economy and right
now
● he does not
October ● like where
January 2010they
(23)are going.
2010 (16)
● December 2009 (6)
● September
Rogers says he● does not see
November power
2009 Most
(23) sales Popular
2010 (20)
returning to the 2007 level
October for(32)
2009 about four more
August 2010
●
●
years. “It underscores that it's likely to ●beFacebook
very
(22) ● September 2009 (21)
anemic in the rebound,” from the severe Read
August 2009 (25)
July 2010
●
● ●

recession
(17) that hit in 2008. Discussed
● July 2009 (27) ●

● June 2010 ● June 2009 (20) ● Emailed

Industrial
(16) sales are up for the year. But the
quarters
● for this year are compared to weak sales
May 2010
(13) in 2009, he notes. So while industrial
quarters ● Survey: US Air ranks
Aprilare
sales
● 2010 fifth-worst
better, they are still below sales airline
in 2007.
(16)
AirTran Airways’
March 2010
●
●
Chief Financial profit
Officer Lynn
takes off Good says there has already been some weakening in the numbers for
(17)
metals manufacturers — one of the first segments to recover after the recession. And industrial
Philip Morris plant targeted for film site
● February
●

customers
2010 (24)are generally not so optimistic about 2011.
● BofA's Desoer underwater in mortgage mess

Increased
● Meet theuncertainty
'pit bull' chasing BofA

See More
Rogers Most
sees Read
three Articles
basic issues for the recovery. First he lists a general fear among businesses about
future government regulation — with healthcare and banking regulation leading the way.
● Philip Morris site targeted for film/music facility
1 comment · 4 hours ago
“Every CEO I’ve talked to (says) …. the level of uncertainty couldn’t be higher,” he says. “The pendulum
hasMicroloans
swung toto
● aid green startup
significantly firms in Charlotte
more regulation, and they don’t know where that stops.”
1 comment · 3 days ago

He How
says,Larry
● Sprinkle has
for instance, weathered
many it all are not yet sure what the financial impact the health care bill
businesses
that1 passed
comment · 3year
this days will
agolikely have on their finances.

● Should the city offer financial support to aid Box Property's

redevelopment
State taxes of Eastland Mall?
14 comments · 3 weeks ago
He says there also is concern among businesses that they are likely to face significant state tax
Survey: Do you support the full repeal of the military's "don't
increases. Most are facing financial straits and some face massive deficits as the economy continues to
●

ask, don't tell" policy?

grow only slowly
2 comments · 2and
daysasago
federal stimulus dollars that propped state services up are likely to end.

See More Most Discussed Articles

He also notes that hiring is likely to be very slow to recover. Productivity gains from highly computerized
industrial processes are becoming more prevalent, meaning businesses will be able to do more with
● Philip
fewer Morris site
workers eventargeted
as the for film/music
economy facility
recovers.

● The Fresh Market prices IPO

● Redevelopment planned in Rock Hill

John Downey covers the energy industry for the Charlotte Business Journal. Click here to read more
● Survey: US Airways ranks among worst airlines
recent postings on Power City.
● NASCAR Hall of Fame looks for attendance answers
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● Email: jdowney@bizjournals.com ● Shaw Power Group’s 2010 profits up
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http://www.bizjournals.com/charlotte/blog/power_city/2010/10/duke-energy-ceo-still-bearish-on.html01/11/2010 11:40:58 PM