Summary

The stock market had a good week and rallied up strongly. Because of the many reasons sited: excessive debt levels; toxic mortgage securities with limited liquidity and real collateral backing; derivative instruments and levels beyond comprehension or understanding, as to how they will or will not work; interbank liquidity problems; major banks that daily are in trouble because of subprime loan problems; and exorbitantly high Libor rates that many mortgages are tied to, especially adjustable rate mortgages to be reset at higher rates over the next year – there are just too many unprecedented and insurmountable obstacles for the markets to overcome.

Unless some very influential leaders are willing to admit that grave mistakes have been made for years upon years, and that a complete restoration of the presently dysfunctional monetary and financial system is needed and needed immediately, I cannot see how it will play out except in hard times for almost all. I wish it wasn’t so, but it is how I see it, so it’s how I tell it. I hope I am dead wrong.

The bond market is the Fed’s go to boy. At any and all costs the Fed MUST protect and save the bond market. If the bond market goes – so goes the system. I am of the opinion the Fed wants to see money leave the stock market in a CONTROLLED manner and enter the bond market. It is the Fed’s belief that such action will stabilize the credit and debt markets.

Maybe, maybe not. First, we don’t know if the funds they are hoping to flow from one market to the other will follow their intended course. Second, even if the money does flow into the bond market that does not preclude that it will be sufficient to stem the tidal wave being slowly built up and created by the subprime debacle, which has only just begun. It has a lot more resonance to sound forth before its energy is fully dissipated. It is NOT going to end quietly or just wander away into the night.

Credit and debt are a two edged sword – a knife edge if you will; any unbalanced movement to either side results in a slice or a fall. Balance must be maintained at all times. One major misstep and the game is over.

Many of the various markets had a good rally this past week. The Japanese yen was very quiet. I still believe that the yen holds the key: if the yen goes up – must markets will go down; and vice versa. I now add the Libor rate to that position as one of the major markers that will signal the direction of the other markets.

Commodities had a good week. Both energy and the precious metals performed well; however, both are becoming a bit extended. That does not mean that they cannot both continue up – but that caution is warranted. More risk exists now than at the end of last week, as the market is higher now than then.

Of all the markets I am most interested in natural gas right now, especially if the price falls back due to the storm dissipating, while a higher low is put in place. If such a set up occurs, I will most likely use it to begin scaling into a position in natural gas. The risk to reward ratio looks pretty good.