Today is Fed day. Bernanke will have spoken by the time you read this, so I will not go into any detail about my own expectations. Suffice to say I don't expect the Fed to announce any new stimulus.

The U.S. economy expanded at a 1% rate in the second quarter. This is revised lower from 1.3%. Investors expected this, so it's not a market moving number.

Growth actually improved from the first quarter, and that's one reason I think the Fed stands down today. We should expect growth to pick up a bit more for the end of the year.

The end is near for one of the world's greatest tyrants. 40+ years ago, the world allowed a ruthless dictator to come into power. This dictator used their power to fund endless war, terror and State sponsored killings, theft, imprisonment - even torture.

But lately, that power is on the wane. Loyal supporters continue to deny that anything is wrong - or even that anything is changed.

I might be talking about Muammar Gadhafi, but I could just as easily be talking about the Federal Reserve Note, or dollar, in common parlance.

Many well-meaning people believe that the State is out to help them. That, if all else fails, the United States Federal Government will swoop in and give them a personal bailout.

So what's backstopping the American way of life? Is it the Government?

We live under the strongest political system the world has ever seen. It's the world's largest employer. It has legions of bureaucrats counting beans, measuring widgets and regulating the unregulatable.

It has the largest military force, backed by the most advanced and deadly war machines to ever exist.

Today I'd like to take full advantage of the power you give me. You might not realize it, but you are one of many. Tens of thousands of people read the words I write every day.

And while it's easy to forget while I sit here alone behind a keyboard, my 3 month old son cooing in the next room while my wife makes coffee - I have your attention for a few minutes each day - and that attention means something.

There's nothing about having the attention of thousands of people that I take lightly, which is why you should know that I do not accuse Ben Bernanke lightly.

When the Federal Reserve announced last week that it would keep interest rates low until mid-2013, it did so despite the dissension of three Fed governors.

Yesterday, one of the dissenting governors, the Philadelphia Fed President Charles Plosser told Bloomberg radio that the Fed's decision to keep rates low for another two years was "the inappropriate policy at an inappropriate time."

I was kind of surprised by this type of strong statement from a sitting Fed president. Most of the time, Fed insiders wait until they're not inside the Fed before they start throwing mud.

The market was obliterated again on Wednesday as the bulls lost nearly all of their hard earned gains from Tuesday. Volume was jacked once again as investors sprinted away from the big banks and financials, which led the indices lower.

The big bank stocks like BAC, C and GS had it much worse and were down 10%, while WFC, BAC and Warren Buffett's Berkshire Hathaway were down 7%.

Yesterday was a critical loss for the bulls. Going into Wednesday every index had form a reversal pattern. And each of those reversal patterns were on high volume. The SPX, for example, formed a bullish harami that took the index back up to 1175 resistance.

The market recovered in a major way. Volume soared as the bulls emerged and took the indices 4% to 5% higher, literally in an instant.

Most indices hit session lows in the early afternoon, and were poised to close lower for yet another time. But in the last hour, the major U.S. indices burst higher to the tune of 7% to close positive.

The big gains from the indices on Tuesday erased most of the loss that occurred on Monday, which was attributable to the credit rating fiasco. Over the past few sessions I cautioned against going short.

As I explained, the market could head lower, but that downside was minimal. And once buyers stepped in a sharp and quick counter-trend rally would ensue. Yesterday morning I was looking for that rally to commence, which is exactly what happened.

The market stabilized yesterday as a long term support zone was tested. The bulls protected 1250, but the countertrend move higher did not look enthusiastic. This was despite the fact that volume raced higher again on Wednesday and total volume is way above average this week.

The high volume could turn out to be a good thing if the bulls can protect 1250 over the next week or so. But if the bulls lose that support, those additional buyers from earlier in the week will quickly look to cut their losses. And by cutting those losses, there will be another stint of selling that would push the market lower, perhaps by another 10%.

I borrowed the title of today's issue from the Daniel Day Lewis movie of the same name - based on the Upton Sinclair novel, "Oil!"

The novel detailed the oil boom of early 20th Century Southern California.

Today I'm not going to talk much about oil, but the title of the movie is appropriate enough for the markets right now.

Because you could have cut the tension in the markets yesterday with a chainsaw.

If you didn't crack and dump all your stocks as some folks appeared to do, I say congratulations: you passed the first of what will likely be some very trying tests in the markets over the coming months.

Financial markets like money. When the Fed was pumping cash in to the system via QE2, stocks moved relentlessly higher.

Yesterday's vicious sell-off was a snapshot of a market worried about a lack of money.

The debt deal passed in Congress yesterday calls for $2.4 trillion in government spending cuts over the next 10 years. We looked at some of the impact of reduced government spending yesterday...

Yesterday was an interesting one for the stock market. There was plenty of negative news hitting the wire -- from the EU's continued inability to decide on a course of action, to the continued standstill of our own budget debate.

But investors glommed onto a suggestion from the minutes of the last FOMC meeting that QE3 could happen if the economy continues to struggle, and stocks rallied sharply right at 2 pm. The mini-rally reversed just as quickly as it began.

The stock market would clearly like more quantitative easing. But it would not be a good thing for the economy in the long run. It is time to let this economy slog through the housing problems and the unemployment problems without flooding the market with cash.

Yesterday, Federal Reserve Chairman Ben Bernanke announced the potential for a third round of quantitative easing only IF economic conditions continue to decline in the United States. He predicted that “inflation will subside as the effects of past energy and other commodity price increases dissipate”.

The Obama administration decided shortly after Bernanke's press conference that they were not willing to wait for an official third round of easing (QE3). So, in a press release this morning  the International Energy Agency (IEA) announced it would release 60 million barrels of oil from global reserves. Over half of the oil released would come from the U.S. Strategic Petroleum Reserve.

The Strategic Petroleum Reserve is located in a man-made underground salt domes in Louisiana and Texas. The U.S. holds 727 million barrels of oil in the reserves which is enough to cover 85 days worth of U.S. oil imports. The U.S. would release the equivalent of 5 percent of its reserves to the market.

The decision sparked controversy between the Republicans and Democrats. Republicans called the Obama administration’s plan to release the oil a political move, while Democrats said the effort to ease shortages may be too little, too late.

On a global scale, this is the third time that the IEA has released strategic oil reserves. The last time was shortly after the Hurricane Katrina.

Crude oil prices and shares of oil companies plunged after the news was reported. Brent crude oil fell more than $6 to $107 per barrel of oil. Shares of Exxon (NYSE: XOM) and Chevron (NYSE: CVX) were all down 3 percent in mid-morning trading. The Dow was down 200 points, but has pared some of its losses since the announcement.

The timing of the IEA move comes only days ahead of the end of the Federal Reserve’s second quantitative easing program (QE2). In the absence of continued Fed buying of Treasuries, and the liquidity it adds to the financial markets, moving to reduce oil prices will be another helping hand to the U.S. economy. Knocking $20 a barrel off oil prices would reduce America’s annual oil spend by some $150 billion.

Stocks are trying to bounce back after 6 straight weeks of declines. As we noted on Friday, the S&P 500 didn’t even post 6 straight down weeks during the financial crisis. So this string of losses has been somewhat remarkable.

Of course, the decline over the last 6 weeks hasn’t been particularly large. As of last Friday’s close, the S&P 500 is down around 7% from its May 2 highs.

The market declined yesterday, but only technology showed clear weakness. The fall from the other indices was a byproduct of the decline in tech stocks. Despite the big drop in technology, and the

When Fed Chief Ben Bernanke told us that he believed inflation was “transitory”, he was saying that commodity prices were higher due to Fed monetary policy.

 

When Bernanke went on to say that he would let QE2 end and not immediately fire up the QE3 engine, because the risks of further inflation were not being offset by gains in employment.

 

Put simply, Bernanke said inflation was all (or at least mostly) his fault.

It was somewhat lost in the shuffle in Wednesday. Investors were so stunned at Fed Chief Ben Bernanke's admission that commodity inflation might accelerate over the next few months before the Fed is forced to act on interest rates, they missed the part where the Fed lowered its 2011 GDP growth estimates from a range between 3.4% -- 3.9% to 3.1%.

For anyone pinning his or her hopes on 3.9%, that's got to be disappointing.

But after yesterday's first read of Q1 2011 GDP growth -- a measly 1.8% -- investors are likely to take another look at the total message delivered by the Fed.

All eyes were on the Fed yesterday as Ben Bernanke gave the first ever press conference by a Fed Chief following an FOMC meeting. And I have to say that Bernanke was remarkably candid as he was peppered with questions about inflation, quantitative easing and interest rates.

 

Bernanke did a verbal tango that could put him on Dancing with the Stars. Yes, he pumped the system with boatloads of cash in a Treasury-buying spree known as QE2. But he also admitted yesterday that such stimulus does carry inflation risks, and those risks may not offset the potential gains in employment.

The end of QE2 is perhaps the biggest question mark right now. It might be the perfect ironic outcome if Treasury bonds rally after the Fed let's its Treasury buying program end.

The Fed was deliberately attempting to prop up the stock market with QE2, driving money out of bonds and into stocks. That's the "risk on" trade, appropriate for when the Fed is backstopping assets.

Following today’s Federal Open Market Committee meeting, Ben Bernanke, the Federal Reserve Chairman, will host a historic press conference.

You see, the Chairman is not a PR specialist. He’s an economist. He’s a banker. He’s the soft-spoken squirrely guy who sat in the front of your math class and said nothing, but aced all the tests.

I have to iterate: this is the first press conference following a policy meeting – ever. That’s nearly 100 years of stoney-silence, broken.

So you have to ask yourself: what the hell does it mean?

Well, when the economy is humming along, unemployment is low, growth is good, but not too good, deficits are in check, and the dollar is healthy – you don’t hear a single word from the Fed Chairman. He’s like that old saying about children, except he’s not heard, or seen.

If he’s putting himself in front of the cameras, fielding questions and generally making himself heard and seen, then the only logical conclusion is that he’s in damage control mode.

For over a year now, I’ve casually mentioned that the leadership in the West, including the United States and Europe is not just unwilling to take the steps needed to nurse the economy back to health, but that they’re increasingly incapable of understanding what needs to be done.

Case in point: you can’t turn on your TV, open your email or look at a newspaper today without seeing headlines about the impending United States Federal Government shutdown.

But as I’ve noted, the amounts of money being quibbled over are pretty insignificant.

You can do the math for yourself. The total outstanding Federal deficit is now over $14 trillion.

Divide $33 billion or $40 billion by $14 trillion and you get 0.0023 or 0.0028. Multiply those decimals by 100 to get the percentage.

So, $33 billion and $40 billion amounts to 0.23% and 0.28% of the total Federal deficit. Even with these cuts, the deficit will grow because they’re not even close to the amount of spending reduction we need to actually put the Feds back in the black.

In a speech yesterday, Fed Chief Ben Bernanke made two very important statements. First, he said that he believes the inflation we are experiencing due to higher commodity prices is temporary. Second, he said he could be wrong.

The specific quote goes like this:

“We have to monitor inflation and inflation expectations extremely closely because if my assumptions prove not to be correct, then we would certainly have to respond to that and ensure that we maintain price stability...”

To QE or to not QE? That is the question.

Whether ‘tis nobler in the markets to suffer

The slings and arrows of outrageous inflation,

Or to take arms against a sea of deficits,

And through austerity, end them.

Yesterday, I sat in on a meeting with the top researchers, analysts and investment gurus here at Wyatt Investment Research. In one room sat many decades of investment experience, two MBAs in Finance, and each person with a specific skill-set that’s unmatched anywhere outside of a multi-billion dollar i-bank or fund.

The Nikkei took back nearly 500 points in Wednesday trading. That's what happens a central bank pumps nearly $700 billion into the banking system, as the Bank of Japan has.

The rally for Japanese stocks is not an indication that the situation there is improving, or even stabilizing. The danger of radiation leaks has increased. Clouds of radioactive steam still rise into the air as workers struggle to keep spent nuclear fuel rods cool.

Nomura Securities stirred things up recently by saying that oil prices would spike over $220 a barrel if unrest spread to Syria and Iran. Some investors are taking that bet.

Bloomberg reports that the open interest for June 200 call options for oil has gone from 1,500 to over 8,000. It might seem unlikely that oil will go over $200 in just 3 months. But if it does, these traders will make a lot of money.

That was quite a rally yesterday. A big drop in new unemployment claims, some pretty good retail numbers from February, and some hope that the Libyan situation may be nearing an end, bolstered the good vibes from Wednesday's ADP private payroll report and sent stock flying higher.

The entire "Apple Complex" of did pretty well, too...

The "Apple Complex" is an open-ended growth story. When you start to imagine the potential of global penetration for this new generation of devices and services, you can get some pretty staggering numbers. That means we can use these stocks as bullish indicators.

The market turned red yesterday. And if I didn't know any better, I would say that sellers developed their first resistance area, 1335. That is an important progression for the bears, and it could

The bigger issue is that prices are rising for just about everything, except houses. And as much as he might want to say otherwise, Ben Bernanke's monetary policy is part of the problem. Bernanke can say that any inflation will be temporary all he wants. The fact is, emerging markets, and possibly even Europe, are raising interest rates to fight inflation. And the Fed is still sticking to its easy money policies.

What happens when the Fed's QE2 ends? What happens when there is no choice but to raise interest rates?

For an economy that has been highly dependent on government and corporate spending, Chambers' outlook wasn't very encouraging. But on a day when Cisco was pounded for around 15%, and Google (Nasdaq:GOOG), Microsoft (Nasdaq:MSFT) and Apple (Nasdaq:MSFT) all finished in the red, the Nasdaq as a whole actually posted a gain.

Now, Apple alone accounts for 20% of the Nasdaq 100 (the 100 largest stocks on the Nasdaq). Throw in Google (4.2%), Microsoft (3.6%) and Cisco 1.6%, and you're looking at 30% of the Nasdaq 100. Nearly one-third of the Nasdaq 100 was lower on Thursday, easily the most influential tech companies, and the Nasdaq managed a gain for the day.

The word "inflation" is appearing in the headlines more and more. For emerging markets, inflation is getting a bit scary. China is expected to show 5% inflation for the first two months of the year. That's clearly a big problem for China. And the situation is similar in other emerging economies, like Brazil and India.

Each of these three countries has raised interest rates to fight inflation. They will certainly have to do more. Especially China. China's currency is undervalued, kept that way by an artificially imposed exchange value known as a "peg." China pegs its yuan to the U.S. dollar.

The U.S. stock market has been a model of resilience this week, battling back from minor sell-offs and a rallying dollar to post new post-recession highs. Even today, the indices have battled back from early weakness to trade in the green.

We got the latest non-farm payroll numbers this morning. And frankly, the numbers raise more questions than they answer.

After the ADP private payroll showed 187,000 jobs added to payrolls. The government number came in at a measly 36,000. But amazingly, the unemployment rate dropped to 9%.

I should qualify the statement: if you are a homeowner, a taxpayer, a retiree, or someone with any savings, investments or dollar-denominated assets - you are the fall guy.

I’ll back up further: what are you taking the fall for?

Simple.

You’re already on the hook for bad mortgages on the books of banks like JP Morgan (NYSE: JPM), Bank of America (NYSE: BAC), and you’ve already backstopped General Motors (NYSE: GM) and Chrysler.

“But Kevin, I didn’t bail out those companies - the Government did.”

Well, Mr. Fall Guy, you know as well as I do that the Government doesn’t have any savings, so the money and resources that they have given and promised to give insolvent corporations didn’t come from some secret government rainy-day fund.

Right now, we’re in the eye of the hurricane of the bond yield news cycle, and it’s a potentially dangerous place.

I know: it’s exciting that bond yields are frantically rising. The as-seen-on-TV inflationary event is starting to unwind, right?

Well...not entirely.

Sure, it’s a small validation for people who have been trading in dollars for gold and silver. It’s even a bigger coup for people who sold bonds to buy commodity stocks.

But bond yields could fall tomorrow. In fact, I’d argue that they’ve risen so far, so fast, that they’re probably due to fall tomorrow.

My point is, there’s no reason to become “extra-bullish” on gold just because of a bond-yield spike. My investment thesis for owning gold is a long-term one. It’s largely predicated on ignoring short term moves in bonds, the dollar - even gold!

Today, I want to discuss a huge mistake I made about one of my favorite copper investments. I like to point out my mistakes because it keeps me humble and honest. If I only point out my successes, you’re likely to (correctly) assume that I’m cherry-picking my track-record.

I also think you’ll agree that learning from mistakes is a lot more fun for you, as a reader, if I’m making them instead of you.

Two months ago, I believed that Ben Bernanke’s then-impending announcement of Quantitative Easing 2 (QE2) was likely to disappoint the market.

Here’s what I said on October 27^th - about a week before Bernanke’s announcement:

There are plenty of analysts and economists that think QE2 is a bad idea. I've been one of them.

And even now, as economic data improves to the point that GDP forecasts are moving higher, the Fed appears steadfast that the economy needs more stimulus. The language in yesterday's FOMC statement was unchanged.

The inflationary risks of QE2 have been well articulated by the anti-Fed crowd. And even though today's CPI number shows that inflation is not happening, it's easy to interpret the rise in bond yields as sign that inflation is right around the corner.

As a result of our Federal Government’s inability to cut spending while at the same time extending Bush era tax cuts, our country’s debt is in danger of being downgraded from its triple-A rating.

What it means: future bond rates will necessarily have to go higher. You don’t get to keep selling low-yield debt when your ability to pay it back is universally recognized as not-quite-prime.

Don’t get me wrong: I’m not saying that we should raise taxes. But I am saying that you can’t cut taxes unless you’re prepared to cut expenses. If it seems like an extreme position, then I take that as good news for my gold and silver holdings.

Once again, stocks are advancing today. Commodity prices have been driving the action lately, and that's the case again today. And much of the reason is China.

 

Inflation has picked up China as demand for goods chugs on unabated. China's government has been taking steps to cool inflation, including raising down payment requirements for real estate purchases and raising reserve requirements for banks.

 

In fact, there was speculation that China would raise rates over the weekend. China did not act on interest rates, and that's one reason commodities, and stocks, are rallying today.

So we know that Bernanke is a liar, but what’s worse is the actual things he’s being truthful about. Taken on face value, Bernanke’s plans simply aren’t working.

In short, Bernanke’s latest announcement of $600 billion of Treasury purchases is intended to lower short term interest rates, which (in theory) should spur investment and growth.

From a pragmatic viewpoint, I think it’s fair to ask: has this strategy worked?

For that answer, you can take a look at the Treasury yield curve here at the Treasury’s website.

If you scroll down, you can see that after Bernanke’s announcement on November 2, only the shortest-term rates (the 30-day Treasuries) have gone down. Every other yield rate from 90 days out to 30 years went up.

Perhaps most notably, the three year Treasury yield nearly doubled, from 0.51% to 0.99%. Doubling your interest payments over three years doesn’t seem like the wisest tradeoff - especially when you’re paying for that yield by conjuring $75 billion every month out of thin air.

It’s disturbing to think that this country has come so far, to the point that our Secretary of State recognizes that our diplomatic efforts are SEVERELY hampered by our sovereign debt levels. If that’s not a signal to ditch the dollar for commodities, then I don’t know what would be.

However, this China problem is something that I think needs to be addressed publicly by our leaders - in an honest and straightforward fashion. I don’t want to hear anymore weak-sister threats, limp-wristed non-statements and dim-witted denials from Timmy Geithner or Ben Bernanke.

The problem isn’t that Ben Bernanke talks over our heads with his arcane banker vocabulary - where you say “quantitative easing” instead of “printing money.”

The problem isn’t even really the idea that being a Central banker is all that complicated. It certainly doesn’t have to be.

The problem is that Bernanke, and other central bankers cram so many lies, half-truths, obfuscations and red herrings into every single sentence they utter that making sense out of their words is like trying to sort out fact from fiction in a 10 car pileup - with 10 drunken drivers!

What are you willing to bet on the likelihood that interest rates will stay low for the next year?

My supervisor raised this exact issue this morning. We were having a conversation about one of the investments we may recommend in an income newsletter we’ll be launching later this month.

I expressed concern about owning an income paying security that deals with interest rates. He replied, “I'd bet anything that interest rates in this country will probably NOT go up in 2011.”

Strong words for sure. If he’s right, this security will continue to pay solid 3.5% yields with the strong potential for capital gains.

If he’s wrong...well, the price of this investment could quickly and easily drop 50% or more. In light of the fact that this investment stands to benefit when interest rates drop, and that interest rates are already at rock-bottom levels, it seems like it might not be a good idea to buy it right now.

Ireland agreed to terms for a bailout over the weekend. And while the U.S. dollar rallied today against the euro, investors should expect that trend to reverse in the near future with the dollar continuing its long term slide against major world currencies.

The European Union's willingness to support indebted member nations is bullish for the euro. Also, the Fed's QE2 will continue to weigh on the U.S. dollar.

The Federal Government is even more clueless than I previously suspected.

I’m speaking specifically about a White House commission’s Federal Deficit Reduction plan.

Surprisingly, the White House released this plan earlier this week.

I say “surprisingly” because the plan is so weak, so obviously ineffective - that anyone with the intellectual capacity to know how to read should be completely outraged at this plan.

They should have never let this plan see the light of day.

The Wall Street Journal outlined the underlying problem implicit to this plan:

“Overall, the plan would hold down the growth of the federal debt by roughly $3.8 trillion by 2020, or about half of the $7.7 trillion by which the debt would have otherwise grown by that year, according to commission staff. The current national debt is about $13.7 trillion.”

Gold continued to make news yesterday and today, but most investors still don’t realize that it’s silver that has posted much better gains this year.

Rick de los Reyes, a metals and mining analyst at T. Rowe Price recently noted that when investors flock to gold, there’s a tendency for silver to fall behind, “silver usually lags [gold]...”

At $1,390 an ounce, gold prices are at an all time. Silver is at a 30-year high. Agricultural commodities like fertilizer are also moving toward new highs.

Economists are warning that these commodities could continue to move higher in price for several months. And the stocks of companies selling these commodities have been surging in the past few trading sessions.

Gold prices rose $45 an ounce today as investors flocked to the ultimate store of value after Fed Chief Ben Bernanke renewed his attack on the U.S. dollar with another round of quantitative easing.

Called QE2, the Fed will spend as much as $900 billion to buy U.S. Treasury bonds as a way to keep the dollar weak and boost corporate profits.