FRIDAY REPORT #3 : H&S FOR REAL ON $NATGAS?

Welcome to the report. The purpose of this report is for you to use during the week of Feb 22nd-Feb 26th.

I will first represent fundamental news, then I will show technical analysis updates.

Thank you, please share with whoever you might think might like this.

-zee

Discount Rate Hike from 0.50% to 0.75%:

First off what is the discount rate? From the Fed's website:

The discount rate is the interest rate charged to commercial banks and other depository institutions on loans they receive from their regional Federal Reserve Bank's lending facility--the discount window. The Federal Reserve Banks offer three discount window programs to depository institutions: primary credit, secondary credit, and seasonal credit, each with its own interest rate. All discount window loans are fully secured.

Under the primary credit program, loans are extended for a very short term (usually overnight) to depository institutions in generally sound financial condition. Depository institutions that are not eligible for primary credit may apply for secondary credit to meet short-term liquidity needs or to resolve severe financial difficulties. Seasonal credit is extended to relatively small depository institutions that have recurring intra-year fluctuations in funding needs, such as banks in agricultural or seasonal resort communities.

The discount rate charged for primary credit (the primary credit rate) is set above the usual level of short-term market interest rates. (Because primary credit is the Federal Reserve's main discount window program, the Federal Reserve at times uses the term "discount rate" to mean the primary credit rate.) The discount rate on secondary credit is above the rate on primary credit. The discount rate for seasonal credit is an average of selected market rates. Discount rates are established by each Reserve Bank's board of directors, subject to the review and determination of the Board of Governors of the Federal Reserve System. The discount rates for the three lending programs are the same across all Reserve Banks except on days around a change in the rate''.

Higher rates are not necessarily seen positively in the
market, but the idea that the Fed now views banks as healthy enough to withstand the higher borrowing costs does offer a more optimistic take on financial institutions. Some may see it as a sign that the Fed will tigheten their monetary policy in the weeks to come. Not quite so. This is an unwinding of emergency liquidity measures which are no longer needed as opposed to the Fed seeking to raise rates and tighten financial conditions.

Is Greece the Next Argentina?

In 1999, the Argentine economy entered into a severe recession that coincided with various recessions and financial crises around the world, a state of affairs that exacerbated the problems in Argentina.

These are the factors that shows it COULD BE.

1.Hard currency regime

Where officials had no control of monetary policy. Leading up to the crisis Argentina was operating under a "hard currency" monetary regime (a currency board that guaranteed convertibility from pesos to dollars on a 1:1 ratio) that had been adopted a decade earlier. This monetary regime was essentially inflexible and implied that for most intents and purposes Argentine authorities had virtually no control over monetary policy (interest rates, monetary aggregates, etc.). Similarly, Greece adopted the Euro approximately a decade ago, surrendering all control of monetary policy.

2. Ingrained culture of fiscal indiscipline.

Prior to adoption of the hard currency regime, Argentina had been a nation characterized, from its very inception at independence, by its fiscal indiscipline. Historically, chronic deficit spending and debt accumulation was followed by monetary expansion to pay off the deficits and debt, resulting in massive episodes of inflation and devaluation of the currency. The Greek culture of fiscal indiscipline, prior to the inception of the euro, is virtually identical to that of Argentina.

3.  Currency overvaluation.

Adoption of the hard currency regime initially spurred massive inflows of foreign direct investment and hot money inflows. This excess liquidity (which monetary authorities couldn't control) increased currency in circulation. Furthermore, as alluded to above, government spending grew at an extremely rapid pace, and this pro-cyclical deficit spending contributed greatly to demand-side economic overheating. Consequently, internal inflation grew at a rate far greater than that of Argentina's trading partners. Over time, this situation produced a massive real exchange rate (REER) overvaluation of the currency in purchasing power parity (PPP) terms. This, in turn, reduced the nation's trade competitiveness, producing massive and structural current account deficits. This situation experienced in Argentina in the decade leading up to their crisis is virtually identical to the Greek situation leading up to the current crisis.

4. Monetary astringency.

Due to unsustainable fiscal policies and an unsustainable current account situation, foreign direct investment and hot money inflows suddenly waned and/or reversed. The outflows through the trade account coupled with hot money outflows necessarily (due to the currency regime in place) produced a contraction in the money supply (astringency), triggering a spike in interest rates and a deep recession. Government officials had no way to counteract this contraction in the monetary supply and spike in interest rates. This situation experienced by Argentina is currently being faced in Greece.

5. Untenable dilemma:

Deflation or abandon currency regime. Under the hard currency regime, the only way for Argentina to regain trade competitiveness was to undergo a painful deflation that would alleviate the REER currency overvaluation in PPP terms. This is precisely the situation currently faced by Greece. The Greek economy isn't competitive, but because they have no control over the currency, they cannot correct this problem through devaluation. As in the case of Argentina, excruciating deflation or abandonment of the currency regime are the only alternatives left to Greece.

6.  Fraud to mask breaches.

The Argentine government engaged in various cover-ups in order to avoid publicly falling into breach of their covenants. When these cover-ups were unmasked, a loss of confidence by investors ensued, causing a rise in interest rates and complicating the task of obtaining financing. A virtually identical situation has occurred in Greece.

7. Conclusion

How did the situation in Argentina end? Not too well. Economic depression, mass insolvencies, bank runs, forced seizure of deposits, unemployment and underemployment exceeding 40%, blood in the streets, a fall of the government, a complete reneging of the terms of the "rescue packages," an abandonment of the hard currency monetary regime, a mega-devaluation, and a massive default of foreign debt obligations.

Can Greece escape this same fate? There are no two situations that are exactly alike, but the similarities of the Greek and Argentine situations are striking.

Interestingly, one difference is that Greek levels of deficits and debt are between two and three times as great as they were in Argentina. In principle this would seem to make the situation in Greece even worse. However, this demonstrates that there is no particular amount of deficits or debt that triggers a debt crisis. What triggers a crisis is more a product of psychology on the part of those that finance the deficits and debt.

In this regard, perhaps the main difference that I can detect between the Argentine and Greek situations is that EU nations have a vital stake in avoiding a Greek meltdown and abandonment of the currency regime to an extent that the international community and the U.S. did not in the Argentine case. This "community of interests" could result in more aggressive and intelligent forms of assistance on the part of EU members towards Greece.

''Up until now, it's looking like a repeat of the same old story.''

Week ahead: Washington, housing

• Lawmakers are planning to meet on a jobs bill. And President Obama is expected to reveal a new blueprint for healthcare reform ahead of a summit Thursday on health care.
• Economists are looking for a year-on-year drop in December home prices, more sales of homes in January, a pick-up in durable goods orders, and a slight upward revision to the government's GDP growth forecast to 5.9%

$SPX

Short Term Equities Perspective:

Play the red channel: If 1115 breaks next week you have to exit all short positions. However, if 1085 breaks you have to exit all long positions.

Long Term Equities Perspective:

The breakaway gap is looking scary. Last time it happened we had a 17.2% rally in 2 and a half weeks. One of the largest rallies and short squeezes happened because of that breakaway gap. Will history repeat itself?

$NATGAS

D- OR U- next week? Leave a comment below.

Short-Term Natural Gas Perspective:
More bearishness to come if we don't rally above the $5.30-$5.35. If we rally above the $5.35 area, traders will look at charts and feel it's safe to pile in long.

URGENT UPDATE FEB 22ND/2010:: THE H&S PATTERN IS IN EFFECT.

$4.90 is SUPPORT (look at the chart and see how many times we've bounced off of it)
$4.50 is SUPPORT

The next target is $4.50



If your long keep stops maximum at $4.80, if $4.80 breaks, natural gas is going into free fall.





The HEAD AND SHOULDERS pattern is one in the same that happened in July 2009..



What happened after this H&S pattern IN 2009? See chart below.

NATURAL GAS WENT ON TO MAKE 7 YEAR LOWS IN JULY 2009

Long-Term Natural Gas Perspective:
I'm a very big buyer at $4.95 [buying futures via CMEGLOBEX using IB; however I will place adequate stops.]