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Peak Theories Research LLC is an on-line research firm dedicated to providing investors with a macro long-term view on thefinancial markets and the economy. Please see important disclosure statements at the end of this document.

September 24, 2010

Abigail F. [email protected]

www.peaktheories.com

Current Commentary on the Primary Financial Market Trend

The Weekly Peak

Investors Are Doing the Feds BiddingAll I can say is that Naoto Kan must be fuming. Ben Bernanke accomplished with three words what it took Mr. Kan $24 billion to do and Bendoesnt even look like the bad guy.

In fact, Ben Bernanke is looking pretty brilliant right now, in my view.

By doing the only thing he can do in these unusually uncertain times which is to assure investors that the Fed will step in and provideadditional accommodation if the outlook should deteriorate, Mr. Bernanke has convinced investors hes holding a royal flush.

And because investors are choosing to believe his bluff and that another round of quantitative easing will be launched to stimulate a sloweconomy if needed, investors are doing Mr. Bernankes bidding for him.

In just a few days, Treasury yields are down dramatically and the dollar has declined by as much as 1.5% since the Feds statement.

If the Fed really plays this hand right, it may even help with its inflation mandate, stimulate economic growth, and push investors toward risk.

First, relative to Treasurys, investors seem to want in on another round of investing in what the governments investing in with the 10-year at2.56% from 2.77% in one week while other maturities have seen similar strength. Only this time investors are doing this investing before thegovernment and, in so doing, accomplishing at least one of the governments conceivable goals of such potential investing or lowering yields.

This will be especially true if yields stay low for at least a little while because it should have the effect of keeping borrowing rates low andperhaps of steering investors to riskier asset classes.

Second, relative to the dollar, investors seem to fear that large purchases of Treasurys by the government will undermine the dollar, and thusare undermining it themselves ahead of any formal undermining.

However, this Fed-mastered but investor-created undermining of the dollar could have a similar effect to the decline seen in 2009 that startedin early March.

It could drive investors toward all of the riskier assets that were bid up then too.

True that decline was accompanied by the launch of QE1 and thus actual liquidity, but perhaps some combination of a sustained decline in thedollar with decent economic data will be enough to herd investors toward risk. One of those riskier asset classes is clearly equities even thoughequity investors appear to want either proof of or the actual liquidity with the S&P 500 down more than 1% since the statement.

Or perhaps Fed talk is the liquidity injection itself.

Should this occur and the stock indices rise with risk, this could be a part of the economic recovery the Fed is looking to support from thestandpoint of wealth creation. If the Fed were to get really lucky, perhaps such wealth creation would help with money circulation in the formof increased spending and possibly even hiring.

But the other thing a cheap dollar might do is to help with exports as Japan is hoping to do by paying to devalue its currency. A weaker dollarwill make U.S. exports cheaper on the global markets, and thus the U.S. trade deficit may improve. This would clearly be a part of theeconomic recovery that the Fed is hoping to support.

Interestingly though, a weak dollar could help out the Fed with its inflation mandate because the prices on the imports that Americans havebecome so addicted to could rise over time.

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Understanding that all of this is speculative on my part and depends on sustained weakness in the dollar, it could just work out that withoutspending a buck, the Fed may be supporting its inflation mandate and stimulating economic growth all with a few words.

After all, this was the third option outlined by Mr. Bernanke in Jackson Hole to provide additional monetary accommodation:communication .

Specifically, Mr. Bernanke said, a policy option for the FOMC would be to ease financial conditions through its communication, and thus itseems we may have just seen the policy response and perhaps a highly effective one at that.

Sams Stash, Gold, and the S&PWhile Treasurys have clearly strengthened since last week with the 10-year at 2.56% from 2.77% as has been mentioned, I still think Treasurysback off a bit with the 10-year back above 3%, or even 3.5%, before too long.

If you recall, in the face of the actual quantitative easing that began in the spring of 2009, the highest the 10-year was supposed to hit due togovernment support was 3.25%. Well that held about two months because by June it was up at 3.86% from the sub-3% level in March.

My point is if the dollars weakness is sustained, we may see that flight to risk and as we saw in the spring of 2009, as the returns associatedwith safety arent quite as appealing in a weak dollar stampede to risk.

And even if its not a full-out move toward risk, it seems there would likely be some steering toward risk if the dollar remains weak.

In addition, bond investors may realize what I believe equity investors have realized already and that certainly seems backwards because Ialmost always think of bond investors as getting it first or the idea that QE2 may not come this year if at all and in going after the invest withthe government before the government has invested could lead one to get burned. Putting the last week aside, this could even be a slightlydifferent version of what weve seen over the last month with the 10-year having gone to 2.795% in mid-September from 2.477% at the end of August as investors may have had a bit of remorse about how aggressively they had shifted to safety.

In other words, we may see investors shift out of their somewhat impulsive leap into government safety.

Mid-term, however, after Treasurys back off a bit, I believe government debt will s trengthen significantly and for good cause as the secondstage of the financial crisis starts to play out and I think this will drive the 10-year to or below 2%, but I do not think this is in the immediate oreven near-term.

Ultimately, and I will publish on it soon, I think Treasurys weaken significantly if not collapse and I think well be looking a double-digit yield onthe 10-year easily.

So, in summary, in the immediate- to near-term, I think the 10-year will move above 3% if not 3.5% before heading down to 2% or below andthen followed by a move toward that double-digit yield. I reference the 10-year only but please view it as a proxy for the directional moves of Treasurys in general.

Turning toward the dollar and in direct refutation to what I thought in August, I was clearly wrong, it is weak and in a bit of a precariousposition as the chart on the following page shows us.

Specifically, its sitting on the ledge of support found around 80 that Ive referenced many times and its held the ultimate point of that supportor 79.507, but even so, it doesnt look so good. For once it breaks that 79.507 and especially if decisively, the chart suggests about 77 and then75 with the best support found around 72.

It should be noted that if the dollar index falls below about 75, it will be a confirmed double top with a measuring implication of about 60. Ifirst pointed out this possibility back in May but similar to then I have a hard time seeing the dollar index fulfilling that structure for if it does,the long-term chart of the dollar index (not shown) suggests that it will not recover from such a decline.

While I continue to believe that such a decline will occur ultimately in the third stage of the financial crisis, it is hard to believe that such a


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toppling could occur too soon. I really hope this is true too.

So well just have to wait and see how well it holds 80 and take it from there but again a break of that 79.507 will not be good for the dollarindex.

It may, however, be good for gold and as far as gold, wow, what else can one say?

Once $1,300 to $1,320 is cleared, it looks like unobstructed chart sailing to me. Investors are clearly looking at this precious metal as analternative currency and transferrable store of value and the chart, once above that small range, suggests this view could carry on for sometime.

And now, lastly, lets turn to the S&P.

Its been an interesting week for the index as it confirmed a bullish Inverse Head and Shoulders pattern by going through its neckline at 1,131and then taking it many steps further by making it to 1,149 only to be pulled back down and below the neckline yesterday.


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Let me first say that I believe this pattern remains valid despite the pullback below the neckline. This move is considered to be somewhatnormal and as I wrote yesterday many of these confirmed patterns balk at the neckline for days, weeks or months before making the nextdefinitive move up.

Such a balk may even lend strength to this pattern due to its weak volume confirmation. Oddly, however, this same pullback and balk areworrisome potentially due to the fact that the confirmation came on lackluster volume.

Were it not for this pattern being protected by something called the Fan Principle, I may have waited to call its confirmation until 1,150 and thenext level of resistance due to that weak volume. However, this use of three trendlines to identify an Intermediate Reversal is very much inplay and shall remain so at every point above about 1,100.

It creates an underlying structural support of sorts for the Inverse Head and Shoulders, in my view.

And so, due to this support and in looking at the charts of other confirmed IHS patterns that fell below the neckline, it appears that this patterncould fall to 1,120 or so and hang out there rather comfortably and the pattern would remain valid. It shall also remain valid were the index totrade between that 1,120 and its neckline.

However, what we really need, clearly, is for the S&P 500 to move back above 1,131 and then 1,135 and then 1,143 and ultimately 1,150. It isthis last level that will lend this structure some desired stability and perhaps all of this will come, assuming it does, on better volume as a


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compensation of sorts for its initial weak volume confirmation.

Regardless of its wobbly beginning as a confirmed structure, this Inverse Head and Shoulders pattern continues to carry a target of 1,250 andthis suggests a roughly 10% move up from current levels.

However, it must be remembered that this pattern is merely a sub-trend to the S&Ps primary downtrend and in due course it is that lattertrend that will carry the index and all of its other trends with it. Put otherwise, if the Inverse Head and Shoulders pattern should fulfill itself with the index climbing to 1,250, this will be a bear market rally only, and thus it must be treated with care.

As always, thank you for taking the time to read this weeks piece.


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DISCLAIMER

Opinions expressed herein are strictly that of the author and are subject to change without notice and may differ or becontrary to the opinions or recommendations of any professional associations held by the author including the authorsemployer. The opinions contained herein should not be taken as specific recommendations to be acted upon. Anyprices or quotations contained herein are indicative only and do not constitute an offer to buy or sell any securities atany given price. No representation or warranty, either express or implied, is provided in relation to the accuracy,completeness, reliability or appropriateness of the information, methodology and any derived price contained withinthis material. The securities and related financial instruments described herein may not be eligible for sale in all

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