I’ve got to be brutally honest…I have never seen such highly manipulated and thinly traded markets in my 20+ year career. It’s worth noting that pundit (and former hedge fund Jim Cramer with whom I normally don’t agree on anything) recently made similar observations.

Do not buy anything unless:

1. it’s already been beaten to smithereens
2. you are averaging into it using a 5 month spread (normally I’d split new capital in a down market into thirds…now fifths)
3. the markets are having a really bad day – if it’s already down big you have a higher margin of safety and the odds of a rebound are higher allowing you to get a head start on a recovery.
4. there’s an income component – income compensates you for risk
5. you’ve got the majority of your money properly set aside in defensive positions

1 – Make banks and all other players in financial services subject to the “know your customer” rule and behavior will change immediately once they can only sell customers investments that are suitable for them…ie. no options and commodities to widows and orphans.

2 – Require the separation of customer funds and banking funds and force disclosure of who’s trading what when to prevent commingling and taking both sides of the bet.

3 -  Either outlaw unsecured third party derivatives or force them onto regulated exchanges with complete pricing transparency.

This doesn’t have to be complicated.

On June 28th, the Chicago Fed released notes saying that the 3 month average of the National Activity Index has now “reached a level historically associated with a mature economic recovery following a recession.”

While the Fed didn’t make clear what constitutes a “mature” economic recovery, I think this is government speak for “we’ve just given the market everything we had and our data suggests that’s all she wrote.” And that, in turn, seems to lend itself to more downside ahead. 

Or at a minimum a very, long protracted and slow recovery.

I think the risks of a double dip recession are growing exponentially by the day:

1 – BP’s oil spill elicited nothing short of a yawning response and political BS when foreign flagged ships could have entered the gulf and captured 90% of the spill (they were offered and refused fearing labor upsets)

2 – nearly 60% of Americans didn’t want the Health Care Reform – and we got it anyway. Evidently this is government at the people not by the people.

3 – record number of businesses are not just trying to preserve 2009 gains but actually bring forward 2011 earnings in an attempt to stave off higher taxes and the double whammy of a stimulus program that is out of bullets

4 – “stuff” remains key to the world – energy, commodities and now a “revalued” Chinese Yuan all suggest the markets don’t trust the intangibles and are not likely to anytime soon.

5 – my proprietary indicators have rolled over…as in over and over at least in the short term.

While I want a recovery as much as the next guy, my supposition waaay back when that we are likely to see range bound markets appears correct…stay cautious folks!

Many of the same strategies that make for successful warriors make for successful investors and vice versa…here’s a few that I’ve been thinking about lately courtesy of my Sensei, Doug O’Connor:

• Strike when the opportunity presents itself.  You often don’t have the luxury or knowledge to plan to strike (or buy or sell), so you have to be ready to do so at any time.  Flexibility in your actions (and holdings).
• Wait until the opponent is fully committed before you strike (wait until a company has revealed enough of itself to know whether or not you should buy or sell…or waiting to see what the rest of the pack is doing and head the other way…UNODIR).
• Trust in your training (trusting in your evaluations and decisions) and relying on it to help you survive (and prosper).
• Discipline in your training…specifically to focus on the basics as they are most important (fundamentals in the market, not the fancy and confusing schemes hatched by con artists or slick hustlers).
• Kuzushi (balance)…how can you best keep your balance while taking your opponent’s balance (or when are markets unbalanced…possibly meaning opportunities or problems…having balanced holdings).
• Zanshin (mindful/alert)…remaining always aware of your surrounds and individuals close to you (aware of what’s happening in the market at all times…and therefore ready to act immediately).
• Kokyu (breath)…striking when your opponent has exhaled and just started his inhale (buying or selling at the right time…knowing the cycles of the market…like breathing…and taking advantage of opportunities).
• When fighting at close quarters, move freely through the melee of opponents.  Your mind must not fixate on any one opponent or action, but move freely without hindrance (move through erratic and volatile market conditions with a clear mind intent on fundamental principles and actions to prosper).
• Timing is the key to achieving victory (both in combat and the world of finance).

Leave it to the Federal Government to put the “con” in Economics.

Tomorrow’s jobs report is expected to produce 540,000 new jobs in May which, if it happens, will be the largest single jump in over a decade. Too bad it has nothing to do with reality.

According to the ADP report released Thursday, private payrolls increased 55,000 for the month. Also reported yesterday was a weekly initial unemployment claims figure of 453,000.

So how is it that the government expects to report more than 540,000 jobs? Because these are the same guys who run Amtrak and the Postal Service and think they’re viable businesses.

If the total new jobs figure is 540,000 as expected and 400,000 jobs come from temporary census related hiring, that leaves a net addition of 140,000 new jobs. Not bad in isolation but hardly the stuff by which to judge which way the economy is heading.

Consider this…just to tread water our country needs to add somewhere in the neighborhood of 125,000 jobs a month just to match population growth. 

But let’s play along. If we assume that the 540,000 figure is solid and does indeed serve as a harbinger that everything’s hunky dory, it’s still going to take 44 months give or take to get back to the mere 10,000,000 unemployed that goes with 5% unemployment. At 140,000 jobs a month, getting back to 5% will take 171 months or 14.2 years before we get back to a “tolerable” 5%. That’s 2024 incidentally.

Most non-census forecasts I’ve seen suggest a net additions figure of 130,000 – 155,000 new jobs created…which would actually be a net decrease from the ex-census jobs data in April. And the figure combining unemployment and underemployment is around 17% give or take so the hole we’ve got to crawl out of is a whole lot deeper than most people think.

There’s another fly in the ointment, too.

If census hirings can artificially jack the jobs report higher, the same is true in reverse. As of June, the Census “firings” will negatively impact the payroll report probably to the tune of 150,000 temporary workers or more who are no longer required. And that will create the opposite problem…an artificial drop in the jobs report next month and probably the month after that, too.

And that’s the problem with statistics that are more cooked than the Christmas Goose…sooner or later you either burn the bird or it simply doesn’t come out the way you planned.

So despite the fact that the talking heads will try to bill what is expected to be a huge jobs figure as a raging success, do try and keep things in perspective.

http://video.foxbusiness.com/v/4221650/575k-new-jobs-to-be-created-in-may

Here’s a clip from my latest appearance on Fox Business. Here’s to hoping the government doesn’t manipulate the numbers too badly on Friday….

Of course it won’t…it can’t. Just like China cannot stop buying U.S. Treasuries and dollars, it cannot afford to stop buying Euros: 1) the EU is a major trading partner and 2) it’s the second most liquid currency which makes it a backstop.

But that doesn’t mean China won’t diversify away from it…likely choices include more oil, metals and commodities.

For many investors, the current stock price tsunami is a buying opportunity. I’m not so sure.

The 3 Month Libor (London Interbank Offered Rate) has gone parabolic suggesting that the level of distrust between banks is not only rising, but rising quickly. People forget that the Libor is not merely the rate banks charge each other for short term lending, but an expression of the risks associated with lending to each other. The higher the rate…the higher the distrust.

As for what’s driving that…look no further than the PIGS in Europe…they’re clearly running the barnyard now despite a trillion dollar bailout. My guess is that banks are leery that, once again, they have more toxic assets on the books for which they have not yet accounted even now…sigh.

As for how that affects the markets…a relatively lack of short term capital means that institutions have to sell things to raise capital absent the relatively depth of short term credit. Given the interconnected nature of the markets, this very quickly becomes a global problem impacting growth and stock prices that naturally turn lower on falling expectations. 

My guess is that we won’t see capital flood back into until the 3 month Libor heads lower.

Today’s onslaught (5-20-2010) is exactly what I warned people about in my prior post. And, unless there is a concerted worldwide regulatory response to the CDS mess, get used to ‘em.