Peak

June 18, 2010

Theories
Abigail F. Doolittle Research
abigail@peaktheories.com
518-391-9313 LLC
www.peaktheories.com

Current Commentary on the Primary Financial Market Trend

The Weekly Peak

Euro-Copter to the Rescue
It seems the S&P 500 and the euro have been pulled from the brink again.

Since the details around the European Financial Stability Facility were released early last week, each has rallied nicely. This reminds one of
the brief period of relief seen after the original May 10 announcement of the 750 billion euro emergency rescue package. But that reprieve
turned out to be short-lived as investors realized that some 440 billion euro were to be funded in some unspecified manner by a yet-to-be-
created entity.

Well, the entity is now an official Luxembourg LLC with some vaguely official details on how the 440 billion euro will be raised from the capital
markets. Its expected to be operational this month but with Luxembourg as the sole shareholder until the other 14 euro-using countries,
Greece was excluded, reconfirm their commitment to enter the capital of the EFSF as soon as possible by completing the relevant national
parliamentary procedures one would have to think that it is not.

Putting aside that small detail, the not-so-small task of obtaining triple A rating for the EFSF looms. Some reports seem to indicate this is
unlikely to be a problem, but Im not so sure. Beyond the fact that it seems unclear as to whether the funding will be raised in advance of a
sovereign emergency or simultaneous to such an emergency, it still feels flawed that the very countries guaranteeing the bonds that are to be
bought by investors could be rescued by the funding to come from those bonds and investors.

On paper, it has been detailed that once a country needs to draw a loan from the EFSF, it will then be taken from the guarantee pool, but
before the vehicles even been driven anywhere, we have a case in point on the problem with the idea. After all, Spain is the fourth largest
guarantor to the 440 billion euro at 53.9 billion euro, but isnt Spain the very country to sit in the hot seat this week?

And this begs the question on how exactly a withdrawn guarantors contribution would be redistributed among the remaining members. On
the 67% combined guarantee of Germany, France and Italy, or the minute likes of Cyprus and Malta?

I certainly dont have these answers, but Im not sure anyone does and without real specificity, it seems unlikely that the rating agencies will
simply rubberstamp this concept with a triple A rating after the debacle of the sub-prime crisis.

Should this be the case, should it show up that the EFSF sounds nice in theory but doesnt have the proper choppers to fly, it will be a rude drop
for Wall Street. And while an imperfect proxy for the euro as an ETF, the downward trend of the chart below reminds us of the likely reality of
a rescue vehicle recall whether by the rating agencies or investors themselves.

Peak Theories Research LLC is an on-line research firm dedicated to providing investors with a macro long-term view on the
financial markets and the economy. Please see important disclosure statements at the end of this document.
 Peak
June 18, 2010
Theories
The Weekly Peak Research
LLC
www.peaktheories.com

The Bonds Arent Buying It

The S&P 500 may be up more than 6% in just 8 trading days after closing at 1,050 on June 7, but the credit markets arent going along for the
ride.

- The spread between Bloombergs 10-year AA composite and 10-year BB composite (high level junk) has widened to 314.5 on June 16
from 302.2 on June 7 and 262.2 on April 12 (a randomly chosen date for comparison before the S&Ps current 2010 high on April 23).

- The spread between the same BB composite and the 10-year Treasury has widened to 433.8 on June 16 from 421.7 on June 7 and
359.8 on April 12.

- The 10-year Treasury yield is at 3.21%, which while 4 bps higher than where it closed on June 7, moved down 9 bps yesterday, and
compares to 3.85% on April 12.

- While 3-month LIBOR has not moved up since the end of May, it has held steady at 0.54 or almost double its 0.30 on April 12.

- The TED spread, or the difference between the 3-month Treasury Bill and 3-month LIBOR, has widened further in June as the yield on
the 3-month bill moved down to 0.09 on June 17 from 0.16 on both June 1 and April 12 as LIBOR moved to 0.54 bps from 0.30 bps on
April 12.

Considering that the earliest signs of the original credit crisis began with the ever-so-slight widening in spreads as Treasuries began to build into
a bubble, the widening that we continue to witness today should not be taken lightly.

The FT recently highlighted the fact that the Bank for International Settlement is comparing 2010 to 2007 rather than Greece and Spain to Bear
and Lehman. Specifically, The BIS sees the sovereign debt crisis as akin to the start of the credit crunch with losses on exposures to
Southern European countries taking the role of the sub-prime mortgage assets as the root cause.

It would seem that the continued cracks in the credit markets back up the BIS contention while the S&P 500s newfound comfort found in the
volatility that first began in earnest in late 2007 would too. Should this be the case, should the problems of 2010 prove to be a forewarning of
darker times ahead, we should all seek shelter now.

Sams Stash, Gold, and the S&P

My view on the U.S. dollar is unchanged from last week in thinking that the dollar is going to decline significantly if not collapse at some point
in the future. As shown in the chart below of the dollar index, the long-term trend is down.

Peak Theories Research LLC is an on-line research firm dedicated to providing investors with a macro long-term view on the
financial markets and the economy. Please see important disclosure statements at the end of this document.
 Peak
June 18, 2010
Theories
The Weekly Peak Research
LLC
www.peaktheories.com

I believe the story behind this decline is a failed Treasury auction at some point in the future and when this occurs, the backstop of Treasurys,
or dollars, will come under pressure, severe pressure.

However for a period of time, as the world flocks to the perceived safety of its reserve currency, it seems likely that the dollar will remain
strong, and thus the decline I am speaking of is likely many, many months if not years away.

This being said, as I pointed out last week, were at a critical moment on this chart. It is either going to continue to move up for the near- and
mid-term, or it is going to fall quickly to below $65 as it, too, could be setting up for another double top reversal at it did in 2009.

Its trading action this week brought it closer to moving into such a negative reversal, but I continue to have a hard time seeing the dollar
decline right now, for the reasons stated above plus the renewed weakness that were like to see in the euro once the reality of the rescue
vehicle sets in, but the possibility exists and so Im simply pointing it out.

Moving on to Treasurys, I am going to simply reiterate what Ive been writing since March which is to say that I believe the 10-year will stay
below 4% and move closer to 3% with the possibility for a spike down.

In fact, I think we are more likely than not to go below 3% on the 10-year as the sovereign-debt crisis continues to unfold.

Long-term, however, as Ive discussed many times before and briefly above, I believe Treasurys collapse. As I laid out in Lender of Last Resort
Crisis (May 5), I think collapsed Treasurys represent some part of the culmination of the financial crisis in its entirety.

Quickly, on gold, it continues to trade in a bit of a confused or even speculative manner, in my view, although it appears that the possibility of
the minor and major double tops in GLD were broken with yesterdays close unless the former is actually a triple top that then breaks into the
major double top. The measuring implications would all remain the same or about $110 on the triple top and about $95 on the major double
top. All of this seems a bit of a stretch to me, but, once more, the possibility exists and so I am simply pointing it out.

Fundamentally, I have to believe that the story, or that gold will remain the transferrable storage of value should paper currencies collapse,
continues on, but the near-term chart may be pointing to a flaw with that thesis. This confusion is likely to be cleared up next week, but then
again, Ive been writing that for about six weeks.

And now lastly, my favorite pal the S&P.

One could make the case that the near-term trend is no longer decisively down for, as shown in the 1-month on the next page, it is flat if not up
slightly. However, the trend is clearly down in the 3-month, and thus it is possible to say that the near-trend is down currently but may change
soon.

The mid- and long-term trends, however, are still decisively down and the 3-year chart looks worse somehow to me with this rally on it.

Peak Theories Research LLC is an on-line research firm dedicated to providing investors with a macro long-term view on the
financial markets and the economy. Please see important disclosure statements at the end of this document.
 Peak
June 18, 2010
Theories
The Weekly Peak Research
LLC
www.peaktheories.com

When these charts are put side-by-side, I think the decline of the 3-month outweighs the flatness of the 1-month and so, at this time, I continue
to believe that the near-term trend of the S&P 500 is down.

In both the 1-year and the 3-year, we see the possibility of a broadening top technical formation. Specifically there are three nearly higher
highs and two intermediate and intervening lows. If the structure fulfills itself, the S&P will fall from here over a number of days and to
somewhere below 1,050 before fulfilling its technical target of about 985.

If the S&P 500 climbs any higher than the plateau of the last three days, the structure is invalid and this sets up the strong possibility of a 50%
retrace or to about the 50 DMA at about 1,040 and especially considering the indexs gritty fight to stay above the 200 DMA.

Should this happen, should the S&P continue to rally, it provides one with a longer selling opportunity for the combined message of these
charts with that of the 30-year chart and its confirmed double top is to sell equities.

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

Peak Theories Research LLC is an on-line research firm dedicated to providing investors with a macro long-term view on the
financial markets and the economy. Please see important disclosure statements at the end of this document.
 Peak
June 18, 2010
Theories
The Weekly Peak Research
LLC
www.peaktheories.com

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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 the
financial markets and the economy. Please see important disclosure statements at the end of this document.