It appears that today’s collapse was the result of fear over who has exposure to the Lehman Credit Default Swaps (which settle tomorrow (Friday).
http://en.wikipedia.org/wiki/Credit_default_swaps
Here is the timeline for how the settlement will play out tomorrow (Friday) –
http://www.reuters.com/article/rbssFinancialServicesAndRealEstateNews/idUSN0841811720081008
What is means in English is the companies which sold insurance policies on the bonds of Lehman Brothers will know how much they will have to pay up tomorrow. $400 billion in Credit Default Swaps were written on Lehman Bonds! The fear is that the companies who sold the insurance will not have the money to pay up on October 21st. That would lead to several companies potentially going out of business this month and then all kinds of new risks enter the system.
I would not be surprised to see the tradable bottom show up tomorrow as the news of the Lehman CDS pricing evolves tomorrow. I will be looking for a capitulation tomorrow morning. If it shows up, then I may put some money to work. If it does not show up, then I stay in cash and wait for Monday…
Thursday, October 9, 2008
970 Broke, Leading to Another Leg Down
I noted the following yesterday –
“The S&P tried to find support the last two days at 970. That level had better hold, or the markets will start yet another leg down”
Here is the chart from yesterday, updated for today’s action. 970 got taken out and the S&P 500 did a nosedive into the close, falling about 60 points (-6.2%) in the last 90 minutes of trading.
I also noted the following yesterday –
“Sellers continue to swamp buyers and the markets continue to sell off hard into the close each day as mutual funds sell to cover what are no doubt massive redemptions.”
This is classic Bear Market action. I think we are in the “capitulation” stage, where people wake up at night in cold sweats and sell because they just can’t take it any more. The last few days of selling are always nose dives. So it can be so very costly if you are even just a few days early. That is why I want to only buy on a low risk set up.
You will not want to buy at the end of a Bear Market or a selling panic. It is human nature. My goal with this blog is to get a continuous commentary going to let you know how the markets evolve and how those internal changes in the markets will tell you when it is time to be buying and not selling.
As the markets were topping last year, I went through the changes with clients in great detail and we were able to take defensive measures to protect capital. Some chose not to sell. I am sure that they will listen next time...
I can now buy the markets at a 37% discount to a year ago. Are you kidding me? Those who raised cash in late 2007 and the first half of 2008 are now years ahead of the game. Those who didn’t may have to delay retirement for a few years.
I think people grasp onto the “buy and hold” mantra because they have not found how to determine when it is time to be buying and time to be selling. Just as the markets gave a lot of clues as they topped, they will also give lots of clues as they bottom. My goal is to keep you informed, so that you are interested in buying what big money is buying, even though the idiots on TV are telling you to sell – just as they were telling you to buy the first 4,000 points down on the Dow! Remember, “Buy low and sell high”.
I did zero trades today. Then I went home and took a long nap. I am exhausted. Interpreting this intra-day volatility is hard work. Even with the hard work, I may still miss the low and not be able to trade whatever bounce we get. My concern now is that the next rally may only carry up to 970 on the S&P 500.
“The S&P tried to find support the last two days at 970. That level had better hold, or the markets will start yet another leg down”
Here is the chart from yesterday, updated for today’s action. 970 got taken out and the S&P 500 did a nosedive into the close, falling about 60 points (-6.2%) in the last 90 minutes of trading.
I also noted the following yesterday –
“Sellers continue to swamp buyers and the markets continue to sell off hard into the close each day as mutual funds sell to cover what are no doubt massive redemptions.”
This is classic Bear Market action. I think we are in the “capitulation” stage, where people wake up at night in cold sweats and sell because they just can’t take it any more. The last few days of selling are always nose dives. So it can be so very costly if you are even just a few days early. That is why I want to only buy on a low risk set up.
You will not want to buy at the end of a Bear Market or a selling panic. It is human nature. My goal with this blog is to get a continuous commentary going to let you know how the markets evolve and how those internal changes in the markets will tell you when it is time to be buying and not selling.
As the markets were topping last year, I went through the changes with clients in great detail and we were able to take defensive measures to protect capital. Some chose not to sell. I am sure that they will listen next time...
I can now buy the markets at a 37% discount to a year ago. Are you kidding me? Those who raised cash in late 2007 and the first half of 2008 are now years ahead of the game. Those who didn’t may have to delay retirement for a few years.
I think people grasp onto the “buy and hold” mantra because they have not found how to determine when it is time to be buying and time to be selling. Just as the markets gave a lot of clues as they topped, they will also give lots of clues as they bottom. My goal is to keep you informed, so that you are interested in buying what big money is buying, even though the idiots on TV are telling you to sell – just as they were telling you to buy the first 4,000 points down on the Dow! Remember, “Buy low and sell high”.
I did zero trades today. Then I went home and took a long nap. I am exhausted. Interpreting this intra-day volatility is hard work. Even with the hard work, I may still miss the low and not be able to trade whatever bounce we get. My concern now is that the next rally may only carry up to 970 on the S&P 500.
Wednesday, October 8, 2008
This Bear Market is of Epic Proportions
I figured that we had a decent chance of a crash on Monday, but this is getting ridiculous.
I only have reliable charts back to 1980, but I can tell you that since 1980, there are only 3 occasions where the markets got to this level of extreme selling – October 1987, July 2002 and this crash.
Today, the markets had an excuse to rally, with several Central Banks cutting interest rates over night and Wal-Mart being less bearish than expected, but the markets cut through support like it wasn’t even there. Sellers continue to swamp buyers and the markets continue to sell off hard into the close each day as mutual funds sell to cover what are no doubt massive redemptions.
Here is the market today
Here is The Crash of 1987
As you can see, The Crash stopped below the -25% band (Black Line). I have no clue where the market bottoms on this leg down. Anybody who tells you they know where things will bottom is making it up and you don’t need to bother listening to that nonsense.
But I can use past market moves to see how the market reacted once the selling stopped. In 1987, the S&P 500 fell below -25%, reversed for a few days, then retested the -25% band (2nd Black Arrow), then rallied back to the -15% band (Blue Arrow), then retested the -25% band again, before reverting back into the Mean (Green Arrow).
So the odds are high that after this selling panic stops, the markets will rally and then retest the lows for a while before they make their move back into the Green Line.
The same thing occurred in late 2002, as the S&P 500 spiked below -25%, then rallied, retested the Bear Market Low of July (Red Arrow), then tested the Green Line on several occasions, retested the July and October 2002 lows one more time in March 2003 (Red Arrow) and then started a new Bull Market.
The 1987 bottom took several weeks and the 2002 bottom took over 8 months to form. So I expect this market to see a bottom form over time. There might be a HUGE short term rally once the bottom is reached, but there will most likely be a retest of the lows after this rally.
The other issue I have noticed is that while the market was in these bottoming processes, the Green Line was falling. So when the market finally does revert back into the Mean, the Mean will be a lot lower than it is today. In 1987, the Mean fell 11.5% from the day the market bottomed, until the day the market finally touched the Green Line again.
Today, the Green Line is at 1300. 1300! While the S&P 500 is at 986…
It is just a guess, but my guess is that price and the Green Line end up meeting in the 1150 – 1200 range.
I expect the next rally to be highly shortable.
Today I moved some of my 401k money from cash into the S&P 500 Index Fund. I did not buy a share of anything for my clients. I did the 401k purchase, because I can only buy mutual funds at the close and it is more profitable to be a day early than it is to buy at the end of the day of the bottom.
The S&P tried to find support the last two days at 970. That level had better hold, or the markets will start yet another leg down. IF 970 holds, then I will consider buying it, because the first real resistance is at 1100. That is 14.4% from 970. If 970 fails, then I will wait for the market to try and build a bottom at some lower level and then look to buy a reliable set up.
Did I mention that 976 is the -25% band on the S&P 500 and 1103 is the -15% band? You can’t make this stuff up.
One of these bottoms is going to work. I’m just not sure which one. But I have to treat every attempt with the potential to be a bottom. I hope the bottom arrives soon, because I am exhausted.
The charts of the NASDAQ and the Dow Jones both have similar potential bottoms to the S&P 500. They will most likely all bottom in unison.
I only have reliable charts back to 1980, but I can tell you that since 1980, there are only 3 occasions where the markets got to this level of extreme selling – October 1987, July 2002 and this crash.
Today, the markets had an excuse to rally, with several Central Banks cutting interest rates over night and Wal-Mart being less bearish than expected, but the markets cut through support like it wasn’t even there. Sellers continue to swamp buyers and the markets continue to sell off hard into the close each day as mutual funds sell to cover what are no doubt massive redemptions.
Here is the market today
Here is The Crash of 1987
As you can see, The Crash stopped below the -25% band (Black Line). I have no clue where the market bottoms on this leg down. Anybody who tells you they know where things will bottom is making it up and you don’t need to bother listening to that nonsense.
But I can use past market moves to see how the market reacted once the selling stopped. In 1987, the S&P 500 fell below -25%, reversed for a few days, then retested the -25% band (2nd Black Arrow), then rallied back to the -15% band (Blue Arrow), then retested the -25% band again, before reverting back into the Mean (Green Arrow).
So the odds are high that after this selling panic stops, the markets will rally and then retest the lows for a while before they make their move back into the Green Line.
The same thing occurred in late 2002, as the S&P 500 spiked below -25%, then rallied, retested the Bear Market Low of July (Red Arrow), then tested the Green Line on several occasions, retested the July and October 2002 lows one more time in March 2003 (Red Arrow) and then started a new Bull Market.
The 1987 bottom took several weeks and the 2002 bottom took over 8 months to form. So I expect this market to see a bottom form over time. There might be a HUGE short term rally once the bottom is reached, but there will most likely be a retest of the lows after this rally.
The other issue I have noticed is that while the market was in these bottoming processes, the Green Line was falling. So when the market finally does revert back into the Mean, the Mean will be a lot lower than it is today. In 1987, the Mean fell 11.5% from the day the market bottomed, until the day the market finally touched the Green Line again.
Today, the Green Line is at 1300. 1300! While the S&P 500 is at 986…
It is just a guess, but my guess is that price and the Green Line end up meeting in the 1150 – 1200 range.
I expect the next rally to be highly shortable.
Today I moved some of my 401k money from cash into the S&P 500 Index Fund. I did not buy a share of anything for my clients. I did the 401k purchase, because I can only buy mutual funds at the close and it is more profitable to be a day early than it is to buy at the end of the day of the bottom.
The S&P tried to find support the last two days at 970. That level had better hold, or the markets will start yet another leg down. IF 970 holds, then I will consider buying it, because the first real resistance is at 1100. That is 14.4% from 970. If 970 fails, then I will wait for the market to try and build a bottom at some lower level and then look to buy a reliable set up.
Did I mention that 976 is the -25% band on the S&P 500 and 1103 is the -15% band? You can’t make this stuff up.
One of these bottoms is going to work. I’m just not sure which one. But I have to treat every attempt with the potential to be a bottom. I hope the bottom arrives soon, because I am exhausted.
The charts of the NASDAQ and the Dow Jones both have similar potential bottoms to the S&P 500. They will most likely all bottom in unison.
Sunday, October 5, 2008
Potential Bear Market Rally Near
There are two absolutes in the markets –
Emotions will take prices to irrational extremes
Prices always revert back to the mean
Over the years, I have discovered that irrational extremes are quantifiable on a pretty consistent basis. If you can identify likely extremes to which prices normally go in times of extreme emotion, you can put yourself in a position to be making decisions at high probability turning points. This can prove to be very valuable.
I want to define a couple of things before I get into detailed analysis of where we are in relation to what has occurred in the past.
The Mean in statistical terms, is the average of a set of numbers. For the markets, I use the average value for the last 30 weeks. If you plot this average every week on the chart, you get what is called the 30-week moving average (Green Line).
Over time, price moves back to the 30-week moving average, or “reverts” back to the mean.
You can quantify the emotional over-reactions as price moves a specific percentage away from the 30-week moving average. Historically, in a panic, prices move 15% or even 20% below the 30-week average. That range of 15-20% below the 30-week average tends to be a very good place from which to look for reversals up in stock price.
If you haven’t yet figured it out, I love managing money. I love the combination of mathematics, emotions and psychology. Knowledge gives me an edge and an intense work ethic allows me to build up an extensive knowledge of historical price movement. Moreover, it is of paramount importance to know how to protect assets when risk increases and opportunity diminishes.
Again, I made it real clear in early 2008 that we were now in a Bear Market for stock markets. I went on defense. My gameplan shifted from buying dips to shorting rallies. It has proven to be very successful this year.
Using the last 12 year of market activity, I figured that I would get chances to buy stocks on extreme moves down in price. I even sent the following chart to clients on several occasions to give them insight into how I was making decisions.
In 1998, the markets were in turmoil as the Long Term Capital hedge fund got over-leveraged and collapsed. This caused a meltdown in the derivative markets and the markets crashed. This panic only took the S&P 500 15% below (Blue Line) its mean (Yellow Arrow).
The Bear Market from 2000-2003 saw the markets fall to 20% below the mean on several occasions (Black Arrows). The markets did not have a weekly close below the Red Line, so any selloff below those levels was immediately rewarded if bought.
In early 2008 (Green Arrow), the markets again were stretched to the Blue Line. At the time I had to analyze the markets and determine if we were replaying 1998, and would rally to new highs, or replaying something similar to 2000-2003 and would find the markets at much lower prices over the next year or two. I thought we were replaying the 2000-2003 market and chose to short the early 2008 rally. History has proven me to be right.
I have expressed a lot of frustration during this Bear Market of not being able to buy extreme moves in price. This is because we have not yet seen the markets get to the Blue Line. Every time the markets get close to cracking, the Fed steps in with some new intervention scheme and the markets bounce a little and I am unable to get a decent risk reward to buy any bounce.
Rallies from this extreme condition have proven to be very profitable. During the 2000-2003 Bear Market, there were four such rallies (Black Arrows) -
Low Date High Date Low Price High Price Return
3/19/2002 5/21/2001 1081 1315 21.6%
9/17/2001 12/03/2001 944 1173 24.3%
7/22/2002 8/19/2002 775 965 24.5%
10/07/2002 12/02/2002 768 954 24.2%
The returns are uniform, because the market tends to rally from 20% below Mean, and then rallies to a few percentage points above the Mean before topping and starting another leg down.
I took a look at the daily charts of each of these legs down and what I noticed was that the trends accelerated down into the lows as panic selling took hold and people sold out at any price.
Final Selloff Numbers (all daily measures are trading days, not calendar days)
Start Price Bottom Duration Loss
1. 1260 1080 10 Days -14.3%
2. 1130 944 8 Days -16.4%
3. 990 775 12 Days -21.7%
4. 850 770 7 Days -9.4%
Amazingly enough, the top of this current leg down is 1265.12 and Monday will be Day 10 of the crash. That is 5 points from the top of the first crash in 2001. I would not be surprised to see the price decline stop between 1080 and 1040 in the next few days.
Sentiment, Momentum and Market Internals
When I start to hear guys like Jim Cramer who have been wrong the whole way down tell me how to play the next 3,000 point drop, I recognize that sentiment may have changed and I may get a chance to buy an extreme selloff in stocks for a bounce that very few are expecting.
Here is a chart of the S&P 500 with several indicators to show just how extreme the current price move is when compared to normal market conditions –
The Top Box is the price of the S&P 500
The Second Box shows the Bullish Percent Indicator ($BPSPX). This indicator measures the percent of stock which are in uptrends. A reading at or below 20 has been seen on 5 occasions in the past 11 years. It has proven to be a good to buy stocks.
The Third Box shows momentum (RSI (14)). Think of momentum as the strength of the trend. A reading below 30 indicates that there is incredibly strong selling - think panic. This low reading has occurred 5 times in 11 years.
The Fourth Box measures volatility in options contracts ($VIX). Think of this as the price of insurance on stocks. The higher the reading, the more people are willing to pay to insure their stock portfolios. So an extremely high reading indicates panic by market participants. An extreme reading of over 40 has occurred only 5 times in 11 years.
So all the things I look for at a tradable bottom in a Bear Market are lining up. I am seeing panic, broad-based selling. I am seeing panic activity in the options market and the perma-bulls have thrown in the towel.
I will come out with a list of potential set ups in the next few days. For the first time in 10 months, I want in.
Emotions will take prices to irrational extremes
Prices always revert back to the mean
Over the years, I have discovered that irrational extremes are quantifiable on a pretty consistent basis. If you can identify likely extremes to which prices normally go in times of extreme emotion, you can put yourself in a position to be making decisions at high probability turning points. This can prove to be very valuable.
I want to define a couple of things before I get into detailed analysis of where we are in relation to what has occurred in the past.
The Mean in statistical terms, is the average of a set of numbers. For the markets, I use the average value for the last 30 weeks. If you plot this average every week on the chart, you get what is called the 30-week moving average (Green Line).
Over time, price moves back to the 30-week moving average, or “reverts” back to the mean.
You can quantify the emotional over-reactions as price moves a specific percentage away from the 30-week moving average. Historically, in a panic, prices move 15% or even 20% below the 30-week average. That range of 15-20% below the 30-week average tends to be a very good place from which to look for reversals up in stock price.
If you haven’t yet figured it out, I love managing money. I love the combination of mathematics, emotions and psychology. Knowledge gives me an edge and an intense work ethic allows me to build up an extensive knowledge of historical price movement. Moreover, it is of paramount importance to know how to protect assets when risk increases and opportunity diminishes.
Again, I made it real clear in early 2008 that we were now in a Bear Market for stock markets. I went on defense. My gameplan shifted from buying dips to shorting rallies. It has proven to be very successful this year.
Using the last 12 year of market activity, I figured that I would get chances to buy stocks on extreme moves down in price. I even sent the following chart to clients on several occasions to give them insight into how I was making decisions.
In 1998, the markets were in turmoil as the Long Term Capital hedge fund got over-leveraged and collapsed. This caused a meltdown in the derivative markets and the markets crashed. This panic only took the S&P 500 15% below (Blue Line) its mean (Yellow Arrow).
The Bear Market from 2000-2003 saw the markets fall to 20% below the mean on several occasions (Black Arrows). The markets did not have a weekly close below the Red Line, so any selloff below those levels was immediately rewarded if bought.
In early 2008 (Green Arrow), the markets again were stretched to the Blue Line. At the time I had to analyze the markets and determine if we were replaying 1998, and would rally to new highs, or replaying something similar to 2000-2003 and would find the markets at much lower prices over the next year or two. I thought we were replaying the 2000-2003 market and chose to short the early 2008 rally. History has proven me to be right.
I have expressed a lot of frustration during this Bear Market of not being able to buy extreme moves in price. This is because we have not yet seen the markets get to the Blue Line. Every time the markets get close to cracking, the Fed steps in with some new intervention scheme and the markets bounce a little and I am unable to get a decent risk reward to buy any bounce.
Rallies from this extreme condition have proven to be very profitable. During the 2000-2003 Bear Market, there were four such rallies (Black Arrows) -
Low Date High Date Low Price High Price Return
3/19/2002 5/21/2001 1081 1315 21.6%
9/17/2001 12/03/2001 944 1173 24.3%
7/22/2002 8/19/2002 775 965 24.5%
10/07/2002 12/02/2002 768 954 24.2%
The returns are uniform, because the market tends to rally from 20% below Mean, and then rallies to a few percentage points above the Mean before topping and starting another leg down.
I took a look at the daily charts of each of these legs down and what I noticed was that the trends accelerated down into the lows as panic selling took hold and people sold out at any price.
Final Selloff Numbers (all daily measures are trading days, not calendar days)
Start Price Bottom Duration Loss
1. 1260 1080 10 Days -14.3%
2. 1130 944 8 Days -16.4%
3. 990 775 12 Days -21.7%
4. 850 770 7 Days -9.4%
Amazingly enough, the top of this current leg down is 1265.12 and Monday will be Day 10 of the crash. That is 5 points from the top of the first crash in 2001. I would not be surprised to see the price decline stop between 1080 and 1040 in the next few days.
Sentiment, Momentum and Market Internals
When I start to hear guys like Jim Cramer who have been wrong the whole way down tell me how to play the next 3,000 point drop, I recognize that sentiment may have changed and I may get a chance to buy an extreme selloff in stocks for a bounce that very few are expecting.
Here is a chart of the S&P 500 with several indicators to show just how extreme the current price move is when compared to normal market conditions –
The Top Box is the price of the S&P 500
The Second Box shows the Bullish Percent Indicator ($BPSPX). This indicator measures the percent of stock which are in uptrends. A reading at or below 20 has been seen on 5 occasions in the past 11 years. It has proven to be a good to buy stocks.
The Third Box shows momentum (RSI (14)). Think of momentum as the strength of the trend. A reading below 30 indicates that there is incredibly strong selling - think panic. This low reading has occurred 5 times in 11 years.
The Fourth Box measures volatility in options contracts ($VIX). Think of this as the price of insurance on stocks. The higher the reading, the more people are willing to pay to insure their stock portfolios. So an extremely high reading indicates panic by market participants. An extreme reading of over 40 has occurred only 5 times in 11 years.
So all the things I look for at a tradable bottom in a Bear Market are lining up. I am seeing panic, broad-based selling. I am seeing panic activity in the options market and the perma-bulls have thrown in the towel.
I will come out with a list of potential set ups in the next few days. For the first time in 10 months, I want in.
Thursday, October 2, 2008
The Bailout Plan
People have asked me about the "Bailout Plan" and I wanted to describe what is really going on.
The issue with the “financial crisis” is simply this – banks are insolvent and lying about the price of the assets they hold on their books.
Credit is created by banks lending back and forth to one another. Banks know that other banks are lying about their assets and are afraid that if they lend to another bank, they may not get their money back. So banks aren’t lending to each other right now. They are hording US Treasuries.
The Paulson Plan
How does the Paulson Plan fix things?
The goal of the Paulson Plan is to give the US Treasury a $700 billion pool with which to buy securities. They want this power so that they can fix prices at artificially high levels.
Why?
Say Bank A has a $1 Billion Mortgage Backed Security. Say that this bank is pricing that asset at 20 cents on the Dollar, or $200 million in paper value. Other banks know that the bond is really worth something like 6 cents on the Dollar, or $60 million in paper value. The US Treasury wants to be able to go to that bank and buy a small portion of their holdings in this bond at some fantasy price well in excess of the current “price" or actual value of the bond, say 40 cents on the Dollar.
That will allow Bank A to increase the value of the bond on their balance sheet and declare a $200 million PROFIT for the quarter! This “repricing” will result in banks becoming flush with “capital” and they will be able to start lending again.
That’s the Paulson Plan. Buy overpriced assets with taxpayer money so that the banks can lie about the value of their holdings. Does that sound like a good plan? It sounds highly illegal and unethical to me.
Plan B
When the Congress voted No to the Paulson Plan, the SEC (Securities and Exchange Commission) decided to investigate a Plan B for how to artificially inflate prices of the holdings on the balance sheets of banks.
The SEC Plan
The day after the Paulson was voted down, the SEC went to FASB and asked them to change the rules for how bonds are priced. The role of FASB (http://www.fasb.org/) is to develop the Generally Accepted Accounting Practices (GAAP) within the United States.
FASB 157 is the rule for determining how corporations price the assets they hold. The intent of the rule is to have prices set based on the actual prices being paid in the market for the security or for a security of similar quality and maturity.
The SEC asked the FASB to change the rule, so that companies could now price their assets based not on the current going price, but on some fantasy estimate of the hypothetical maturity value of the security.
At this point I just throw my hand up in the air. The SEC is supposed to enforce the laws to protect the public from transgressions by companies which hurt the public.
The SEC is now instructing companies to lie about the value of their holdings
The credit markets are now frozen because nobody trusts the guy on the other side of the trade
US Treasuries are being horded at the expense of new corporate debt creation
The stock market is imploding because nobody wants to hold rigged assets
The US Government wants to give $700 billion to the US Treasury to further rig the prices of bonds
We are in deep doo doo.
The issue with the “financial crisis” is simply this – banks are insolvent and lying about the price of the assets they hold on their books.
Credit is created by banks lending back and forth to one another. Banks know that other banks are lying about their assets and are afraid that if they lend to another bank, they may not get their money back. So banks aren’t lending to each other right now. They are hording US Treasuries.
The Paulson Plan
How does the Paulson Plan fix things?
The goal of the Paulson Plan is to give the US Treasury a $700 billion pool with which to buy securities. They want this power so that they can fix prices at artificially high levels.
Why?
Say Bank A has a $1 Billion Mortgage Backed Security. Say that this bank is pricing that asset at 20 cents on the Dollar, or $200 million in paper value. Other banks know that the bond is really worth something like 6 cents on the Dollar, or $60 million in paper value. The US Treasury wants to be able to go to that bank and buy a small portion of their holdings in this bond at some fantasy price well in excess of the current “price" or actual value of the bond, say 40 cents on the Dollar.
That will allow Bank A to increase the value of the bond on their balance sheet and declare a $200 million PROFIT for the quarter! This “repricing” will result in banks becoming flush with “capital” and they will be able to start lending again.
That’s the Paulson Plan. Buy overpriced assets with taxpayer money so that the banks can lie about the value of their holdings. Does that sound like a good plan? It sounds highly illegal and unethical to me.
Plan B
When the Congress voted No to the Paulson Plan, the SEC (Securities and Exchange Commission) decided to investigate a Plan B for how to artificially inflate prices of the holdings on the balance sheets of banks.
The SEC Plan
The day after the Paulson was voted down, the SEC went to FASB and asked them to change the rules for how bonds are priced. The role of FASB (http://www.fasb.org/) is to develop the Generally Accepted Accounting Practices (GAAP) within the United States.
FASB 157 is the rule for determining how corporations price the assets they hold. The intent of the rule is to have prices set based on the actual prices being paid in the market for the security or for a security of similar quality and maturity.
The SEC asked the FASB to change the rule, so that companies could now price their assets based not on the current going price, but on some fantasy estimate of the hypothetical maturity value of the security.
At this point I just throw my hand up in the air. The SEC is supposed to enforce the laws to protect the public from transgressions by companies which hurt the public.
The SEC is now instructing companies to lie about the value of their holdings
The credit markets are now frozen because nobody trusts the guy on the other side of the trade
US Treasuries are being horded at the expense of new corporate debt creation
The stock market is imploding because nobody wants to hold rigged assets
The US Government wants to give $700 billion to the US Treasury to further rig the prices of bonds
We are in deep doo doo.
Tuesday, September 30, 2008
Market Roadmap
I know that I am rehashing things, but it is the start of a new quarter, so I wanted to review my Roadmap. This is the chart of the Standard & Poors 500 Index (S&P 500). The S&P 500 ($SPX) is a composite which tracks the performance of the 500 largest companies which trade on US Stock exchanges. As this index goes, so goes the economy. It is a Leading Economic Indicator.
I consider this chart my Bull Market / Bear Market Roadmap, because it makes it easy to see whether we are in a Bull Market and you should be focusing on making money or in a Bear Market and you should be focusing on protecting your money.
Very simply, if the bars are above the Red and Blue Lines, then you should be buying pullbacks into the Red and Blue Lines. If the bars are below the Red and Blue lines, then you should be shorting bounces into the Red and Blue Lines. Pretty simple, huh?
We are now below the lines, so you should not be holding stocks. If you want to try and make money, then you should be shorting rallies into the lines. If you don’t want to risk money, then sit in cash and wait for the next economic expansion.
I consider this chart my Bull Market / Bear Market Roadmap, because it makes it easy to see whether we are in a Bull Market and you should be focusing on making money or in a Bear Market and you should be focusing on protecting your money.
Very simply, if the bars are above the Red and Blue Lines, then you should be buying pullbacks into the Red and Blue Lines. If the bars are below the Red and Blue lines, then you should be shorting bounces into the Red and Blue Lines. Pretty simple, huh?
We are now below the lines, so you should not be holding stocks. If you want to try and make money, then you should be shorting rallies into the lines. If you don’t want to risk money, then sit in cash and wait for the next economic expansion.
In January 2008, I alerted clients that the markets had broken down and it was time to get defensive. Those who were late in reacting were advised to sell the first bounce into the Red and Blue Lines.
I made it very clear on a number of occasions this year that I think we are replaying the 2000-2003 Bear Market. This is the second crash since the late 2007 top. The 2000-2003 Bear Market had four crashes. I am not sure if we have two crashes or ten in this Bear Market. But I do know that I will be ready to buy when the Bear Market ends.
I also know that I have avoided the majority of the carnage of 2008. Even with today’s monster rally, the S&P 500 was down 9.21% for the month of September! Yikes!!
In my opinion, you had better know how to play offense AND defense, or you should find somebody who can do it for you.
I made it very clear on a number of occasions this year that I think we are replaying the 2000-2003 Bear Market. This is the second crash since the late 2007 top. The 2000-2003 Bear Market had four crashes. I am not sure if we have two crashes or ten in this Bear Market. But I do know that I will be ready to buy when the Bear Market ends.
I also know that I have avoided the majority of the carnage of 2008. Even with today’s monster rally, the S&P 500 was down 9.21% for the month of September! Yikes!!
In my opinion, you had better know how to play offense AND defense, or you should find somebody who can do it for you.
Currencies
I was asked about Foreign Currencies and I wanted to address the issue. I have written about this topic a lot this year, but again I have not been able to get the information out to everybody and that is why I started the blog, to aggregate all of the information I send out to people.
Here is the historic chart of the US Dollar ($USD) relative to a basket of foreign currencies. As you can see, the Dollar was able to hold support at 80 on several occasions (1991, 1992, 1995 and 2005). The Dollar broke down in September 2007, after the Fed decided to use its balance sheet to rescue the US Financial Sector. Foreigners took the August 2007 emergency rate cut as their cue to abandon their holdings in the US Dollar.
The Dollar is now rallying up into the old breakdown point. That is an extremely Bearish pattern. Normally a security will break support, then rally back into the breakdown level to “kiss it goodbye” and then implode.
The mirror image of the US Dollar is the Australian Dollar. I think this is because Australia is a commodity-based economy selling into the Asian economic expansion. The Australian Dollar ($XAD) broke out above historic resistance and has now pulled back into massive support – potentially very Bullish.
The ETF (Exchange Traded Fund) which tracks the Australian Dollar (FXA) is now yielding 6.87% and appears to have little downside from here. I will be looking to see if good entry points show up in FXA. I love the yield and the potential for appreciation as a US Dollar hedge.
The Euro ($XEU) is also pulling back into long term support. This is also Bullish and may set up as a great hedge against a falling Dollar.
The Japanese Yen ($XJY) has been sitting in a trading range for 12 year. This has been the result of Japan keeping interest rates artificially low (basically zero) to allow investors to borrow cheaply in Yen and buy the Nikki (part of the mystical “Yen Carry Trade”). At some point, Japan will get their interest rates back in line with reality, and when they do, the currency should break out of this trading range.
The bottom line is that the chart of the US Dollar is extremely Bearish and the charts of the Yen, Euro and Australian Dollar are extremely Bullish. That is not good news for you if the majority of your assets (your house, your 401k, your savings accounts) are priced in US Dollars. So, going forward you may need to focus on hedging your US Dollar-based holdings relative to other currencies or a basket of real assets (commodities like foods and metals).
Here is the historic chart of the US Dollar ($USD) relative to a basket of foreign currencies. As you can see, the Dollar was able to hold support at 80 on several occasions (1991, 1992, 1995 and 2005). The Dollar broke down in September 2007, after the Fed decided to use its balance sheet to rescue the US Financial Sector. Foreigners took the August 2007 emergency rate cut as their cue to abandon their holdings in the US Dollar.
The Dollar is now rallying up into the old breakdown point. That is an extremely Bearish pattern. Normally a security will break support, then rally back into the breakdown level to “kiss it goodbye” and then implode.
The mirror image of the US Dollar is the Australian Dollar. I think this is because Australia is a commodity-based economy selling into the Asian economic expansion. The Australian Dollar ($XAD) broke out above historic resistance and has now pulled back into massive support – potentially very Bullish.
The ETF (Exchange Traded Fund) which tracks the Australian Dollar (FXA) is now yielding 6.87% and appears to have little downside from here. I will be looking to see if good entry points show up in FXA. I love the yield and the potential for appreciation as a US Dollar hedge.
The Euro ($XEU) is also pulling back into long term support. This is also Bullish and may set up as a great hedge against a falling Dollar.
The Japanese Yen ($XJY) has been sitting in a trading range for 12 year. This has been the result of Japan keeping interest rates artificially low (basically zero) to allow investors to borrow cheaply in Yen and buy the Nikki (part of the mystical “Yen Carry Trade”). At some point, Japan will get their interest rates back in line with reality, and when they do, the currency should break out of this trading range.
The bottom line is that the chart of the US Dollar is extremely Bearish and the charts of the Yen, Euro and Australian Dollar are extremely Bullish. That is not good news for you if the majority of your assets (your house, your 401k, your savings accounts) are priced in US Dollars. So, going forward you may need to focus on hedging your US Dollar-based holdings relative to other currencies or a basket of real assets (commodities like foods and metals).
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