Dipping a Toe

I'm cautiously dipping my toe back in on the short side. 600 points in three days has put some meat back on the bone. We'll see. I'm re-entering things slowly for now.

Airlines and commercial real estate stocks seem vulnerable.

The Fuse Has Been Lit

Just wait, there will be more.

MORE:

Other states are experiencing similar problems on a smaller scale.

The Montana Board of Investments, which manages the state's money, has seen $247
million withdrawn by local governments in the past three days from a $2.5
billion money-market-like fund called the Short Term Investment Pool.

"We've had some local government withdrawals in the past few days because of reports
about Florida's problems," Carroll South, executive director at the Montana
Board of Investments, said in an interview on Thursday.

Rating agency Standard & Poor's warned last month that it could downgrade a $4.8 billion
investment pool run by King County, Wash., because of potential subprime exposures.

Preview

"The nation's subprime-mortgage crisis is prompting Florida cities, counties and agencies to pull billions of dollars out of a state-run investment fund.

They fear they could have lost their money because a state agency invested it in funds backed by loans to homeowners with questionable credit -- the same loans that have triggered an international credit crunch.

Governments and agencies typically take money intended to pay for such basics as teacher salaries or road repairs and invest it in the short-term state fund so they earn interest before the bills come due."

Here's where we are headed. The toxic waste is everywhere. I'm not kidding. Got to love Gov. Crist's response, which was basically, "Don't worry we'll bail you out."

Since Greenspan we've all become accustomed to bailouts. Seems like everyone gets bailed out. We have socialized risk. Meanwhile the profits are usually private. At some point this all becomes too big to bailout. Can we really bailout everyone at the same time? Who is going to bailout our government? China?

It's all one trade. The equity markets are at that same point, where we assume the bailout is coming to save us. The Fed will cut and save us. It always works right? Well I fail to see how problems that were created by easy money will be fixed by more easy money. Anyway here are the articles:

http://www.orlandosentinel.com/news/local/state/orl-bk-statefund112907,0,5698387.story?coll=orl_tab01_layout

http://www.orlandosentinel.com/news/local/state/orl-run2907nov29,0,138068.story

Bears Get the Horns

Out was smart. For the moment anyway. I'm still out. Basically flat save for a small handful of positions. This way I'm not hostile and feeling under attack with the market going against me. Really I should have not only covered but went long today as well. Don't know why I felt it appropriate to be so arrogant as to shun easy low risk long trades. Bottom line is I don't trust the long side here. Our problems are just too big. It's important to be able to sleep at night.

Apparently the "Fed will save us" trade is back on in the equity markets. Strikes me as fallacy but the fallacy has the upper hand for the moment. No sense in fighting it. The more of a bounce we get the more meat on the bone come time to short again. Thing is, none of this will be easy. The coming bear market will be tough to trade long or short. Think volatility.

I'm Gone

Futures up huge again. Just like that. I'm wrong, I'm gone. This morning I will burn it all to the ground. No part of my trading plan allows for staying flat-footed while losing money. I'm gone. Maybe I'll get long. Yuck. Maybe I'll go lay on the beach.

Really I should have been out before the close yesterday but I was out of the office for the last half hour. Didn't expect such a big pump into the close. That will cost me. It hurts too. The best month ever for me is no longer. But I will admit when I'm on the wrong side. That is clearly now the case. I'll take my remaining profits and walk.

My watchlist for today has long ideas outnumbering short 2 to 1. Let me be clear though. This bounce has legs and could even last until year end. Does it change the big picture? No. I still think this is setting up the shorting opportunity of a lifetime. However, in the short run, you must trade the tape you are given. You are never smarter than the market.

Sucker Rally

Not convinced by the huge upside action today. Staying pat with my shorts despite the pain.

Back to the Bloodletting

Well there you go. That bounce didn't last long. One day of weak holiday volume. We gave back all of Friday's gains. And more. One giant flush this afternoon.

This market is damaged. No. This market is broken. Not technically though. Not yet. Soon enough.

The pain has just begun. Maybe the market can put in a double bottom here and vault higher. Though it feels to me that we are rolling over. A CLIFF!?

Tonight's watchlist provided 37 short and 13 long candidates. I'll be looking at the shorts and maybe adding to current positions. Cautiously now. The bounce is still out there waiting to trap the bears. Change in sentiment from uber-bullish to sanguine/nervous has me concerned but I don't yet smell fear. AAPL, GOOG and RIMM need to roll first. That may start real soon. Or not. I'll be watching those names more closely just the same.

Again the futures are being gunned upward tonight, speaking of a bounce. See, I'm scared. The short side has been too easy and when I'm hot, I'm nervous. Let's see if this one lasts any longer.

I had lots to be thankful for this year. Hope you did too. Even had Thanksgiving TWICE, on two different days, at our house and with me doing dishes.

Confetti Update

Here is your US Dollar. Insert expletive here. Thanks Bernanke you asshole.

It's Everywhere!

The toxic waste is everywhere. Like I've been saying, it's in your money-market fund and it's in your pension. It's owned by your bank, your insurance company and, apparently, your state and local governments. This is going to be ugly when all these dead bodies manage to start floating to the surface.

Public School Funds Hit by SIV Debts Hidden in Investment Pools

By David EvansNov. 15 (Bloomberg) -
- Hal Wilson smiles at the blue numbers on his desktop screen. His money is yielding 5.77 percent. For the chief financial officer of Florida's Jefferson County school board, that means the $2.7 million of taxpayer funds he's placed in the state's Local Government Investment Pool is earning more on this October day than it would get in a money market fund. And Wilson says he knows the Florida officials who manage the funds of the 1,559-student district have invested them wisely. ``We're such a small school district,'' Wilson, 55, says. ``We don't have the time or staff for professional money management. They have lots of investment advisers. It's risk free and easy.'' It may be easy, but it's not risk free.

What Wilson didn't know in October -- and what thousands of municipal finance managers like him across the country still haven't been told -- is that state-run pools have parked taxpayers' money in some of the most confusing, opaque and illiquid debt investments ever devised. These include so-called structured investment vehicles, or SIVs, which are among the subprime mortgage debt-filled contrivances that have blown up at the biggest banks in the world.

Bad Day To Be a GSE

Interesting day in the markets, if you like stomach churning events, like say bad automobile accidents or current pop/celebrity culture. Up 120 on the DOW, then down 260 to the lows, then up 170 from the lows in a straight line into the close. For me today, that reads like down some to up a whole lot to up less than a whole lot. There you go, still net short as the bulls press back hoping for a bottom. I believe any bottom would be short-lived, should it come.

For your viewing pleasure today. I have a total horror-show. Blood. Gore. The whole nine.

This last one is more of a tell on the economy.

Where's My Turkey?

Pleasantly surprised to see the futures in the red this AM. What happened? I thought we were all supposed to buy stocks this week because of the calender. Hmmm. Well, I guess there is still a chance for the bulls to throw a party this week. I suspect they better hurry before the last level of support cracks and this whole market gets split open like a watermelon.

Three days and five hours until turkey.

Bring on the Turkey

Thanksgiving is the best holiday. Period. No gifts. Turkey and football. Excessive celebration of said holiday will be priority numero uno next week. As for markets I'll play defense.

Trading should be thin. Hopefully boring too. I've got stuff to do.

The consensus is that stocks will be bought based on the calender. Meanwhile the fundamentals are deteriorating around us. The weak bull case may win out in the short term. We could drift higher. Or not.

There are some stocks worth buying. Utilities and other defensive sectors look good. However, the warm fuzzy holiday market, if that's what we get, isn't likely to last long.

Full Disclosure: I hate Christmas.

Looking for the Rollover

One sector I want to watch closely and participate in from the short side is commercial real estate. These stocks have held up pretty well relative to other real estate/finance stocks. I'm looking for the rollover. Be careful these babies bounce hard.

VNO is my favorite at the moment. If you look at the daily chart it's flirting with support.

There are a bunch of these stocks that have similar patterns though. So you have other choices. SLG, for instance, an old Ken Heebner favorite.

Agnostic

Feels like the easy money has been made on the short side. It may get a bit more complicated from here (in the short term anyway). I could make the case for a rally or another 300 DOW points of downside. I'm sort of agnostic. I'll try to stick with my shorts that are working but I want to be less aggressive on a Friday. My watch list is thin today. Two words: capital preservation.

Again, rally or no, there isn't much I want to buy here.

However, at some point here in the near future, I think silver is going to go nuts to the upside. It's marking time here. I feel no immediate urgency to add to my position but somewhere in this neighborhood is where I want to do so. The point is not to get too cute trying to buy at just the right time. Maybe I'll scale into some more SLV starting today. Maybe not. Just know that at some point the SLV is going to $200. I really want to be on that train in a big way. I've been waiting a long time for this breakout.

I remain short financials. Again, as we have observed previously, the market correction over the last couple days was led by financials. This has happened repeatedly. They are acting as a tell on the market as a whole. Continue to watch them.

Perspective

My watchlist for today has 44 short candidates and 16 long candidates. Hmmm. It's a shame too. I'd like to be more balanced, and not leaning against this market so heavily, but the only candidates that really excite me are on the short side.

At midday the market seems to be rolling over here. Metals are getting creamed too. Should be an interesting afternoon. I guess I'll be rooting for more downside.

Where's the Fear?

I see none. AAPL up a couple bucks. AMZN upgraded. Buying the dip is apparently a difficult habit to break.

Late Day Plunge, Nice for a Change

No 2:30 jam-job into the close today folks. Nope. Today we plunged. Made my day.

What I saw today was a lot of stocks that had already made their moves back to overhead resistance (formerly support). Therefore, low risk shorting opportunities were abundant. And still are, some of them.

We made several attempts at the magical 1490 level on the SPX. The bulls were lobbing hand grenades and the bears were armed with kitchen scissors. Sure enough the bulls ended the day origami.

Metals were strong. Dollar spent the day trading lower before closing flat. Yen was off 1%.

Everything basically worked for me today. Even the lottery ticket (short AAPL) paid off. The balance of the week should be very interesting. Option expiration Friday. Heads up folks.

Testing 1,2

Oh. Oh. Oh. I figured out how to put an image or chart on my page. What's up now?! Get up Estero! That only took 6 months. Bottom line is, and I often admit it, I have the mechanical aptitude of a 14-year-old girl. I'm pretty excited even though I'm probably still doing it wrong.

Thanks to Stockcharts.

Update

Couldn't resist. Took a position in the SDS this morning below 53. Small position. Limited risk. We get a close above 1500 on the SPX and I'm long gone. If it goes my way however the position will be increased.

Starting to dip my toe in on the short side again. Have lots of ideas.

Key Level

1490 on the SPX. That's the bull/bear line in the sand. Here goes...

Day of Massacre Redux

This time it was the shorts who got ambushed. DOW up 319. NDX up 89. Eighty-frickin'-nine. Wow. Absolutely green across the board.

This sort of volatility is associated with bears, not bulls. After all the selling we were due for the big snap back.

Today actually hurt. I got smaller again and have enough buying power to choke a horse. Sure there was money on the long side but I'm not interested in that here.

Maybe this is the big bottom here and we vault to new highs. That would be surreal. I'd be wrong and late to the big party. Oh well. I'll make money long if I have to. Nothing wrong with being wrong. Your average trader is wrong half the time. Key to being wrong: admit it and move on. You have to have a plan that allows for you to be wrong. Live to fight another day.

Anyway, if new highs aren't in the cards, I'm happy to sit out this bounce. We'll see. I can't not play the game so I'm sure to deploy capital soon enough.

Fleckenstein's headline today was great: "Market upgraded from buy to grab!"

Mo-Mo No Mo'

APPL down $11.61 (7%),

RIMM down $10.62 (9.38%),

and wait for it. Wait for it. Yep,

GOOG down $31.90 (4.8%).

Mo-Mo names are broken. Hence the weakness in the NDX.

Day of Massacre

Yep. The metals got hammered. I was waiting for that. Classic. When they decide to turn against you the metals will rip out your heart, rape your daughter and burn your whole village down to the ground, like the Janjaweed. Don't make oversized bets. I've learned the hard way.

For those that are long the GLD (down 4%) or the SLV (down 6% +/-) today was painful indeed. I trimmed those positions into strength last week but still got pummelled. Mining shares were brutalized as well.

Then we had a fake market rally today with the DOW up triple digits at one point only to unmask itself into the close where we actually ended red to the tune of 55 pts. I covered some shorts this morning as I took down risk across the board.

Now long almost nothing. Some metals and the DBA. Sold COGN this morning when I was throwing things into the fire. Bought it Friday afternoon. Ha. Accept luck as luck and move on.

Still somewhat aggressively net short. But now I have lots of ammunition and virtually no leverage. Just feel like we could go either way here and I have very little conviction. My gut says that the market is going to crack but we could also get a violent (Santa Claus?) rally off of these lows.

On one hand I fear getting left behind on the short side if we go lower here and now. On the other, there will plenty of money to be made once (if) the market breaks. As a younger man I would have a hard time standing back from a position in fear that I would "miss it". Now I realize that there are opportunities every day, every week and the most important thing is to just "stay in the game".

My advice to you? Stay in the game. Peace.

Weekend Review

Last week the DOW dropped 4%. Plenty painful for bulls. Transports also fell 4% and while not technically broken yet I am operating under the premise that they are broken. The shippers, strong for long, are now looking weak. Airlines suffered big losses. FDX looks like it could fall off a cliff.

That's nothing. The NDX dropped 6.5% last WEEK. All of the mo-mo darlings (GOOG, AAPL, RIMM, etc.) got roughed up. That's important for market psychology. At some point investors will realize that technology will not recession-proof a portfolio. I'm short the cubes and AMZN.

I'm short the RUT via IWM and was a touch disappointed with the relatively quiet 3% drop. But that index still may look the worst of them all.

The dollar continued it's freefall. Yen was up 3%+. All week I liked the look of FXY and all week I passed it by in favor of other opportunities. Gold was UP 3%, crude was flat.

I don't have a clear feel for gold here. Keep thinking that it will correct but it has yet to do so. The fact that the equity markets got pummelled this week and gold was strong is a potentially important development insofar as gold needs to show it can trade on it's own, uncorrelated to equities. That may take some time. It seems extended in the short term. Silver has broken out and seems likely to go to $20/oz., but could also be overextended.

You could make the case for a bounce in equities next week. You could make the case for a crash in equities next week.

Certainly no one believes equities will go down during the holidays. Apparently, it's some sort of eleventh commandment. Seems a bit cute to me. Everything is unravelling but the true pain will be polite enough to wait until after we've all opened our presents?

I remain net short, somewhat aggressively. Going through my extensive watchlist this weekend, I don't see much of anything I would want to go long here. Nor do I see many stocks that I would really want to run out and short. I have only five names that excite me enough to initiate a position. All shorts. I'm probably about 65% of the way through my list of like 600 stocks.

No time to be a hero.

One thing that did leap out at me was European financials. They appear to be rolling over and may offer some opportunities next week as well. Perhaps it's setting in that the toxic paper isn't contained to just every US-based financial. We exported a lot of it too. Seems like widespread acceptance of that fact would provide the dollar a chance to bounce.

We should know more on Sunday night after Asia starts trading.

Morning Jibberish

Great market to be a bear. We're going lower again this morning.

Funny. On the big bounce off the lows yesterday I took a lot of risk of the table- covering profitable shorts. Smart to control your risk and protect hard "earned" gains. Thought we would get a bounce to retest 1490 on the SPX from below. Thing is, as I laid in the bathtub last night, I started thinking about the likelihood of a total rout in the indices. If we were ever to have some sort of crash-like event (and it's always a low probability) now would be the time.

We could literally fall off the edge of the table. I've had this anxious feeling all week in watching the tape. If the August lows don't hold watch out.

Now set to open lower (and with my decision yesterday afternoon not looking so smart) the question is how aggressive I want to get in chasing it down this morning. Have a list of about fifteen short candidates which I'll start nibbling at depending on pricing and I think I'll short the cubes (QQQQ) for the first time in a long time. That's really an opportunity I've been waiting for. Technology has been the port in the storm for the bulls. Once tech gets going to the downside we are in for some serious weakness. Saw the first signs of that yesterday. The mo-mo stocks were uniformly weak.

Speaking of mo-mo, I shorted AMZN yesterday. Small position affords me the luxury of not caring what it does in the next few sessions unless it approaches my stop price way overhead. Seems very unlikely. Meanwhile, if I'm right it's going to go much, much lower.

Just thinking out loud here but the point is that I would advise you to protect yourself. With the increasing volatility we are apt to swing violently in either direction. Even if we are going lower it likely won't happen all at once. Don't trust a wounded bull. It still has horns. Protect your gains!

But also keep in mind that if on one of these big down days we don't get the predictable afternoon bounce we could easily go down 500 points. Just something to think about.

Arrogance

When trading, have a plan. Trade that plan. Don't trade outside of that plan.

In my case, my plan is not to daytrade. Period.

But...when my plan is making me lots of money, over an extended period of time, I think to myself, "Jeez I must be a frickin' genius..."

That's when the trouble starts. Daytrading equals trouble (in my case). Then... to amplify my mistake I'll trade a position that's way, way too big. Just broke another rule.

So when the trade goes against me a touch...I'm gone for an unnecessary loss.

Ofcourse had I held a bit longer the trade would have been wildly profitable. But that's beside the point.

Now written in black pen at the top of my trading notebook page: YOU ARE NOT A DAYTRADER!

Speaking of Gold

My only son had his first birthday this weekend. We had a nice little party here.

He received lots toys and clothes from our friends and family. What did daddy give him? Gold ofcourse.

He's getting richer by the day. Too bad the country in which he lives is becoming a banana republic.

Hope You Bought Some Gold

Dollar Falls to Record on China's Plans to Diversify Reserves

By Stanley White and Kosuke Goto

Enlarge Image/DetailsNov. 7 (Bloomberg) -- The dollar slid to record lows against the euro and the Canadian dollar on speculation China's plans to diversify its foreign exchange reserves will involve selling U.S. assets.

The currency slumped after Cheng Siwei, vice chairman of China's National People's Congress, told a conference in Beijing the country should improve the structure of its $1.43 trillion of foreign reserves by favoring stronger currencies. It pared losses after he later added that doesn't mean buying more euros. The dollar also slumped to a 26-year low against the pound and a 23-year low against the Australian dollar.

``Cheng Siwei, a China adviser, apparently said China should diversify into strong currencies,'' said Lee Wai Tuck, a currency strategist at Forecast Singapore Ltd. ``This is one of the comments that triggered the buying of the euro and selling of the dollar.''

The dollar slumped to $1.4666 per euro, the lowest since the 13-nation currency debuted in January 1999, before trading at $1.4615 at 11:31 a.m. in Tokyo from $1.4557 late yesterday. It fell to $1.0975 per Canadian dollar, the lowest since Canada's currency was floated in 1950.

Against the pound, the dollar declined to $2.0947, the lowest since May 1981. The currency slid against the Australian dollar to 93.75 U.S. cents, the lowest since April 1984 from 92.87 U.S. cents. The dollar may fall to $1.4700 per euro today, Lee forecast.

China Investment Corp., which manages the nation's $200 billion sovereign wealth fund, said last month it may get more of the nation's reserves to invest to improve returns.

Bernanke "Is A Nut!"

My aim here is not so much to link EVERYTHING Jim Rogers says and mentally masturbate over it but more to express my own viewpoint through the words of others. Again, Rogers hits the nail on the head. Here is an interview from Bloomberg.

Highlights:

Rogers on Bernanke: "This man is a nut!"

On the secular bull market in commodities: "3rd or 4th inning..."

On gold: "I know I'll buy more."

On the Federal Reserve: "If I were Bernanke I would abolish the Fed and resign. It would be the best thing for the country."


Could not have said it better myself.

Fraud is Rampant

Deals With Hedge FundsMay Be Helping MerrillDelay Mortgage Losses
By SUSAN PULLIAMNovember 2, 2007; Page A1

Merrill Lynch & Co., in a bid to slash its exposure to risky mortgage-backed securities, has engaged in deals with hedge funds that may have been designed to delay the day of reckoning on losses, people close to the situation said.The transactions are among the issues likely to be examined by the Securities and Exchange Commission. The SEC is looking into how the Wall Street firm has been valuing, or "marking," its mortgage securities and how it has disclosed its positions to investors, a person familiar with the probe said. Regulators are scrutinizing whether Merrill knew its mortgage-related problem was bigger than what it indicated to investors throughout the summer.SCRAMBLING BULL•
The Issue: Merrill Lynch & Co. has been off-loading some of its mortgage-related assets to hedge funds as part of an effort to cap its exposures.•
Backdrop: Merrill's mortgage assets fueled a $7.9 billion third-quarter write-down, leading to the forced retirement on Tuesday of Chief Executive Stan O'Neal.•
Regulatory Question: Did some of Merrill's recent mortgage asset sales effectively postpone the reckoning for some write-downs?In one deal, a hedge fund bought $1 billion in commercial paper issued by a Merrill-related entity containing mortgages, a person close to the situation said. In exchange, the hedge fund had the right to sell back the commercial paper to Merrill itself after one year for a guaranteed minimum return, this person said.While the Merrill-related entity's assets and liabilities weren't on Merrill's own balance sheet, Merrill might have been required to take a write-down if the entity was unable to sell the commercial paper to other investors and suffered losses, the person said. The deal delayed that risk for a year, the person said.In a statement, a Merrill Lynch spokeswoman said, "We don't comment on specific transactions and we are confident in the appropriateness of our marks."At issue with any hedge-fund deals is whether there was an attempt by Merrill to sweep problems under the rug through private transactions kept out of view from investors. Some previous scandals, such as the collapse of Enron Corp. and the troubles of Japan's financial system in the 1990s, involved efforts to hide problems through off-balance-sheet transactions.
Ground Zero
Merrill has become ground zero of mortgage problems in the U.S. Last week, the firm announced a $7.9 billion write-down fueled by mortgage-related problems -- one of the largest known Wall Street losses in history -- after projecting just a few weeks earlier that the write-down would be $4.5 billion. Merrill also took a $463 million write-down, net of fees, for deal-related lending commitments, bringing the firm's total third-quarter write-down to $8.4 billion.A few days after the announcement, it ousted Stan O'Neal, its chief executive. Some analysts and others say they expect Merrill to take additional write-downs of roughly $4 billion in the fourth quarter.The rapid widening of Merrill's losses has led investors to wonder whether other banks and brokerages have a good grasp of their exposure to bad debt. Bank shares fell sharply yesterday, contributing to a 2.6% fall in the Dow Jones Industrial Average. Merrill's shares fell $3.83, or 5.8%, to $62.19 in 4 p.m. trading on the New York Stock Exchange.Merrill's deals have attracted the interest of some mortgage investors and specialists.Making the Rounds"Merrill has been making the rounds asking hedge funds to engage in one-year off-balance-sheet credit facilities," Janet Tavakoli, who consults for investors about derivatives, told clients in a recent note. "One fund claimed that Merrill was offering a floor return (set buy-back price)," she said in the note, "so this risk would return to Merrill." Ms. Tavakoli said such transactions would explain how Merrill's mortgage-related exposure dropped in the third quarter.In recent weeks, Merrill has been scrambling to line up hedge funds to take as much as $5 billion in mortgage-related securities, people close to the situation said, part of what Merrill executives refer to as a "mitigation strategy." Under the strategy, which started earlier this year, Merrill has tried several means of lowering the risk of its exposure to mortgage-backed securities, these people say.In accounting for such transactions, "the general guiding principle is whether the benefits and risks of ownership were transferred," says Charles Niemeier, former chief accountant for the SEC's enforcement division and now a director of the Public Company Accounting Oversight Board. Legal questions can arise if the seller retains some exposure to the risk of the assets losing value, and if the deal is designed to disguise the picture of a business's financial health.FROM THE ARCHIVE• U.S. Investors Face an Age of Murky Pricing10/12/07Jay Gould, a securities lawyer at Pillsbury Winthrop Shaw Pittman LLP, says if a firm is unloading securities from its books "without a real commercial purpose other than to create a value for pricing purposes, that can be a problem."Other big securities firms with mortgage-related losses have arranged similar deals with hedge funds. As disclosed in a recent page-one article in The Wall Street Journal, Bear Stearns Cos. sold $1 billion of risky mortgage loans to a hedge fund under a one-year pact known as a "mandatory auction call." Bear Stearns agreed to participate in an auction for the loans that provided the hedge fund with a guaranteed minimum return.Three big U.S. banks are assembling a group of financial institutions to create an investment pool to buy some mortgage-related securities from "structured investment vehicles" that are being forced to sell. That effort, which is backed by the Treasury Department, has also led some investors to question whether the goal is to delay the point at which banks recognize losses on troubled assets. The banks say their aim is to forestall forced selling of the assets.In mid-July, before the credit crunch worsened, Merrill reported better-than-expected earnings with little impact from exposure to mortgage-backed securities. Asked about the firm's mortgage position on a call with analysts, Merrill Chief Financial Officer Jeff Edwards said: "Proactive aggressive risk management has put us in an exceptionally good position." Two weeks later, Mr. O'Neal personally sent an email to Merrill employees assuring them the firm had such risks well in hand.
Source of Problems
One source of problems was the First Franklin mortgage company, which Merrill bought in December 2006. First Franklin catered to subprime, or less credit-worthy, borrowers. Subprime loans have fallen sharply in value this year due to rising default rates.Another source was Merrill's underwriting of collateralized debt obligations, which are securities backed by pools of assets including mortgages. Merrill ranked No. 1 in the area from 2004 through 2006.By the end of June 2007, Merrill had CDO exposure of $32.1 billion and a subprime-mortgage exposure of $8.8 billion, totaling $40.9 billion. Much of the CDO exposure was in triple-A rated "super senior" slices. These were supposed to enjoy strong protection against defaults, but they began to decline steeply in price in late July.By the end of September, Merrill says it reduced such positions through sales, hedges and write-downs to $15.2 billion of CDOs and $5.7 billion of subprime mortgages, a total of $20.9 billion. The write-downs totaled $6.9 billion for CDOs and $1 billion for subprime mortgages.

Down 360 on the DOW

How'd that feel?

More to come I'm guessing. Technology stocks are not going to drag the entire market higher when the financials are collapsing. Retail isn't looking so hot either. Builders and anything in the housing ATM food chain continue to leak deep crimson pools.

Hey bulls. Google won't save you. Neither will the Fed.

If the market decides to really go down (and we're overdue) there will be nowhere to hide. At least not in the short run.

We need to clear the dead wood. It's abundant and it's very dry. All it takes is a spark.

Was today that spark? Not knowable right now. The way to look at it is that the bulls are very determined to buy every dip. It's worked for so long that it will take time for the reality of trend change to set in and alter behavior.

Huge drops like the one today in CROX will help to change psychology. There have been many others in last couple weeks.

Latest From Jim Rogers

Without question Jim Rogers is smarter than you or I.

Bloomberg

``I'm in the process of -- I hope in the next few months -- getting all of my assets out of U.S. dollars,'' said Rogers, 65, who correctly predicted the commodities rally in 1999. ``I'm that pessimistic about what's happening in the U.S.''

Dow Drops 366, Nasdaq Down 74

Wow! That was fun. What a bloodbath.

After learning my lesson earlier in the week via my YHOO raping I was "smart" enough to cover a huge WB short and a modest COF short ahead of earnings. Ofcourse, they both got annihilated today. And, as I suspected their earnings sucked. Just goes to show you can't win. Tough market.

Unfortunately I was modestly long this morning. Like the bulls I sat watching my trading account balance slowly disintegrate before my eyes. Down a quick 2%, erasing yesterday's gains.

What did I do? Started selling longs and initiating shorts. Then I took a nap. It's Friday after all. Woke up and the market was still down 200+ but my balance had recovered- down only 1%.

Finished the day down 300 bucks. Ha! I could have easily lost 20 times that. So on one hand I'm patting myself on the back. On the other, I feel like I missed an opportunity to scalp the bulls for big profits today. Damn. I hate the bulls and I'm glad to not count myself amongst them today. Must say, I'm very excited to see my shorts working again after the parabolic rebound of the last few weeks.

Oil Closed at $89.15 Today. Whew!

Nine handle here we come. I hear Pickens is calling for $100. Sure. Why not?

We'll notice this sooner or later. As consumers that is. The crack spread has collapsed lately and higher per barrel prices have yet to translate in to higher prices for refined product. That won't last. Look for gas prices to head higher.

Geopolitical plays a role here too. Turkey suggesting an incursion into Iraq. Bush talking about WW3 with Iran/Russia. Fun stuff.

Rookie Mistake and Lesson Learned

So Tuesday I noticed YHOO breaking down. Nice. Shorted 300 shares of that dog.

Now in years past, during earnings season (of which we are in the midst with most major companies reporting this week), I closely followed upcoming earnings report. See, as a trader, it makes sense to avoid positions in which earnings are imminent. You have no advantage since you generally have no idea what the company is going to say.

Lately though I have suffered from news overload. Just decided I don't care much what's in the news. It's all so depressing. Especially when you interpret every piece of news as an indication of impending doom, as I'm apt to do. Long story short, I've not even noted upcoming earnings reports. Just don't care.

Well after initiating the YHOO position, that afternoon they reported. The numbers reported were not as awful as expected. That's the game- expectations. Despite the fact they suck and earnings were totally unspectacular YHOO stock popped $2.50 afterhours. Instant $750 loss- now I care.

So traders, watch for earnings reports! Don't make the same rookie mistake I just did.

Sucks. As per my discipline I have exited some of my favorite positions this AM. COF reports tonight. Covered my short. WB reports tomorrow morning before the bell. Covered my short. Fortunately they were both down big this morning giving me a nice opportunity to exit.

Sure I think there is a good chance WB in particular will not have anything good to say. But banks are black boxes, thanks to mark-to-make-believe accounting and other trickery they could report anything. No advantage for me. No reason to accept the risk of a violent move in reaction to the report.

As for YHOO...I'm gone. My thesis, a technical breakdown imminent, was immediately proven wrong by the market. I'm gone. Discipline folks. Live to fight another day.

Social Security Benefits to Rise 2.3%, Linked to Infation?

This is another scam. And partial explanation of deliberately understated inflation statistics as reported by Uncle Sam. Social Security benefits are linked to inflation.

Now you can certainly argue that social security is a disaster. It is. And that we should just give people their money back and wrap the whole thing up. No young person who has thought about it, thinks there will be anything left for them in the way of "benefits". But there is no money there now either because Congress spent it already. Ha! Ugggh.

However, society does have some responsibility to those less fortunate. And the purposeful deception of our seniors is wrong. Where is the AARP on this?

Here's the link from Fixed News...Link. Where I lifted this brief explanation.

"The 2.3 percent increase in the cost-of-living adjustment that will go to 50 million Social Security recipients is the smallest in four years even though many prices are rising more quickly this year than last year.
Blame it on the vagaries of how the government computes the annual COLA. The price change is based on the amount the Consumer Price Index increases from July through September from one year to the next."

Ugly TIC

"The Treasury said net sales of US market assets – including bonds, notes and equities – were $69.3bn in August after a revised inflow of $19.5bn during July. The August outflow exceeded the previous record decline of $21.2bn in March 1990."

FT.com

Worth keeping an eye on the somewhat slimish possibility, or perhaps inevitability, of substantial capital flight in the process of devaluing our currency.

M-LEC = FRAUD

Here's the latest bailout attempt: ReadMoreHere.

"The proposal essentially transfers assets to a new entity, essentially a ``game of three-card Monte, where unrecognized losses keep getting shuffled around to hide them,'' said Joshua Rosner, a managing director at investment research firm Graham Fisher & Co. in New York. "

Get Involved

Express your displeasure to the powers that be. Demand that everyone play by the same rules. Demand that your currency be protected as a store of value.

This petition is a touch over the top. However, considering the circumstances, strong language is warranted.

SignPetitionHere

Seriously.

Be Aware

The summer stock market swoon was led by housing/financial stocks. I've been closely following these names for an indication of what to expect going forward. After a few false starts my bank shorts stuck at the end of last week. They look weak again today. Could the banks lead the market lower again? Possible. I'll be looking for the opportunity to get more aggressive in shorting bank stocks and select housing/finance names. Careful out there.

Marc Faber on CNBC

Highlight of my day: CNBC interview with Marc Faber.

Excerpt:

Mark Haines: So you think the US dollar is on par with the Zimbabwe dollar?

Marc Faber: It's not there yet. But...

FullInterview

Broken Record Plays On

The Federal Reserve continues to devalue the dollar. It cannot be stressed enough that you must have a plan to protect yourself from ongoing debasement. Unfortunately that is easier said than done. We all must use dollars as a medium of exchange however you must hedge against continued dollar weakness in the form of commodity exposure. Own gold, own oil, own agricultural commodities. It probably would also make sense to have some of your wealth in a foreign currency. This is serious business, folks.

The Fed is stuck between a rock and a hard place. On one hand inflation is completely out of control. On the other the economy is clearly slowing as consumers who have relied over the last five years on mortgage equity withdrawal begin to fill up their credit cards. Don't even try to tell me that inflation is "contained". That's horseshit! As a matter of fact I'd go so far as to say that government inflation statistics are an outright fraud. However, it's these same bogus inflation numbers that have allowed the Fed to ease despite the fact they should be trapped.

The American people are nearly oblivious to this fraud. Sad as it is, at this point we are going to get what we deserve. Deserve? Yes. Just look at our politics. For example, the Democrats are using a 12-year-old boy to convince the public that the S-Chip health program should be extended. Granted, the S-Chip program is to the benefit of our children but still. Worse than that is the fact that the Republicans are actually attacking said 12-year-old boy. He just came out of a comma for christ sakes! Disgusting.

I will concede that in the latest Republican debate Ron Paul actually spoke to my issue- the currency/inflation- eloquently. That man is on the ball and he makes a lot of sense. Problem is he's polling like 2%. He's considered a joke. A pariah in his party. The people laughing at and belittling him are the same ones who scoff at Peter Schiff. The same ones who don't take my vehement warnings seriously. That's just about everyone. Yep. We deserve what's coming. Sad.

Dollar Weakness Attracts Modest Attention

Bernanke is full of shit. NYTArticle:
Though Mr. Paulson has primary responsibility for American exchange rate policy, Federal Reserve officials have also made it clear that they are not worried about imminent inflationary dangers from a weaker dollar.
The Fed chairman, Ben Bernanke, recently told a Congressional hearing that the dollar’s value remains strong in other ways. “The value of the currency can also be expressed in terms of what it can buy in domestic goods — the domestic inflation rate,” Mr. Bernanke said in response to questions about the dollar from Representative Ron Paul, Republican of Texas and a long-shot candidate for the Republican presidential nomination. Noting that inflation remains low, Mr. Bernanke suggested that the dollar’s weakness was not a source of concern to the Fed.
Democratic lawmakers, who have been quick to attack the Bush administration about most other economic policies, have said almost nothing about the currency’s decline.
To at least some European officials, worried that the soaring value of the euro will hurt European exports, the American silence has been thunderous.

Fisher Points to the Elephant in the Room

Richard Fisher, president Federal Reserve Bank of Dallas, on inflation statistics: "Many of the arguments for excluding food and energy—in particular, the statistical arguments—are based on the notion that an exceptionally large price increase today will be offset, somewhere down the road, by an exceptionally large price decline. But suppose the increases in food and energy prices we've been seeing over the past few years represent longer-lived trends, rather than transitory blips. The arguments made for excluding food and energy prices would be on shaky ground. To put it more succinctly, we risk throwing out the signal along with the noise." ReadFullTextHere

Weekend Wrap-Up

This week the dollar got pounded. Long term rates remain higher than when Ben cut. Gold, oil and commodities in general are soaring. Housing remains in the toilet, yawn. The economy is slowing. These are the important things to watch going forward.

It seemed a foregone conclusion that the Fed would panic in the face of a slowing economy. However, the specific circumstances under which the Fed eased are very ominous. Oil is at an all-time high (in nominal terms). The dollar was sitting right at long term support following near perpetual weakness. Then they aggravated their gaffe by cutting more than expected. You hear Bernanke and these "governors" talking about managing "inflation expectations". They don't even manage inflation anymore but expectations? That should be easy since none of them see any inflation going forward. Absurd (bordering on criminal). Will they have the audacity to cut again?

The major stock indices have rebounded sharply. Momentum names remain strong. However, I suspect we will see continued weakness in the banks which is similar to what we saw trigger the last sell off. I remain skeptical but if banks go higher and the tape is making new highs I will remain cautiously long. Regardless, the play here is gold. Oil. Nothing fancy. Respect the market and don't let out too much rope.

Next week features an employment report Friday. It is fair to expect fireworks. This is truly a battle of the arrogant undefeated bulls and demoralized perpetually derided bears.

Ron Paul Gets It

A fellow Cassandra.
http://www.youtube.com/watch?v=AeHWW5gbc0w

Gartman on Bloomberg

Audio only. Nothing new here. Sell the dollar, buy gold.
ClickHere

'Sleepwalking Into Crisis'

Interview with former Shell chairman from The Independent. ClickHere
Here are some highlights:

He accused the industry of having its head "in the sand" about the depletion of supplies, and warned: "We may be sleepwalking into a problem which is actually going to be very serious and it may be too late to do anything about it by the time we are fully aware."

In an interview with The Independent on Sunday ahead of his address to the Association for the Study of Peak Oil in Ireland this week, Lord Oxburgh, one of the most respected names in the energy industry, said a rapid increase in the price of oil was inevitable as demand continued to outstrip supply. He said: "We can probably go on extracting oil from the ground for a very long time, but it is going to get very expensive indeed.

The latest figures from the US Energy Information Administration show that global liquid fuels production in August was almost a million barrels per day lower than the same period in 2006.

Marc Faber on Bloomberg

The always eloquent Marc Faber is much smarter than you and I. Here is his recent interview with Bloomberg. Enjoy.
ClickHere

This Trend is Accelerating

http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2007/09/19/bcnsaudi119.xml

Welcome To The 1970s

As you're likely aware, today the Fed cut interest rates and it's discount rate both by 50 Bps. The dollar instantly tanked. Oil shot higher. Gold shot higher.

There was a few weeks where you almost had to give Ben Bernanke the benefit of the doubt. When he first cut the discount rate in response to the credit market turmoil it seemed like a reasonable move. Greenspan would have cut the Fed funds rate. Greenspan was a complete whore. So you figure Bernanke is attempting to act more responsibly. Then he says: "It is not the responsibility of the Federal Reserve--nor would it be appropriate--to protect lenders and investors from the consequences of their financial decisions." Those words actually came out of his lying mouth.

Well, today Bernanke proved that he is the Greenspan incarnate. Ofcourse we've known for a long time that the Fed would panic and slash rates in the face of a slowing economy. But the circumstances at this particular moment in time are especially insidious. Oil is at an all time high! All time high! The dollar is threatening a complete collapse having broken it's last support level. Well guess what, Bernanke just pushed the dollar over the cliff.

Let's put this in context. The Federal Reserve was founded with the primary objective of price stability. Control inflation. That is the mandate. Now we've devolved to the point where the Fed apparently doesn't give a damn about inflation.

You can bet that pushing the dollar over the cliff will have ramifications. To be felt by every single citizen of this country. There is no avoiding this now. You could probably paint the scenario...I guess, in which we impeach Bernanke and start jacking up rates in the face of a slowing economy. That's what it would take and the chances of that are virtually nil. That scenario wouldn't be pretty either but it's a whole lot better than what we're going to get.

Think $5/gal for gasoline. Think about your grocery bill doubling. Think about everything in Wal-Mart going up in price by 30%. That's all in our future. Kiss the middle class goodbye. They're history.

How did this happen? Bernanke wanted to bail out Wall Street. Pure and simple. Bernanke is a tool. A puppet. We just sacrificed the middle class of this country in an attempt to insure Wall Street players get their bonuses. Labor just got screwed again.

This rate cut will not even help the housing mess. Long term interest rates will be going higher not lower. Bernanke just made things worse for housing.

If I had the choice I would move my family out of this country right now. As it stands, that option is not on the table. It will be six years until it is. By then it will be too late and we'll be stuck here. That is my fear and such is my level of disgust that I am deadly serious. I would move-right now!

Folks, I suggest you take actions to protect yourself and your family. Get out of the dollar as much as possible.

Some Truth From The Nation

Someone is paying attention. I don't have any idea who this Greider guy is but he is spot on here (bold print is mine). In addition, there is a book review from Jim Grant in today's WSJ worth reading.

The Lies of Alan Greenspan
By: William Greider (TheNation)

Alan Greenspan has come back from the tomb of history to correct the record. He did not make any mistakes in his eighteen-year tenure as Federal Reserve chairman. He did not endorse the regressive Bush tax cuts of 2001 that pumped up the federal deficits and aggravated inequalities. He did not cause the housing bubble that is now in collapse. He did not ignore the stock market bubble that subsequently melted away and cost investors $6 trillion. He did not say the Iraq War is "largely about oil."
Check the record. These are all lies.
Greenspan's testimony endorsing the Bush tax cuts was extremely influential but now he wants to run away from it.
In the instance of Iraq, Greenspan is actually correcting his own memoir, The Age of Turbulence, which just came out. This weekend, newspapers reported provocative snippets from the book, including this: "I am saddened that it is politically inconvenient to acknowledge what every everyone knows: the Iraq war is largely about oil."
Wow, talk about your "inconvenient truth." Greenspan was blithely acknowledging what official Washington has always denied and the news media faithfully ignored. "Blood for oil." No, no, no, that's not what he meant, Greenspan corrected in a follow-up interview. [Bob Woodward in Monday's Washington Post] He was only saying that "taking out Saddam was essential" for "oil security" and the global economy.
Are you confused? Welcome to the world of slippery truth Greenspan has always lived in. He was the Maestro, as Bob Woodward's loving portrait dubbed him. Wall Street loved the Chairman best because the traders and bankers knew he was always on their side and would come to their rescue. The major news media treated him like an Old Testament prophet. Whatever the chairman said was carved on stone tablets, even when it didn't make any sense, as it often didn't.
Some of us who followed his tracks more closely, were not so kind. Harry Reid, now the Democratic Senate leader, said Greenspan was "one of the biggest political hacks in Washington." Amen. I called him "the one-eyed chairman" who could always spot reasons to stomp on the real economy of work and production, but was utterly blind to the destructive chaos in the financial system. No matter. The adoration of him was nearly universal.
Until now. The economic consequences of his rule are accumulating and even the dullest financial reporters are stumbling on crumbs of truth about Greenspan's legendary reign. It sowed profound and dangerous imbalances in the US economy. That's what happens when government power tips the balance in favor of capital over labor, favoring super-rich over middle class and poor, then holds it there for nearly a generation.
Things get out of whack and now the country is paying big time. A pity reporters and politicians didn't have the nerve to ask these questions when Greenspan was in power.
He retired only a year ago, but is already trying to revise the history. To explain away blunders that are now a financial crisis facing his successor. To rearrange the facts in exculpatory ways. To deny his right-wing ideological bias and his raw partisanship in behalf of the Bush Republicans.
The man is shrewd. He can see the conservative era he celebrated and helped to impose upon the American economy is in utter ruin. He is trying to get some distance from it before the blood splashes all over his reputation. Of course, he also came back to cash in--an $8 million advance for a book that is sure to be a huge bestseller. I don't want to be unkind, but Greenspan could have avoided all the embarrassing questions if his book was posthumous.
I haven't the read it yet. I have a hunch I am not going to like it.

Full Interview w/ Jim Rogers

http://www.bloomberg.com/avp/avp.htm?clipSRC=mms://media2.bloomberg.com/cache/vjUSJ.lwS8e0.asf

Apparently I'm Not The Only One Concerned

Think I'm full of hot air. Maybe you'll consider similar commentary from one of the greatest investors of all time. Jim Rogers echoes what I have been saying...


http://www.bloomberg.com/apps/news?pid=20601087&sid=aYBOOiT5mAO0&refer=home

Wake Up!

So, my friend sent me an e-mail this morning. One of those keep-out-the-immigrants-pass-it-along type e-mails. I couldn't contain myself. Instead of just ignoring it I blasted back that illegal immigration is almost entirely inconsequential in light of the larger issues we face. Seriously, watching the news, reading the papers and listening to the conversation of others it seems as if I might as well be living on another planet. In this country we have our collective head up our collective ass.

Britney Spears' lack of undergarments gets more airtime then the legitimate threats we face. For one, the global peak in oil production. Or the fact that our Federal Reserve is in the process of debasing our currency. Really hate to say it but we deserve what we are going to get. What are we going to get? Eventually, a wake-up call to the new reality. Just because we are collectively ignoring it doesn't mean everything is going to turn out just peachy.

Global terrorism? Who the hell cares. We lost 2,000 fellow Americans on 9/11. A tragic loss indeed but an American would have a better chance of winning the lottery then getting blown up by a terrorist in this country. Meanwhile, every single one of us is going to be affected when our dollar is virtually worthless.

Here is what to expect. Incredible price increases (measured in years not months) for all the things we need to sustain our current lifestyle. Oil, water, electricity, agricultural commodities just to name a few. Now is the time for us to wake up in order to have any chance of controlling our fate. I'm losing hope.

We'll eventually be confronted by this new reality. By then it will be too late. Future generations will wonder why it is that their parents and grandparents ignored these problems. They'll wonder how it is that we could have been so irresponsible and distracted by nonsense. We are going to hand down to our children a nation in shambles. As a new father, it all makes me so angry, that I just want to reach out and shake those around me. Wake Up! Before it's too late! I want to drive to Washington and burn down Bernanke's house for what I think he is about to do. I want to see Greenspan strung up in the town square.

Dollar Cracking

Dollar index below the incredibly important 80 level. And the Fed is going to cut into this? Ha. Bring it on. I'll continue to beef up my metals positions. I suggest you have at least some exposure to protect yourself from ongoing dollar weakness.

We're Not Done

US home sales decreased 12% from June to July! That's a big number.

http://www.bloomberg.com/apps/news?pid=20601087&sid=ajD_j6XBeepg&refer=home

check, check and check

David Walker, comptroller general of the US, speaks the truth. I appreciate that increasingly rare attribute. From the FT:

Drawing parallels with the end of the Roman empire, Mr Walker warned there were “striking similarities” between America’s current situation and the factors that brought down Rome, including “declining moral values and political civility at home, an over-confident and over-extended military in foreign lands and fiscal irresponsibility by the central government”.

Fast One

After being down 200 pts the Dow has rallied back to flat (now green). The bulls are attempting to again snatch victory from the jaws of defeat. "The Skeptic" still does not believe in fairy tales.

Of Fairy Tales and Weak Arguments

Global growth. Global growth. Global growth. If the moron pundits on CNBC say it enough maybe the bleeding will stop. Click your heels and hope Goldilocks can be revived. What a joke.

Look Out Below

Look here folks. You had better take precautions. Not even money market funds are safe according to today's WSJ. You see these slick wall street types on TV talking about the risk being spread out all over so no one is going to blow-up. Right. It just means this toxic waste is everywhere. It's in Germany where they are already bailing out a small bank and Paris where BNP Paribas dropped the bomb this morning that got us off on the wrong foot. I woke-up at 8ish and the futures were down more than I could ever remember seeing in a decade. Apparently the ECB had stepped in an attempt to stop the bleeding. According to the Financial Times:

"The European Central Bank might have called it “fine-tuning” but its decision to inject nearly €95bn into the eurozone banking system, the largest such intervention since the September 11 2001 attacks, is anything but. Does the ECB know something the rest of the world does not? After all, the Federal Reserve on Tuesday gave no inkling that a systemic threat might arise from the stream of banks and funds confessing to subprime-related problems."

So that toxic waste is in Europe and around the world. There's just so much of it. But don't forget here at home it's held by hedge funds, banks, insurance companies, builders, money market funds, pension funds and endowments. We are at the edge of the cliff. We are staring at the oncoming headlights. If we go over or stand flat-footed every single American will be affected. Period.

So you had better brace yourself as every asset class is being liquidated. We are still very close to the top and the hedgies are already blowing themselves up left and right. It's indicative of how much leverage has been employed.

Won't be long before cash (the dollar) isn't safe either despite the bounce today. If "The Skeptic" were to sell anything in the long-term account the proceeds would go into the GLD. Everything was sold today but gold has the best chance to protect you (after the ongoing liquidation). If you were smart you'd buy some farmland with water rights, bury some oil drums in the front yard and put some gold in a safe which you protect with a firearm. Good luck.

Disclosure: Long GLD

UPDATE: Countrywide just dropped the bomb. Look out.

Here's a Must Read

Great article. Absolute must read. Here's a latest from http://contraryinvestor.com/mo.htm

"The conceptual message seems pretty darn clear. When the rate of change in household debt growth decelerates meaningfully, the US has experienced recession. You don’t need us to tell you that this makes all the sense in the world. We’re a consumption based domestic economy that has been heavily debt financed. When the rate of change in debt slows, so does the economy. Simple enough? And what we see in the current period is a very sharp slowdown in household debt growth as of now. In our minds, this demands monitoring as we move forward."

Insert Expletive Here

This from the Daily Telegraph:

"The Chinese government has begun a concerted campaign of economic threats
against the United States, hinting that it may liquidate its vast holding of US
treasuries if Washington imposes trade sanctions to force a yuan
revaluation."

Wow. Read that one again.

Now:

"Two officials at leading Communist Party bodies have given interviews in
recent days warning - for the first time - that Beijing may use its $1.33
trillion (£658bn) of foreign reserves as a political weapon to counter pressure
from the US Congress. Shifts in Chinese policy are often announced through key
think tanks and academies.
Described as China's "nuclear option" in the state
media, such action could trigger a dollar crash at a time when the US currency
is already breaking down through historic support levels.

It would also cause a spike in US bond yields, hammering
the US housing market and perhaps tipping the economy into recession. It is
estimated that China holds over $900bn in a mix of US bonds."

Great Analogy

Check out this video. This fella makes some very important points. 200 basis points? WatchVideo

Break from Doom and Gloom

There has been a lot of doom and gloom from me lately. Despite my genetic predispositions I try to maintain some balance. You need to make money both long and short. Bull or bear. In that spirit I would suggest biotech. It's working. It should be as it's a sector that won't be directly affected by the slowing economy. Or so the theory goes. Think AMLN, not AMGN.

Also, select basic material and resource plays look intriguing. Utilities bounced hard today and seem to have more upside. Check your favorite names in those sectors.

Monday Bearkill

The stock market emasculated the bears today. Dow up 286 points. Cancelling out entirely Friday's massive drop. A few thoughts:

1. For a day when the Dow was up 2.18% and the S&P 500 was up 2.42% the breadth was weak. NYSE had 1793 issues advance and 1570 decline. Not impressive. More telling perhaps was the Nasdaq which saw declines outpace advances 1617-1453.
2. There are some delicious short candidates out there. But who the hell is going to stick their neck out before the Fed meeting. No one. Therefore, only buyers today.
3. I'll be the first to admit that I've been waiting for a long time for this market to crack. I remember the other pullbacks and how every single one has been met with more strength and eventually higher prices. Obviously, betting against the bulls has a low probability of success. However, I look at hundreds of charts everyday and can tell you that damage has been done this time. I've not seen so many ugly looking charts since before the bull began.
4. The dollar index briefly dropped below 80 this morning before bouncing. Stay tuned.
5. "The Skeptic" welcomes a market rally as an opportunity to get more aggressively short. Unless proven wrong entirely in which case it'll be time to get reluctantly long...again.

Well. That's all for now. I understand that calling a top in the market or calling for a bear market is a fool's errand. You are the butt of every joke. Everyone is against you. Fine with me. Just like when I sold my home in the summer of 2005. I was ridiculed by everyone. No one is laughing now. The bulls had better enjoy this last dance because it won't be long before I'm sticking my foot up their asses. Good luck out there. It's going to get interesting.

Jim Rogers on CNBC

Here is the link to Jim Rogers' appearance on CNBC this morning. http://www.cnbc.com/id/15840232?video=456571213&play=1

Later in the day CNBC's Joe Kernen went on a rant about his theory that Jim hasn't made any money since his days with Soros and that he is a joke. Kernen speculated that Jim probably has had all his money in T-bills since the 1980s and that he has been a global bull but probably only buys one share of stock in each country just to say he owns it. He then added that Rogers has always been negative on US stocks. Kernen generally doesn't irritate me too much but this was over the top. For one thing Rogers called the secular bull market in commodities, before anyone else, when it was still in it's infancy. He also told you to get long China. Sure he has been negative on US stocks but it seems he'll be proven right eventually. You have to understand, Rogers is not a market timer or trader but a big picture thinker. Has Kernen even read Jimmy's books? I bet not.

Seriously, Kernen you just need to pipe down. You are a TV host! Not an investor, not a money manager, not a trader....and apparently not even a very bright light. Stick to the teleprompter Kernen, you dumb shit.

Bulls on the Run

Wow. That was some week last week. Tuesday it looked like the bottom might fall out. Then we had two big up days followed by the big FLUSH on Friday. Fun stuff. Volatility is back. Gets better next week when we throw the Fed meeting into the mix (Tuesday 2:15 et). That's good for 150 Dow points but who knows in which direction. The risks are heightened here not only for bulls but bears as well.

Friday's market was opened with a weak jobs number (92K is bunk), was spooked by Bear Stearns' call on which they said it was the worst credit market conditions in 22 years and highlighted by Cramer going apeshit on national TV. Link. That was classic. Oh please bail us out. PLEASE bail us out. Fed come to our rescue. All the spinsters who wrote and/or purchased this mortgage backed toxic waste should be forced to eat it. None of these characters deserve a bailout. Fine, whatever. Have it your way but it won't help much.

One thing I noted on Friday was the weakness in the dollar and the concomitant strength in gold. The dollar index is cracking 80 soon. The Fed will hit the panic button soon enough. The talk now is that they will change their stance to neutral and open the door to a cut this week. They do that and any cut will come too late. Maybe they'll cut now in a vain attempt to save the day which either shoots us higher a few hundred points or is interpreted as fear and we get destroyed. Either way, it's just a matter of time until the Fed cuts meaning dollar weakness which encourages "The Skeptic" (along with the strength Friday) to buy more gold. And silver. This is why I own it and the time I've been waiting for.

So Monday? The yen trade overnight Sunday could be a tell. We could go either way substantially. My guess is we work our way lower. Banks look due for a bounce (still wouldn't touch 'em) which could stabilize the tape. Maybe it's calm until Tuesday. Doubt it. Be careful. There are many stocks out there that have further to fall, bounce or no.

Disclosure: Long GOLD, Long SILVER

Take Heed, Ye of Bullish Persuasion

``So this bubble is the worst we've had in housing and it's going to be the worst before its over cleaning it out.'' -Jim Rogers

My man Jimmy knows his shit. A significant portion of the housing market is going to just disappear. Financing will not be available for all! As of NOW. This will result in significant consequences for the American consumption-based economy.

To anyone listening (and frankly most tune me out) "The Skeptic" would advise extreme caution going forward. DE-fense. Better to have a plan for unforeseen events, which you hope to not need, than to make one up on the fly. "The Skeptic" will be shorting stocks into oblivion from his gold-plated bunker, if necessary.

Don't Screw with Mother Russia

Seriously, I would not want to have to rely on Russia for energy. That's a bad bet. While all seems quiet now in regards to energy supplies to western Europe eventually Russia will flex it's growing muscle towards them as well. Here's a related story from the NYT:

MOSCOW, Aug. 1 — In the latest of Russia’s many disputes over energy payments with neighboring countries, the natural gas monopoly Gazprom warned Wednesday that it would reduce supplies to Belarus by 10 a.m. local time on Friday unless the former Soviet state pays an outstanding gas bill of $456 million.
The tough tactics could also affect Gazprom customers farther west along Europe’s natural gas pipelines, again raising worries about the reliability of Russian supplies and the wisdom of Europe’s growing dependence on Russian energy.

More Evidence of Slowdown Underway

July auto sales, announced today, were positively awful. GM and Ford are in big trouble. According to Bloomberg:

GM's July sales fell 22 percent, as none of the automaker's eight brands managed a gain for July. Hummer suffered the biggest losses, dropping 30 percent to 4,895.
Sales of GM's cars were off 26 percent, and truck sales declined 20 percent, including a 29 percent slide for the Silverado large pickup. That vehicle accounts for about 15 percent of GM's total sales.
``The industry has been underperforming in the past couple of months. We have housing prices and gas prices around $3 a gallon,'' Paul Ballew, GM's chief sales analyst, said in an interview. ``Overall, it's tough in the U.S.''
Ford's 19 percent July decline included an 18 percent drop in sales of F-Series pickups, the top-selling line of vehicles in the U.S.

Ka-Boom Redux

BloombergLink

July 31 (Bloomberg) -- Bear Stearns Cos., manager of two hedge funds that collapsed last month, halted redemptions from a third fund after a slump in credit markets prompted investors to demand their money back.
The Bear Stearns Asset-Backed Securities Fund had about $900 million invested in asset-backed securities, including mortgage bonds, spokesman Russell Sherman said today in a telephone interview. The fund was overwhelmed by redemption requests, Sherman said.
The fund's stumble is a setback for New York-based Bear Stearns and illustrates how the crisis in the subprime mortgage market has spread. The fund had less than 0.5 percent of its assets in securities linked to loans to subprime borrowers, Sherman said. The two funds that collapsed invested almost fully in subprime bonds. Losses have spread to banks, insurers and hedge funds in France and Australia, including one run by Macquarie Bank Ltd.
``This shows you don't necessarily have to be a subprime fund now to be having problems,'' said Bryan Whalen, a portfolio manager in Los Angeles at Metropolitan West Asset Management, which oversees more than $21 billion in fixed-income assets.

The LBO Ka-Put

At this point it's not a question of whether or not the LBO boom is over (toast) but whether "done" deals will start unravelling. The TXU deal mentioned in this WSJ is from what seems like forever ago. WSJLinkHere

"The breakup fee on an LBO deal typically runs from 1% to 3% of the total amount of debt banks need to sell to finance it. Loans and bonds for recent buyouts whose financing didn't clear the market -- and that banks got stuck with -- are trading at as little as 91 cents on the dollar (U.S. Foodservice) or lower. That means the banks who arranged the financing for these deals already have taken a hit of as much as 10% on the loans.
Take the buyout of Texas utility TXU Corp., for example. Citigroup Inc., Goldman Sachs, Inc., J.P. Morgan Chase & Co., Morgan Stanley, Credit Suisse Group and Lehman Brothers Holdings Inc. agreed to provide as much as $37.4 billion of debt financing. The breakup fee that the buyers of TXU -- Kohlberg Kravis Roberts & Co. and TPG -- would be on the hook for if they walked away is $1 billion. That is considerably less than the credit losses the banks could face if the volatility the markets is experiencing now persists when the deal is funded."

Ever Notice?

Ever notice how the market seems to get marked up at the end of every month? Yep, Wall Street is a shady place. The SEC might as well just close up shop as they are obviously ineffectual. Just announce to all market participants that there is no regulation as opposed to feigning regulation and doing absolutely nothing to actually regulate.

Although, to be fair, it may not be the SEC's fault entirely. It may just be that they are starved for resources, allowed to wilt on the vine, under the current administration. Like the EPA for instance.

Monday Bounce

The bounce is here however "The Skeptic" remains a seller. Going thru my watch lists I see a handful of promising longs but a whole list of juicy shorts. There is no reason this bounce couldn't last all week long. That being said I remain skeptical of the bullish gameplan which holds that every dip should be bought indiscriminately. Every once in a while that dip leads to a complete loss of altitude. We shall see.

Growl of the Bear

It's time to put in perspective more specifically where I think we are. Following a week in which the bulls were emasculated they'll be looking for the bounce. It seems likely at this point that any bounce, while potentially violent in the short run, will be short-lived setting up a failing rally and ending the bull market. Despite ending last week in incredibly ugly fashion the Dow is near a level which could potentially offer support. The S&P however has already broken, but nearing it's 200 dma, so it's a coin flip. At some point next week we'll get a bounce and it's a bounce to sell.

The market has ignored the bad news (or what I like to call reality) for-seemingly-ever. To my eye the market and the fundamentals have never diverged to such an extreme in the ten years I've been following the market. That's a bold statement considering that I remember 1999 very clearly (though at that point I had very little idea what the hell I was doing). In '99 the valuations were more absurd but things were good in the world. We lived in a relatively peaceful world in which the US was the only world power. We enjoyed super cheap energy supplies and solid economic growth. Household balance sheets were solid. Everything was, as they say, honky-dory. Very different picture from today.

Let's step back and look at the big picture:

The Economy: It's slowing folks. The Fed bailed out the economy following the tech stock crash by taking interest rates to historic lows. This action fostered the housing boom. Rather than take our medicine we leveraged household balance sheets in the name of overconsumption. Americans have developed quite a voracious appetite for overconsumption evidenced by the fact the 70% or so of our economy is services. We no longer manufacture anything and our exports are dwarfed by our imports (you can't export mortgage brokers). During the housing boom most of the hiring that went on was in housing related sectors. That plus is now a minus.

To keep the ball rolling consumers have leveraged themselves. Mortgage equity withdrawal and the wealth effect from skyrocketing real estate values have kept consumers happily consuming. That fairy tale (the Goldilocks economy I think it's called) is over.

Real Estate/Housing: In '99 I remember my co-workers tuned into CNBC (I prefer CNBS) throughout the workday. Everyone had a hot stock and we were all going quit to be daytraders. In 2005 everyone was a mortgage broker or had a condo to flip. We are a nation of speculators. Both were bubbles. The difference? In 2007 we are stuck with a trillion dollars in suspect loans. A trillion dollars? Well really who the hell even knows but the number is BIG and GROWING.

You know all the terminology by now...ARMs, cash-out refis, flex-pay, piggybacks, HELOCs, etc...Apparently if you give the American consumer enough rope to hang himself he'll do just that. As far as the financial institutions themselves, a bull would argue that banks have done a good job of spreading the risk around by packaging these loans into securities and selling them. Great. Instead of just cordoning off the troubled banks we have bad paper everywhere. The banks themselves are still holders but so are the brokers and the insurance companies. Probably even your pension fund. This is what they call a systemic risk.

Pundits have been calling the bottom on housing for six months now. Wrong. If we're lucky we've experienced the worst of the price declines but prices aren't going to see a bounce anytime soon. There is a ton of inventory and credit will be harder to get as the lenders begin to pullback thereby taking the final leg out from under the market.

Financial Dark Matter: (term borrowed from Bill Fleckenstein) Financial dark matter are derivatives. Financial nuclear weapons. CDOs, CDS, MBS, etc... Frankly, I only have a cursory understanding of this arcane marketplace. Here's what I know. This shit is toxic. There is a bunch of it, everywhere. It's highly leveraged (like anything else on the Street these days). It's mispriced, in some cases grossly mispriced, due to faulty assumptions and we don't know who is exposed and to what degree. Oh and it's highly illiquid. It all lies cloaked beneath the surface.

The Fed: These guys are a joke. They inflated the tech bubble then bailed it out with a housing bubble. Greenspan was particularly insidious in recommending ARMs just when rates were at their nadir. Expansionary monetary policies have fostered the most well-rooted inflation since Volcker killed it in the 1970s. Even after they do their best to strip from the inflation picture everything that goes up (i.e. ex-food and energy) they still have an inflation above the stated "comfort level". Commodities are in a secular bull market. Now growth is slowing. The Fed is trapped (sooner or later). Cut in an attempt to reignite growth or remain vigilant on inflation (that pesky mandate)? I maintain that the Fed will choose to cut. Growth at all costs. The market is trained to anticipate a bailout. We've had two down days in the market and traders are already looking for a cut in rates.

Bigger Picture: Domestic oil production peaked a long time ago and global production is peaking now. We do not yet have a viable replacement for fossil fuels. Meanwhile China and India are putting new drivers on the road at a breakneck pace. Oil exporters are also using more of their own oil at home. The worldwide scramble to secure energy resources has commenced. It will remain an increasingly hostile environment.
China has us by the balls. I love how we deal with them as if we are in a position of strength. Beating them up over exchange rates though will only bring us higher prices at the Wal-Mart. The dollar is doomed anyway. China is the world's next great power. Sooner rather than later if we continue to rot from within at our current rate. We suffer from a complete lack of coherent political leadership.



So it's all somewhat depressing. Maybe I've got it wrong in regards to the market. Maybe this is a buying opportunity and we are on our way to some sort of super-charged inflation-induced equity orgy but I doubt it. Maybe the financials have their issues contained but I doubt it. Maybe we will find a wondrous new energy source, hope so. I intend to remain flexible and profit either way but I think it might be on the short side of equities as it was this last week.