Big week in local politics and an art show = very few Market Updates this week

Duck and Cover

Taking Your Job, Your Home, & Your Money

Aside – Note well the correlation between falling stock and home prices. As stock prices fall investors have less money to buy homes and fewer homes get sold. Also the more unemployment rises the greater the foreclosure rate and stocks get toasted too. All three are tied together.

July & October 2007 Dow goes over 14,000 – Then -

  1. Investors slowly began to realize that the goose that had laid the golden eggs has died and the housing bubble has burst.
  2. Slowly again investors realized there were "Financial WMD’s" (Warren Buffett’s words for Credit Default Swaps – CDS) out there deeply over leveraging the subprime mortgages.
  3. Next we learned the unregulated $50 to $70 trillion CDS market involved not only on mortgages, but everything from car loans to credit cards.

The FIX is in as Dow falls to @11,000

The Fed Prints money, Sovereign Wealth Funds buy, Mergers, Your bailout tax dollars, Lower interest rates and a whole lot more occurs globally to fix the housing and unregulated CDS problems

One Big hole in the Dike.

Opps, Nobody comes to the rescue of Lehman Brothers and the 4th largest investment bank goes into bankruptcy. They are so loaded with WMD’s or CDS’s that Lehman Brother’s bond is only worth 8.675 cents on the dollar. LINK $365 billion of over leveraged debt (CDS) is released throughout the world. Immediately London goes limit down (8.9) before stocks open in mid October. Two days after the dust clears the Dow looses about @ 900 points. Investors still believe that the $750 taxpayer bailout will take toxic debt out of system.

Bait and Switch Taxpayer Bailout

Secretary of Treasury Paulson instead of using money as intended to take toxic debt out of the system gives it to mostly big banks. There is no oversight, little transparency in this move which oversteps Paulson’s authority. The banks hoard the $ instead of making new loans. Even Barney Frank who should be and busting blood vessels screaming about this, is just saying "this is not what we intended this money to go for." Brain dead american public/media is busy watch pretty pictures of Obama family and following Brittany Spears Sarah Palin adventures.

Why is there so little objection to Paulson’s probobly criminal move? Probably because without the infusion of your tax dollars (bailout money) these financial stocks would crash and burn because they are loaded with CDS’s. This would send stocks into a massive fall and the 8,000 Dow technical support level would now be a cinder.

Last two weeks – Dow fall @ 12+% from its high

Three HUGE companies that lead three major sectors of the economy are slammed. They all have one thing in common. They are loaded with financial WMD’s of CDS’s.

  1. GE – chart falls @25% twice what the Dow fell in last two weeks. GE Financial is loaded with CDS’s or WMD’s
  2. Citigoup – chart falls @35% The mega bank loaded with CDS’s announces 40,000 jobs cuts today
  3. GM – chart falls over 50%. GMAC – their financial division is loaded with CDS’a or WMD’s. Will the entire auto sector go bankrupt like Lehman Brothers?

Jim Cramer (CNBC Mad Money Friday night) computes that Lehman’s Brothers bankruptcy cost the Dow about 15% and a GM bankruptcy would cost the Dow down another 30%.

Would you lend money to any of these companies? Warren Buffett loaned billions to GE, but since then their stock is down @35%

Fear Returns to Credit Market

See LIBOR and 3 Month Treasury Bill commentary below.

Standing on the Edge of a Cliff

Bottom Line – We’re standing on the edge of a cliff. Technically we are @500 points away from the last line in the sand support level for the Dow at 8,000. There s one ledge on the cliff that says nasty long recession. The abyss is a depression.

This is not the time to be Long Stocks, unless you have short positions that protect these long positions. There are just too many things that have to go right for us to fundamentally hold the 8,000 support level. Who were the institution(s) that bought the last time at 8,000. one totally wild proposition is the Treasury or the Fed somehow stepped in and bought or encouraged (twisted arms) institutions to buy at Dow 8,000.

Please somebody talk me down from the edge. Till then BEARS RULE and at some point in time the 8,000 support level will collapse. Housing will continue to decline. Even if Obama can walk on water (he can’t) his administration is two months away. The worst is yet to come.

I know I’m sounding like Dr Doom, (Nouriel Roubini) so let me put the icing on this dark cake. Scroll down a little and look at this chart of consumer spending since 1993 to present.

When we fall which ledge will we hit?

Stocks

AS ALWAYS DO YOUR OWN RESEARCH BEFORE INVESTING

Index % Change Volume

Dow -3.82% down
NASDQ -5.00% down
S&P500 -4.17% down
Russell2000 -7.07% –

Headline

US Market & Foreign Markets

Technicals

[From Friday -"Yesterday's rally was all about the technical aspects of the market and had little to do with fundamentals."]

About 2/3 of Thursday’s gains were wiped out (in lower volume) = Bad news for Bulls – Benchmark Dow down 5% for week.

Asia closes slightly higher overnight. China leads up + 2.22%

Futures on the Dow down about -2% at 9:00 AM EST.
Chart of the benchmark S&P 500

Chart of the Russell 2000

Chart of the NASDQ

Chart of the Dow

Fundamentals

See above editorial.

Three Month Treasury Bill & LIBOR

Credit markets are the dog and the Stock Markets are the tail. Without credit the tail won’t wag.

Real progress WAS being made. The credit spreads are tightening and LIBOR has fallen from 4.8% a three weeks ago to 2 .24. However, The last four days the LIBOR has started to rise again. This rise is accelerated. NOT good news for Bulls

LIBOR at ___? this AM. # comes out at 9:00AM EST.

The 3MTB fell -31.58% yesterday and closed at 0.130% The Fed rate is 1.00% The rally is good news, but it is well below the 0.20% support level. A normal 3MTB would be just under the Fed rate.

Sure looks like PANIC is starting to envelop the credit markets again

3 MTB chart

LIBOR chart (3 month)

Bottom Line – LIBOR falling helps Main Street’s – Credit cards to adjustable mortgage rates are tied to LIBOR. But by no means is credit back to normal.

OIL

Chart of oil (WTIC)

The Dollar

Dollar and Yen are rising. (More on this later)

Chart of Dollar

The VIX

The VIX (measures amount of fear/volatility in S&P) .

Chart of VIX
Short Term Outlook
= NASDQ broke support and closed at a new low. Other major indexes within 2% of closing lows

[Repeat] The overall problem that America has is consumers and government are over leveraged. American’s have borrowed and spent their way into massive debt.

AS ALWAYS DO YOUR RESEARCH BEFORE INVESTING

Long Term Outlook – BEARS RULE

Changes to Bottom Line section bolded .

Technicals
- Double bottom has formed, advance in strong increased volume. Technically all this = at least a short term rally and maybe a long term bottom.
Reading tea leaves
- Look for range between 8000 and 10,000 for rest of year. Very concerned 8000 Support level will not hold.
Fundamentals
- Financial mortgage transparency problem (credit default swaps $50 to $70 trillion) is far far far far far far far far far bigger than anyone thought. New worldwide rescue plan offers hope, but this rally is going to be a bumpy ride because retail investors trust has been shaken. Global growth is obviously slowing.

We are in a recession. How bad/long the worldwide recession will be is be is the major question. It’s beginning to look like the recession might last through 2009 – perhaps longer

Asset Allocation/Recommended Sectors (long term)

50% to 90% Cash – This depends on your risk tolerance – Long Term Investors (up to 10+% stocks – only buy big dips) Wait for the next big dip to add 5 to 10% PROTECT ANY LONG POSITIONS .

*5%+% US Index Funds
UWM (ETF that does 2x what Russell 2000 does) & QLD (ETF that does 2X the NASDQ ) DDM (ETF that does 2X the Dow ) SSO (ETF does 2X the S&P 500)

*10%+ Emerging Markets
EWZ (Brazil) should out perform other emerging markets in a rally and under perform in a fall – highest risk
FXI (China ETF)

*5%+ Alternative Energy
GEX(Alternative energy ETF) (If Obama wins you will see this sector flourish)

Chief Strategy – Buy the DIPS of trending sector – This is not your fathers market- over the 8 Bush years the Dow has gone from 11,000 to 9,000 and uncertainty clouds the future. The major trend now is volatility.

Traders who have a strong tolerance for risk jump in on dips and invest more. Sell or go short into major rallies. Long term Investors who can tolerate risk and are 100% in cash nibble just a little on big dips. (5% on each big dip) Do not buy into rallies.

Shorting – Three ETF that short 2x what the the major indexes do – Long term traders should use these ETF’s when markets get close to major resistance levels.

TWM – ultra short Russell 2000
QID – ultra short NASDQ
SDS – ultra short S&P 500

As Always Do Your Own Research Before Investing

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