After the worst day Wall Street has had since 9/11 the fundamentals are getting worse. The world’s largest insurance company AIG had its bonds downgraded by S &P and Moody’s. This is going to hit the entire insurance industry and other banks because they are all tied together. You can listen to a video from CNBC – link (the financial station) now call this possible collapse "Financial Armageddon"

Washington Mutual, the nation’s largest financial institution has fallen from a $43,00 stock to $2.00. Scroll down at following chart/link . Check out the following link on yesterday’s meltdown

AIG – down 60%
Bank of America – (bought Merrill Lynch) down 20%
Morgan Stanley and Goldman Sachs (potential buyers of AIG) down 13%
Lehman is now a 17 cent stock.

Cramer (CNBC’s most popular analyst on why AIG must not fail. Link

Silver lining – oil prices are falling like a stone and the Fed meets today. The Fed will probably lower interest rates and this will psychologically help. Of course this will have nothing to do actually fixing all the toxic debt there is out there.

Politics and the Meltdown

This is mana from heaven for the Democrats, because it brings the focus the on the economy. Simply put the Republican’s have been in charge for the last 8 years and they have blown it. This is a clear simple fact. They are responsible for Iraq and they are responsible for the economy.

1) We’ve added at least $5,000,000,000 to the national debt and have the largest trade deficit ever. (Past Updates has explained how phony the $5 trillion numbers and it is actually several time larger.

2) Republican’s lowered taxes, especially for the wealthy and launched the $3,000,000,000 war. See reviews of Nobel Prize winner Joe Stigletz’s book -"The Three Trillion Dollar War -Link"

3) Trillions of American dollars for eight years have been flowing out of this country to petro dictators, and authoritarian governments (see past Updates)

All of this has made our financial and economic structure much weaker. Now that we have a major financial crisis we are in a far weaker position to deal with it than before we invaded Iraq.

The systemic cause of this whole mess is the lack of regulation and enforcement on Wall Street. For decades McCain, lobbyists, Republicans, and Wall Street have screamed the orthodox mantra of more financial regulations and enforcement will devastate free markets. We don’t want Washington telling you how to run our businesses was their mantra. Realty is that there are just as many crooks on Wall Street as there are on Main Street. Nurses, teachers, steel workers, salesmen, artists (etc) all have regulations and enforcement – why should Wall Street have less. Enron was the first and this financial meltdown is a hammer over the head.

John McCain is/was not just an orthodox Republican who blocked moves for more regulation and moreenforsement he was up to his neck participator in the last major banking meltdown.

"John McCain has excellent experience–a ringside seat–in the vagaries of this experiment in greed and anarchy. He was a member of the Keating Five. This was the signature scandal of the Savings and Loan crisis, twenty years ago. It concerned the insider help that five Senators gave Charles Keating and his Lincoln Savings and Loan, in return for contributions and gifts. The deregulation of S&Ls–community banks dedicated to local mortgages (like George Bailey’s bank in "It’s A Wonderful Life")–enabled slick operators like Keating to make reckless loans in new areas where they had no expertise. The final tab to the taxpayers was $165 billion."

To be fair the other 4 members of the Keating 5 were Democrats. But most are long gone and they r not running surrounded by lobbyist for president. If you’d like to read more on the above quote see link from Time Magazine .


Index % Change Volume

Dow -4.42% up
NASDQ -3.60% up
S&P500 -4.71% up
Russell2000 -4.23% –

US Markets

Biggest one day meltdown since 911. The volume was huge. S&P 500 broke support levels (this year lows) and the Dow had its lowest closing in two years.

The silver lining is that technically this sure looks like a climax sell off or the beginning of one. The bad news for Wall Street technicians is that the benchmark S&P 500 has established a lower low this year. (see the VIX below)

The Fed meets today and announces at 2:15.

Chart of the benchmark S&P 500

Chart of the Russell 2000

Chart of the NASDQ

Chart of the Dow

These two factors combined make a case for investing some funds at the end of October.


Good news oil prices crashed and burned yesterday and is down to @ $93 in pre market trading Bad news – this is a signal that long term we are heading for a worldwide recession.

Chart of oil (WTIC)


In a bear market the VIX is a reliable prognosticator of when the market will turn. The VIX measures fear/volatility in the markets. When the VIX spike to levels of great fear – that usually wipes out all those who will panic. Therefore there are few left to sell and the markets move higher. The VIX is now above 30 and each time it has reached this level of fear goes up so high no one is left to sell and stocks go up.

Chart of VIX

The VIX is now at 31.4 and has reached 37.5 twice in the past. So one could argue that the VIX needs to move a higher before the markets turn.

Short Term Outlook – Those who love risk can buy especially if the VIX reaches 37.5. But obviously do not invest large amounts of capital. All eyes on AIG – the situation worsened for them overnight because of the downgrades. Warning – If AIG goes down the 5 % meltdown over Lehman yesterday is chicken feed. Already the downgrade of their bonds is going to ripple though out the world’s economy.


Bottom Line

Long Term Outlook Bearish

Technicals – The bullish trend of the summer rally has been broken.
Fundamentals – financial mortgage transparency problem is far bigger than anyone thought, looming global recession vs the shop till I drop US consumer and lower gas prices
(Caution – this “Outlook” is based on US equities and while US markets greatly influence other markets it is not necessarily the outlook for recommended sectors.)

The question for Wall Street is not whether there will be a recession or not, but how long will it last and when will it spread to the rest of the world People feel like we are in a recession, the actual strict definition – 2 quarters of negative GDP growth has not occurred.

Asset Allocation/Recommended Sectors (long term)

* 85% to 100%% Cash

* 15% US Index Funds
UWM 2x what Russell 2000 does SSO 2x what S&P 500 does & QLD (2X what the NASDQ does) ( short term plays only on dips)

Chief Strategy – Buy the dips of trending sector Nothing is immune in a true Bear market. Therefore this is not a time for investors to buy. Shorter term traders and risk takers can always find something to buy-
Changes to Bottom Line Section Bolded

As Always Do Your Own Research Before Investing

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