Alan Greenspan

After so many years as being treated almost as a God it’s amazing how fast his reputation is falling. Greenspan (aka The Jolly Green Giant) insisted that markets would self regulate and we needed NO market regulations or regulators. When historian’s look at whose to blame for the credit meltdown the person at the top of that pyramid is probably going to be Greenspan. See Monday’s Update on Credit Default Swaps. Greenspan testifies today in front of congress.

Californification

Since more than a handful of you in CA get Market Updates there are two significant ballot questions. Question’s 7 and 10. California is way ahead of the rest of the USA in alternative energy. Here’s Tom Friedman’s editorial Bailout and Buildup .  This doesn’t exactly address these ballot proposals but does stress the urgency of a stimulus package and alternative energy.

Question #7 – Required utilities to create 50% of their power from alternative sources by 2025
Question #10 – a $5 billion bond to further promote the change of cars from oil based gasoline to cleaner natural gas and a promotes a minority of other alternative energy idea.

Obama Being Tested

Several of you have sent emails about Obama being tested just like Kennedy and Reagan were tested because they were new. Six things to consider.

1) Colin Powell has his back. – Obviously Powell has been advising Obama and Biden his VP has gobs of foreign policy experience.
2) You’ve watched Obama against Clinton and McCain maintain the same calm, substantive, reasoned response vs McCain’s "unsure" unpredictable, and irrational (Palin & financial crisis) response
3) The price of oil has tanked. This puts Russia, Iran,Venezuela and the rest of the petro dictators in a far weaker position to do any challenging in the next year. They are far too worried about their own economies now.
4) Obama is wildly popular abroad (200,000 listened to him speak in Germany) and this should lead American allies returning instead of deserting as they have since Bush took office
5) Obama has correctly identified Afghan/Pakistan as the real terrorist problem and McCain is still hung up in Iraq. This and more = better judgement.
6) What if Palin becomes president. You can dress her up in $150,000 worth of high fashion clothes, but she still lacks substance. If McCain thinks she can handle the job certainly Obama can.

Aside – Interesting front page story in WaPO that the al Qaeda (from their blog) endorsed John McCain. LINK

Stocks.

AS ALWAYS DO YOUR OWN RESEARCH BEFORE INVESTING

Index % Change Volume

Dow -5.69% up
NASDQ -4.77% up
S&P500 -6.10% up
Russell2000 -5.40% –

Headline – World Recession

US Market & Foreign Markets -

Technicals – Yesterday’s Quote – "You can feel the bear’s breath on the back of your neck". Well it happened – another massive sell off in increased volume. Volume, the chief confirmation factor of any price move, was above average, but not too huge. A slight 150 point rebound in the Dow in the last 10 minutes of trading changed the day from a catastrophe to a disaster.

The silver lining to the cloud is the last 10 minutes. If that 150 point loss on the Dow and similar losses on other major indexes had held we would have established new closing lows. Lower lows would have reinforced the long term bear market pattern. The good news is that major support level again held. It’s now held three times. Every time it holds it gets stronger.

The benchmark S&P 500 did make a new closing low.

A major test will come today. Markets will try to rally off the support levels. This will be technical traders. Some additional long term traders probably ran for cover and got out of their mutual and hedge funds. They funds will sell into the rally.

Asian markets fell on poor outlook for global growth from -7.5% (S. Korea) to Japan -2.3% overnight. European markets are down )but not as bad as Asia) a little over 2% this AM.

Bad News – Weekly jobless claims just came in (8:30EST) much higher than expected -15,000.

Fundamentals - The LIBOR 3MTB spread continued to close but the rare of change is slowing (see below). Real problems in global growth are intensifying across the world and it looks like US markets have not factored in just how bad the global recession will be.

Nouriel Roubini views (long term recession) seem to be emerging everywhere. Yesterday he opened on the financial channel (CNBC) and closed last night he was on PBS. But you got his views here first in Monday’s Market Updates

Chart of the benchmark S&P 500

Chart of the Russell 2000

Chart of the NASDQ

Chart of the Dow

Three Month Treasury Bill & LIBOR

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

The 3 MTB inched lower -7.76% yesterday to an interest rate of 1.01%. After 4 straight days of moving higher it does technically look like we have started a reversal of the trend. Too early to tell if this will develop into something significant or just a natural consolidation.

As the chart shows the LIBOR, while still very high but taken a dramatic drop since the revised rescue/bailout plan of buying equity in banks has been accepted) LIBOR in a week+ has dropped from 4.8% to 3.53%. Again the rate of change has diminished. We still have a long way to go. LIBOR should be a lot closer to the 1.5 % Fed rate but the trend is very clear. LIBOR has now improved 7 days in a row. This is certainly major positive and shows that worldwide intervention seems to be slowly working.

3 MTB chart

LIBOR chart (3 month)

Bottom Line – Banks are not leading to other banks, but the commercial leading market is slowly opening up. This helps Main Street’s access to credit cards to adjustable mortgage rates.

OIL

Basically stocks go up so does oil. Stocks go down so does oil. Oil prices have completely unwound and are now below $67. OPEC cartel meets to cut output on Friday. Demand destruction has occurred worldwide as as fears of a worldwide recession grows. A big cut OPEC cut could stabilize the price of oil- but members cheat. Therefore we have not yet reached the bottom.

Oil Prices are rebounding this AM suggesting a rally in stocks.

Chart of oil (WTIC)

The Dollar

Dollar is rising. (More on this later)

Chart of Dollar

The VIX

The VIX (measures amount of fear/volatility in S&P) This is a contrarian indicator. The VIX reached 69.65%. This is right at the resistance level that has held for the last three weeks.(see chart) Translation – if you see markets start to move lower a whole bunch of technical (day) traders will move in and support stocks. Every time the VIX has moved above 70 we have rallied.

Chart of VIX.

Short Term Outlook = Holding on

The VIX has held for weeks and the area around 70 is a very strong resistance level. So for those who love high risk this looks like a point to buy. Of course if things fall apart I never said this. Wait for the VIX to reach above 75/80 then buy. 80 is the all time high. Traders should at least get a short term bounce

The only problem with this trade (not for long term investors) is that every market technician out there sees the same thing.

If you are a long term investor, not invested in the markets, and are willing to recognize things could be bad for a couple years you could nibble a little now. Please read the tea leaves below.

This market is a traders dream and a long term investor’s nightmare.

Reading The Tea Leaves – We may not have hit our lows, but we’ve already had a 35% loss. How low can it go? Certainly below the 7800 Dow interday low. Right now the Dow is at 8335. Could we loose another 30% to 6000? Its possible. I don’t think we’ll loose another 30%, but I do think the next two years will see us at least test 7800 and probably get below that.

AS ALWAYS DO YOUR RESEARCH BEFORE INVESTING

Long Term Outlook – Bear’s Rule

Technicals – Double bottom has formed, advance in strong , increased volume, and a new high on VIX -Technically all this = at least a short term rally and maybe a long term bottom.
Fundamentals – financial mortgage transparency problem 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

People feel like we are in a recession. The actual strict definition – 2 quarters of negative GDP growth has not occurred. How bad the 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)

* 75% to 100% Cash – This depends on your risk tolerance

* 10+% US Index Funds
UWM (ETF that does 2x what Russell 2000 does) & QLD (ETF that does 2X what the NASDQ does) DDM (ETF that does 2X what the Dow does)
*5% Emerging Markets
EWZ (Brazil) should out perform other emerging markets in a rally and under perform in a fall – highest risk
*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 8,500 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 dips. Do not buy into rallies.

Shorting – Three ETF that short 2x what the the major indexes do -
TWM – ultra short Russell 2000
QID – ultra short NASDQ
SDS – ultra short S&P 500

Changes to Bottom Line Section Bolded

As Always Do Your Own Research Before Investing

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