Major benchmark

[TNTrader]

Ya'll know where I stand on the markets right now, I haven't posted much lately since beating a dead horse is pointless.

However, as of this writing the DOW stands at just over 7580. We have passed the last major bechmark left on the capital markets, there is no bottom side support below 7675.

7675 is important because it marks the same percentage loss of the great Depression. Unless the quants have modeled worse than worse case scenario's the only major buyer of stocks below this mark will be the government.

Things can and may well turn back up, if it does look to the volume for an idea of the conviction behind the buying, also make sure that the majority of buying pressure is is NOT coming through the Philly exchange. So far the fed has routed most of its interference through Philly so a sudden burst of above the ask buying is possibly the fed moving again.

Good luck and if we close below 7675, I would suggest getting out of the way. The rush to the door will get brutal.


Good Luck

[thegreatgate]

The "Test" Is Here
Bespoke Investment Group: The "Test" Is Here
The much awaited "test" of the November lows is here for the Dow Jones Industrials Average. While this is quite depressing while it's occurring, it's a normal part of a "bottoming process" if the bottom is indeed being made. If the market holds and can bounce off of these levels over the next few days, those hoping that the lows are in will breathe a sigh of relief. If, however, this support level breaks and the market heads lower, the last three months of a "bottoming process" will be a complete waste, and the cycle will have to be repeated again once a new short-term bottom is put in.

(Double bottom?)


A number of indicators are showing that the market in its current state looks much better than it did in November. We have detailed these in Bespoke Premium reports over the past few weeks, but one of them is the fact that recent declines have been concentrated in just one or two sectors. As shown below, Financials and Consumer Staples are the only two sectors that have gone down since November 20th, with Financials declining the most at -11.8%. On the other hand, four sectors are still up more than 10%, even though the market as a whole is flat. These four sectors include Consumer Discretionary, Materials, Technology, and Health Care.

[TNTrader]

In reply to a comment on the normal market cycle that says to buy when everyone is badmouthing stocks, and sell when the hype is rosy.



In a normal correction cycle I would wholeheartedly agree. Your post accurately describes the normal cycle within the capital markets. Unfortunately, this correction has two major elements that break the cycle. First, the actual depth of the financial sectors meltdown. We have seen only the tip of this iceberg. So far, everyone has been focused mostly on the mortgage and liquidity issues, huge problems in a credit driven market but one that could be dealt with by the usual flow of broad market economics. Meaning that the further creation of wealth in other sectors would eventually offset the major losses of a single sector bringing the markets back in line over time. The real problem though lies in the derivatives of the mortgage markets, specificly in the default swaps and hedge vehicles used to insure against losses in the CDO market. The losses in the mortgage and CDO arena are bad enough at the 30-36 trillion estimate worldwide, this though is a paper loss. There will still be some value remaining in the property that backs the debts. Total real dollar losses here will likely be more in the 14-20 trillion at worst. The insurmountable problem lies in the up to 600+ trillion that the CDO debts were leveraged up to via the swaps and hedges. This would be real dollar losses as they have no tangible assets that actually stand for the debt. The worlds financial geniuses have managed to do the unthinkable, defraud nearly every government and sovreignty on earth out of more than the entire capital worth of every nation on the planet. How to deal with this one is simple but unpalatable to anyone. The world is unlikely to agree that the whole thing was a bad idea and just chalk up the trillions they paid as stupid tax.

Second is the unprecedented level of governmental intervention worldwide. The US alone is at least 9 trillion into this mess and the debt grows daily. Eventually all of that borrowing must be paid back with increased taxation on an epic scale. The deflationary pressure caused by the flood of dollars into the world economies will devalue the dollar as a trade medium, while inflationary pressure of so much public debt will inevitably spike prices leading to further deflationary pressure against the dollar. It is a vicious cycle that feeds on itself as long as the increased supply of dollars outstrips the purchasing and pricing power of domestic industry and consumers.



My reply above engendered this question:
So...all Obama, his administration and the Fed need to do is print up another 600 trillion dollars?


My response:

Not quite. Only about half of the total is all American. Wall street had plenty of numbskulls helping create this debacle all over the world.
Unfortunately, even a paltry 330 trillion is around 33 years of America's entire annual GNP. If they were to assume the banks obligations and pay off the debt holders they would need to tax Americans at a 100% rate for 30+years to do so. That is IF the debt clock stopped ticking this instant and IF the American dollar were still worth anything with that amount in circulation.

No. As nice as the easy way out would be, there are only two alternatives that I can think of.

Alternative one would be a global agreement that the banks did this and they stand for the debt. Agree that the physical holdings of the banks and the personal liability of the executive and marketing personnel be sufficient to provide token restitution for their fraud and everyone goes home , licks their fiscal wounds and chalks this mess up to paying stupid tax.

Alternative two is far worse. In alternative two the debt holders, mostly China,Saudi, Russia and a host of others that dont like us much want their money and hold the nation responsible for the criminal acts of the banks. Many analysts that I speak with assume a trade war would ensue, perhaps even a threat of a physical blockade as a token gesture. I disagree for several reasons, not least of which is the empty threat of a trade war. America is in for a sea change in our economy either way. Our sheer size and diversity , along with two primary trade borders, make both a trade war and a token blockade useless. We can be self sufficient in every aspect, though at a far lower standard than we have had. America can feed,clothe and power itself at about 65% current capacity in a heartbeat. We already eat too much and 65% of todays standard is still far better than 90% of the world today. That leaves us with the worst possible scenario. Losing trillions in real wealth and hundreds of trillions in paper wealth will devastate the economies of China,Russia, et. al. Saudi will fall as will most of Africa and South America.
China and Russia could well decide that the risk of all out war is worth it and decide expansion is better than taking their losses and starting over.

If alternative two is the decision things get really nasty really fast. Or not. The new administration is a global unknown, at this point all bets are off. The deciding factor will be in how weakened the US is percieved to be both by the economic problems(our almost non-existent spare industrial capacity being a major factor) and the resolve of the new political climate against socialist expansion.


Good Luck

[TNTrader]

The housing rescue plan. Since the focus is currently on the foreclosure problem, the government has moved to reduce the foreclosure rate by funding a loan modification effort. What little detail on this no-plan that is available is linked to at the bottom of this post. As Mr. Gibbs so blithely suggested in reply to Mr Santelli, download it and read it.

There is little in the way of actual gudelines for assisting in mortgage modification, again a plan that has no planning from an adminiatration that has no clue.

The Outline presented, at a cost of 475 billion in taxpayer debt, seems to do little more than encourage lenders to take federal payments for doing their jobs. The refinancing provisions, as outlined in the official documents, does intend to decrease the monthly payments of current,qualified borrowers by around 8-10%. Thats nice. Until we realize that that reduction via refi is frontloaded and actaully increases the total repayment by extending the loan terms, albeit at a 2% or so lower rate. Check your amortization schedule for an average refi cost that extends out the loan for thirty years.

One glaring fact is repeated throughout this no-plan. It frontloads all taxpayer funded assistance to run out, tada!! just as we get to the next presidential election cycle. Wow. Whoda thunk it?

Within this no-plan lies yet another brazen display of economic idiocy and political chicanery. The sub-prime,non-qualified borrowers that are at the heart of the mortgage problem are treated quite well, at taxpayer expense, BUT, this assitance is also heavily frontloaded and designed to end just in time for election 2012. Things that make ya' go Hmm.. Within the provisions designed to force taxpayers to subsidize non-qualified homeowners, most of whom have balloon,option ARM, ARM and other exotic loans, lies a ticking timebomb. Yep. You guessed. These exotic examples of economic lunacy are refinanced into..... drum roll please....... ballon, option ARM and ARM loans that adjust ..... another drum roll please,........ just after the next election ......


In short, this plan, as it stands now, is designed to delay mortgage armaggeddon for qualified borrowers until just before the 2012 election and for sub-prime borrowers until just AFTER the election. Think about that one for a minute. What possible reason would there be to have a tiered system, one that includes proven failed loan options at all, that specificly re-create current problems timed specificly with the election cycle? It does not make economic sense in any manner. Personally, if I had responsibility for pizzing away 475 billion of other peoples money, I would have a bit more plan and whole lot less agenda. Responsible adults suck it up and deal with the problem, petty children playing "look at me!" deliberately screw everyone around them for attention.


Good Luck and God Bless us all.


http://www.treas.gov/initiatives/ees...ampleSheet.pdf

http://www.treas.gov/initiatives/ees.../FactSheet.pdf

http://www.treas.gov/initiatives/ees...iveSummary.pdf

[thegreatgate]

Some interesting analysis from Jason Kelly:

As we continue trading, it's important to keep the context clear. We're in a monster bear market, much worse than I thought it would become. It's one of the worst in history.

We're now 16 months into it, and many are saying that after 16 months we have to be close to the bottom. That's true for ordinary bear markets, but not monsters. The following table shows five monster Dow bear markets and four other monster bear markets. It includes the dates, index, bear duration in months, time to low in months, and loss at the low:

1929-1954 | Dow | 301 mos | 34 mos to low | -89% at low

1989-? | Nikkei | 233+ mos | 229+ mos to low | -82% at low

1974-1987 | Madrid | 145 mos | 74 mos to low | -74% at low

1988-1995 | Helsinki | 76 mos | 41 mos to low | -73% at low

1988-1995 | Stockholm | 51 mos | 38 mos to low | -53% at low

1973-1983 | Dow | 120 mos | 23 mos to low | -49% at low

2007-? | Dow | 16+ mos | 12+ mos to low | -48% at low

2000-2006 | Dow | 81 mos | 33 mos to low | -40% at low

1966-1972 | Dow | 201 mos | 66 mos to low | -34%

Among these nine monster bear markets, the average duration was 136 months, the average time to the low was 61 months, and the average loss at the low was 60%. In this crowd, the current bear is young.

That means one of two things. Either we are blessed and the low was indeed hit last November, or we haven't yet seen bottom. Statisticians flag the latter as more probable.

The following link displays a chart of four bad bear markets, courtesy of dshort.com, that shows us to be a little past the middle of the typical length of a bad bear:

http://tinyurl.com/587968

On Friday, we were 500 calendar days into this bear market and the Dow was already down 48% from its Oct. 9, 2007 peak at 14,165. That's the second-steepest beginning of any U.S. bear market in history. Only the 1929 bear dropped faster in the first 500 days, declining 57%. The 1973 bear fell only 22% in its first 500 days, and the 2000 bear only 6%. If the momentum of the beginning of the current bear market persists, it will become the worst of all time.

[thegreatgate]

Here is how I'm looking at it. We are down about 50% (48%) from the October 2007 high, which places us 7th worst out of the following 9 "monster" bear markets. Scratch the lows on #1 through #4 (-89% Great Depression, -82% Nikkei, -74% Madrid, and -73% Helsinki) because there is no way in hell the Dow will drop 70% or more from the October 2007 high. Here is what it would look like if it did:
-70% = 4,249.50
-75% = 3,541.25
-80% = 2,833.00
-85% = 2,124.75
-90% = 1,416.50 <-------LMFAO

More realistically speaking:
-48% = 7,365.67 <-------current Dow Jones close and new bear market low
-49% = 7,224.15
-50% = 7,082.50
-51% = 6,940.85 <-------If I had to guess, although I like -48% as the low
-52% = 6,799.20
-53% = 6,657.55 <-------I'd be shocked at anything below this #
-54% = 6,515.90
-55% = 6,374.25
-56% = 6,232.60
-57% = 6,090.95
-58% = 5,949.30
-59% = 5,807.65
-60% = 5,666.00

#1: 1929-1954 | Dow | 301 mos | 34 mos to low | -89% at low
#2: 1989-? | Nikkei | 233+ mos | 229+ mos to low | -82% at low
#3: 1974-1987 | Madrid | 145 mos | 74 mos to low | -74% at low
#4: 1988-1995 | Helsinki | 76 mos | 41 mos to low | -73% at low
#5: 1988-1995 | Stockholm | 51 mos | 38 mos to low | -53% at low
#6: 1973-1983 | Dow | 120 mos | 23 mos to low | -49% at low
#7: 2007-? | Dow | 16+ mos | 12+ mos to low | -48% at low
#8: 2000-2006 | Dow | 81 mos | 33 mos to low | -40% at low
#9: 1966-1972 | Dow | 201 mos | 66 mos to low | -34%

[TNTrader]

Great posts, thegreatgate. Your analysis is just as valid as anyones, given the unruly nature of this cycle. You could very well be correct in your prediction of a bottom level in the broad markets.

My view is somewhat more pessimistic. In my estimation, the spiral has begun to feed on itself and wont have much in the way of hiccups as it winds down to the bottom. Once I factored the capital damage from the banking sectors demise, the steadily worsening rates of real(11.3%) unemployment, the capital burn rate of the various sectors,the short and longterm costs of governmental intervention,tax rates going forward 2 years 4 years and 6years(as the debts used to finance much of the bailouts come due) and the utter devastation of many trading partners across the world the picture became more bleak.

Until and unless something drastic is done to eliminate the 600 trillion plus swap and derivative debts owed by the world finance sector to the sovreigns that hold it, this situation can only get worse. See, this is the true core of the problem. So many nations bet the farm on the returns from these obligations that their cash on hand is nil in comparison to what they had expected to use to finance further growth. Our ability to continue to borrow from these capital pools is rapidly declining,and getting more expensive with each tranche auctioned. This creates an even further debt burden on taxpayers, taxpayers whom are increasingly becoming fewer. This has the effect of further reducing productivity which leads to more job loss. Which leads to less tax revenue to service debt.

Until something is done to break the cycle that does not include further debt, the spiral will continue.


Good Luck