In all fairness, there is no way of determining the longer term outcome of recent events which occurred over the past month. There are no doubt long term effects that should result from the credit squeeze which has occurred, sum good and sum very bad but on a purely technical basis the probability of seeing further appreciable price erosion of equities has diminished greatly from the chart action which was engineered this week. The boys did what they had to do in conjunction with the FED and on paper this week.  They fixed a lot of apparent leaks and painted a price chart that now looks more bullish than bearish. Whether it is sufficient to stem further erosion later in the year remains to be seen, but for now it appears that further equity value declines have been rendered moot.  We’ll begin to see whether the general public buys it once all the folks who went off to sunbath in the Hampton Beaches begin to trickle back into their work cubicles this week.

From the technical chart perspective, we now have developed and enormous “irresistible tail” on the daily and weekly charts that most likely generates an incentive to buy rather than to sell going forward. My interpretation is that we shall travel back up to the approximate area where the PSAR last gave it’s sell signal which is approximately the 1500 SPX mark where the battle will begin anew. That being the case, some bears who are currently sitting on some sizable profits, if they are short from higher up, should book’em Danno and await the inevitable retracement IMO.

Final Thought

“My doctor gave me six months to live, but when I couldn’t pay the bill he gave me six months more” – Walter Matthau

Last week we wrote about a few of the dynamics that could affect stocks in the coming weeks and how we do not know the true extent of their stats. We watched another equity roller coaster week and listened closely to the news and the commentary on those news events. What jumped out at us is the assuredness many commentators, both bullish and bearish, have regarding their take. Considering the source is always important. For instance have you ever met a Realtor that tells you that it is not a good time to buy real estate? When the market swooned from 2000-03 so did the ratings for CNBC and we have noticed they tend to put a positive spin as much as possible on the market views. We thought it might be instructive to share some of these dynamics that depending on how they play out collectively could have an impact on stocks. Remember these are our thoughts and only our opinion.

1. What is the real number of sub-prime mortgages in the system and how significant is the looming resets on adjustable rate mortgages?

2. Will lenders re-finance these loans rather than foreclose on the mortgage holders?

3. How much did the consumer actually fund their lifestyle with home equity withdrawals and are they now tapped out?

4. Eliminating these sub-prime players from the real estate market and potentially adding their foreclosed homes to inventory is probably not good for the real estate market?

5. How much did the real estate market truly play in the economic recovery of the last few years?

6. How much of these sub-prime loans are buried in AAA paper sold to domestic and foreign institutions and can they be effectively valued?

7. How much leverage have these institutions used in their portfolios and how will margin calls affect the markets?

8. Has a similar issue occurred in the corporate, private equity, and municipal bond arena’s?

9. Will the liquidity the Fed injects solve or exacerbate the current credit problem?

10. What happens to the dollar and our markets if foreigners decide to unload their U.S. assets?

These scenarios playing out poorly are what most Bears are basing their gloom upon. The Bulls have the resilient global economies (although the economy always looks good at the top, remember 2000) and liquidity to hang their hat on. Another factor not mentioned much lately is that it is rare for a financial debacle to unfold in the midst of a Presidential campaign. Take away the performance of the economy and the stock market and the Republicans could struggle even more than they did in the 2006 mid-year elections. This is a good time to put your financial advisor to the test and ask him/her what she thinks about these issues. If you get an answer that we are familiar with, “Stay the course” it might be wise to ask others for their input. What a surprise, huh?

Excerpts from the Avid’s Live Chat Room…

What does the future hold? My bet is ~1300 SPX in the fairly near future. Then most likely new highs after that. But I reserve the right to change that forecast. : ) It is certainly interesting, and confirms suspicions about the nature of the selling, that as soon as the NYSE closes, the futures rebound somewhat. Often it is the futures that push the market around. But not in the past couple of weeks. Institutional selling becomes a fundamental piece of information for the Futures camp, there is nothing you can sell that cant be sold.

The present situation is not exactly ‘business-as-usual’. But my current judgment is that there will not be a huge impact on the aggregate economy from what is happening. I.E. we will not see two consecutive down quarters in real GDP. The Federal Reserve was created for the very reason that an institution like the Fed was required to stabilize things when discontinuities like the present happen. There had been so many of theses kinds of events in the 1800s, which did have fairly serious economic ramifications, that finally in the 1913 (?) they created the Fed precisely for the present type of situation.

So, I expect us to weather this without a problem in aggregate GDP, but clearly there are a lot of entities that currently are short of cash and need to liquidate assets to raise cash. How long the liquidation will last is anyone’s guess. But SPX ~1300 seems like a sensible number to me. Although I have to say that my degree of conviction about GDP in the immediate coming quarters is appreciably less than it would be without the present ‘mess’. But my point is that it depends on who it is that is selling that explains PREM. Or if you like, PREM gives some information about who it is that is selling. This time it is not the futures people who are applying the selling pressure. Let’s put it this way, if the Fed wants a recession it would have no trouble getting one going. But if the Fed doesn’t want a recession then all the gods in the universe combined would have their time cut out trying to create one. IMO

Excerpts from the Avid’s Live Chat Room…

The three leading rating companies, all based in New York, say that policing CDOs isn’t their job. They just offer their educated opinions, says Noel Kirnon, senior managing director at Moody’s.
“What we’re saying is that many people have the tendency to rely on [the ratings], and we want to make sure that they don’t,” says Kirnon, whose firm commands 39 percent of the global credit-rating market by revenue.

S&P, which controls 40 percent, asks investors in its published CDO ratings not to base any investment decision on its analysis. Fitch, which has 16 percent of the worldwide credit-rating field, says its analysis are opinions and investors shouldn’t rely on them. The rating companies apply disclaimers about their analysis. S&P says in small print: “Any user of the information contained herein should not rely on any credit rating or other opinion contained herein in making any investment decision.”
Joseph Mason, a finance professor at Philadelphia’s Drexel University and a former economist at the U.S. Treasury Department, says the ratings are undermined by the disclaimers.
“I laugh about Moody’s and S&P disclaimers,” he says. “The ratings giveth and the disclaimer takes it away. Once you’re through with the disclaimers, you’re left with very little new information.”

Sounds like most stock prospectuses these days. LOL If one isn’t supposed to rely on a rating agencies opinion on risk, I wonder why they would actually offer an opinion? Oh well, equities appear to be far less risky these days as compared to debt instruments…………. should seek out new highs on equities as investor’s risk appetite decreases IMO.

Excerpts from the Avid’s Live Chat Room…

Bush’s truth-defying crusade for war did not mark a shift for him. Throughout his campaign for the presidency and his years in the White House, Bush has mugged the truth in many other areas to advance his agenda. Lying has been one of the essential tools of his presidency. To call the forty-third President of the United States a prevaricator is not an exercise of opinion, not an inflammatory talk-radio device. Rather, it is backed up by an all-too-extensive record of self-serving falsifications. While politicians are often derided as liars, this charge should be particularly stinging for Bush. During the campaign of 2000, he pitched himself as a candidate who could “restore” honor and integrity to an Oval Office stained by the misdeeds and falsehoods of his predecessor. To brand Bush a liar is to negate what he and his supporters declared was his most basic and most important qualification for the job.

His claims about the war in Iraq have led more of his foes and more pundits to accuse him of lying to the public. The list of his misrepresentations, though, is far longer than the lengthy list of dubious statements Bush employed–and keeps on employing–to justify his invasion and occupation of Iraq. Here then is a partial–a quite partial–account of the other lies of George W. Bush.

Tax Cuts

Bush’s crusade for tax cuts is the domestic policy matter that has spawned the most misrepresentations from his camp. On the 2000 campaign trail, he sold his success as a “tax-cutting person” by hailing cuts he passed in Texas while governor. But Bush did not tell the full story of his 1997 tax plan. His proposal called for cutting property taxes. But what he didn’t mention is that it also included an attempt to boost the sales tax and to implement a new business tax. Nor did he note that his full package had not been accepted by the state legislature. Instead, the lawmakers passed a $1 billion reduction in property taxes. And these tax cuts turned out to be a sham. After they kicked in, school districts across the state boosted local tax rates to compensate for the loss of revenue. A 1999 Dallas Morning News analysis found that “many [taxpayers] are still paying as much as they did in 1997, or more.” Republican Lieutenant Governor Rick Perry called the cuts “rather illusory.”

One of Bush’s biggest tax-cut whoppers came when he stated, during the presidential campaign, “The vast majority of my [proposed] tax cuts go to the bottom end of the spectrum.” That estimate was wildly at odds with the analyse of where the money would really go. A report by Citizens for Tax Justice, a liberal outfit that specializes in distribution analysis, figured that 42.6 percent of Bush’s $1.6 trillion tax package would end up in the pockets of the top 1 percent of earners. The lowest 60 percent would net 12.6 percent. The New York Times, the Los Angeles Times, ABC News and NBC News all reported that Bush’s package produced the results CTJ calculated.

To deal with the criticism that his plan was a boon for millionaires, Bush devised an imaginary friend–a mythical single waitress who was supporting two children on an income of $22,000, and he talked about her often. He said he wanted to remove the tax-code barriers that kept this waitress from reaching the middle class, and he insisted that if his tax cuts were passed, “she will pay no income taxes at all.” But when Time asked the accounting firm of Deloitte & Touche to analyze precisely how Bush’s waitress-mom would be affected by his tax package, the firm reported that she would not see any benefit because she already had no income-tax liability.

As he sold his tax cuts from the White House, Bush maintained in 2001 that with his plan, “the greatest percentage of tax relief goes to the people at the bottom end of the ladder.” This was trickery–technically true only because low-income earners pay so little income tax to begin with. As the Center on Budget and Policy Priorities put it, “a two-parent family of four with income of $26,000 would indeed have its income taxes eliminated under the Bush plan, which is being portrayed as a 100 percent reduction in taxes.” But here was the punch line: The family owed only $20 in income taxes under the existing law. Its overall tax bill (including payroll and excise taxes), though, was $2,500. So that twenty bucks represented less than 1 percent of its tax burden. Bush’s “greatest percentage” line was meaningless in the real world, where people paid their bills with money, not percentages.

Bush also claimed his tax plan–by eliminating the estate tax, at a cost of $300 billion–would “keep family farms in the family.” But, as the New York Times reported, farm-industry experts could not point to a single case of a family losing a farm because of estate taxes. Asked about this, White House press secretary Ari Fleischer said, “If you abolish the death tax, people won’t have to hire all those planners to help them keep the land that’s rightfully theirs.” Caught in a $300 billion lie, the White House was now saying the reason to abolish the tax–a move that would be a blessing to the richest 2 percent of Americans–was to spare farmers the pain in the ass of estate planning. Bush’s lies did not hinder him. They helped him win the first tax-cut fight–and, then, the tax-cut battle of 2003. When his second set of supersized tax cuts was assailed for being tilted toward the rich, he claimed, “Ninety-two million Americans will keep an average of $1,083 more of their own money.” The Tax Policy Center of the Brookings Institution and the Urban Institute found that, contrary to Bush’s assertion, nearly 80 percent of tax filers would receive less than $1,083, and almost half would pocket less than $100. The truly average taxpayers–those in the middle of the income range–would receive $265. Bush was using the word “average” in a flimflam fashion. To concoct the misleading $1,083 figure, the Administration took the large dollar amounts high-income taxpayers would receive and added that to the modest, small or nonexistent reductions other taxpayers would get–and then used this total to calculate an average gain. His claim was akin to saying that if a street had nine households led by unemployed individuals but one with an earner making a million dollars, the average income of the families on the block would be $100,000. The radical Wall Street Journal reported, “Overall, the gains from the taxes are weighted toward upper-income taxpayers.”

This member used excerpts from a published article in the October 13, 2003 issue of The Nation

Market Size and Participants

The ISDA[3] reported in April 2007 that total notional amount on outstanding credit derivatives was $35.1 trillion with a gross market value of $948 billion. Risks involving credit derivatives are a concern among regulators of financial markets.   Several statements have been issued by the US Federal Reserve in the Fall of 2005 about these risks.  They even highlighted the increasing backlog of confirmations for credit derivatives trades. These backlogs present risks to the market (both in theory and in all likelihood), and they exasperate other dangers in the financial system. One difficulty in regulating these and other derivatives is that the populace who know most about these  derivatives  also typically have a vested incentive in encouraging their growth and lack of regulation. (The incentive may be indirect, through not only consulting incentives, but also incentives in keeping the door open for research.) In other words, Debt Derivatives are an unregulated, manipulated by greed Market that is beginning to CRASH.

Humans always revert back to past practices and in the Debt Derivative Crisis now occurring have become MUCH more creative in designing worthless financial instruments in a way to be sold by investment houses to greedy institutions banks, hedge funds, insurance companies, pension funds, and other corporate. This show should be fun to watch as the taxpayer ends up footing the bill.

US Treasurer Paulson’ Last Debt Derivative Calculation before leaving Goldman Sach’s:

Excerpts from the Avid’s Live Chat Room…

In the recent documentary “Maxed Out”, Harvard law professor and author of several books on consumer debt, Elizabeth Warren, states that the middle class is near extinction not only because of a lack of financial information, but specifically because debt is, in her words, “obscenely profitable” for lenders. Panzner says little about this in the book, but he does say that “Ever-growing investment returns, an endless housing boom, and the Federal Reserve had conditioned Americans to believe that, inevitable good fortune would eventually bail them out – should it even prove necessary.” (4) The current debt nightmare, however, is not merely about “conditioning” but is, in my opinion, based on hard evidence, calculated and contrived. Both “Maxed Out” and “In Debt We Trust” make this exceedingly clear. Furthermore, in examining the history of the financial train wreck now in the making, one must grasp the history of America’s aristocracy, not only in the days of the Robber Barons, but within the past thirty years. Catherine Austin Fitts’ website subtitled, “The Aristocracy Of Stock Profits” provides an excellent historical account of this.

Nowhere in the book does Panzner mention the $1.3 trillion missing from the Pentagon or the $59 billion missing from the Department Of Housing And Urban Development and a plethora of other instances where money is “missing” as documented, again, by Catherine Austin Fitts. Nowhere does he address the issue of fraudulent inducement, also noted by Fitts in her audio CD on the housing bubble, which simply means, enticing people to borrow when it is obvious that it will be impossible or near impossible for them to repay.

It is crucial to understand that the current economic meltdown is a transfer of wealth from the middle and lower classes to the ruling elite. Wealth transfers do not just happen, nor are they the products of incompetency. They are intentional and well planned. Central to wealth transfer is corruption at the highest levels of the economic and political systems. In hindsight, we look back upon the Savings and Loan debacle of the 1980s, at that time, the largest theft in the history of the world, yet today, our minds cannot begin to wrap around the wealth that has been stolen from the American people, making the S&L scam look like piggy bank pilfering – and to my knowledge, Catherine Austin Fitts at her Solari and Dunwalke sites, is the only person to have documented this so impeccably.

Friday’s drop satisfied the unfilled 1442.93 target from 8/6. The next lower targets are 1402.96, 1357.91 and 1330.11. There is more than one possible scenario for Monday; therefore there is no official call. However, there are two possibilities which are more likely than others. The first is that we made a double bottom and are going higher. Also, we recovered from a deep pit to close positive. The problem I have with this possibility is that the positive close is an illusion. Other indices besides SPX closed negative. After the close, futures tanked, not only going under fair value but going under cash as well. The second possibility involves a little fundamental analysis (which I rarely use) and Elliott wave theory (which I rarely use).

Friday the Fed poured cash into the system an unprecedented three times. (They bought illiquid mortgages; its cash finds its way into the market and props up prices temporarily.) With just minutes left to trade SPX was safely in the black, the market was rallying and usually no one wants to fade a strong move going into the weekend. Instead of biding its time, the market sold off sharply. In an environment where only professionals were left to trade, people wanted out at any price. The implication is that a huge in pouring of funds was insufficient to keep the market up. If Friday’s rally were due to the Fed pouring in funds, it should be rejected immediately with a strong gap down, ideally undercutting all of Friday’s recovery. In such an event, the market likely would not recover as it did Thursday and Friday; it would drop and keep dropping. And dropping.

Here is where I try my hand at Elliott wave theory on a 5 minute chart. If wave 1 down went from the 8/8 high to the 8/10 low, then wave 1(iii) goes from 1487.06 to 1431.32. Wave 1(i) is 50% of this wave and wave 1(v) just misses being 23.6%. Countertrend wave 2 up has a nice A=C pattern and wave 2 itself is 50% of wave 1(iii). It is easy to count 5 waves down from the top of wave 2; this would be wave 3(i). Countertrend wave 3(ii) has printed and we are about to start wave 3(iii), which can be vicious its rate of descent. If wave 3 is 161.8% of wave 1, then we hit 1371.83. Betting on a crash is a low percentage bet. Just because the conditions for a crash are present does not obligate a crash to occur. But every now and then conditions are right for a crash; and they are right for a crash on Monday. The patterns are projected forward not backward.

For example in the chart posted above I wanted to see what type of pattern we had for June. So the pattern recognition software took all SPX daily data prior to Monday May 28th going back years and crunches looking for pattern recognition. When it finds a pattern depending on how well it recognized it, it generates a probability for that pattern playing out given previous similar patterns and forecasts.In this case it picked up a pattern with 69%+ probability. You can see the projected forecast for June and July going into August was impressive. If you wanted to go back then I would pick say SPX data prior to January 2007 and see what projection for the months you mentioned. Problem is that previous forecasts have had low probabilities below 60%. It was the one I posted that had a more than usual probability well above the 60% that I thought was worth a post. THE ABOVE CHART IS JUST AN EXAMPLE. PLEASE DO NOT TRADE THIS!

Excerpts from the Avid’s Live Chat Room…

I have said it before and will say it again this market will not be allowed to correct meaningfully. I think the action over the past couple of days by the FED and other Central Banks confirms that. Of course it will end at some point but my guess it will only end when the rest of the world decides it has tired of subsidizing U.S. debt. The one thing that I find alarming is just how clueless some of our Elected and Appointed Officials truly are! When someone like Paulson (Sec of Treasury) comes out and says China would be crazy to sell U.S. denominated assets and even if they did it wouldn’t really be that big of a deal because their holdings only represent less than one trading days total volume I almost passed out laughing. Yes, I’m sure if they decided to sell their 1.3 TRILLION in bonds and converted their Dollars into Yen and the effect that would have on the Yen Carry Trade I’m quite certain it would be No Big Deal!! LOL

Although I doubt it will happen – it seems the greedy thieves on Maul Street simply can’t steal enough money in such a restrictive environment with FED funds at a whopping 5.25%. The whining is thunderous for the FED to cut by .50 or even 1.00. In other works undo a years worth of tightening in one fell swoop. Given the FED’s jawboning that they are more concerned with inflation which of course does not exist, a crash could be engineered in order to scare the FED into cutting sooner and by more than they really want to or should.

Funny how when the housing bubble was being created, and people were borrowing money for a down payment on a house they couldn’t afford with a 2% adjustable ARMS, and anyone with half a brain KNEW it couldn’t go on forever, Wall Street couldn’t sing loudly enough about how GREAT of a job the FED had done and how they should stand aside. Once they began to raise rates, if you can call it that, with their .25 basis point hikes strung out over two years, Wall Street was crying about how the FED should stand aside and let the markets work! Now, we have a 5% correction and panic has set in, WE ARE CRASHING and the FED needs to CUT!

All I know is (1) if a 5% correction is enough to scare the FED into cutting rates to save the market Congress should have the balls to limit the FED’s role, and (2) If this country is so dependant on the stock market going straight up it speaks volumes about what “They” know about our Social Security System and future retirees relying on it for their retirement.

Bernanke is showing that he is cut from the same cloth as the rest of the spineless Central bankers who opt to postpone the “day of reckoning” for reckless lending and money creation policies in order to prolong the myth of a sound US banking system and to promote dishonest money creation…. it all has worked thus far because “a rising tide of liquidity lifts all boats” or put another way “genius is a bull market” … everybody who participates in a bull maket i.e “greater fool theory” feels like a genius… for a certain amount of time… all bad financial decisions get papered over by an ever increasing tide of (debt) liquidity.. until…. it doesn’t…. because debt must be repaid WITH interest. Ttime has run out… I think we have reached that point now because the “bull” psychology is broken… and a (large?) part of the banking system is illiquid. Bankers know this and that is why they are panicking even as the Dow is still UP for the year and only a few percent off the high…. this attempt to liquefy will fail.

The problem now is global in nature and our creditors will not stand for this. They will look to liquidate US dollar assets at the first opportunity… watch for long interest rates and gold to rise in direct proportion to the Central bank liquidity injections and asset reallocation by our creditors. Pandora’s box has opened…. it has clearly taken ever increasing amounts of credit creation to keep asset prices at these levels. In fact, credit creation in the last 15 years is on a parabolic path that is 400% above the level of 1990 and it took is 225 years just to get to 1990 level. The difference IMO is that long term history – ptr 2002 and certainly pre 1990′s consisted of “Real Individual Investors” and not a Government Backed Guarenteed Casino. All one has to do is look at the liquidity created by the FED since 2002. I saw it posted on some other site not long ago where it took years for the FED to add 1 Trillion, in 2006 alone they created 2 Trillion and were on pace to create 2.3 Trillion in 2007. It became so shameful they quit publishing M3.