The Week Ahead

Last week the shorts got killed. Consider these numbers. Following the close Wednesday you had the biggest 4 day gain in the history of the U.S. markets going back to 1932 (in the middle of the Great Depression). That is before the Friday rally. It underscores something I have been saying for awhile, it is okay to be very small or not participate at all. The market continues to be very sick. The ultra short financial etf was down 44% last week!!! Wow!! For those following my short trade I put on at the close on Monday I exited at the open on Wednesday at breakeven (actually made a very small amount). I thought it was a great risk reward setup that did not pan out and was able to get out when the market opened down over 100 points on Wednesday. That is one key that many investors have trouble with. If your make a long term investment based off many hours of research, don't become a trader with that position and if you place a trade but typically are a long term investor don't get sucked into holding your position for the long term if your thesis as a trade breaks down.

The early indications are mixed but I get the sense from reading several articles that Black Friday was not as bad for retailers as many feared. I am not really surprised considering the level of investor expectations. Considering the rally last week most of this will be priced in though. You have alot of bad economic news coming out this week. Front and center will be job numbers released on Friday. You also have chatter starting up again concerning the GM and Ford bailout. A pullback to 850 would be natural and even a big pullback back to 800 would not be necessarily out of the ordinary. I would be shocked if we break 800 anytime soon. I am going to go out on a limb and say that we will not be breaking 800 before January 20, 2009 and that the S&P will break 1000 before we break 800. I could be very wrong but why do I think this?

Last week marked a potential major shift in mortgage rates as they tumbled with the FED's latest rescue plan. There is this built up psychology of investors that if housing prices would stabilize everything would be okay. That housing is the problem. This is very closely coupled with mortgage rates and investors bemoaning the fact that mortgage rates haven't come down with the FED Target rate. Well last week mortgage rates tumbled and I think you are going to start seeing more and more chatter on this being the panacea for housing. Then you have more and more chatter about the coming Obama administration and plans to save the world. January 20th, 2009 is the inauguration date. I think both of these will keep the November bottom in and over the next couple of months feed this powerful rally. I think this is another bear market rally full of false hope. Why?

First, investor are right that if housing prices stabilize everything would be okay, twelve months ago. We are long past that. The feedback loop has moved well beyond housing prices. It is a problem but only one of the problems. Even if housing stabilized, though this would be huge, it wouldn't fix everything. The economic tumble is going to cause corporate defaults and job losses out of this world. Concerning housing prices, even if the mortgage rates stay low, housing prices still need to decline to get back to normal long term averages. Secondly, it is well established that your brain receives more pleasure anticipating pleasure than the actual event of pleasure. You receive more emotional excitement anticipating food, sex, money than the actual event. This is well established in investing as well. That is why a stock will rise in anticipation of an earnings beat, then the company beats and the stock sells off. So the mass psychology is going to buy ahead of the Obama inauguration and I think start selling afterwards. Finally, I think you are going to see a huge spike in unemployment starting with the February numbers. January I think you will see mass layoffs as corporations start out the new year and this will show up in numbers released February 6th and March 6th. The natural dopamine letdown after the Obama inauguration combined with continued poor economic numbers I think will start the next sell off downward.

I could easily be wrong especially if something like General Motors files for Chapter 11 or the Thailand riots create instability or a sovereign country defaults. We may never see 1000. Those are my thoughts of what I think is natural. Of course that tells you nothing of how to make money. It is never easy to make money in bear markets because of the rip your face rally that occurred last week that occasionally occur and because fundamentals are marginalized. That is why it is best to play small and focus on wealth preservation. If you have preserved wealth it does not really matter if you have caught the absolute bottom.

Paul Volcker - Hammer Bearer

A very good article on Paul Volcker. As I have said before on this blog, I consider him a true American hero. This article brings out how he was willing to be hated to accomplish the better good for America. Very few people in history can do that. Contrast that with Alan Greenspan who only wanted to be loved and coddled.

This article tries to infer that Paul Volcker will be able to play the same role again. I am doubtful. Remember as Fed Chairmen he was politically isolated. That will not be case in hos new position as head of the New Economic Recovery Advisory Board. Warren Buffett has already been called an idiot after a month of the stock market not immediately rebounding after his NYT editorial. You think Paul Volcker will be given any more respect if what he recommends doesn't work within 4 weeks? I doubt it.

http://www.politico.com/news/stories/1108/16033.html

Volcker’s decisions were not easy ones. His actions touched off the worst recession since the Great Depression. There were unprecedented protests against the central bank. Fed officials were picketed and received two-by-fours in the mail with notes from workers in the hard-hit housing sector, saying “I can’t do anything with these, so you can keep them,” Reinhardt said. Volcker also had to withstand criticisms from politicians on Capitol Hill and in the White House under both Democrat Jimmy Carter and Republican Ronald Reagan.

Through it all, Volcker was tough and resolute.

Alice Schroeder Speech on Warren Buffett

This is a speech given at the University of Virginia by Alice Schroeder author of Snowball, the most extensive biography written and just released about Warren Buffett. I found this to be an intriguing speech. It starts getting good about minute 10 and found it really interesting around minute 18 containing several insights on how Buffett looks at companies. The question and answer session is subpar. Main takeaway is that he does zero forecasting and looks at everything like a horse handicapper. I highly recommend taking the time to watch this. Thanks goes to Pete.


http://www.youtube.com/watch?v=PnTm2F6kiRQ&NR=1

George Soros Interview

Don't agree with everything he says but always interesting to hear his perspecitive.

http://www.spiegel.de/international/business/0,1518,592268,00.html

Soros: If Obama is wise, he will find common ground with China to solve this crisis. If he wants to do it alone, we will go into a worldwide depression because America is not in a position by itself to clean up the mess it created.

Mother of all Bear Market Rallies?

Has a massive rally started? For someone who put on some short exposure right at the close yesterday, it was a frustrating day. First three day rally in the Dow since August. I looked like a genius until about 7 a.m. when the Fed announced their new TALF program. (This one also may actually have some teeth) The futures were down over 100 points and it looked like a quick flip for a profit when the FED announced a huge new program on Tuesday. On Tuesday?? When has that happened? Just when you think things are becoming to easy the market will always throw a curveball. So you spend a day watching the tape trying to decide what to do. From a short exposure trading perspective, we held the resistance which is around the 865 to 872 level but the market looked like it wanted to go up all day. It felt like it wanted to go up. In fact if oil hadn't just crumbled the market would have been up alot. So for this trade the probabilities came down but I still felt they were in my favor to keep it another day. If we break that area, watch out, the market will be moving much higher. I would not be surprised if we move lower before making another run at them.

The Elliot Wave guys are not clamoring for a massive rally at least back to 1080. This is based on wave patterns. It is very complicated if you have never have heard of it so google it if you want to learn more. It is something that I don't really follow but am aware of and think has legitimacy, just not sure it is applicable enough to actually make money on. Alot of it is after the fact.

Another guy who is talking of a massive rally is Barton Biggs of Traxis Partners. He wrote a piece in the financial times. Alot of his basic points I agree with. I thought this rally was coming off the Oct 10th lows. It may be coming of the latest lows. Article is below.

It continues to be the bifurcated nature of the problem that makes fundamentals exceedingly difficult. I would much rather be reading a 10-k than reading what Barton Biggs has to say about a massive rally but never in my life has investing been more of an art than a science than it is currently. The next big fundamental play will be buying companies selling for less than net working capital. I have come to the conclusion though that you do not want to buy companies who meet this criteria at the beginning of the downturn but those at the end. Those at the beginning probably have a reason to be there. Those at the end set up for good risk reward scenarios. So until then, it seems best to nickle and dime with a small portion of the portfolio. Remember doing nothing is a completely viable option as well.

http://www.ft.com/cms/s/0/1ef9847e-ba41-11dd-92c9-0000779fd18c.html?nclick_check=1

First, let me point out that by definition the bottom of a bear market has to be the point of maximum bearishness. Thus sentiment becomes a crucial indicator...... Furthermore there is compelling evidence that investors, hedge funds, pension and mutual funds, and the public are not just talking bearish, they have raised astounding amounts of cash.

and

Second, valuations are cheap.......stocks around the world are very cheap, but not as cheap in absolute terms or versus interest rates as they were in the 1930s or at the 1974 bottom.

and

Third, stock markets have been obliterated and are deeply oversold. Even dead cats bounce. The Dow has had the steepest decline since the 1930s, and the spread between the price and the 200 day moving average at 34 per cent is the greatest since July 19, 1932.

and

At the bottom of a panic, the news doesn’t have to be good for stocks to rally, it just has to be less bad than what has already been discounted. I want the markets to stop going down on bad corporate and macro-economic news. The fact that it still does shows the bad news has not yet been fully discounted. I have no idea when the next bull market starts, but I do think we are setting up for the mother of all bear market rallies.

I have been thinking that for about a month though I also firmly think the ultimate low is not in.

Jeremy Grantham TV Interview

One of the best giving his first tv interview. A must watch. Thanks goes to Pete.

http://www.wealthtrack.com/exclusive_video.php

Citigroup -Your an Owner and Your Paying for this Privilege

If you pay taxes, you are now a partial owner of Citigroup. It was one of the most awful purchases you ever made. What is going on is just insane. It makes you want to throw up your hands and just give up. Does this deal somehow help the system by screwing the tax payers? If it did that than maybe it would be worth it. The problem is I don't think it does. Not only are we now bailing out debt holders but we are working on bailing out (with taxpayer money) common equity holders. How is the Citigroup management still have their jobs with huge salaries and massive previous bonuses? Why does the government act like they are negotiating when their counterparts do not hold any of the cards. The government has pocket aces and Citigroup has 2 and a 7 off suit. On the flop another ace comes out. The government is acting like Citigroup also has two aces. It is asinine. It is just going to cost us that much more and prolong the problem. (I have never had a position long or short in Citigroup)

The markets rallied and set up for a great risk reward short at the close. The S&P rallied back to major resistance around 850. You also have the Case Schiller index numbers coming out tomorrow and more importantly the FDIC banking and troubled bank report. Friday I passed on doing anything. Today I shorted right at the close. Your basically doing nothing (which is a great option) or trading occasionally when it sets up right. I am doing both. Trading with about 5 to 10% of the portfolio and nothing with the rest. It's not what I am used to but when you have companies like Berkshire trading in 10% ranges daily something like the entire financial sector up 15% in one day, I think your a fool if your not taking advantage of craziness. Playing small makes sure you don't get killed in the insanity. If your buying or covering shorts at the close today you got it backwards. Outcomes are so bifurcated right now, for everything, that unless you have a balance sheet play, I see very little to long term invest in. Earnings are still as about as predictable as the eventual date of the end of the earth.

Speaking of bifurcation (which has become my word for 2008), my biggest fear continues to be massive inflation. That the dollar eventually starts to tumble as the price of bailout America and the equity holders skyrockets and faith in currency itself disapears. This is not something I am predicting, just something I worry about. One of the most interesting things the last couple of days has been gold's strong move higher. Since last week Thursday, you are up by over $80 an ounce. Despite all the deflation talk gold is at the same price it was on January 1st of this year. Talk about an outperforming asset class. I watch gold daily along with treasury yields. That will be the canary in the mines telling you if inflation is going to become a major concern in the not to distant future. Gold's action in the last three trading days raised one of my eyebrows.

We shall see what kind of insanity occurs tomorrow.

Short Selling Once Again in the Crosshairs...Incorrectly

Shorts are getting blamed again. Mr. Pandit of Citigroup is screaming that is the problem with his firm.

http://www.nytimes.com/2008/11/22/business/22bank.html?_r=1&ref=business&oref=slogin

One maneuver that Mr. Pandit has championed is for the Securities and Exchange Commission to reinstate the “uptick rule,” which prevents short-sellers from betting against companies whose stock price is falling. Mr. Pandit has been lobbying the S.E.C. for the past week, as have other Wall Street chiefs.

Mr. Pandit and others have suggested that Citigroup is a victim of short-sellers, which some have blamed for speeding the demise of other financial companies this year.

In actuality the facts show something much different. Short selling has gone down in financials.

Financial Sector (933 Companies) – Short Interest as a percentage of Shares Outstanding

07/10/08 6.29
07/28/08 6.12
08/12/08 5.90
08/26/08 5.83
09/10/08 5.72
09/25/08 5.01
10/09/08 4.26
10/28/08 4.08

A decrease of 35.1% in the short position from 7/10/08 to 10/28/08. Net buying every single period. Total current value of short position: $64.8 Bil.

Investment Banking Brokerage Sub-industry (33 Companies) – Short Interest as a percentage of Shares Outstanding

07/10/08 9.42
07/28/08 8.62
08/12/08 7.80
08/26/08 7.55
09/10/08 7.63
09/25/08 6.28
10/09/08 5.34
10/28/08 5.49

A decrease of 41.7% in the short position from 7/10/08 to 10/28/08. Net buying in 5 of last 7 periods.

Source : Short Alert Research - Square One Analytics

Tim Geithner Rally

I had been expecting that the next rally would be on the Treasury Secretary announcement. We got it today. Combine that with the normal madness on options expiration day and you have moonshot higher.

I am personally really disappointed. I was hoping that Paul Volcker would be announced as the new Treasury Secretary. I have heard from good sources and read elsewhere that he was offered the job.

I really don't know much about Tim Geithner. So I don't really have an opinion. I just don't know. CNBC is all positive on him but you would not expect anything different. One thing that sort of worries me is that he is coming from the Fed. The Fed is supposed to be politically isolated from the whole situation. This has almost completely disappeared and tapping a Fed official as Treasury Secretary can only make it worse.

How long this rally lasts, who knows. I was tempted to short at the close but felt the probability set up wasn't good enough in my favor. If you have a Citigroup resolution over the weekend or Geithner unveils some plan the rally could have legs. Doubt it but not easy enough money for me.

Paul Volcker Dire Warnings

I consider Paul Volcker one of America's greatest hero. I would put him at the same table as George Washington and Abraham Lincoln. Special people do what they need to do even if they know they will be hated. That is what Paul Volcker did in the 70s even though he had death threats and was essentially fired from the Fed. Now he is considered one of the greatest Fed Chairmans. He was in London talking not sounding so rosy. Thanks goes to Pete.

http://www.telegraph.co.uk/finance/economics/3474683/Volcker-issues-dire-warning-on-slump.html

"What this crisis reveals is a broken financial system like no other in my lifetime," he told a conference at Lombard Street Research in London.

"Normal monetary policy is not able to get money flowing. The trouble is that, even with all this [government] protection, the market is not moving again. The only other time we have seen the US economy drop as suddenly as this was when the Carter administration imposed credit controls, which was artificial."

and

He advised Mr Obama to tread a fine line, embarking on bold action with a "compelling economic logic" rather than scattering fiscal stimulus or resorting to a wholesale bail-out of Detroit. "He can't just throw money at the auto industry."

Hedge Funds Leaving Stocks and Looking at....Baseball?

The title is misleading because the article is very dated but still interesting. The Lion Fund out of San Antonio finding value in minor league baseball. Before you throw it out as another fund manager doing dumb things with money, the Lion Fund is legitimate. I have met one of their key money managers and they have a very successful deep value track record. I need to figure out how it turned out. Thanks goes to Nathan for the article.

http://www.allbusiness.com/company-activities-management/company-structures/10576146-1.html

A San Antonio-based hedge fund's public solicitation of Indianapolis Indians stock is akin to a hostile takeover attempt, industry observers said.

While officials for The Lion Fund LP said they aren't looking to take majority control of the city's AAA baseball franchise, they're willing to pay a substantial premium over the Indians' last buyback offer of $9,200 per share, and even more for large blocks of stock.

The Four Bear Markets

We have now caught up to the bear market / crash of the Great Depression. Time will tell whether we track the same path. FYI, its funny how math works. If we were to go down 89.2% from top to bottom we would go down another 75% plus from current levels. So though we are down 48.5% to get the negative 89% return would require a decline from these levels of 75%. Ouch.

The link is to the graph below. It was originally on over at calculatedrisk.com

https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj0DShmmrdSQGhWtyhowOijlGcPVrNSCPh3NjZQ_4z5UOYUeM_DnIrp656h4b-Kudar7XHajYdsH0m8Lfr8_BNaJDCjxn-1RqotTBhmZWZv2GbjWRGWhV3KysYwJExxcAI9u4G6Jk89cNQ/s1600-h/four-bears-large.gif

Taken Out Back and Shot - Execution Style

That is a decent description of what happened in the stock market yesterday. Every major index but the DOW went through their lows like a hot knife through butter. What continues to hold the DOW up is Exxon and Chevron. I have no idea why. The liquidity these two names provide must be getting a premium. All other oil and gas stocks are getting murdered as well. Because the DOW Jones is a price weighted index, Exxon and Chevron have the most influence of any two stocks in the index.

So what to today. If the market opens flat to up you think about adding to your short positions. If it opens flat to modestly down you do nothing. If it opens down 150 + or moves there very quickly you think about buying (short covering). The markets finished hideously yesterday both in price action and where they finished. The Dow finished at 7997. That is in the middle of nowhere considering major support was 8000 to 8100. Futures have been all over the place. Down over 100 points around 3 am and then close to flat about an hour ago. Jobless claims numbers just came out, and it wasn't pretty with the 4 week average initial jobless claims up to 506,500, futures are back to tanking mode. The market will be volatile today.

We are getting to the area, another 5% to 10% or so, where even I will start dipping my toe in the murky water. Right now, another bottom, and the associated bottom callers, are a long forgotten memory.

Plunge Protection Team

There is some growing debate about the PPT or the government's plunge protection team meant to manipulate, I mean calm down, the markets in a situation where the market is crashing. This group was supposedly created after the crash of 1987. This is a video where it is actually discussed on CNBC. Scott Nations, President of Fortress Trading, had the the audacity to suggest the government was buying futures on October 10th and 24th. CNBC about freaked when this was brought up.

My 2 cents. I think it is naive to automatically assume it does not exist. The market are inherently random but there are certain ways that a market trades. October 10th and 24th are good examples of where these normal relationships did not exist. I would add November 13th and 14th to the list (last Thursday and Friday). Last Thursday it looked like death to equities as the the S&P 500 broke new lows. The amazing thing is how fast it happened dropping 20 point in about ten minutes. The government wanted to hold the October lows and steps in (a little slow) and starts buying S&P futures when no one in there right mind would buy them. You have a billion dollars of cash flood the market every couple of minutes which then gets real money working and short covering and you are off to an 11% rally in two hours. So the theory goes. What really looked even more weird to me was Friday the next day. The market is once again moving down strong, down over 3% and all of a sudden the market reverses again. What was really amazing though is it was only the major indexes. The Dow was up almost 100 points while the Russell 2000 (small cap index) was down over 4%!! That doesn't happen. So there was buying interest only in the big names which seems very questionable considering the massive gap in performance. If your trying to manipulate the market it is the big names you mess with, not the Russell 2000 which has companies with market caps of say $50 million.

Anyway, I have definitely seen abnormal trading action that on the surface makes the most sense if big money is at work trying to stop the market from going down. I have considered the PPT the worst kept secret on Wall St that doesn't really exist except when things are bad and something the general public is not allowed to know about. Who knows what really goes on. I definitely am not anymore informed than the next guy and I hold the opinion that the government's manipulation, if it occurs, only buys time. It doesn't really change anything. To think we are this great capitalistic nation is being an idealistic. At best we are closet socialist with capitalism thrown around to make everyone smile.

Here is the actual video
http://www.cnbc.com/id/15840232?video=931599105

Below is more comments from Big Picture
http://www.ritholtz.com/blog/2008/11/debate-on-the-existence-of-plunge-protection-team/

Well, well, well … it’s early morning and a guest on CNBC’s Squawk Box blurted out in vociferous fashion about how The Working Group on Financial Markets, or the Plunge Protection Team, has been active in the S&P futures markets … most notably on October 10 and 24. He mentioned that late market action in which the S&P rose 100 points from low to high for no apparent reason, and that the US Government was in no mood to let the markets close for the weekend(s) in a near state of panic.

Well, you can imagine the horror on the faces of The Muppets, especially as this guest, Scott Nations, President of Fortress Trading, refused to back down and kept right on despite protests from the Planet Wall Street apologist hosts. Some reactions and observations…

*Economist Steve Leisman said he had heard from others about the PPT, but that this was the FIRST time it had been mentioned on the show, perhaps even on CNBC. Leisman wanted more specifics, proof. Scott Nations mentioned the George Stephanopoulos ABC public comment regarding the activities of the PPT during the Clinton Administration.

*Becky Bimbo, the one who goes around the world sucking up to Warren Buffet, almost went apoplectic, saying this PPT comment in no way represented the views of CNBC in any way. She was taken aback and acted like this guy had no right to an opinion such as that in America.

*Bank of America economist, Mickey Levy, was immediately praised, especially after he said the PPT notion was silly, while he frowned disdainfully.

*Scott Nations came back with the government is in the bond market, why not the stock market?

*To his credit host Joe Kernan mentioned that with all the money thrown around by Washington these days, that a billion here and a billion there could really move the S&P around in a short period of time.

For some reason Kernan would not let up, questioning floor trader Art Cashin next, who got his Irish dander up …. decrying it was Black Helicopter stuff and “conspiracy crap.”
Kernan pressed him further about others saying the same thing regarding a PP and Cashin began to stutter, becoming madder and madder. Cashin came across as an ole goat of a man, whose 40 year commentary from the floor and dealings in the market had been threatened.

*The net, net from The Muppets was the talk of a PPT was just internet conspiracy talk. Yet, Kernan and Leisman obviously have been bombarded with such talk, and NOT from the internet.

*Most of the Muppets/Planet Wall Street, like Becky the “B” and Cashin can’t handle the truth.

*And finally, and I can say this from personal experience, “Scott” has made his last appearance on CNBC.

More Cracks in the Glass

Today was really a miserable day in the stock market. Yes the the markets ended up but if you peel back the onion there is not much to get excited about. Part of the end of the day rally was technical. You had Budweiser leaving the S&P 500 after the merger with InBev and replaced by a much smaller company. What this means is that all the index funds tracking the S&P 500 take alot of money from the old Budweiser investment and buy other S&P 500 companies in the last hour. I think you can see this in the Dow and the S&P 500. Both finished at or above up 1% on the day while the NASDAQ and the Russell 2000 was flat to down. You have alot of overlap between the S&P 500 and the Dow, not much with the NASDAQ. The rally was also very short in breadth lead mostly by Home Depot and Exxon. On the NYSE there were 1100 advancers while you had 1900 decliners. 350 companies set new 52 lows compared to 27 new highs. Financials were also down over 1% even though the markets rallied. So all in all I would say the glass cracked a little more and in a dangerous situation all the way around.

One thing that could get the market moving higher would be Obama's annoucement of some of his cabinent, especially the Treasury Secretary. That could be worth a several hundred point rally in itself.

Glass Shattering?

Are we breaking today? We are right at the October lows. It doesn't look like we are going to hold. 850 is very important on the S&P 500 and we finished on top of it. 8000 is the number on the DOW. Hewlet Packard had some decent numbers but it doesn't matter. Not now anyway. Wall St. is in a furver on the plummeting economy and the power vacuum that has been created with President Bush as a lame duck and President Elect Obama not president yet. I would love to see the S&P drop all the way into the 600s. Not sure if we are going to get it but even I would be buying then.

I was shopping this weekend and man, if you can preserve or create wealth, deflation is a marvelous thing. First time I have really been shopping in months and the deals are amazing. It of course means that margins are coming way down, we all knew that anyway, but how far nobody knows. I am thinking about buying a flat screen tv, never owned one, and waiting for the best deal at Circuit City. No way I would go to Best Buy now with Circuit City in bankruptcy and for sure some great deals. This plays out everywhere and all of sudden you have plummeting prices and earnings. Only the strongest are going to survive.

Out and About

I am out for the weekend. Everyone have a good weekend. Just to follow up since I mentioned it yesterday, I covered my index short right at the open. It was a 2x ultra index so received about 4% in 1 minute of open trading (30 seconds at the close yesterday and 30 seconds at the open this morning) and decided to get out. Don't do many trades like that (especially in the fund) but I thought it was a great probability bet that was just asking to be taken. Sure the market has since rebounded and fallen further but trading is different from investing. I don't consider myself a great trader but even I can see Everest among hills.

Buy Erin Burnett

This is awesome though inherrently useless. Erin Burnett is smoking so logicaly it makes since even if correlation and causation may be confused here.

http://adamsoptions.blogspot.com/2008/11/does-erin-burnett-cause-bull-markets.html

CNBC just had Justin Walters from Bespoke on, and he looked at the cummulative returns of buying the market during each hour of the day.

And found the only positive return was in the 2PM to 3PM hour. Erin Burnett Time!

The New Global Dow Index

If you have looked at cbs.marketwatch.com recently, you have noticed a new index called Global Dow. I expect that over time it may become a fairly important knew index. Below describes exactly what it is.

http://www.marketwatch.com/news/story/New-global-index-takes-pulse/story.aspx?guid={C57CB27C-177A-4491-84DF-19AC8C3A195B}

The Global Dow launched on Tuesday -- the first addition to the Dow Jones Averages family of indexes in 75 years.

and

The Global Dow is much bigger -- 150 stocks rather than 30 -- and its components are weighted equally rather than by price. All 30 Dow industrial stocks are included in The Global Dow, as well as some from the Dow Jones Transportation and Utility averages.

and

But The Global Dow isn't an exact mirror of the DJ Wilshire Global. The Global Dow is a bit underweight in the Americas (the U.S. is at 42% instead of 46%) and puts greater emphasis on Europe at 32% versus 27% for the DJ Wilshire Global. Asia/Pacific is a smidgen heavier in The Global Dow at 21% rather than 20%.

Panic for Everyone - Buyers and Sellers

Well like I said, sell at the open. It was the right call, you just had to be at a computer to buy at noon. The open told you it was something to sell because of the news combined with the apathy attached to it. About 11:00 central time we finally had the crunch that would have been the open I was looking for to buy. You were down from the open to low point over 400 points on the DOW in about 3.5 hours. You had the capitulation selling that had to come. So you had panic on the downside and the short coverers came in at those huge technical levels. I know this because the stocks that started moving higher first in the stocks I follow on my ticker screen were the most heavily shorted stocks. After the short coverers came in, the buyers took it as a successful retest of the lows and they started buying and all panic broke out with a stampede to the upside. Unless your a hard core trader you probably saw all this and just got a dazed look. There is nothing really rational about any of it. In fact it shows how sick the patient is. It is like seizures on the operating table. The market isn't healthy when it trades like this even if the movement is up. GE added over 22 billion dollars of market cap from 1 o'clock. Are you kidding? I am not a trader and didn't really do anything except right at the close (literally the last 30 seconds). I put on a "trade" bet going short an index. I usually don't "trade" but this is a true trade based on probabilities. If the market starts moving up substantially tomorrow I am out. I just like the probabilities that after a 900 point rally in 2 hours or 11.25% on the biggest exchange in the world that I will get a chance to cover my short at least a little lower.

The bigger question is where from here? After this 900, 11.25% rally in 2 hours we are dramatically back to where we were at 2:30 p.m. on Tuesday. Wow, talk about volatility. The stock market guys are pounding this as a successful retest throwing terms out there like triples bottoms and reverse head and shoulders. At some point the market is going to get ahead of the bad news and we will rally hard for many months even as more bad news pounds us. As I have said I thought the October lows was it. Now I don't really know. This is still either a digestion of the October lows setting a base or that trading range that I felt was verified on Monday with the first lower low of the rally from October. All that is a bumbled mess of I really don't know. I was very vocal on Tuesday that I thought we were going to retest the October lows and it could happen very quickly (it happened quicker than even I thought). If we break through 940 to 950 (which is my stop loss on my index short I put on right at the close) I think you can forget about the October lows for awhile, at least like a week. lol The patient is just sick.

Oh one other point. The rally started about the time President George Bush started speaking. Now I am not crediting the rally to that, it is probably more coincidence but it was the first speech from him or anyone in government that I have heard that was motivating, instilling confidence, gave me hope. It was all about capitalism and other great crises and America going to get through it. It was about the market working things through and working things out. Where was this 3 months ago, 6 months ago? Every time I have heard George Bush speak in the last 6 months it was like deer in the headlights. In fact it was playing in the background and ignored the first half of it until it just started drawing me in. It almost made me want to buy. That probably had no impact on the market rally but it was curious of the timing. Unfortunately, especially since he will be seeing the exit door very soon, it is to little to late.

More Videos

In my world there was an event of high importance on capitol hill. The hedge funds testimony. Watching the questioning by some of individuals on the committee in Congress made me sick. They are so clueless and it is very concerning to know these jokers are the ones controlling our country trying to find solutions for this current mess. There is a reason that billionaires were answering the questions versus asking the question. The politicians are often times the ones who can't make it elsewhere.

All the hedge fund managers gave opening statements. Some of them fascinating. Below are videos if you missed it and would like to watch. These guys are a whose who of the industry.

George Soros
http://www.cnbc.com/id/15840232?video=927424255&play=1

James Simons of Renaissance - I thought an important point he made was that hedge funds leverage is controlled by their lenders unlike the investment banks.
http://www.cnbc.com/id/15840232?video=927435607&play=1

John Paulson of Paulson & Co.
http://www.cnbc.com/id/15840232?video=927447220&play=1

Philip Falcone of Harbinger Capital
http://www.cnbc.com/id/15840232?video=927453513&play=1

Kenneth Griffin of Citadel Investments Group
http://www.cnbc.com/id/15840232?video=927435625&play=1

Interviews With Wisdom

One of the key's of successful investing is listening to the right people. Jim Cramer, not so much. James Chanos, your head should snap to hear what he is saying. CNBC occasionally some great guest hosts on. This morning was one of those mornings. Below are links to several very good videos.

Famed short seller James Chanos
Paraphrased quote from the video - true value players are in the debt markets, not the equity markets.
http://www.cnbc.com/id/15840232?video=927292895&play=1

More of James Chanos
Adding to his infrastructure shorts even currently after they have gotten slaughtered.
http://www.cnbc.com/id/15840232?video=927293850&play=1

More of James Chanos
Focus on healthcare area for shorts -service area and device area
http://www.cnbc.com/id/15840232?video=927295744&play=1

If you have more time:

James Grant of Grant's Interest Rate Observer
http://www.cnbc.com/id/15840232?video=927270192&play=1

James Grant of Grant's Interest Rate Observer and Dennis Gartman
http://www.cnbc.com/id/15840232?video=927263191&play=1

Ridculous Open

It looks like the futures point to a flat open in the market. If your looking to play long, another disappointment. As mentioned yesterday after the bell Intel released just a horrific forecast. Market after crumbling yesterday during regular trading hours and crumbled some more after hours. My thought was if you had a truly horrific open you buy through either explicit buys or through implicit short covering. Now we have climbed all the way back to looking at a flat open even after jobless claims climbed up to 516,000. Shows a lack of fear and lack of panic. I think you sell at the open now.

To add a little humor to this morning:

How do you get a graduate from Texas Tech off your front porch?

Pay for your pizza.

Another Dreadful Day

Just another dreadful day. Nothing can go right. Best Buy issuing just horrendous guidance, Paulson playing pick a plan showing no confidence and receiving none in his press conference, and then Intel after the bell also releasing horrific guidance setting up for a massive move lower at the open tomorrow which if it occurs will slice through the October lows. There are signs of capitulation (really for maybe the first time this whole thing started) with quotes of some of the Titan's of finance finally looking gloomy. These same guys 6 and even 3 months ago still thought the world was rosy.

You had Dimon saying the economy was going to be worse than the credit crises.

http://www.bloomberg.com/apps/news?pid=20601087&sid=a5NNkx582T90

JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon said the U.S. recession ``could be worse'' than the credit-market crisis that brought lending to a standstill.

Unfortunately he added this:

Still, Dimon said there is reason for optimism about prospects for the economy. ``We're not running this company like we have a Great Depression,''

The CEO of Merrill Lynch, John Thain, filled the gap.

http://www.ft.com/cms/s/834ebf5e-aff9-11dd-a795-0000779fd18c,Authorised=false.html?_i_location=http%3A%2F%2Fwww.ft.com%2Fcms%2Fs%2F0%2F834ebf5e-aff9-11dd-a795-0000779fd18c.html&_i_referer=http%3A%2F%2Fcalculatedrisk.blogspot.com%2F

The global economy is entering a slowdown of epic prop­ortions comparable with the period after the 1929 crash, John Thain, chairman and chief executive of Merrill Lynch, warned on Tuesday.

But former Goldman Sachs Chairman John Whitehead outdid them all.

http://www.reuters.com/article/Finance08/idUSTRE4AB7HT20081112

The economy faces a slump deeper than the Great Depression and a growing deficit threatens the credit of the United States itself, former Goldman Sachs chairman John Whitehead, said at the Reuters Global Finance Summit on Wednesday.

Whitehead, 86, said the prospect of worsening consumer credit woes combined with an overtaxed federal government make him fear that the current slump is far from over.

"I think it would be worse than the depression," Whitehead said. "We're talking about reducing the credit of the United States of America, which is the backbone of the economic system." Whitehead encountered plenty of crises during his 38 years at the investment banking firm and was a young boy during the 1930s.

First the bad news. All these guys are probably right and saying things I have been saying for a long time. Now the good news. You need this race to the bottom of who can be the most bearish, the most cataclysmic, the most depressing for the buying opportunity to finally develop. This is the first time I have seen it at all in those whole debacle by what I call main street wall street. Not the smart money that manages money but just the normal Wall St types. I have not seen this level of pessimism through this whole thing but rather continued cheerleading. I noted on this blog on the October lows (the Monday after the intraday low on Friday), I was dismayed at how many bottom callers you had. At some point we are going to stop setting news lows every one to three months and will establish a low that will hold for many months. I thought October may have been it. Not looking like it but if you get Wall St in a game of who can be the biggest bear, in the short term, the bear may be headed into winter hibernation after this next drop. We could very easily be 10 to 20% lower than we are currently for that to happen.

Market Action

Dismal, that is how you describe the market action today. It was bad across the board. Breaking 900 doesn't mean we are headed to new lows. What I do think it means is that either we are in a trading range or we will be testing the lows shortly. In my mind it took off the table my expect ion of visiting 1100 on the S&P in the next month or two. It was the first true lower low since the rebound started. What was even more interesting was that at 1:00 Freddie, Fannie, and the FHFA talked about this "new" loan modification program. The market rallied 270 points back to break even. I was working out and was like short that rally. We rolled over and went down 250 points before a slight bounce at the close. A couple of things. If the market was still in rally mode it would have latched onto that news. Instead it saw it for what it was, a selling opportunity. Loan modification program? Please, has been tried, doesn't have great success, and doesn't really change anything. Either way the market in rally mode tends to latch onto this things as something to buy. Didn't happen today besides the initial short covering. So with the break of 900 I don't really know where we are headed, my guess would be lower though not necessarily breaking new lows in the short term, but I do think you can wave goodbye to a truly big Santa Clause rally.

Gun Run?

Maybe another investment idea? Probably not, unless your doing it for a trade but was talking to an investor about Sturm, Ruger & Company (RGR) today.

http://onenewsnow.com/Culture/Default.aspx?id=315260

Numerous reports around the U.S. indicate that citizens have been racing to purchase both guns and ammunition before Obama takes office next year. On Election Day, a Cheyenne, Wyoming, gun store set a one-day sales record -- then broke that record the next day. The Franklin Gun Shop outside Nashville sold more than 70 guns on Election Day. It was the biggest sales day since opening its doors eight years ago.

The day after Obama was elected, the owner of a shop outside Salt Lake City sold nine assault weapons -- and another gun store owner in Fort Worth reported sales of $101,000 in merchandise, shattering its single-day sales record.

NRA spokewoman Rachel Parsons has a theory on the gun run. It is quite apparent, she says, that people are concerned that Obama truly has had a radical record of opposition to the Second Amendment.

Big Day

Huge day in the markets today!! Below 900 on the S&P is the first lower low since the first week in October. That is not an absolute low but we have been setting higher lows after every major drop. Last week's major drop went from 1000 to 900. Friday and Monday we bounced to 950. If we break through 900 we could be visiting the October lows very quickly and the idea of a continued bounce may be distant memory. Yesterday I came outright depressed looking at what was going with AIG. Things are getting uglier out there.

Federal Reserve's Dirty Little Secrets

I was asked what my thoughts were on this story so I decided to blog on it. First the highlights of the story.

http://www.bloomberg.com/apps/news?pid=20601087&sid=ahdVHk_Ccoeg&refer=home

The Federal Reserve is refusing to identify the recipients of almost $2 trillion of emergency loans from American taxpayers or the troubled assets the central bank is accepting as collateral.

and

The Fed made the loans under terms of 11 programs, eight of them created in the past 15 months, in the midst of the biggest financial crisis since the Great Depression.

``It's your money; it's not the Fed's money,'' said billionaire Ted Forstmann, senior partner of Forstmann Little & Co. in New York. ``Of course there should be transparency.''

First, what a mess. We are in so much trouble. I go from being pessimistic to super pessimistic and today I am in the super pessimistic camp. It stems from talking to a debt investor over the weekend about the massive corporate defaults that are coming then compounded by the AIG news this morning. The AIG "bailout" is a total scam in the sense that it is something new and you start extrapolating to what it means for other financials and we are in major trouble. I haven't been this depressed about the state of our economy since late September.

Anyway back to the article. I can't blame the FED. If I was in the FED's shoes I would be doing the same thing. I am not saying it is right but you can't blame the FED. You have to blame Congress for not requiring such disclosure. If that information is released (I would argue we do have a right to know it) then alot of people will get wiser alot quicker with how bad things are. If your the FED at this point you don't want that. It needs to happen but their are ramifications attached to it so if your the FED you almost have a responsibility to focus on the ramifications. If your Congress or the court systems at this point you have a responsibility for justice and rule of law to prevail. I think everyone is acting correctly in a capitalistic way though I think the end outcome should be disclosure.

Either way know there will be no upside surprises to whatever the FED is holding.

More on Ideas from Anywhere

Now this is interesting. The link shows graphs of asphalt inventories, prices, demand, imports, and production. The reason I am not just ignoring this with prices are going to fall because the economy is going to stink is because of the very real possibility of increased government spending in the infrastructure arena, specifically roads, bridges, etc. This creates a demand curve that may not track the economy.

http://media.corporate-ir.net/media_files/irol/12/123440/Asphalt_Fundamental_Charts_10_31_08.pdf

Ideas From Anywhere

It is amazing where investment ideas can come from. I was just messing around browsing news sources and saw this is on foxnews.com I had no idea this was going on. I am not that all familiar with liquid asphalt though I have spent time and invested in the actual aggregates.

http://www.foxnews.com/story/0,2933,449172,00.html

Expect a bumpier drive. An asphalt shortage is delaying road maintenance projects in communities nationwide. Asphalt is becoming scarce as U.S. refiners overhaul their equipment to maximize output of highly profitable fuels such as diesel and gasoline, using inexpensive — and hard to process — crude oil.

To make things worse, refiners are also cutting back on the production of a petrochemical that many states mix into asphalt to make roads more durable.

Dozens of road repairs were delayed last summer and municipalities around the country may face another shortfall next summer. Road-maintenance projects that have gone forward cost significantly more as the price of asphalt nearly tripled over the past year.

why?

In the past, about 40 percent of an oil barrel would be turned into asphalt products and now it's around 10 percent, McMinimee said.

The reason for the decrease

The shift in refinery technology that led to the decline in asphalt production was spurred by increased oil prices.

Oil refineries around the country are installing billion-dollar machines called "cokers" that are able to refine the chunkiest, low-grade and least expensive crude oil into highly profitable fuels, such as gasoline and diesel.

Which has resulted in:

The U.S. is currently undersupplied by about 24,000 barrels of asphalt a day, or 5 percent of daily demand, and that number is expected to jump to 257,000 barrels a day by 2012, according to San Antonio-based NuStar Energy L.P., a producer of asphalt.

Other impact because of substitution:

The skyrocketing price of asphalt has had at least one positive effect — on the concrete industry, as its product becomes more attractive to city engineers.

So I started digging around and went to NuStar's website and saw this on the front page of the website:

http://www.nustarenergy.com/Pages/default.aspx

NuStar Energy L.P. (NYSE: NS) today announced that it has successfully completed its acquisition of CITGO Asphalt Refining Company’s asphalt operations and assets for $450 million, plus inventory of approximately $360 million subject to post-closing adjustment.

So then I went to go look at some of the fundamentals of the company and found out it is paying a 9.44% dividend yield. Now I am a long way from making an investment. It is just amazing where ideas / work comes from.

Younger Bears and Older Bulls

I have noticed this phenonomenon also. Older individuals tend to be more bullish. I don't know if it is wisdom or conditioning. This is a good write up talking about various older and younger investors.

http://lloydsinvestment.blogspot.com/2008/10/older-bulls-wiser-than-younger-bears.html

Old bulls versus younger bears. This could be entirely coincidental. Has anyone noticed that bullish sentiment seems correlated with age?

The most prominent U.S. stock market bull to surface in recent days is highly respected Mr. Buffett, who was born in 1930 and grew up during the Great Depression years.

If the younger bears are wrong, this is the reason.

One interpretation is that the older generation, having closer first-hand experience with the crash of 1929 and economic hard times during the 1930s, have a deeper appreciation for today's unprecedented government efforts to stem the current financial crisis before it reaches depression-era proportions.

Transition Economic Advisory Board

I was asked to give my ideas to Obama's new Transition Economic Advisory Board. That sounds way more presitgious than it really is because I am no way directly involved. Below is the email I sent for those who would be interested:

Unfortunately that group seems way to big to actually get something accomplished but we can always hope. Feel free to cherry pick or plagiarise anything below. In my mind the financial crises is over. The government has taken on all systemic U.S. financial risk out of the private sector and put it onto the government balance sheet. This was massively mishandled. Now you have an unfolding economic crises that is much more difficult to deal with than a financial crises.

I asked a buddy what he thought and his three word response was "buy a bunker." Unfortunately that may be the best answer but lets pretend for a second like somebody can do something to help.

I am going to split up this email into two parts. I believe Charlie Munger got it right when he said "invert, always invert." So I will invert the problem in the first part and then offer ideas in the second part. The reason inverting is so powerful (though unfortunately rarely done) is it forces you to think about collateral damage of various actions and you often see things working backwards you would not otherwise see. All of this in an email response is simplistic and all ideas can be vetted out much further.

First Part (Inversion)

What is at the basic core of capitalism? It is a system that fundamentally relies on 1) trust and 2) supply and demand. One is soft, kind of airy, and can't be measured. One is hard, factual, and data driven. Trust is capitalism greatest strength and greatest weakness. It is the greatest strength because it means the product over time will maximize utility for the purchaser. I won't do business with you unless I trust you. You screw me or sell me a faulty product, you won't last long in whatever product you are selling. I will go somewhere else. Compare this to U.S.S.R. communism where I have to buy a tire from the government sanctioned tire maker. A system that relies on trust creates accountability. It is capitalism greatest weakness because trust can leave in a heartbeat for the entire system (and does throughout history) causing other trustworthy institutions to become untrustworthy (i.e. banks) because of the domino affect. You don't have trust and you don't have an economy. Supply and demand is self explanatory but is also uniquely capitalistic. Communism mandates prices or the number of cars produced. In a capitalistic system the market mandates what is produced. The weakness in capitalism is you can way overshoot. Right now we have a rare moment in history where we have massive imbalances in both. Trust and supply and demand. Both of these feed off of each other. To much trust leads to to much supply and vice versa creating huge overshoots in economic activity So every government decision needs to be with the goal of restoring trust and working towards a balance of supply and demand. This is very important because so many government policy decisions in the last six months have been panic responses that ultimately hurt trust and policies trying to manipulate supply and demand versus restoring supply and demand.

So lets work down to the next level. What do you want to avoid. In my mind you work down from this list.

1) Massive inflation - arbitrary what this means but probably 20% plus type of numbers
2) Depression (many would argue this is a worst outcome than hyper inflation. I would argue, that though extreme, depressions are natural. US has experienced several. Britain has as well. Countries emerge from a depression often times stronger than before. Show me one example in history where hyper inflation was ever controlled and the country emerged stronger or the same as it was before through natural economic correction? Maybe you can think of one, I can't. I think the reason is that extreme inflation is the ultimate trust buster. Inflation means trust in currency and hence the government backing that currency is essentially gone. 10% inflation is probably better than depression. Much beyond that and I think you created a worse problem.) 3) 1980 UK recession
4) 1982 US recession
5) 1991 US recession
6) Economic expansion.

Why is this important? Two reasons. You can't start with 6. If you start with 6, economic expansion, it means in my mind you haven't accepted intellectually the problem. This was the problem with the stimulus checks back in June. Regardless of what we do we are going to feel economic pain. What you don't want to do is create something that will be worse than it would otherwise would be. The government has already been good at this. The second reason this is important is it forces you to think through a policy decision to work down from the lesser evils. First avoid massive inflation, then do what you need to do to avoid depression, than a 80 UK recession, etc. working all the way down to policies that will generate economic expansion.

So lets work down to the next level while still inverting. Ideas floating around out there.

1) Foreclosure freeze - In my mind a very very bad idea. It continues to destroy trust and does nothing to restore supply and demand but instead manipulates it. It destroys trust because if bank x wants to borrow from bank y, the bank y will know that like itself, bank x no longer has control of its assets while asset value is deteriorating knowing that at some point bank x will experience that pain so the stated book is overvalued and won't make that loan to bank x. It also creates an incentive (also destroying trust) for rational (though maybe unethical) homeowners to stop paying their monthly payments because I can't be foreclosed on. Rationally, I don't pay for six months, put that money I would have paid in the bank, earn interest, and then pay it six months later when the threat of foreclosure is on me again. It distorts supply and demand manipulating supply of homes downwards and masking performing loans upwards. This cycles back to trust deterioration of investors who are unwilling to make an investment because I can't judge what the true supply / demand and value equation really is.

2) Second stimulus package - In my mind a bad idea (not very very bad idea). If you don't have trust, consumer will not spend a check. This does nothing to restore trust. It is also like providing a cocaine addict with another shot of cocaine. It is not going to hurt but it probably won't help either. There is much more you can do to get bang for your buck than with a 100 billion odd consumer stimulus package writing a check to individual Americans.

3) Bail out automakers - there is way to much excess supply in the auto industry. The auto industry would be much better off today if Chrysler would never have gotten bailed out. You are sending money into a sink hole. I could go on with other policy ideas but lets move onto the second part.

Ideas

So with all that in mind above what policies can be done to help restore trust, work towards a natural supply and demand base while decreasing the chance of hyperinflation, than depression all the way towards economic expansion? The trust and supply and demand is all interrelated so while one idea may address more specifically one or the other, it ultimately addresses both.

There are two paths. Sweden which addressed the problem, didn't try to hide the problem, and took painful medicine, and the Japanese route who did the exact opposite. Right now we are on the Japan path. The Swedish path means America has the stomach to take pain now for gain later, I am dubious that spoiled Americans can do that.

1) My favorite idea (this is 100% original) that gets to the heart of the problem and I have mentioned this to you before, is for the government to buy and bulldoze houses. This is 100% from inverting. If the problem is housing lets address housing instead of running around addressing everything but housing. I have talked about this with alot of people and nobody has told me why it is a bad idea. To my knowledge it has never been tried and to me it is very capitalistic at its core. Total existing housing inventory is about 4.8 million and sales run rate is about 4.8 million so give our take you have about a 12 month supply. If you bought 1.6 million homes at an average price of 250k that would cost you 400 billion (that moves supply down to 8 months). What do you do? Instead of manipulating supply you are literally moving the supply curve. 8 months is still to high and so home prices will still drift down to more natural levels avoiding inflation but it will help prevent the overshoot which is what will kill us. Your injecting capital directly into main street and most importantly you are dramatically impacting the recovery rate for many of the CDO and CMO which dramatically impact the value of these securities which dramatically impact capital levels. Most of the bank losses are in the derivatives off the mortgages, not the mortgages themselves. This goes to the heart of impacting the mortgages. You take a dramatic overshoot off the table which increases the weighted average expected value of houses, which increases mortgage values, which has a huge impact on derivatives because of the leverage involved. You have some provision that mandates the government will sell this land back to the private sector 10 years from now over a 10 year period. Take the housing database, sort by delinquent mortgages, and by months of supply in various states, and buy the most strategic 1.6 million homes Maybe this is a bad idea. It hasn't been done but it addresses the core problem, it makes the government the buyer of last resort where it is really needed, and adds to the governments millions of acres that they already own that can easily be sold back in the future. Bulldozing the houses limits the problems you will have for squatters or litterally takes the supply out of the U.S. versus just freezing the supply.

2) If you don't this at least buy mortgages with the TARP money. It is the recovery rate that is key to hundreds of billions of dollars in losses. Buying boatloads of mortgages dramatically increases the recovery rate increasing the value of derivatives multiple times than if you would have just bought the derivative.

3) Force the banks to stop hiding losses. Ignoring the problem doesn't fix the problem. It damages trust and prolongs the problem. I know you and me differ on this but the accounting is so loose and so opaque that the banks can hide billions upon billions of losses. Investors know this and banks knows this. What is unknown is which bank is the worst off and to what extent. So it destroys trust because I don't trust any bank. I don't want to own any bank. I don't like any bank. Banks have the same feeling toward each other. This TARP plan encourages losses to stay hidden just like Japan. Lower the required regulatory capital ratios for a set period of time while forcing all banks to cleanse their balance sheets. Those banks that will fail because of this, let them fail. Wipe out the equity holders. Nationalize these banks. The pain will be large for a short period of time. What will also be large is the amount of trust that will flood back into the banking system.

4) Create supply where there is to much demand. Infrastructure stimulus plan. This is the one area in the U.S. we are under supplied. Probably the only area. Our infrastructure is old and in certain places not enough. Create large amounts of jobs while overhauling our infrastructure. The return on this investment will be huge. It will help unemployment and will directly put dollars in Main Street's hands.

5) I will throw a bone to Obama (don't let my dad know). Move the tax rate for the top 5% of Americans up. The top 5% of Americans greatly benefited from the system, it is our duty to help save the system. I would demand a 5 year limit on this but any increase in revenue inflow will help on the potential inflation front. It helps maintain trust in the government itself.

You can't save the world and the world is in trouble. This means that no matter what America does, the pain is going to bad moving forward. The best we can hope for is that you don't create a bigger problem and help minimize the pain through smart economic policy. If we are lucky we will get out of this with a price tag of 4% of GDP. It could be much bigger. As I said, in my mind the financial crises is over. I would say the banking system still needs to be cleansed instead of being propped up and if the government is going to backstop the entire system force a cleansing. The threat of financial collapse, unless the government collapses, has been taken off the table. Now you have an economic crises of massive proportions. Focusing on trust and supply and demand is the only thing that will minimize this pain.

Discretionary Spending Goes the Way of the Dodo BIrd

One of the great weaknesses of capitalism is that it relies on trust. The trust swings wildly from one side to the other. Two years ago it was blind trust to the point of utter foolishness. Now we are rapidly heading towards the other extreme where all trust disappears. When this happens saving rates move up and hoarding develops. This is occurring now and unchecked you get depression. What is good for the individual is not good for the whole. You saw this with banks, credit card companies, brokers, hedge funds, etc. etc. The government has been trying to stand in the gap restoring this trust but with little success (partly because of previous massive mistakes made by the government). It is now moving mainstream which is deadly dangerous. Article below talking about what MasterCard is saying about what they are seeing. Very scary.


http://www.reuters.com/article/ousiv/idUSTRE4A43TQ20081105

NEW YORK (Reuters) - U.S. consumers slashed spending in October, shunning purchases of items over $1,000, as a global financial crisis battered their savings accounts and their psyches, according to figures released on Wednesday by SpendingPulse, the retail data service of MasterCard Advisors.

"The numbers for October are very negative across the board," said Michael McNamara, vice president at MasterCard Advisors, of sales figures tracked by SpendingPulse.

"Any area that deals with consumer durables, especially areas like furniture, electronics and appliances ... that relies heavily on sales purchases that exceed $1,000 in value are under significant pressure," he said.

Obamaized

The title really isn't fair. The market I don't think sold off because of the election (and I am no Obama fan). You had the election rally yesterday. Today was buy the rumor and sell the news. This combined with just awful news today and profit taking after being up 18% in 7 days and you get an ugly day. It was definitely profit taking and I figure the market discounting the jobs number that comes out on Friday. I figured we would see 950 before we saw 1050 but didn't expect it to happen all in day. I don't think we are done from rally mode that this is a normal pullback in a counter bull rally but depending on how bad the jobs numbers are on Friday, who knows. Arcelor Mittal who makes 10% of the entire steel in the world came out and said this is the biggest crises going back to the Great Depression and that steel demand has fallen off a cliff. The stock down 20%. Cisco after the bell (the CEO is one of the biggest cheerleaders in the world) said revenues were down 8% yoy in the month of October!!!! For someone like Cisco that is just massive!!!!!

Another concern is that you have this dead period between November and January when you get a new administration and the steady flow of dollars to the problem may slow down as those in charge lose interest in keeping things propped up since the election is over.

It will be very interesting how the next five trading days play out. I don't think we are done going up as a counter trend rally but things could start snowballing the technicians.

Political Tuesday

Several articles on politics and the markets. All kinds of debate on who is better for the markets, Democrats or Republicans. Historically it is thought Republicans but that really isn't true. According to the articles below the markets doesn't really care about the President, it is Congress that matters. What appears to be even more important is having a divided government. That is what I always say. If the government can't accomplish anything we are much better off. If Congress gets a filibuster proof Congress today the market will most likely sell off tomorrow. Thanks goes to Cason for emailing these articles to me.

http://www.heraldtribune.com/article/20080804/COLUMNIST/808040303/2301/BUSINESS&title=What_history_has_to_say_about_the_ballot_box_and_economics

"When the Republicans controlled Congress, the market's annual appreciation was 14.41 percent irrespective of the party of the president. In the opposite case, the annual appreciation was 6.79 percent."

http://online.wsj.com/public/article_print/SB122117691244025843.html

"Maybe we should lag the results by a couple years. That is, we'll assume that the growth in a given year was the result of the president's policies from two years ago. When we do that, we find that the economy performed pretty much exactly the same regardless of the president's party...But then who ever said that the president alone determines the economy or the stock market? It's Congress that makes the laws. The president just signs them. Based on congressional control, the study results look very different. Under Republican Congresses, stocks have averaged a 19% return, while under Democratic Congresses only 11.9%."

http://online.wsj.com/public/article_print/SB122117691244025843.html

a Democratic president and a Republican Congress. Under that deal, stocks have averaged a 20.2% total return, and real GDP averaged 4%

More on S&P 500 Earnings

More on earnings from Barron's. The article will probably be free tomorrow or Tuesday. If you want it now let me know and I can email it.

http://online.barrons.com/article/SB122549989687489919.html?mod=b_hps_9_0001_b_this_weeks_magazine_home_left

Talk about out of touch: Analysts currently estimate that earnings for the companies in the S&P 500 will rise 29% in the fourth quarter, and keep climbing, by 15% in 2009, to a record $91.41 a share, according to Thomson Reuters. That seems wholly unrealistic, given the recent jump in unemployment, the credit crisis and last week's news that the economy contracted at a 0.3% annual pace in the third-quarter.

The analysts may be asleep on the job, but the markets certainly seem to be anticipating a sharp drop in corporate earnings.

and

Five prominent strategists we polled last week expect earnings for the S&P 500 to fall 15% this year and 3% next year, to roughly $70 a share.

If the strategists are right, stocks are pretty fairly valued right now. The S&P 500 was trading Friday at 960, or 13.7 times the strategists' $70 earnings estimate for 2009. For the past 30 years, stocks have traded at an average of 13.7 times expected earnings. So 13.7 times depressed earnings seems pretty reasonable.

What I referenced earlier:

"We believe the analysts' numbers will come down considerably," says Howard Silverblatt, senior index analyst at Standard & Poor's. As of now, S&P's own analysts are calling for $94 of earnings for the S&P 500, while S&P's economist expects only $62.40.

and

Let's say that S&P companies earn only $60 a share next year, which is Merrill Lynch's top-down estimate. Apply the same historic multiple of 17.82, and the index would be valued at 1069 -- about 11% above Friday's level.

The risk: In past recessions, earnings multiples have fallen well below the average. In the 1975 recession, the market's trailing P/E sank to 7.28, and in the 1980 downturn it shrank to 6.84. A seven multiple applied to $60 of earnings would result in the S&P 500 trading for only 420 -- 50% below current levels. That's something we hope never to see.

S&P Earnings

Had a couple of emails about what analysts earnings projections are for the S&P 500 for 2009. One friend pointed out that according to Barrons this weekend the S&P companies analysts projected earnings adds up to 91 while the S&P economists have earnings projected of 62. So basically you have company analysts who cover say Microsoft who do not look at the big picture and in most cases have not lowered projections. There you have earnings of 91. The economists who look at the big picture and the index have 62.

Not sure where the 45 number came from in the article from last week.

I personally think 62 may be to high but that 45 is to low.