I have taken a look at YTD Retail Sales and CPI.

CPI is increasing at an annual rate of 4.8%.
In an credit crunch panicky environment
Inflation is still tying Mr. Bernanke’s hands.

Real Retail Sales is at .9% indicating a weak economy.
The weakness in the US will have repercussions in the stronger overseas economy.

Coventree's Rocket fund, which some miners have invested in, has the following holdings: 45 per cent 'structured financial assets,' whatever those are; 25 per cent personal lines of credit; 13 per cent uninsured mortgages; 17 per cent other. It really makes you wonder why any company would invest its funds in that. We will soon see who else was irresponsible enough to be buying into those. BTW, NewGold Inc. had $152M into ABCP's.

Also, the so-called bank 'bailout' by Canadian banks actually makes the holders of those funds make a really hard choice: convert the currently unmarketable investment into much longer term, (sometimes as long as 8 years!, or take a deep cut now. What a choice! Delay production by 8 years, wow!

Anyway, Bill, I understand the temporary cash injection will lift things a bit, but wasn't the lowering of the rates part of the fundamental problems we are now facing? Inflation has not gone away, as Will points out above. The real rate hasn't been lowered - yet, and how can it be? What has transpired this week smells like a bandaid solution, if not purely psychological. The problems have not gone away, I just cannot see why the bulls would have a case, just a little extra cash now, but that is just my little informed opinion. I am hedged either way, I am just shocked at what I see.

I tend to agree with your general thesis Bill, but I am not at all certain we're going to get the retrace you're talking about.

Yes, I know that we SHOULD, but I don't think its going to go to there.

It may, but...

Why do I think that? Take a look at the Dow in particular. It has formed a very nice Head And Shoulders, and pierced the neckline. Yesterday we took a run at the neckline and failed there.

The S&P 500 took a run at the 200 (from the bottom) and failed THERE.

If you put Fibs on from the peak to the bottom of the hammer handle Thursday, we got almost a 50% retracement now, and have passed the 38.2% level. While a 61.8% retracement would be more "normal" the first micro-wave retracement in the decline was truncated, and thus it is reasonable to expect that this one might be too.

What Bernanke did Friday was arguably one of the most foolish things that a Fed has done in the last 50 years. Playing hell with institutional investors who were locked in posititions subject to the Friday SOQ, leaving them with no real opportunity to lay off the risk was wildly unreasonable - and unnecessary. Making the announcement just a few minutes later when the market was open would have prevented this; it smacks of an intentional act, never mind that late-day rally Thursday which now, centered in the financials, smells an awful lot like a leak, doesn't it?

You can bet that the Hedgies and Institutional guys who got reamed yesterday will be even more jittery than they otherwise would be, which is reflected in the fact tha the VIX didn't even lose a full point against that big rally!

I give the odds as 50/50 that the 200 will hold and so will the H&S pattern. And if it does, we better be prepared for some nasty stuff in the next leg down.

I don't remember Canada having hurricanes.

Here's wishing you and others in the region safety through the hurricane season, Bill.

My son begins his first year at Tulane this year, so I am not just a casual onlooker.

SIO2Regarding the lower rate: The lower rate was for banks at the discount window--not a wholesale cut. It will not trickle to any of us, but was meant to give institutions a chance to break free of the liquidity crisis. Essentially folks are going to cough up collateral, and the Fed will lend against it for 30 days rather than overnight.

My wild-eyed conjecture is that there will be some HBB's looking at the collateral and pricing it--I imagine some of the folks shoving this stuff under the window will be unable to repurchase it in 30 days. I don't think that any of this peek and price is nefarious--it will serve to off load the problem back into the private sector.

Look around at the global economies: US, Europe, Japan. They are all showing signs of slowing.

I'm still waiting to see some floating bodies. I think that there will be a few surprises. This move by the Fed, which I applaud though there is some supspicious activity beforehand, means that there are significant problems--probably much greater in magnitude than LTCM.

It's also worth noting that regardless of hedge fund strategies (and there are about 14 asynchronous strategies with various degrees of correlation/non correlation among the strategies and with the major indices) when liquidity is suddenly withdrawn (as we've seen) then everything moves in lock step--it's called phase locking. With the exception of sovreign bonds, there was no safe haven.

I suppose that many are also realizing that investing in different countries does not provide much in the way of a market risk hedge--for this liquidity withdrawal is worldwide.

2nd_Ave: with Dean, I've elected to keep my UNG. I also found UPW--a very thinly traded (but watch it become fatly traded) 2 x utilities index. I believe that in addition to financials, utilities will thrive in this lower rate environment. Financials will too, but you need to ensure that you don't have a floater!

Genesis,,,just a thought,,,if you subtract the distance from the top of head to the neckline,,,it's roughly 800 points.

Then subtracting those 800 points from the neckline and you get roughly Dow 12,400. On Thursday the down draft hit 12,500.

It is possible that will satisfy the technicians for a bottom.

Dab

Thanks Leisa. It won't trickle to us now, but the question is whether the Fed signalling a cut in September.

The Financial Post has several good articles today. One of the is "The House that Alan built". http://tinyurl.com/3yzqbr I quote from the last paragraph:

"If, as expected, foreign banks in Europe and Asia refuse to take on high-risk loans, there will be defaults and stock markets will continue to decline.

The U.S. central bank cut a symbolic lending rate yesterday, and indicated that the next move could be a cut in the meaningful overnight lending rate. But carnage in the stock market is unlikely to be avoided, says BMO's Mr. Porter"

BTW, here's an article on utilities for you from the same edition: http://tinyurl.com/23xrsq

Genesis,

Excellent analysis and post. Thanks.

Regarding the Feds methodology, I agree--it was foolish. It may even be a question of ethics. Regardless, what is the message to the markets? If you buy insurance, to protect your financial life, know that the Fed reserves the right to both negate that insurance and change the rules of the game at our convenience. What are investors and traders to do now? Forgo insurance? Or, find another game where they can get insurance, get assurance that rules will not change mid-game, and know the rules will be applied equitably to all--even when the home team is behind.

Off topic, but I wonder if fewer people will bet on NBA basketball games after NBA referee Tim Donaghy admitted throwing games, and his recent suggestions that others are involved. Will people bet on games where public information and handicapping skills may be irrelevant or switch to games with less credibility issues.

Good thing that couldn't happen with US financial markets.

Leisa

Allways enjoy your comments. Can you point me to good resources/articles to understand hedge funds and how they can/will affect the markets? I know Henry Liu has some good material on these issues.

There's a distinction to be made between bad and good government. Nixon deficit spent to pay for his war and the practice has been taken to it's illogical extreme during the last thirty years by bad government. I hate bad government, but I do believe bad government springs from apathetic and uninvolved citizens. I think that America is 2 nations not 1, in opposition to each other, and that the art of American politics involves playing to the worst instincts of both antagonists. In another sense, I think the American system of politics is designed to discourage involvement by us. By agreeing to be marginalized, we are in effect getting the government that we "deserve".

How difficult was it, they will ask years from now, to use a people's antiquated notions of it's own freedom against it, to user songs and slogans and flags and a false and empty sense of unity against the people's interest and to rob from them, the freest people in the world, their one most precious gift?

Hallvardo-

i think leisa spent the month of april researching the systemic risk of hedge funds, and you should be able to find the posts on her blog: http://theperplexedinvestor.blogspot.com/

i seem to recall the posts occurring just around the time of the VA Tech incident...

I think the moves in the XAU suggest that many are anticipating the bear market corrections to come in fall and are selling now out of surprise at the weakness in gold & gold shares, so that they can position for later.

I think that would go for gold markets, but possibly preservation of cash to buy lower would not be totally out of the question for other markets as well.

If this really is a 'Rich Man's Panic' then probably a major collapse is not imminent, and that selling now would not necessarily be a mistake, just that the downsides are perhaps limited into what we normally call a correction.

For instance, a Dow of ~12000 is not unreasonable, given where the 89-week exponential MA is on the chart and where previous sell offs had found some stability.

Moreover, I had been taking my cue from the crisis indicator at Now And Futures which shows that the crisis is not 'here' yet. A crisis would entail a collapse of a major currency. The Yen going up is not a collapse, and the dollar holding ground is steady, so which? Where? British Pound? Loonie?

A lot of economists are out on a limb right now, including the ones at the Fed. Very good time to take in each with a grain of salt and discard the ones that are off the mark.

"The price patterns reminds you that every movement is but a repetition of importance of similiar price movements, that just as soon as you can familiarize yourself with the actions of the past, you will be able to anticipate and act correctly and profitably upon forthcoming movements". Jesse Livermore

For those of you interested in a beautifully written chronology of the 1929 crash go to the following. If you change the dates and the names it is eerily similiar to today.

http://xroads.virginia.edu/~Hyper/Allen/Cover.html

Click on Crash.

Once you start reading you won't be able to stop.

Also, there is a segment of the "Big Bull Market" & "Aftermath 1930-31".

"Those who cannot remember the past are condemned to repeat it". George Santayana

A must read for today's investor.

latest update from Hulbert shows that "as of Thursday night, the HSNSI stood at minus 11.3%, which means that the average market timer that is part of the HSNSI is recommending that his clients allocate 11.3% of his equity portfolio to actually going short." On July 25, the HSNSI stood at 44.5%.

shorhttp://tinyurl.com/39dxfe

just one of many indicators, of course, but in my (very limited) experience, one of the best in the short-term...

"Crash" was a pretty good read..and parts of it were reminiscent of the Thursday action in miners.

also re-reading bill's "Typically, it is the second wave that is THE BIG ONE."

think the idea of selling into strength is on everyone's mind right now..which should be good for at least a minor rally...

playing the long side for now, but changing the mindset to selling at the first sign of weakness rather than pressing the position into strength...

more on the XAU:GLD ratio from lance lewis (also see markm's posts from thursday):

http://tinyurl.com/2y8ob8

Excerpt:

"The XAU/Gold ratio (see below) shows us that the gold shares plunged yesterday to just shy of their deepest discount to the metal since the gold bull market began. Buying the gold shares at this discount to the metal has always paid off over the past seven years, and it should again as the Fed is forced to print its way out of the housing bust in the coming months.

Like we've been saying... we have all seen this movie before, and we know how it will end. It's just the precise makeup of the filler in between the opening credits and end of the movie that are somewhat in doubt."

I think something stinky has been box covered...

http://tinyurl.com/2wo8e6

Another bloated body rises to the surface...

http://tinyurl.com/yw2jn9

I think its pretty clear there was a concerted effort to expand the money supply through commercial paper tied to long/short formulas on currencies. Just my guess.

Gold may be tied into it, but I am thinking nowadays that the commodity aspect of gold is now overlooked and should be apprehended.

Quite curiously, the liqudity crisis has called in on some pretty strange blogs:

http://www.smalldeadanimals.com/archives/006844.html#comments

Do these people look worried?
http://tinyurl.com/2436qd

"A rush to pull out cash"
http://tinyurl.com/2r34jv

"On the other hand, in some quarters I am aware that people are absolutely furious that central bankers stepped up with tactics specifically designed to temporarily calm the panic emotion this week. I have to ask, are these people being reasonable and responsible?"

Yes Bill, I'm mad as hell. I'm incensed and infuriated that a cabal of currency inflators disguised as government entities can steal my money under the pretense of "calming the markets" -- as if that makes everything okay.

The Industrial Revolution took place without central bank intervention.

Let me repeat that: The Industrial Revolution took place without central bank intervention.

Capital markets and stock exchanges worked just fine, as they had for hundreds of years. In addition, there was virtually NO inflation, so a worker who worked 50 hours a week in his 20's could stuff a coin in his mattress worth 10 hours of labor and expect its equivalent in 30 years when he retired. I'm sure you'll agree that's no longer possible, but shouldn't it be? Oughtn't it be?

Then, as now, our worker could have invested his money. By *personally* assuming risk, he might gain a little more than 10 hours labor in 30 years. If he did his homework and lent his 1 pound coin to a cautious banker, the banker might relend the same 1 pound and give him maybe 3% per annum. The banker would take home far less than that, mind you. Note that the depositor does this *at his own risk*, the banker relends the money *at his own risk*, and if the judgment of either is faulty they have only themselves to blame.

Enter the Fed aka "central banking" et al. No longer is a 1 pound note equivalent to a depository receipt, but rather some nebulous thing called a "reserve note". Except the reserve isn't a static reserve of wealth, of hours of thought and labor and sweat accumulated, but a paper money supply determined only by the speed of a printing press.

August 17th, 2007:

Q. Where does the "Fed" get the money to offer cheap loans at the discount window?

A. Tacitly, it comes from the taxpayers. Implicitly, it comes from printing more "reserve notes" from an overdrawn checking account.

Q. Is it reasonable and responsible to loan money to people who've demonstrated they have no skill in using it? (in choosing whom to loan their depositor's money?)

A. No.

Yes, panics occur in markets. They are a reflection of human nature: who hasn't been caught up in the panic of love or greed or disappointment or fear? We learn from them and learn to conduct ourselves accordingly. But should my wealth and the retirement I stuffed in my mattress be confiscated through inflation to calm the current generation's foolishness and lack of judgment?

My answer is no. What's yours?

omphalos-

so what's the latest on changing human nature ;)

seriously, i can't get too worked up about "the current generation's foolishness and lack of judgment." my generation contributed its share, and with more than a little help from me. the older i get, the more i find myself accepting the "shortcomings" of others, and the more i question my own point of view.

reading a link to the "crash" of 1929 brought to mind a film by the same name from 2005. people are far more complex than we can possibly know from our usually brief encounters with them. they may seem to "lack judgment" in a particular situation only because we don't know the whole story. people also behave paradoxically, and the a--hole you run into the night before may act heroically saving your a-- the next day.

life isn't fair. but i'm pretty thankful for what i have, and if bringing stability to the markets requires sacrifice on my part, so be it.

Hallvardo--I spent the better part of March and April studying (in an amateur way) hedge funds/systemic risk as well as the CDO's and reading 10-k's of the mortgage insurers and insurance companies. Admittedly, it made my head hurt.

Here's the first item-- You can click on the label and find the other two installments. http://theperplexedinvestor.blogspot.com/2007/04/hedge-funds-and-systemic-risk.html

I hope it doesn't bore you to death! And it is essentially a summary of a terrific paper. Systemic Risk and Hedge Funds
Nicholas Chany, Mila Getmanskyz,
Shane M. Haasx, and Andrew W. Loyy
This Draft: August 1, 2005

I closed my last installment post with this paragraph: "Thank you for reading this and your comments (both public and private) on the material. Because I wrote (regurgitated) this information, it forced me to wrestle with concepts that were both foreign and complex. Nevertheless, I understand the risk--so if we ever have a meltdown, you can say, "Yes, I've read about those auto-correlations and this event is not a surprise to me.""

Not to sound proud (but I'd be lying if I didn't say that I wasn't a wee bit proud), this was not a topic that had any air time. It should also encourage any of you to do (should you have time) some digging around on your own. The Federal Reserve sites have great papers--in fact, I think that is where I found the one that I read and referenced extensively.

Bon weekend à tous! Couldn't help seeing that Leisa's post was at 2:20 AM! Regarding the fine article she cites concerning hedge fund risk, which in turn mentions phase locking, if I remember correctly, you can find that term mathematically explained in Steven Strogatz's book on differential equations. He talks about how he observed in SE Asia fireflies in the trees along a river bank at first flashing asynchronously, only to fall into what is known as "phase locking" where they all flash on and off simultaneously. There are many beautiful mathematical concepts like this that could be fruitfully applied to the markets and which do not require a PhD in math to understand. For example, I would recommend looking at "Catastrophe Theory" invented by the French mathematician René Thom in the '70s. This beautiful field goes a long way toward accounting for much of what we see in the financial markets. Incidently, the word catastrophe is perhaps a misnomer; the theory is really about continuous change giving rise to sudden jumps, such as the buckling of a beam as gradually increasing weight is applied. The fascinating thing about catastrophe theory is that you can actually remove the mathematics and discuss phenomena qualitatively using the 7 different catastrophe types that Thom
discovered. There is an excellent essay in a book by Christopher Zeeman which has a highly successful cure for anorexia based on the "swallow tail catastrophe" if I remember correctly--no math at all in this essay, and highly readable. On the subject of catastrophe theory, I highly recommend any books by John Casti including his two volumes "Reality Rules", although they require mathematical sophistication to read in depth. He wrote two less sophisticated volumes on the same subject which give a good accounting of various mathematical theories (including nonlinear dynamics, aka chaos theory) that can be applied to everyday phenomena like the market (forgot the name for the time being), Please folks, don't put these ideas on the back burner because of fear of math! They are beautiful and extremely fertile ideas for the phenomena we are confronted with at this site and it behooves all of us to have at least an elementary appreciation of some of what is happing in this golden age of mathematics.

Leisa's post was at 2:20 AM!

Only because I'm trying to assimilate a new dog into our home life. Between 1-3 my existing dog and my new dog went into the canine form of phase-locking. But it is really going better than I reasonably expected, but I value few things as much as a night of uninterrupted sleep.

"All of the old-timers knew that subprime mortgages were what we called neutron loans — they killed the people and left the houses. The deals made in 2005 and 2006 were going to run into trouble because the credit pendulum at the time was stuck at easy."
LOUIS S. BARNES, a partner at Boulder West, a mortgage banking firm.

From NYT

"The Industrial Revolution took place without central bank intervention.

Let me repeat that: The Industrial Revolution took place without central bank intervention."

Depends on you definition of when and where the industrial revolution occurred. Very probably various pre-eminent eras of the 'industrial revolution' was touched off by a credit crunch, much as the internet bubble was created out of the LTCM collapse.

Its true, the Central Bank in Britian rarely intervened. But this doesn't mean fractional reserve banking did not exist along with the various problems inherent widening credit spreads. This also does not exclude liquidity injections by financial concerns compelled to fix serious credit problems by supplying emergency funding to borrowers in dire straits. (Such as we are seeing with Coventree and the Caisse - this is a classic example of how that works)

During the industrial revolution you had railway manias, wildcat banking where they printed their own currency, bills of accomodation which carried 100x leverage and collapsed, runs on banks, market corners in wheat which would touch off collapses, gold bubbles, all at a time when gold was part of a worldwide accepted standard.

The latest credit crunch has all the accumulated warts of every major blowout in financial markets history. As contractions in the real estate sector continue, this will continue to inexorably affect the entire credit cycle. The only thing missing is a currency crisis, or a country missing its interest payments on its own debt.

Phone Rings:
Answers: "Hi, this is Ben, how can I help you"

Caller: "Hi Dad, Can you call my bank and ask them to back off from raising the interest on my ARM that Uncle Alan said was such a good deal. Its really squeezing us, and we may lose the house"

Answers: "Sorry son, you must know that I can't interfere with private contractual arrangements. You could try asking Uncle Alan for a bridge loan, I hear he's making a ton of money on the talk shows these days. Got another call, so gotta go, good luck"

Answers: "Hi, this is Ben, how can I help you"

Caller: "Ben, this is HBB. You need to lower interest rates right now. Damned bank won't roll over our loan without more collateral, and our counterparty is under water at these rates."

Answers: "OK, I'm on it, but it'll take 24 hours"

Caller: "Why the hell do you need a whole damn day"

Answers: "Got to give Bill Poole time to save face. But the markets still open for another hour, so do what you can to calm things down wink wink".

Caller: "Gotcha, Bye"

To assistant: "Start up the helicopters"

Leisa,
I'm a dog professional. That's what I do when not sitting on front of this infernal machine.

I train herding dogs to manage livestock on farms and ranches and for competitive herding trials. I have found this useful for reading the herding behavior of humans in the markets, but I digress.

Dogs are pack animals and they live in holes they dig or find in the ground, ie: dens. This means that they like to be lead (they actually like being a little bossed around by an alpha that is fair and they respect) and they like dens, which people can re-create with crates.

Everyone's dogs should learn to stay in a crate when needed. We have 11 dogs presently and they all learn to stay in crates from their first breath (they are born in a half a crate) and they are house trained using a crate (they immediately go outside to potty when removed from the crate). They all sleep in crates and take ownership of their crates. They have free run of the area they are in but choose their crates with the doors open and will stay in crates as long as an overnight stay (8 hours+/-) with the doors closed without any stress.

Like all things this training is done in small steps so it isn't negative but a positive experience. Try feeding in the crate with the door closed and then immediately release when done to go outside and potty. Pretty soon the dog will know you always let them out and they get food in the crate which is a positive reinforcement. All good. We travel all over the world competing with dogs so being comfortable in crates is vital. Crates are an amazing tool.

People see them as cages and tend to apply human logic to them as cages, but dogs are not humans, they are den animals and they are at home in their den. Get at least one crate (that the dog can fully lie down, stand and turn around in) and use it during the night so you and your dogs can sleep peacefully. The plasitc "airporter" crates can be had for little $$ at Walmart and they are good quality.

Anyone wanting to know about herding or dogs feel free to ask. I'm not the expert in financial markets like some of you, but you can be sure I see your behavior and get alot from it through my observations of pressure and herding behavior.

BTW, that is why I'm not so hopeful of a big run up in the markets. Fear is hard to overcome.
It will take a real turn and some distance before the whole flock agrees to turn and move up from the current fear. The flock leaders will need to really move to convince the followers. It's far easier to scare the flock into panic. Take note of what the flock is saying.
When all the taking heads say they are afraid and expect further pullbacks, you can take something from that. It's when they try to talk the flock out of panic that the clown suits are so readily apparent. I think you can take it to heart when they get negative. They are telling you they aren't buyers. If they aren't buyers then they are either passive or selling which means we go down. Some of the flock will run to the grain the fed threw down, but as soon as some of the flock starts to run, we're off to the races again.

I'm finding some books addressing this discipline, IE: herding behavior and asymetric information in capital markets. I would say we are definitely in an informationally asymetric environment. That is, waiting for more floaters to appear. Those will scare the flock again.

Trader:
Thanks for referencing the NYT article. Its a good article, but its much too kind. Like you I do not believe this mess was unanticipated. One would not have to have been an old timer to know that liar loans were neutron bombs that would kill not just the liar's house but the neighborhood and much of the value that the other houses in that neighborhood that were sold to non-liars originally had. One would also not have to be very sophisticated to understand that the rotten apples (the liars' houses) would ruin the whole barrel of apples (all the houses in the neighborhood), thereby reducing virtually all the mortgages in that neighborhood to subprime. If I were investing my own money in mortgages I would never buy a liar loan, and if I did I would want some responsible co-singers and a high enough interest rate to enable me to get my money out very very very quickly.

I am sure the Federal government will pick on one or a few culprits as the cause of this catastrophe, prosecute them, and then pass a few regulations to convince the investing public that this kind of abuse will not occur again. And, I agree that this particular abuse will not occur again not because of any governmental action, but because it has run its course. Such governmental action will not stop the financial industry (this includes, the investment banks, the rating agencies, and the managed money funds) from developing new and different abuses that accomplish the same purpose, i.e., separating the public from its savings.

The money management industry has been badly corrupted by individuals who are working in a criminal conspiracy to appropriate other peoples money to purchase assets that are so bad that they should not be purchased, and certainly not at a high price. These are not investments because they will never be repaid much less generate a return on investment. They are just fee generating vehicles for an industry which has abandonned any semblance decency and has betrayed their public trust.

Just one more stupid comment.

Panicked sheep will stand in the best grain and alfalfa up to their asses and never touch it because of fear. They just get tighter together and run or face the threat. Think about it. People are exactly like sheep. It takes some time to get them to settle and calm down.

What is the fed feeding (so far) that will overcome panic?

2nd_Ave -

Great catch on $XAU:GLD. that 7 year chart really captures the extreme relative low of gold stocks today vs. the metal. The most dramatic rendition I've seen.

I then created a daily chart, and saw that RSI, STO, and MACD have all ticked UP, meaning that a move of the stocks vs. the metal may have begun.

Craig--thanks for your advice. I've not used a crate, as it has not been necessary in the past. Daisey (new English Setter) and Macy (existing Am. Bulldog mix) are actually doing quite well. BUT Macy sleeps in the bed with us (yeah, I know that's wrong!) and Daisey in the 3 days she has been with us has established herself as dominant female--and, she has latched onto me like a shadow. Fortunately, Daisey already sees me as her leader and is responding well to a gentle but firm leadership. She jumps and nips in her excitement until she settles down. But her being the dominant dog with Macy in the bed worked fine 2 nights ago, but didn't work last night nor is likely to work in the future. So a crate may be in my future!

-Phase locking

Don't lock out the human phase.

Its an interesting notion that markets can seize because enough instances of unforseen failures can occur simultaneously so that a mechanical style lock up occurs.

Mostly credit failures become pervasive enough and occur so frequently that the players risk some kind of social transgression because of their actions and are withdrawn from the game. Essentially a gambling addiction.

That is, when players seeking to expand credit and face losses and still take on more, sometimes with 100x leverage, betting that conditions will allow for more returns only to disappoint, this is at the heart of failures.

Very few of these players will be jailed as a result of their actions, but quite literally, they are conducting fraud on a grand, unlimited scale. By accumulating losses with other people's money and continuing to bet on a recovery of those finances with still more credit is fraudulent, however elegant the theory.

Sure, you can take large loses on a certain percentage of bets and still hope to extricate yourself from the fire hoping that your fortunes will turn, as statistics are in your favour. But the line has already been crossed, all that remains is for the markets to disagree.

Consensus in corporations is essential, even a kind of unchallenged evangelism, so its entirely possible for a very large number of people to engage in this kind of behaviour with impunity and not recognize the problems.

All that remains is for one instance of malfeasance to come to light, the confidence game collapses.

Craig, very interesting about your dog behavior knowledge. I've read many books recently about wolf pack behavior and also watch The Dog Whisperer on National Geographic Channel (one of the best shows on TV...jmo).

I got into reading about wolves because of reading the Jack London books as a kid and wanting to revisit that experience. Best book read recently is called Shadow Mountain by Renee Askins. As part of graduate work she raised a wolf cub and helped introduce wolves back into Yellowstone Park.

As you can see I'm passionate about wolf behavior & also dog behavior. I'm my shepherd mix dogs Alpha...lol. Great dog. He was trained w/crate. Very effective as you said. Before he got his "doggy door" we trained him to ring a bell by the slider (daughter's idea) and used that method for going out (also effective for use in our motor home). Initially he rang it too much & drove us crazy but that wore off :-)

Thanks for all you wrote & I do see the comparison between dog behavior and human behavior. Very much so. And, it extends into all areas including the financial market responses.

Craig,,,,I trained gaurd and attack dogs during the Vietnam era(1968). I also help to train dogs for friends/family on occasion.

A note on cages,,,many people don't like to use cages because they feel sorry for the pet and that they are being cruel in some way.

Personally, I feel cages are an absolute must, especially in the puppy stage until they have matured enough for the couch,,,lol.

The dogs, after cage training, will use their cage as a safe haven(den theory).

This also dramatically speeds up the house
breaking procedure.

My black Cocker Spaniel Lucy would happily spend time in her cage if I drug it out today, and it would come in handy if I traveled somewhere where she wasn't as welcome as in her home,,,lol.

Dab

I like the hurricane Ivan story. It serves well. The dog and sheep anecdotes are incredibly helpful too. The dead cat bounce lovers have yet to weigh in.

The Coventree story may actually have let the cat out of the bag. We see major gold mining companies investing in Coventree. Goldcorp and Barrick. (I imagine Rob McEwan steaming in his moustache at Goldcorp's involvement) Pretty big names. Large derivatives market associated with them and gold.

The gold markets will probably be flogged mercilessly in the press going forward. The gold markets are probably a story that should be followed at this point, as the XAU has reset into its downtrend temporarily.

Lets say the breakout there was premature, though the fundamentals keep pointing towards stronger gold markets.

aucourant-

"the word catastrophe is perhaps a misnomer; the theory is really about continuous change giving rise to sudden jumps, such as the buckling of a beam as gradually increasing weight is applied..."

beautiful one-line introduction to a theory i know nothing about..i can see useful applications arising from it, along the lines of (catastrophe) prevention or forecasting...anything from seizure activity in humans to that under the ground...being a californian, wondering if it has been used to forecast seismological activity..

craig-

"Panicked sheep will stand in the best grain and alfalfa up to their asses and never touch it because of fear."

some of us need the todd harrison rural-urban dictionary (lol): http://tinyurl.com/33alls
"Indiscriminate selling is the textbook time to rescue babies from the bathwater."

Mom&Pop Stuff

Working with/for China:

In the past I’ve related in postings that my better half manages a $ Store and have reported happenings there to parallel the financial scene, so consider this an update.

If you are the manager, you can work no more than a 40 hour week and the word ‘working’ takes on laborious meaning. The other management person is the assistant mgr. and can work no more than 38 hours.

Below management level you are considered full time and can work no more than 28 hours and part time 16 or less.

Thursday 8.16.07 a fax arrived stating all hours will be cut 20% due to increase in product cost from China (providing 85-90% of the merchandise sold in the store) and the fact customer traffic has fallen drastically since early summer even the ‘no tax‘ day just before school started didn‘t help.

Now we all know that WMT just announced their client base has decreased and were having trouble making ends meet from month to month but wasn’t the scenario not long ago that the thrift stores or $ stores were going to reap the benefits? Not so in my Deep South town.

number2son, re Tulane,
fwiw, my home town is nola and I grew up on the campus as a kid. as you more than likely know, real well, Tulane has a reputation for a party school and the city has serious crime problems. it's a wonderful opportunity for your son to experience first hand urban civic issues of historic proportion, but do not underestimate the potential dangers. The match between school and student is critical, and even more so in this situation. My sister's oldest daughter entered a few years back pre Katrina; the consequences were tragic. The city needs all the revenue it can get and i'm sure many may consider my cautionary comments disloyal. If you want more information glad to share off site.

leisa- yes..c/w/s with my own UNG...

Sorry 2nd....

Try this: Panicked investors don't tend to buy until they settle down and the feel danger has been averted/mkt stabilized. Like RSI's rising above 15. If they still see or think there is more danger (a CDO in wolf clothing?), they will tend to panic first and stop later.
In short, the Fed throwing feed ($$$) can't help but alert traders to danger and it may prevent them from buying.

It's not natural for most people to switch from panic to greed without something to follow. Like Rules or a Sith guide.
But, if there is a large herd of big bulls running this makt up, then the rest of the herd will be eager to follow. If not them we will probably run back and forth (likely within Bill's range) until the next Fed meeting where we are either led to slaughter or we are thrown tons of low rate $$$.
I can't see us losing on PM's either way.

We either run up from here or we are given one last chance to get in. Sooner or later the slaughter of the USD is assured. What's a person to do? It's like opposing Iraq. The choice left was to profit from Halliburton and the MIC or not. Same here. We don't get to tell the Fed to not cut rates so our choice is to profit from it or not. I say yes!

Interesting bunch of behaviorists and trainers here, I love it!

2nd,

Thanks for the complement. I personally haven't read about predictions of earthquakes, but that would be a very interesting and appropriate application. There is an excellent application to the capsizing of ships that would ply their way through the dangerous seas just off the southeast coast of South Africa. One of my favorite applications in the social science area was in the prediction of prison riots in England. Using catastrophe theory enabled researchers to isolate the one variable that is the tell whether a riot is likely to occur; it turned out that an increase in the number of visits to the prison infirmary was the critical variable. Imagine using it to isolate a tell variable in financial markets! René Thom invented the theory to "explain" biology (not to be confused with mathematical biology which is the application of mathematics to biological phenomena such as tumor growth, population dynamics, disease spread, etc). Thom was interested modeling biology mathematically in the most general sense after he had read d'Arcy Thompson, and he wrote an almost unreadable book called something like "Structural Morphogenesis and Biological Form". I really think it's time to see some serious applications of this theory in finance and market behavior (perhaps they have already occurred, given all the buzz about math PhD's raking in millions.) I was surprised to meet a mathematical researcher at Genentech who was not familiar with this theory, so perhaps it needs more publicizing in general.

This video encourages buying Countrywide Financial Corp. (CFC) on May 29, 2007. The price of the stock on May 29th was 39.25. From Friday's close, this stock is down 45%.

http://tinyurl.com/2khsjx

For treasury only money market funds, which one do you think is the most financially solid? There is a list of about 20 here http://www.forbes.com/funds/SimilarFunds.jhtml?pg=category&cat=UST. I'm with Vanguard, but I'm interested in diversifying into a second one, so I won't have all my eggs in one basket. Thanks.

Craig,
I enjoyed your dog/sheep analogies too and it took me back to my youth. We had cattle which behave some differently than sheep, and herding dogs; border collies and blue heelers. Both were hard working, smart, fearless breeds. The collies were even-tempered, the healers just plain mean. When a border collie arrived, cows took notice but didn't panic. When the collie indicated it was time to move, they did. There was respect but not fear. When a heeler arrived cows looked for the exit.

The heeler earned his keep moving bulls. In late spring bulls become single-minded (males in some species suffer from that tendency) and agitated. It can be difficult, even dangerous to move a couple dozen bulls who aren't getting enough. They can't be reasoned with and fear nothing. However, a heeler doesn't take "No" for an answer and they seem to enjoy drawing blood. At some point the fight vs flight instincts of the bull change--like flipping a switch--and the bull's rage and courage is replaced with absolute fear. At the point the bull will break and run and nothing can stop him--not another bull, not a man on horseback, not a fence. Nothing.

aucourant, regarding Chaos Theory we had to tackle the math end of that in grad school. At first I was excited, but it got to where I couldn't see the forest for the trees. The twitch came back just reading your post. If you can successfully apply it, my hat is off to you. Maybe I'll take a look at the book you suggest . . . as my pulse quickens and fight or flight instincts cloud my judgement. . .

aucourant-

"Using catastrophe theory enabled researchers to isolate the one variable that is the tell whether a riot is likely to occur; it turned out that an increase in the number of visits to the prison infirmary was the critical variable. Imagine using it to isolate a tell variable in financial markets!"

that is exactly what someone should do (although, as you point out, the predictable result would be to employ the findings under the radar)...as slick as as the denizens of the Street are, there must be certain predictable"tells" (behavioral or otherwise) that slip through the cracks...

I've been looking at a tremendous chart of the '87 crash by Arthur Cutten and noticed some stunning parallels with today's market. In 1987, the correction was -10% on the DOW in 28 calendar days (August 21 to Sept 21). The current correction has been -10% in 28 calendar days. However, the run-up to the '87 top was much briefer (about 45 days) than today, so we may be looking at a much bigger top, and a potential seven year double-top to boot.

After the 10% correction in '87, there was a 7.8% bounce in 10 calendar days, and then a 17 day slide to the crash. Friday, October 2nd was the top of the bounce. This lines up very well with Friday August 31st in terms of time.

Also, the '87 crash pattern is very similar to the '29 crash pattern.

I don't mean to scare anyone. I am not predicting this will happen, but it is a possibility as Bill has warned, and all of us should be prepared for every scenario. I will be watching the rally very closely the next two weeks.

If anyone wants a copy of this chart please email me at ab_41 yahoo.

Have you ever experienced a cell phone running out of power just at the critical time when you need it? Would you not love a cell phone that runs 6 months straight without needing recharge? Or a laptop computer that works a month at a time?

You will LOVE it! The technology is finally here! They spent billions of dollars on this thing for years and it's finally ready for mass marketing later this year. It's called DMFC, Direct Methane Fuel Cell.

Fuel cells, like DMFC, MUST utilize precious metals palladium and platinum. Supply of PGM is very limited. The whole world produces only 7 million ounces of palladium per year, and consumes more even without fuel cell. There will be a huge shortage, driving the price of PGM metals, especially palladium, to the stratosphere!!!!

That brings a huge opportunity buying the SWC stock, near 52 week low now. SWC is the one of the only few PGM metal producers in the world, the ONLY one in the USA. The stock is cheap because it has NOT been making money yet. But with huge demand of PGM kicking in as DMFC goes to mass market soon, you bet you can make money in SWC beyond your wildest dream!!!

SWC has a price/sales ratio as low as 1.2. What kind of P/E will it have if PGM metal price just increase 4 or 5 times? Click on my name to read more on my blog.

One other point. I saw part of Larry King this week with a roundtable of financial experts (couldn't stomach more of the discussion). Almost all of them were reassuring investors that their money is always better in the market in the long run. Don't sell! The market is up on the year! One idiot even said that there is no 10 years in the history of the stock market where the market has been down at the end of the period! (This is an 'expert') The only one I had respect for was Donald Trump. He said that he is pessimistic because we have many problems and he fears it will get worse.

I think that most small investors are listening to this type of reassuring advice - hold on, everything will be OK. The baby boomers have much of their retirement savings in the market and remember the last bear market. The recent stomach churning correction leaves the ones who haven't panicked yet in a state of denial/fear. I fear that on the next big down day these people will not be able to stomach the volatility and will start selling. This will lead to a selling crescendo on the next leg down.

You can see this fear in the run on Countrywide's Bank reported in the link above.

Everytime SWC is mentioned Nissan comes to mind.

SWC:
Could be a low risk entry point around here for a trade to $10.75, but if it trades below $7.89, be out FAST

Here's something for the deep thinkers here. This is a very thought-provoking argument from Richard Russell (I know he has his critics. So be it. He's an old timer who has seen a lot.) Although he is a strong believer in the long term bull market in gold (fiat money and all), here is his take on near term dollar strength. I want to know where he's wrong on this.

"all these massive debts and loans represent a "synthetic short position" against the dollar. Debts (loans, mortgages, etc.) are a short position against the dollar because all debts must ultimately be paid back -- in dollars. Now that multi-billions in loans (mortgages) are in question or being reset, everyone needs dollars. You pay off your debts and mortgages, you stay solvent -- with dollars."

He has made this point for about 2 years now, and I guess we'll now see if it comes to pass.

In preparation for the next stage in the markets after this 2-5month rally I was wondering what would be an appropriate safe haven.
It looks like Gold will peak out at around 750 only to coming crashing down once the market sells off.
Consumer staples may be a safe place. Such stocks like anheuser busch, however, I wonder if the market sell off will encompass these stocks to a great degree.
Going to Cash seems like a good idea, but what currency would be most protected. In this next stage I would suspect the USD would crash, and that will have an affect on other currency like the Canadian dollar.
Anyone interested in looking at the next stage, or am I jumping the gun.
JMHO

So far it looks as if Asia is settling down for now. We'll see if they settle Europe and the FTSE. Tomorrow AM should be very interesting. VIX is still in alert mode. As noted by Jack above we'll have to go with the big bulls or get run over.

I have Heelers Jack. We call them Australian Cattle Dogs which is more of a mouthful but hat's what the Australian's agreed on and AKC adopted. I was lucky to get a bloodline that has some eye like a Border Collie which steadies them, gives them some flank and sensibility, but they still bite when I need it. I also have had Border Collies and an Australian Shepherd, but I train them all. We start them on sheep so we can control the situation better than with cattle or the result would likely be as you described! I've heard versions of that story *many* times. LOL! Especially the fence part.
At my very first trial many years ago I showed up and ran my cattle dog and the judge, an Ol' Boy from Texas said, "That's the first one of them blue alligators I've ever seen with any control on it". I won lots of cattle trials with that dog.
Dab, my first trainer was a Vietnam era K-9 trainer. The old Koehler school. He was likely the extreme. I got better results using more positive motivations as most herding breeds are looking to please and work with an alpha and I can use instinct to my advantage.

They are all really wolves though! Herding is simply truncated hunting.

Those in MPEL aren't getting good news and Macau gambling equities may go down tomorrow in sympathy. Those involved may want to check it out and keep an eye on their holding tomorrow.

Anyone read about Greenland's NunaMinerals getting gold in their drill results? Anyone follow or know about this co?

Some great historical headlines that appear oh so tragically similar to today courtesy of itulip.com. For humor feel free to replace the past source of the quote with your current favorite uber bull. I visualize Don Luskin.

http://www.itulip.com/forums/showthread.php?t=1797

Stocks Soar As Bank Aid Ends Fear of Money Panic
By W. A. Lyon

The stock market strode out from under the shadow of a panic in call money that so lately threatened, revived in all its old strength yesterday. Assured that the New York banks were ready with their boundless resources to prevent a money crisis, the public and the professional trader set out to repair the damage done to prices on Monday and the major part of Tuesday.

Stocks in the aggregate, though bucking a 15 per cent rate for loans, enjoyed the greatest advance they have known in a single day in the last two years. Not even the surging bull markets of the memorable year 1928 saw such a day of heavy buying.

- New York Herald Tribune, March 28, 1929

Banker Says Boom Will Run Into 1930

That at least a part of the great amount of money in the securities market may represent temporary employment of funds eventually finding their way into business uses, and that the prosperity of the present business cycle will probably not end in 1929, is the belief expressed by the J. Henry Schroder Banking Corporation in the quarterly review of the London house of Schroder.

- The World, March 30, 1929

Brokers Believe Worst Is Over and Recommend Buying of Real Bargains

Wall Street in looking over the wreckage of the week, has come generally to the opinion that high grade investment issues can be bought now, without fear of a drastic decline. There is some difference of opinion as to whether not the correction must go further, but everyone realizes that the worst is over, and that there are bargains for those who are willing to buy conservatively and live through the immediate irregularity.

-New York Herald Tribune, October 27, 1929

Craig,,,,Yes the wartime training methods were very harsh, however I kept the basic of praise as my guideline and with alot of love have been successful in my endeavors(with a little Pavlov thrown in,,,lol).

War was life or death and required harsh methods at times.

I use a choke chain, but only as a nudge not a penalty.

Dab

How would a day trader know if the carry trade is slowing or reversing? I'm asking in view of a short call option purchase on ABV.

short term*

Ahh. I had missed that the BoJ was adding liquidity. That was the missing key to the yen falling that I was looking for. So mentally, anything that had fallen due to the yen rising would rise due to the yen falling. roughly, I think. Although, now that I say it. Why would a trader who just had to sell securities due to the stronger yen repurchase them due to the short term weaker yen? without any protection from the long term stronger yen?