Thanks Bill, I'm seeing breadth overall last week was as nasty as it's been in any closing week the past few weeks suggesting more downside to come. I'm seeing the least broad selling in Transportation and Retail. The broadest selling occured in Utilities, Energy, Telecom, Financials, Metals and Mining, etc... In fact 21 of the 273 sectors I track had -100% breadth, that’s just not right!

Good Trading,
Ralph
http://successfulonlinetrading.com/blogs/

Bill,
As you know I have been bearish.
But I think there is a great chance that Tuesday(1/22) will provide an excellent entry point for a ST bounce.
My 5-day momentum indicator is in "Buy Mode" and together with the 10-day Adv/Dec Volume is providing positive divergence with respect to the S&P-500 price action.

See "Short Term Bottom for January 22, 2008"

I am starting to think WALL STREET is about as unAMERICAN as you can get, they are killing the country with their games and greed and lies.

And the sad thing is people who know it, use the knowledge to benefit or dont want others to know to benefit off of IGNORANCE.

Keep em DUMB CNBC, its a farce and the only one who stands up and is the real American is Ron Paul who gets muffled by the military industrial complex.
People like to silently wallow in this "American decline", but its not a good thing for the world at all IMO

Bill,
Thanks for the insight to help navigate this ever changing dance floor with something better than two left feet!

Although I ended up essentially flat for the week, due to a few errors in judgement (usually acting too quickly), I consider that to be somewhat of a victory in my short trading career.

Listening to you and those you've brought together have been a huge help, to say the least.

Good luck with your move, those are only fun to plan, and to look back on!

Have a great weekend all!

AAII Bull-Bear Ratio is at lower readings than , 2002/2003, 9/11/01 time, 1998, even close to 1987

Bill, Will, Ralph: Thank you for the great reports. I'm a total novice so it's reassuring to see that after digging through a few charts and my own common sense that I came up with a similar conclusion.

The credit goes to the wizard instructor (and a little to age, experience and disfunctional/ addictive/compulsive observational skills).

Ralph, the list is stunning. Everyone needs to go to your site and sort the list to see which sectors were supposedly holding up. Home builders? Retail? Trannies? Sporting goods?
While some of the largest and most influential sectors had 100% breadth? YIKES!

Will, talk about calling this thing like a square dance! Anyone reading your last weeks reports would think you have a crystal ball as well. Well done.

2nd, As usual you saw the sentiment extremes and acted on them. Good on ya!

Me too, I hope we are right.

Quentusrex,

Thanks for the long and useful options commentary yesterday. I've added it to my snippets from this site as something worth reading a few times. Do you have a web site?

re: halting redemptions of funds in that fund in Britain. Not sure what the best approach here is... but if it were my money I would want immediate access too (this is why I ditched my mutual funds, other than the fees there are the early redemption penalties). When a pyramid fails it usually isn't pretty.

If I was a fund manager with everyone's money I would probably want to get the best return, and prevent a run on money for the good of the bank/fund. Any pressure selling should be staggered out over time to ensure the liquidity of the fund.

If I was the bank, I would want nobody to withdraw to keep my reserve ratio in check. Good example may be the 401k debit card? Reselling loans are possible, reselling cash withdrawl's aren't. (though that would sound like a good market to be in right about now)

I have read somewhere that with the $30 billion Canadian ABCP issue, it may take 7 years for investors to get their money. With timelines like that, and with the amount of money in question, a discounted underground market is sure to form. You should always be able to get $0.10 on the dollar for something with a price... just need a market to meet the buyer.

"What we also learned yesterday, however, is that a private underground market in ABCP paper is alive and kicking. Westaim Corp. of Calgary has agreed to sell 50% of its holdings in ABCP units. Originally valued at $17-million, the assets were written down to $14-million earlier, and now Westaim is selling half its ABCP portfolio for $6-million, off a book value of $7-million. The Westaim sale implies a writedown of up to 30%, which doesn't sound like AAA-rated material."

http://tinyurl.com/2nayql

The whole thing smells bad. Reminds me of a certain wealth seminar speaker who talks about how he started a multi-billion dollar company with only $15k. How did he get the loan for the $15k?

He owed the banks millions.

Thanks Graig.
2007 was a phenomenal year for me and so far 2008 looks even beter!

Been checking around on the internet...

Go to any number of invesment blogs...seems like everyone is looking for some type of bounce next week..

Maybe...But what if we don't?

Contrarian in me says too many people looking for some type of bounce...That is usually a bad sign...

I want to see everyone so frustrated as to not want to go long ever again...

Seems 2nd_Ave..jumped ship yesterday and may take a break from day trading. I will miss his comments if this is true.

I will wait till everyone has given up HOPE...

Then I will be buying...

Jock,
I don't know if you're still collecting penny dreadful names. Golden Valley (GZZ.V) and Everton (EVR.V) are two juniors in which I have relatively significant investment. Both are early stage exploration juniors who practice a JV model of business primarily in Quebec/Ontario. They both have a Rob McEwen relationship and IMO have had good early results and good development prospects.
GZZ.V - http://tinyurl.com/2gornn
EVR.V - http://tinyurl.com/948hy

Nowandfutures.com has corrected the gold values in € and revised its gold forcast:

http://www.nowandfutures.com/images/predict_gold.png

Bill,
I need to thank you.
I have been interested in gold since before it was below $300 but never could buy it for lack of an income stream.
Last year mainly from reading your blog I became convinced that the general utrend in gold would continue.
I started buying synthetic stock in GDX with in the money Puts and out of the money Calls with the added twist that the Calls were Jan09 and the Puts were Jan08.
Then every month I sold the next months calls against the stock which provided me with a good income stream. I put the margin required in high dividend Canadian Oil & Gas.
Last Friday all of the Puts(the risky part of the transaction) expired worthless laving me with the Calls (in the money) with a year to run.
Any idea of how the gold miners will do in the future? It appears that production costs are increasing faster than the price of gold. If that continues gold could go up at the same time that gold shares are going down. Any ideas?
How do I obtain an autogpraphed copy of your book?
Thanks again for the blog.

This from prudentbear.com by Wakefield:

As you can see, the total net inflow from all investors into US stock mutual funds from July through November 2007 was only $6.6 billion, while in less than 2 months a handful of big investors placed a total of $37.8 billion in three global, financial powerhouses.

hi bruce - dont quite understand your GDX transactions. would be great if you can post a little more detail. e.g., did you buy GDX stock, sold otm calls (repeatedly) & bought itm puts - in other words a collar? if these were protective puts, why do you say they wer "risky"

hi bill - would be great if comments couls be numbered ( automatically)... on heaby days it is tough locating a reference post

Bill, apropos your comments yesterday about the dangers of writing call options on long positions in a bear market, I found this new ETF from PowerShares:

http://www.powershares.com/products/overview.aspx?ticker=PBP

Timing is everything. Then again, sometimes it is not. In any case, its initial performance illustrates your point exactly.

score22,
I use the time posting at the bottom of each comment as a reference number.

Basketguy, it may be the case that everyone is looking for some type of a bounce next week BUT they are also very scared and have not started buying yet. So when some brave souls will start buying and the prices will start moving up, everyone will jump onboard and a major rally will start, with short covering along the way.

Score22,
You buy a call and pay for it by selling a put. If you are really aggressive you can actually recieve a credit to take a position. The leverage can be extreme. The downside is that if the stock goes down you can loose dollar for dollar +- on the same basis as the stock. Because of this the broker makes you keep securities or cash in your account to buy the stock if it goes down and you are required to buy it. I look at the position as inventory which I rent out each month. This works best for stocks that have a high volitility because the option price is large. If you look at GDX you can make $2.00+- each month on a $48+-. dollar stock. The return is 50% per year if you roll each month. A stock like GE only pays $.76 on a $34 stock (that is the 35 Feb08 call-Fridays price) or a return of only 27% +- per year.
The best way to understand it is to use position software-I get it at options express but it is available at CBOE site for free. You can diagram the potential of the various sides over various time periods.
As long as you are correct on the long term trend you do well. If you are incorect about the long term trend you can experience significant loses.
Probably a longer answer than you wanted but there it was.

Good luck.

Cramer RANTS again - this time against ABK, MBI, C, MER and the rating agencies.

Nobody cares if he (wrongly) blames Bernanke, but hitting Wall St? THAT can rile sponsors, and send their business to FOX ! - LOL

http://www.johnmugarian.com/

PS: He thinks WFC and JPM, and US Bank are solid, their financials are real, and that they will become great bargains as these "babies" are thrown out with the bathwater ...

Fred -

Thanks for your suggestion of two juniors. In fact, they are already on the list of candidates for the Cara100. I was impressed by Everton at last year's PDAC.

But do keep the ideas coming. And if you have knowledge of how to read drill reports and/or of finance, we REALLY need help in this area ....

Jock

score22, this is how that trade would work:

Let's say you have $5000. This could be $2000, or anything else. But as long as it's above the price of 100 shares of GDX. OK? GDX is currently trading at 48.34, so as long as you have more than $4834 you're able to trade what Bruce traded. So, let's get started.

You want to buy GDX because you believe it will go up in value over the 1-2+ year time horizon. Good. You have a margin account. Good. You buy 100 shares of GDX. Because GDX is an equity(a mutual fund, but in the eyes of a margin account they are the same) you can margin it. Usually margin allows you to double the amount of cash that you have. So you can buy $10,000 worth of stock. Good. If you buy on margin you will be charged interest, be aware of this and the rate of the interest.

Once you've purchased 100 shares of GDX, you want 2 things. First, you want to buy 100 more shares at this price, rather than at the higher price it will be at over the next year or so. Second you want to make some income from your purchase.

For the first option you have 2 ways to do this. First you can sell a put leap, for instance one year out which means that if the stock drops in price below your put, someone will sell you 100 shares of GDX at the strike of your put. The second way to take advantage of the low price of the stock is to buy leap calls. This means that when you finally have another $5000 you can buy another 100 shares of GDX no matter how high it went. You can choose one of the choices or both. You have to give it a lot of thought and know how they will affect you in the future. If you sell the put, you get cash which you can then invest and margin(BE CAREFUL!!!), but if the price of the stock drops you HAVE to buy 100 shares of GDX at the strike of your put, even if the strike is $50 and the current price is $10. If you buy the call you 'get' to buy the stock at the lower price. When you buy the call you pay cash, and get the choice to buy or not.

Now, the second option once you've purchased the 100 shares is that you want to have some income. This is done by selling out of the money call options that you believe will expire worthless soon. There is risk involved. If you stay conservative you can make some monthly income, but you must realize you could get 'stuck' with cash. This could happen if you sell the call option at a strike price of $55, and GDX goes to $70. You'll have to sell the stock for $55 each, and you'll have the cash from the sold call option, but that won't be enough to buy back your 100 shares. You'd either have to settle with owning 90'ish shares, or sticking with cash. OK? Or, you could possibly use the call leap that you bought so you could recover from this accident.

Now for real world examples. Ready?

You have $5000. With Margin you can buy $10,000 in stock. You can't buy options with margin, only with cash. Just keep that in mind. So, you buy 100 shares of GDX at $48.34 each. That's $4834 in GDX stock, and $166 in cash, and $5166 left in purchasing power(margin plus cash). Good. Now, you sell the leap put. I'm going to use the 2 year leap rather than the 1 year leap, because the current bid-ask spread on the 1 year leaps are huge(on the Jan-09 $49 put bid ask is $5.90-$10.40). So, before you pic an option to sell you must know how much purchasing power you have. That will limit your strike price. Since you only have about $5000 in purchasing power, you can't sell $60 strike puts. So, let's say you sell the Jan-10 $40 puts. They are worth $6.10. Good. Your portfolio now has $4834 of GDX, and $610+$166=$776 in cash. This gives you non margin of $5610, plus another $5610 of margin for a total of $11,220 of purchasing power. Except that you now have used up $4000 of the potential margin for your put you sold. $11,220-$4000=$7220. You now only have $7220-$4834=$2386 of unused purchasing power. Still with me? :) You can still buy $2386 worth of stock, but you can only buy $776 of stock before you start to pay interest. You don't pay interest if you don't buy with margin, but instead use the margin to sell a put on the stock you hope you'll own, or keep the income from the option.

Now, remember you'll eventually have another $5000 saved up and you want to buy another 100 shares of GDX at nearly todays price. So, what you want to do is buy a leap call. Now, you have to make some choices. How much do you want to spend. You could buy the Jan-10 $40 call for $16.50, which would allow you to buy 100 shares of GDX for an all in cost of $56.50 per share. $16.50 per share now, and $40 per share later. Or you could buy the Jan-10 $50 call for $12.00, which would allow you to buy 100 shares of GDX for an all in cost of $62.00 per share. Or, you could buy the Jan-10 $60 call for $8.70, which would allow you to buy $100 shares of GDX for an all in cost of $68.70. See? You could pay more now, and it's cheaper in the end. Or pay less now and it's more expensive in the end. Also, keep in mind that you have TWO FULL YEARS to use your leap call option. Also, keep in mind that for every dollar over $776 you spend you'll be paying interest, because you purchased the call option with margin money. Keep that in mind.

Let's say you go and buy the Jan-10 $40 call for $16.50. If you hold it for the full two years and you have a 10% APY interest on your margin account you'll spend an additional $174.8 in interest payments. I calculated this because the cost was $1650-$776=$874. So you used $874 of margin for the call option. $874*0.10=$87.4 per year in interest. For a total of $174.8 over the course of 2 years. That adds an additional cost of $1.75 per share for an all in cost of $56.50 per share plus, $1.75 for a total all in cost of $58.25. How's that sound? As long as you know that GDX will be worth more than $58.25 in Jan-10 this is a good investment.

Now, let's say you have another $6000 in cash that you've added to your investment account over the course of 6 months. Let's say GDX is currently at $55. I'm going to keep this simple and not do a full portfolio 'guestamation' but I'll tell you that it's cheaper to buy 100 shares of GDX from the market rather than using your call option. So, go ahead and do that. You still have about 18 months to use your call option. Why use/waste it now? Save it for 6 months from now, or 12 months from now when you have another $6000, but the price is at $70, or $80.

Remeber that monthly income part? Now that you own atleast 100 shares you can sell covered calls and make some montly income. You want to keep in mind that the goal is to sell at a strike high enough that you would either be happy to sell your shares at, or a strike high enough that you believe it will expire worthless. You could chose a strike price of $60 that way if the stock went way above you'd always be able to get back in by using your leap call option, but the downside is that the Feb-08 $60 call option is only worth $0.25 per share. So you'd only make $25 a month, and you'd have to subtrack commission fees from that. The other option is picking a strike closer to the current price, but far enough away that you think it'll expire worthless. Let's say $50, so the Feb-08 $50 call option worth $1.75. You sell that. Then as it is about to expire you either buy it back at (hopefully) a much lower price, or you let it expire and you sell the next months call option. Let's be conservative and say you get to keep 50% of the premiums from all the options you sell. You could make 12*$175*0.5=$1050 a year from your 100 shares of GDX.

I'll also let you know that you 'could' sell the call option against your leap call as well as the call option you sold against your 100 shares. This makes things a little more complex, but just so you know. It is possible.

Yes this is a bit long winded, but I believe the best way to teach is to bring things down to the lowest level. Those who already know parts of this can either review, or skip it. But those who don't have that firm grasp get to see the inner workings.

wavesmash, thanks for the compliment. I don't have a website. Atleast not one about trading. I feel like I have a good understanding of options, but less of an understanding of the large scale macro. So, I'm very willing to give to the community my knowledge of options in return for an education on the macro level picture.

I also save tabs for good posts. I find it is really helpful to reread the posts after a few weeks to soak up what ever wisdom was there.

Jock
re reading drill results. Here is a slide show linked thru Paul Van Eeden's website which is fairly basic but might be helpful.

http://www.paulvaneeden.com/pebble.asp?relid=821

Well, this is my first attempt at passing on a web address and the above doesn't look like it will allow a person to hyperlink ( I did a cut/paste). But manually should do it anyway.

Hi,

Albeit many of you say that FED and ECB temporary market operations mean nothing to the evolution of market prices, I stubbornly insist in saying that a correlation exists (with all due respect and apology for my contrarian thought).

The FED goes on drying up liquidity at quite a hefty pace, as you can see by checking the slosh report at:

http://www.gmtfo.com/reporeader/OMOps.aspx

Friday's data shows that the total sloshing (open temporary open market operations) is now standing at a mere 18,5 Billion USD, which compares to a high of 62,5 Bn USD registered on December 17th.

The numbers objectively show that:

- 70% of the liquidity that had been added by December 17th, has been withdrawn from the market.

- This means that a total of 44 Bn USD is how much US Banks have had to pay back to the FED onver the last 3 weeks. That is what you could call a "considerable ammount".

To see why this is not irrelevant, simply put it into perspective. This ammount of cash is about;

- 0,3% of the US GDP
- 30% of the ammount announced by US President Bush last Friday (150 Bn US) that is supposed to revive the economy.

So, please excuse me all those of you who say that there is no correlation between this and what has been going on in the equities market, but beg to differ as I think we should take this data into consideration.

If so, then what can we get out of this?

Short term - No TOMOS maturing Tuesday and "only" 3,5 Bn maturing Wednesday, which is likely to bring some respite to a very hurt market, and may signal that we start getting a rebound.

But the more important is: why?

It seems schizofrenic to have Bernanke saying that he is ready to act agressively, and then see the Fed drying up liquidity, at a time when Bush announces a rescue plan, of which a 1/3 has been withdrawn from the market in a few weeks.

My opinion here is simple:

- The FED will cut agressively on Jan 30, not before, probably 0,5%.

- They know that the market will rally on their decision and therefore they decided to "cut the steam" beforehand to avoid that such rally brings a breakout of the all time highs, which would lead to a parabolic spiral in prices, which would in turn both be ultimately inflationary and would most certainly generate a crash afterwards.

So, as incredible as it may seem, what we are getting is the "soft landing", Bernanke style.

As you all know I am long here, and am actualy quite comfortable with that. It will be very very unusual not to get a rebound here for the following reasons:

- Below these levels, equities are set for a crash. A real old style crash with a possible 5 or 10% gap down opening day. And that is not a good thing, is it? So it will not happen, at least if Ben can avoid it.

- The broad market indices are tremendously oversold. Too oversold to avoid a crash if s rebound does not happen very soon.

- Short interest is tremendously high, and this will bring significant short covering and short squeeze as soon as the market shows rebound signals.

In this light, I am expecting a hefty bounce as trading resumes on Tuesday.

Enjoy your "oversizesd" weekend.

Cheers from a Sunny European winter afternoon!

PS: 2nd Ave, do not give up trading!

:-)

maromatics:

"...(with all due respect and apology for my contrarian thought)..."

No need to apologise... We need more "contrarian views" to help us make intelligent decisions.

I read all the "short sellers" comments on this blog and take them as contrarian views as I do not short. But their opposite views help me understand why a particular stock may not be a good buy at the time.

Please, no one reading this blog should feel they have to apologize for their views as long as they are relevant and not offensive.

I learned a long time ago to say what you think needs saying because I found out that many times what you say means something to someone...maybe not everyone but someone.

Than you Macro – here is another another contrarian view

Consider the Asian currency crisis. They hold over 1 Trillion of $US paper. We are told that most of these holdings and in the form of US Treasuries. We are also told that this pile of $ claims is increasing at the rate of more than 30 Billion per month.

If Asia does nothing, the 1 Trillion will go to more than 1.3 Trillion by year end.

Side note – I think the total market cap of Ford and GM at today prices is about 24 Billion – Don’t get ahead of me yet!

Assume that Asians are not dumb, and assume you are the one responsible for investing this pile of $ claims. Would you leave it in investments (US Treasuries) that are almost certainly going to lose value relative to any other currency on the face of the earth over the next few years? Probably not, but, what are your options?

Hire Buffett to manage your money!

What would be the first thing Buffett would do?

He would liquidate most of the 1 Trillion of $ US Treasuries and buy brick and Mortar.

What happens to the 10 year? It probably goes over 6% in the next 2-3 years.

What happens to equities? They go up dramatically.

No sane person would hold $’s in the amount that Asia does knowing that they are almost certainly going to be worth less in the future than they are now. The only thing that stops this long term systemic slide is if the US balance of payments deficit becomes a surplus. Anybody think that can happen?

These guys cant have it both ways...Ben was dealt a bad deck but you cant say you believe he is doing a bad job because he hasnt lowered rates low enough and also say we wont fall into a recession in the next breath.

wabrew, but what if the dollar goes up? It has stabilized and many think it will go up. Will that view change with a 50 bps cut? We'll see.

Jock, thanks for the link to Mugarian and the Cramer video . . . both well worth the visit. The more this situation unfolds, the more it appears the real driver behind the panic selling is the crisis in confidence occasioned by the collapse in the monoline insurers and banks like C and MER and UBS and MS and BSC. Recession is just a sideshow.

I also appreciate maromatics' take on things and you aren't alone in looking for a bounce.

Speaking of oversold, I've been looking over the charts for a few miners this weekend (HL, VGZ, IVN, KGC) and they have been killed this past week. While not many have benefited from the rise in precious metals, they have certainly borne the brunt of the pullback in prices, thus proving that all equities suffer in a bear market.

Home builders DR Horton (DHI) and Ryland (RYL) report earnings next week. Centex (CTX) reports on Jan 30th. Curiously, these stocks have held up very well in the carnage played out elsewhere in the markets. In fact, they had impressive gains, albeit from oversold conditions. In looking at their charts, however, I see evidence that they are going to be sold off again soon, continuing their stair step descent to new multi-year lows.

We may still see a precipitous opening gap to 11800 in some form of capitulation before a rebound to retest 12800.

I only mildly disagree with one point, a capitulation or as my friend Maromatics called it, "A real old style crash with a possible 5 or 10% gap down opening day." hasn't happened yet and while certainly unpleasant to aome, a capitulation needs to happen. Something like August where you could feel the fear through your monitor and it grabbed your solar plexus.
http://tinyurl.com/292dqv
http://tinyurl.com/ytdqjr

I think it will play out technically, as it has to this point, which can be taken both ways.

A possible 700 pt bounce is still an opportunity should it happen. A decline to 11800 or lower is still an opportunity, should it happen.

I believe long term we are in a bear market and headed lower, but it won't likely happen quickly or in a straight line. These recessive processes are like parasites, they debilitate slowly over time. We still have many many months of lower home prices, defaulting loans, slowing spending and lower profits to come. Meredith Whitney is still saying there is more to come and she has nailed it so far.
There are more levered instruments to come.

The "stimulus" package will take many months to work out and into the system with dubious results. The powers that be will use it to bargain for their longterm goal of no taxation of any kind for the wealthy while the ignorant citizenry and their children and grandchildren still unborn are enslaved by their debt.

But I will take a bounce too.

Today is moving day in the Bahamas. If I was there I would carrying boxes today, but alas I'm in the cold Northwest. Here is my meager contribution:

CARDBOARD BOXES - Loudon Wainwright III
I'm gonna go to the supermarket,
I'm gonna go to the liquor store,
I'm gonna get me some cardboard boxes,
You know what them boxes are for,
I'm gonna rent me a U-Haul trailer,
Hook it on the back of my old car,
Call up some of my stronger buddies,
That's what your strong buddies are for

We're gonna move,
We're gonna move

Give it to the Salvation Army or the Goodwill,
We got so much junk it's a joke
Wrap a knickknack in some old newspaper
I know it was a present, but the damn thing broke
Your old shoes and my old T-shirts,
My strong buddies crave ice-cold beers,
Don't throw that away, it's a family heirloom,
I've had that ashtray for fifteen years

We're gonna move,
We're gonna move

We're gonna empty out our old place
And move into a brand-new better space
We got the books and the records and the tapes and the pictures
And the pots and the pans and all the breakable glass

The living room couch and the dining room table,
The washer and the dryer, what a pain in the ass
The TV and the home entertainment center,
The box spring and a queen-size bed
The Christmas decorations and the bureau and the playpen,
If we had a piano, I think I'd drop dead

We're gonna move,
We're gonna move

At the end of the day, the old place is empty
And the new place houses all of our stuff
Hunt back all the crap in the cardboard boxes,
It wasn't that bad, it wasn't that rough
But my strong buddies look a little bit grumpy,
I don't know why, I broke my butt,
Tomorrow we'll call up the telephone company
And get another set of house keys cut.

I can tell by the look on your face
You just love your better brand-new space, baby

All,

Thank yo for the kind words and interesting views.

Enjoy your weekend.

Cheers,

Craig...

As my 4 year old granddaughter would say...

"move it, move it, move it... you gotta move it, move it....

:>)

Maromatics: I really enjoy your posts, the kind that invoke thinking and more research.

In your calculations of the Fed TOMOs, have you considered the effect of the Temporary Auction Facility (TAF)? As I understand the purpose of this facility, it was to offer repo transactions to institutions other than the Primary Dealers (is that the correct term). Hence, the drying up of normal repo transactions which are replaced by the TAF, which lent $30 billion for 28 days Jan. 14 (settling Jan. 17), and intends to do the same every two weeks for an indefinite period. The way I read it, the total liquidity increase with the TAF will rise to $60 billion, because the first temporary loan would become due the day the third injection occurs. From then on it would be essentially a continuous rollover of $60 billion until increased or decreased.

Do I have this right? I'm a novice on understanding the Federal Reserve system, but am attempting to learn. I would welcome comments from more knowledgeable readers. Below is most of the press release that my comments were based on.

"Press Release
Federal Reserve Press Release

Release Date: January 15, 2008
For release at 10:00 a.m. EST

On January 14, 2008, the Federal Reserve conducted an auction of $30 billion in 28-day credit through its Term Auction Facility. Following are the results of the auction:

Stop-out rate: 3.95 percent

Total propositions submitted: $55.526 billion
Total propositions accepted: $30.000 billion
Bid/cover ratio: 1.85

Number of bidders: 56

Bids at the stop-out rate were prorated at 11.12% and resulting awards were rounded to the nearest $10,000 (except that all awards below $10,000 are rounded up to $10,000).

The awarded loans will settle on January 17, 2008, and will mature on February 14, 2008. The stop-out rate shown above will apply to all awarded loans."

http://tinyurl.com/2rc55x

Here is one simple template to evaluate the current market situation using a combination of valuations, market conditions,country/sector rotation to determine swing /day trading tactics. Add /customize as you see fit for your trading method, personal temperament and timeframe

I share some publicly available links I use to help me determine the trading plan for the day/week ahead:

Valuations:
Global demand and the economic cycle control the E in P/E, so wall street has taken the P down , fast and furious until more transparent guidance is available. Next week has market moving earning and guidance from AAPL, AXP ,, BAC to name a couple.

See the market P/Es here..mean reversion is at work..

http://online.wsj.com/mdc/page/marketsdata.html?mod=topnav_0_0002

The convergence point of corporate debt, SIV, CDO, consumer debt, and debt contraction with economic reality has yet to happen..so longer term, there could easily be more downside as we are not likely at capitulation levels….however…

Market Conditions/Breadth:

In the meantime..an intermediate bottom or oversold conditions is here. for those who would like a graphical depiction of what oversold means..the following free links do a good job..

http://tal.marketgauge.com/dvmgpro/Gauges/TodaysGauges.asp

Note the market specialist and NYSE member short position that corresponds to previous market lows. ( Intermediate or otherwise )

A time frame perspective…note how over a 3 year period..percent of NYSE stocks above their 200 DMA is at at 3 standard deviation events..see the chart here..

http://www.indexindicators.com/charts/none-vs-nyse-stocks-above-200d-sma-params-3y-x-x/

A word of caution…oversold conditions need a “catalyst” to encourage buyers to step back in.so far…that has not appeared…but could from anywhere, and any .direction. so stay flexible with both the mental bias and stops.

Tactics:

Being oversold/overbought to me means the reward/risk is contrary to the short term trend..i.e…preparing to go long during oversold conditions. 1/3 long position the last couple of days ..buying the last minute before market close, while trading intraday the morning trends.

If you have the time..keep an eye on the screen and have a long and short list.

Stock/Sector selection:

Note the sectors and countries that are showing signs of buyer interest here…

http://stockcharts.com/def/servlet/Favorites.CServlet?obj=msummary&cmd=show,iday[Y]&disp=SXA

From these sectors and countries..you can pick the stocks/ETFs Keep a manageable list of stocks in each sector/country that are highly liquid..and ‘seem’ to observe technical traits…do they fill gaps..follow fibs…etc..

Which ones are showing strength /weakness to determine long/short when conditions are ripe? What chart patterns are you seeing on Intraday and EOD charts?

No matter what the market does, as truly anything can happen…you have a plan. Long, short or out..based on a method.

Entry..Stop....Target…Exit…Bail out!

This is a game of probabilities…so buy low sell high if you are going long ..
Buy at support and sell at resistance levels whether you are trading channel lines or zones..and know which times intrady to trade that are favorable/unfavorable. For whatever reason…stocks seek symmetry ( equidistant levels/moves ..we are at one right now with the SPY from the 150 level)

This is a game of probabilities…so buy low sell high if you are going long ..or short high..and cover low..using RSI.

Have a method to determine your stops based on the stock you are trading..and a bail out plan in case the trading or investment thesis goes awry.

How will you know when its not going your way?
Do you have a method for determining when to hold overnight or not , if you are a trader?

Market Tells: Do you know your market leaders for the countries or sectors you trade?

Good luck..its the Year of the Rat…see link below..may we all prosper in interesting times.

http://www.usbridalguide.com/special/chinesehoroscopes/Rat.htm

About the myth of Fed injections and their effect on the market: I have followed the slosh report daily for several months now and its numbers can be used and misused to prove anything. However, I have just done a correlation study covering the entire period from Jan 2006.

This report is available at: http://shockedinvestor.blogspot.com/

The correlation between Fed injections and DIA is -0.06.
The correlation between Fed injections and SPY is -0.17.

The correlation between the SPY and the DIA is 0.94). A number close to zero means there is no correlation, a number close to 1 indicates a high correlation.

Of course we will get the odd bounces, and we will play them, the stock market has never gone down in a straight line, but seems to have little to do Fed injections. Money was being made available to cover the the end of the year period for the banks. However, the banks are in tremendously terrible shape, this money does not seem to end up in the stock market.

By the way, close to 1M Jan puts expired in the money on Friday.

Quentusrex:
You have a gift of describing a transaction.
Think of this:
It appears to me that you might be able to eliminate risk and still pick up a 50%+- return. What if you bought and sold a stock or leaps and then sold the short term options OTM on both each month and simply rolling to the next month when your time premium was 10% of the original purchase price. Any way to back test such a concept? You would elilminate most of the gain or loss from the movement in the stock price but if you could pick up a reliable 4% per month by selling the options it might be worth it to go both ways especially if you could eliminate risk.
What do you think?

Quentusrex:
You have a gift of describing a transaction.
Think of this:
It appears to me that you might be able to eliminate risk and still pick up a 50%+- return. What if you bought and sold a stock or leaps and then sold the short term options OTM on both each month and simply rolling to the next month when your time premium was 10% of the original purchase price. Any way to back test such a concept? You would elilminate most of the gain or loss from the movement in the stock price but if you could pick up a reliable 4% per month by selling the options it might be worth it to go both ways especially if you could eliminate risk.
What do you think?

# 2

The $ will continue to flucuate. That is for sure. The $ looked great two yeas ago when it moved up dramatically against the euro. But, I think a serious move down - possibly another 30-40% against most currencies - from these levels is "baked in the cake".

Barton Biggs, a hedge fund operator who was previously the stategic thinker for Morgan Stanley, came out with a prediction in Mid December that we were on the verge of a "massive" short covering rally. So far, a very wrong call.

Biggs is rarely wrong. If Asia even hints at what I alluded to in my earlier post, this market makes new highs in 3-4 days.

Freedom 57,

Thank you for your comment. I had not taken the TAF data into consideration, it is great that you have brought it up.

Of course that this data changes my prior analysis.

EEM,

Cool.

Sio2,

Thanks, again.

Cheers!

Goldman to set up $130m charity
By Mark Kleinman
Last Updated: 11:11pm GMT 19/01/2008

Partners at Goldman Sachs, the financial powerhouse, are to contribute almost $100m to a new charitable fund being set up by the investment bank as it bucks the trend of ¬mammoth losses being racked up by its Wall Street rivals.
The bank will announce this week that all 379 of its partners, who shared in a huge $21bn compensation and benefits pool during the last financial year, are to participate in the fund, Goldman Sachs Gives, which was launched in November.
Its establishment comes at a time when corporate phil¬anthropy is high on the business agenda.
The subject is likely to be an important talking point when the World Economic Forum's annual summit gets under way at the Swiss skiing resort of Davos this week.
Peter Sutherland, the chairman of Goldman Sachs International, said the fund, which is expected to be worth $1bn within the next few years, was an acknowledgement that some of the vast wealth enjoyed by the firm's employees should be redirected to charitable causes.
"The firm's partners recognise that they have a responsibility to the communities in which they operate," said Sutherland, who is also set to step down as chairman of BP, the energy giant, this year.
"They voted in favour of the proposal because it will provide a vehicle for effective giving," he added.
Goldman Sachs itself will donate about $50m to the fund, according to the bank, taking the total size of the fund at launch to $130m.

http://tinyurl.com/2j55pr

Si02,

With the fed injections, wouldn't they go to working capital within a bank and not directly into SPY or DIA?

Does the study take into account a delay in injections vs. utilization of the funds?

Interesting study... Fed is really smoke & mirrors? From what I've been reading about the crisis in the 70s, liquidity injections don't seem to matter a whole lot when there is a hole in the boat.

Looking at the QQQQs... we seem to have hit the Aug lows... yet with more volume selling than Aug. Push something harder and won't it go faster? Looking at MACD over 1 year timeframe shows that this month is pretty pitiful and capital flows are moving somewhere else... where?

My guess is we drop down to a range between March highs & lows. Tipping point is the credit rating adjustments in the bond markets & increased credit default swap insurance costs, not to mention a slowdown in shipping to save fuel costs, and increases in inflation all around.

SPY appears to be the weakest performer... DIA is the strongest... QQQQ is right in the middle.

Through the end of December these followed each other fairly well. Come Jan 3 the QQQQs plummeted, while the other two went down in tandem, with some increased selling in SPY after options expiration.

If I'm reading the charts right, QQQQ is down around 15% since the Nov 6 downturn?

http://tinyurl.com/2qym7p

The P&F chart is even uglier, suggesting a bottom around $37-38. (Is that around another 17-18% slide from these levels???)

http://tinyurl.com/2ldg3s

Any comments or different views on this one? Am I interpreting these charts correctly?

Next week should be interesting... My guess is we pop a bit, go flat and then down some more. Flip a coin...

There is a huge crisis right now in Israel, a crisis with China, US & Taiwan, and a few issues between Russia & Britain... just to name a few of the big players.

http://tinyurl.com/2k9zfj

Not that much of these will be reported in US media. Even Greenspan in his book said that his wife, an NBC correspondent, had problems bringing up anything other than domestic political issues during the last economic crisis.

Of course there are the current thoughts of conflicts of interest and ethics with Greenspan's joining a hedge fund. If you can't trust Mr. Bubble, who can you trust?

http://tinyurl.com/32lhgo

I saw Alan Greenspan at the last Trump Wealth Seminar November in NY if that puts it into perspective. His topic - The 2008 Outlook for the Economy was probably seen by around 8000 people via a satellite feed at 8am on a Sunday morning.

The last question he was posed? "So, Mr. Greenspan, what is the outlook for the economy in 2008?"

His answer? "I guess you'll need to buy my book to figure it out." or something to that effect.

Total non-borrowed reserves:

200 million?

http://www.federalreserve.gov/releases/h3/Current/

JIM...

What does that mean? It does not seem like a warm and fuzzy number.

As my 4 year old granddaughter would say...
"move it, move it, move it... you gotta move it, move it....

Posted by: golfer [TypeKey Profile Page] at January 20, 2008 12:08 PM

my wife says that's exactly what my 5 year old was singing under the influence of nitrous oxide at the dentist...

re trading->don't recall saying i was giving up trading, just that daytrading has ceased to work for me the past 2-3 days, and that i sense a longer holding period would work out better, maybe even one as long as several weeks...of course, trying to game the market the next day difficult enough, let alone over a weeks-long period, so we'll see...simply being honest with my impressions...

wavesmash: your first question about where the funds go: yes, I think you are correct. Clearly they do not go much into the stock market. These banks are in too much trouble to be playing it the markets, but heck, they've done riskier things.

The point was what to do next time someone mentions the "injections".

BTW, index/ETF straddles returned over 90% profit on SPY and DIA, as well as moves required for February. I'll publish the full results Monday or Tuesday. If anyone has a favorite ETF and wishes the moves required computed let me know and I can try to add it. It has to be very liquid and with small spreads.

http://nexalogic.com/straddles-jan08f.pdf

2nd Ave :

Applaud your courage to be self-honest, without it day trading or any trading just perpetuates our mistakes. Think I relate to what you are going thru.

Mind if I offer you some suggestions?

Have you read Trading in the Zone by Mark Douglas? Together with Elder’s Trading for a Living..it might help you to get thru this period.

Take the best lessons from there for you and integrate it into a set of daily habits. Businesses have best practices so should traders. I always get the impression day trading attracts ‘rebels’…it made me successful elsewhere in business, but not in trading. Trading has rules and I want all of them that will help me be consistently profitable.

When I first read the two books, at the depths of horror at my day trading results and skills, I wrote down my mistakes …it filled 3 pages!!

Here were some mistakes that I made. I share these, in case you are going thru some of them so you know you are not alone. I use the Mind-Market-Money-Method model in my journal now to go over my trading day. It helps me focus and pinpoint where I need improvment.

1. Trading in a state of hubris or over confidence . I become reckless, doesnt work.
2. Trading based on what I want and believe versus what I see and what the market delivers.i,e, trying to game the market direction..I go with the flow when I am day trading.
3. Trading against the Trend, this never works..only at market extremes will I be a contrarian.
4. Trading in congestion zones…those zones after a nice intraday trending move..only to give up my earlier profits . Check out when you make the most consistent profits..I bet its before 10am PST.
5. Refusing to change my mental bias in the face of market evidence to the contrary…highly opinionated people, should not be day traders..either I change or get out.
6. Trading without doing my homework…without support and resistance zone marked, without trendlines and channels, without setting alerts and stops.
7. Revenge trading..trading to get my money back..and lose more in the process.
8. Gambling vs trading…trading in a state of self-denial..confusing LUCK with high probability trade set-ups/stops.
9. Trading with a confused or cluttered mind… now I stay neutral, alert and opportunistic..anything can happen . Yoga helps so does visualization.

I paid over $50K, over a 3 month period to learn these lessons. Whatever type of trading you decide to do, I hope you don’t pay/invest that amount to learn the same lessons.

Best wishes and with all respect.

Bloomberg headlines for Asia this morning are not looking to good at the moment. I'm looking for Asia to turn around by the time they close, to offer some optimism to our open on Tuesday.

* Australia's S&P/ASX Falls for Eleventh Day in Longest Selloff For 26 Years

* South Korea's Kospi Index Falls, Led by Hyundai Heavy, Samsung and Kepco

* Asian Stocks Decline for Third Week on Concern U.S. Entering a Recession

Missed this... but it could explain some of the flight of capital out of the banks.

November 2, 2007

"Thank you, Mr. Chairman. Let me begin by saying how delighted I am that the Board of Governors is today considering the final rule implementing the advanced approaches of the Basel II framework for large, complex U.S. banking organizations. Maintaining strong capital levels is essential to safe and sound banking. The Basel II rule will promote improvements in risk-management practices that will enhance the resiliency and stability of the banking and financial system. As the Chairman noted, this is an important step in the process--one that has, at times, seemed like a long time in coming. I have often been reminded of Sisyphus, pushing the stone up the hill but never quite reaching the summit--until now."

http://tinyurl.com/326xy7

In the 70s due to changes in regulations there was a flight of capital to Cayman & Bermuda... are we seeing a similar trend now?

The Economist: All Fall Down

http://tinyurl.com/yrjnfu

This is a must read!

Here is what grabbed my attention in The Economist's article:

Bond insurers
All fall down?
Jan 18th 2008 | NEW YORK
From Economist.com

Huge new problems in the capital markets?

AMERICA’S big bond insurers, which have underwritten some $2.4 trillion of private and public-sector bonds, usually go about their business largely unnoticed. But now they are looking distinctly wobbly they have started to attract attention. If one or more of them were to topple over, there will be a huge knock-on effect on banks and other financial institutions that rely on their guarantees. This in turn will further worsen the credit crunch and cause an even bigger headache for policymakers already grappling with a sharp slowdown in the American economy.

The threat of such a financial domino effect looms large. Moody’s, a credit-rating agency, has signalled that it might downgrade the AAA-ratings of two of the biggest bond insurers, MBIA and Ambac, in the near future. On Friday January 18th, Ambac said that it had dropped a plan to raise $1 billion of new equity capital to preserve its rating—making futher downgrades even likelier. In response, Fitch, another rating firm, cut Ambac's rating.

MBIA, which recently managed to raise $1 billion of new capital on top of another billion that it received from Warburg Pincus, a private-equity firm, will almost certainly need even more money if it is to preserve its AAA-rating. ACA Financial Guaranty Corporation, another insurer, is in even direr straits. In December its single-A credit rating was cut to junk status. The firm begged its trading partners to give it more time to sort out its problems. But by Friday it had still not come up with a rescue plan. The state insurance regulator of Maryland, where ACA is incorporated, has already assumed responsibility for some of its operations.

Bond insurers in effect “lend” their top-notch ratings to lower-quality debt, raising its value in the eyes of investors. Any cut in those ratings may make it impossible for the bond insurers to take on new business and would reduce the value of the securities they have already underwritten. Such cuts are now a distinct possibility because the insurers have underwritten billions of dollars of mortgage-backed securities, including those notorious collateralised-debt obligations (CDOs) that have now gone sour.

ooops...missed out 2 more no-nos

11. Letting P&L determine entry or exit vs. trade -setup. Focus on the cause, the effect will follow.

12. Canvassing for information and knowledge vs focusing on trade execution and patience/discipline. What is already known is not worth knowing..what helps is profitable execution.

Ambac Downgraded, Cities Seen at Risk
By STEPHEN BERNARD and LESLIE WINES
The Associated Press
Friday, January 18, 2008; 7:14 PM

NEW YORK -- A downgrade of bond insurer Ambac Financial Group Inc. is likely to have far-reaching effects, making it more difficult for cities to issue new bonds and forcing further write-downs at financial services companies, analysts said Friday.

After Ambac scrapped plans to raise $1 billion in capital, Fitch Ratings cut the company's crucial financial strength rating to "AA" from "AAA."

The downgrade likely means Ambac will not underwrite any more business, said John Flahive, director of fixed income for BNY Mellon Wealth Management. Market prices of existing bonds insured by Ambac and MBIA Inc. were trading lower before the downgrade, and Flahive suggested any downgrade could accelerate the decline.

Ambac and chief competitor MBIA together insure $700 billion in municipal bonds, and MBIA's "AAA" rating is also under threat. The company issued $1 billion in bonds this week to preserve the rating, though that may not be enough to satisfy the ratings agencies. MBIA said in a statement Friday it intends to keep working toward maintaining its "AAA" rating.

http://tinyurl.com/2boy94

Bruce, remember there is no free lunch. But, there are great deals. Also, nothing is ever truely risk free. So let me see if I've got your trade correct. I'll use GDX as an example stock. You said to buy both leaps? So you'd buy a leap call and a leap put, and sell the near term call and put?

Well, for this to work you would want the leaps to move as much as possible the same amount as the near term options so that when the stock price moved the gain in the leap would offset the loss in the near term option. Also, when the stock moved away the loss in the leap would be offset by the gain in the near term option. As a trade this could work, but it'd be tricky. You would be taking advantage of the difference in time premium degradation between the leap and the near term option. You would want to find a stock that has higher near term Implied Volatility(basically a high amount of premium on all of the near term options) and as low as possible leap Implied Volatility. Let's take GDX. The stock is at $48.34. The Feb-08 $48 put is at $3.10, and the Feb-08 $50 call is at $2.30. The Jan-10 $60 put is at $18.50, and the Jan-10 $40 call is at $16.50. Alright, you would buy both leaps for a total of $3500, of which $1500 is premium. You have 22 months of options sales, so your leaps would lose about $70($68.19 actually) in premium per month. So far this trade looks good. You sell the near term call and put for a total of $540. Conservatively let's say you get 50% of the premiums, for $270 a month minus the $70 leap loss, for a total of $200 a month time 12 months for $2400 income per year from a $3500 investment. Yeah, that looks very tempting.

Now let's look at the actual risk you would be taking. If the stock moves up you have 2 things to 'worry' about. One, you are only covered from leap losses equal to the price at which you sold the near term option. So, if the stock moves up more than about $3 your put will take uncovered losses. And at this same time your leap call won't make any money to offset this loss because the near term call that you sold will offset any gains from the leap call. The same works for the opposite. So, this won't work for just any stock. You need one that will move either up or down in a slow or conservative fashion, but hopefully not past the strike prices of your near term options you sold. So, this would be a safe way to profit from a stock that is in a trading range or channel, but this will only lead to losses if the stock breaks out of the trading range.

Jim Sinclair is very familiar to me. Does anyone recognize his name? Not to scare anyone, but what he has written in the last two days is very worrisome:

Thursday the Chairman of the Federal Reserve expressed his support for a significant fiscal and monetary stimulus as a preemptive strike against a U.S. recession. The market answered by dropping over 300 points. Today the President of the U.S. broadly outlined a non-specific plan for economic stimulation. After the Administration's plan for $150 billion of economic stimulation was made public, the DOW closed almost 60 points lower. The result of the Bernanke/Adminstration fiscal and monetary stimulus is a total Dow decline of 479 points, according to my calculations.

Nothing said by either luminary addresses the problem, including those that developed this afternoon by the downgrade of the debt of Ambac, one of the four major bond insurers, MBIA, MGIC and similar companies dealing in OTC Default Derivatives. Should S&P and Moody take similar action, which is expected, two trillion in debt should also be downgraded. The downgrade of the debt of the guarantor must impact the debt they have guaranteed. So the two trillion is debt that may well and should be downgraded now is another domino of titanic size.

This afternoon's problems are new and their size says both Kings Are Wearing No Clothes" with respect to their presentations of Thursday and today.

The general equities market must be calmed. Should the Dow crater, another major domino falls. Let's see how the PPT (Price Protection Team) brings the Dow in Tuesday morning in pre U.S. trading and then how Tuesday closes. The DOW better be higher each day than the indices are before U.S. trading or as the last two days demonstrated, the PPT has lost its tight control of the equities markets. Watch the pre-open indices and closing Dow very closely.

If the equity markets cannot be calmed then:

* Recognize this is the Formula happening like everything else much sooner and much bigger in its implications than anticipated.
* Gold will rise to $1650 as an almost immediate effect of what will be done to attempt to fend off a total panic starting to take place in general equities, therein threatening to be followed by all credit markets of all kinds.
* The funds and hotshot short term traders in gold shares will be killed by the upward explosion of the gold price about to occur.
* The PPT and the Fed will step out of gold’s way because gold is one of the tools used in 1930 by Roosevelt and in 2000 by Bush. It will be used again now on the upside.
* Gold is the only insurance there is against what all this means because a panic in equities will blow the financial system, already coming apart, to smithereens.
* All country funds would shut down on any further investments in "at the wall" financial institutions.
* The rollover in credit and default derivatives would exceed the entire foreign debt of the USA.
* The rest of the $450 trillion dollar mountain of derivatives would start a disintegration like nothing you have every seen in your lifetime.
* Consumer demand would slam shut.
* The auto industry might as well go into liquidation this coming Monday, avoiding the June 2008 rush.
* The US dollar would burn a hole in the floor going directly to .5200 or lower.
* As the dollar disintegrates gold would rocket to and through $1650 in days.
* The markets for general equities would all have to institute total trading halts every 100 points on the downside for 30 minutes each.
* All commercial call loans would be called.
* All debtors one day late on any payment, lacking grace period, would be liquidated. All debtors over one day of the grace period would be liquidated.
* It is clearly visible to anyone with eyes or a mind to think that the PPT has lost all semblance of control in the equity markets and will soon in all remaining markets.
* The commercial paper credit market which is almost dead will die totally.
* Should no emergency action take place soon, you will see an old fashioned panic of the 1929 variety.
* Just as emotional fools sell gold and gold shares, be assured that more emotional general equity fools will unload and bring the averages down more than ever in history in one day.
* Recognize this is the Formula happening like everything else much sooner and much bigger in its implications than anticipated.
* Emergency action will be all splash and theatrics but truthfully the cat is out of the bag. It buys some time but corrects nothing. It makes the Formula 100% correct.
* There now must be EMERGENCY ACTION because the Chairman of the Fed has BOMBED OUT PUBLICLY and a PANIC is about to occur. Expect EMERGENCY ACTION in days, not weeks.

If you have not protected yourself, you may only have days to do so. Protection amounts to a simple act: As much as possible eliminate financial agents between you and your assets. Own gold or equivalents equal to one half of your liquid net worth. Then you insure your entire net worth. Do not have margin debt. If you have debt you must own gold fully paid equal to that debt to insure it.
Posted On: Friday, January 18, 2008, 5:35:00 PM EST

Could This Be "The Mother of All Wakeup Calls"?
Author: Jim Sinclair

Dear Friends:

This is it and even the prestigious "Economist" knows the truth.

The Default Swap and Default Derivative (herein called bond default insurance companies) meltdown that will follow the cut of the bond rating on Ambac, a bond insurer, is referred to as a DOMINO EFFECT.

What this means is that the side of the derivative special performance contract that is required to perform cannot perform and may in fact not even be there.

In my exchange with Monty yesterday, I named his concept the “Resurrection Trust,” as in Lazarus. However, in this case Lazarus does not rise because in all probability he will not even be there at rising time.

Pop Goes the Weasle of derivative madness in the form of 2.1 trillion dollars. I see this entire matter as the crime of all time, not simply the Great Train Robbery.

Once again these geeks have killed us all to some degree. For those who refuse to protect themselves, you are certainly going to be a victim.

When will people realize that these companies could never perform on the products they sold even when they were flush with money?

Default swaps and derivatives were always a scam if you consider their inability to do what they had contracted to do. No one ever imagined that multiple credit problems could occur simultaneously. That means no one ever did or considered the “What If” in this whole fiasco. All that existed was world class unbridled GREED.

How thick can people be that they can't see that the entire financial world is now threatened with a problem for which there is no practical solution?

Tax cuts, lower interest rates, and putting $800 in every consumer’s hands is not going to put a dent in this juggernaut of unwinding derivatives that are hell bent on producing a Financial Apocalypse.

The potential now is akin to the Weimar Republic case study. Yet many sleep comfortable in their imaginary world, seemingly immune to what's about to happen.

Posted On: Sunday, January 20, 2008, 2:59:00 PM EST

NIKKEI 225 is down over 2.5% right now!

The Cost of a Free Lunch
New York Times reporter David Cay Johnston surveys a world of government interference in the market to privilege the privileged.

Brian Doherty | December 28, 2007

David Cay Johnston is a Pulitzer-winning New York Times reporter. His latest book, just out this week, is called Free Lunch: How The Wealthiest Americans Enrich Themselves At Government Expense (and Stick you With the Bill). It’s valuable from a small government perspective because of its detailed stories of government attempts to manipulate or adjust the market, leading—predictably, a libertarian might say—to benefits for the well-off and well-connected rather than the disadvantaged or the masses.
Free Lunch is full of sharp, heavily reported takedowns on eminent domain, expensive special favors for sports teams, legislative deals that put taxpayers on the hook for private train company’s crimes and errors, giveaways from small towns to attract big-box stores, and how heavily government-managed markets in areas such as power and health care can enrich some at everyone’s expense.

While almost every depredation recorded in Free Lunch can be traced back to government actions or decisions (generally combined with some individual or company’s decision to act like a bit of a creep), Johnston engages in a fair amount of rhetoric along the lines of how “the ideology of blind faith in markets” is somehow implicated in this or that crime or ripoff.

Still, he often uses sound free market arguments to make his case—for example, noting how some government action places on everyone an often-unnoticeable little burden in order to give a big special benefit to a few. Unfortunately, he’s apt to forget that sort of argument when he, say, condemns outsourcing of jobs overseas, or trucking deregulation.

As Johnston tells me, he’s not selling any consistent ideology about government. He sees himself as an investigative reporter, looking for interesting untold stories. In this interview, conducted by phone on Thursday, Johnston is nonetheless aware his book has a distinct moral message.

http://tinyurl.com/ypqm54

bruce - re 11:15 PM Jan 19 post,
quentusrex -re 12:53 A:M - Jan 20 post,

gentlemen.... thanks so much for the thorough explanations of the GDX Leaps trade.

thx

ALOHA !!

What few people, even Jim Sinclair consider is that a dowgrade of major US Banks that will be a domino effect of bond insurer downgrades is a further downgrade of US debt ratings from their current AAA. This means less foreign investment into the US government's policies of policing the World and the oil supplies. All this leads to higher gold prices denominated in US Dollars and since most of our trading partners have accepted US paper in trade for goods and services inflation will skyrocket here in the USA where imports make up a large part of our daily lives.

What investors need to concern themselves with is their own position not only in markets, chasing prices, but being outflanked by inflationary prices that directly effect lifestyle. Costs such as food, gas, utilities and housing and believe it or not "taxes"! One point Sinclair makes abundantly clear is that government will increase taxes. If not directly via a Democratic Party takeover then via money printing(monetary inflation tax). I would have no worries about all this if the USA had savings and had exports to fall back on, but we do not! What the US government now has wrought on its citizens is "every man for himself" mentality that has taken over financials and spreading throughout US business and US society. This is the essence of "fiat" where instability and no standard of measure exists. If most of you will recall I put forth a metaphor for this by using the example of two skiers being caught in an avalanche. So long as the two skiers look at each other it apears that nothing is moving and there is no danger, but as soon as they look past themselves at the trees going by at high speed then and only then do they recognize the severity and danger of their predicament. To me that describes perfectly all global fiat currencies when measured against each other, but when measured against the "trees" ... gold ... only then will they see they are all in trouble, because they all practice the exact same monetary regime.

I take myself out of that loop by growing my own food in Hawaii and investing in food producing land. Buying gold and getting out of debt and off the "grid" of dependance is the only way out for individuals who are not connected to the elite banking and politicial entities. If you only have a "trading plan" then you are only thinly protected. In my mind you have to plan past day trading profits. In my mind trading is only a tool to shortcut your way to buying "real" protection that has been time tested for centuries. That would be "real money" gold and silver and farms that produce food. I find it odd that I have to add the part about farms that "produce food", but in these times there are still many US farms that are paid to produce nothing. Your tax dollars at work ... I also need to key in on farms that are dependant on external sources of water or water supplies that are irratic or drying up either in actual source or politically. A lot of the farms located in the central valley of California are in that boat!

I think about that aspect of being in Hawaii where water shortages are non-existant as I tour around West Australian cities and realize that a lot of this growth being seen now would evaporate in an instant without water. Much like Las Vegas or LA without a water supply the land would revert back to being a desert! Why water desalination plants aren't being built in coastal regions I have no idea. Right now the "drought" is on for a lot of Australia ...

AUSTRALIA HOUSING
Housing here in Australia is very similar to the prior US real estate bust. They even have TV shows about "flipping houses" ... One called "AUCTION SQUAD"!! All the warning signs are here in spades. Any major decline in mining will push it all over the cliff. In other words if China and India stop buying!! The BIG DIFF mates is that Australia actually has an economy that does not depend on McJobs! West Australia is actually selling something that has value ... minerals! The US only exports fraud, weapons, debt and dollars! That's a thin line ... We have no real wealth to fall back on! But Aussies beware ... your government follows the US government WAY TOO CLOSELY!! In my mind that is a mistake ... Good old Ruudy! He's now got a five point plan out to fight "inflation"! Gerald Ford redux?

GOVERNMENT IS ONLY AS HONEST AS ITS MONEY ...

Mullie - thanks. I'll have a look !

WOW.

All I have to say - Sunday night here in Florida as I watch a great duel between the Giants and Packers - is that sometimes this page contains such a wealth (pun very much intended) of information, insight and analysis, that I am simply boggled.

Heh, I have had the Saturday discourse up for two days, and have re-re-re-read the posts here until my li'l brain is just a spinnin!

I finally decided to just save it for further review.

The amount of sharing is amazing. Happy Sunday to you all!!

can anyone give me the website where I can listen to Don Coxe's weekly report? Thanks.

Hi Bill,

It sounds like the US regulators are always at least a few years behind in regulation.

I remember reading that the banks locating offices in the Cayman's had to build on the second floor of any building, so that they would not be recognized as a domestic retail bank.

I guess my question is, where is the money going? When a large bond issuer has a ratings downgrade and a selloff ensues in the markets, where does the money flow?

When government regulation causes money to flow beyond borders, where would it end up?

Canadian banks paid a lot more than expected to implement Basel II. How are the more complex US banks going to hold up to scrutiny & implementation costs?

http://tinyurl.com/2pwsws

I wonder what would have happened if Ponzi's investors got bailed out.

http://tinyurl.com/3c4pbs
http://tinyurl.com/fyez3

March 3, 2008 is the date for Lou Pearlman's pyramid scheme trial, something like $500 million dollars worth of fraud. Another one in Costa Rica was expected to have net $400 million.

What do you think of all of this talk about bank defaults & shrinking non-reserve assets today? How about government intervention (bailouts) in capital markets? What are the next couple of months going to look like when it comes to the markets?

Euro at risk from Europe’s own economic storm
By Ambrose Evans-Pritchard
Last Updated: 12:59am GMT 21/01/2008

One begins to glimpse the distant end of America's financial crisis. A mood of capitulation is sweeping Wall Street, the time-honoured moment of black darkness before dawn. Losses are coming into focus. We know that rates on $1,500bn in adjustable mortgages will jump by 300 basis points over 18 months. House prices may fall by 15pc from peak to trough. S&P has raised the default forecast on 2006 sub-prime debt from 14pc to 19pc. "The US housing market slump may last far longer than previously expected," it said. The phase of denial is over.

Read more of Ambrose Evans-Pritchard
Get the latest news and analysis on the economy
Goldman Sachs and Merrill Lynch expect recession. "The perfect storm took time to brew, but it hit hard and fast - much harder and faster than we expected," said Bank of America.

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Few still insist that the real economy can shrug off an implosion of credit. Fund managers are adapting to the new consensus. A fifth now expected a global slump. Citigroup is coming clean on write-offs with abject confessions: a further $18.1bn last week. Merrill swallowed $16.7bn.

The apparatus of the US government is now in rescue mode. The Federal Home Loan Bank system has quietly slipped mortgage banks $750bn since the crunch. It injected $210bn in November alone, with taxpayer guarantees. Citigroup gobbled $95bn. God bless socialism.

The Fed will cut rates a half point to 3.75pc by month's end, if not more. Ben Bernanke is "exceptionally alert" after unemployment jumped from 4.7pc to 5pc in December, the sharpest rise in a quarter century.

"It is patently obvious that the Fed has thrown its inflation worries to the wind," said Stephen Stanley, from RDB Greenwich Capital. Quite right too. Oil has broken below $90 a barrel. The Baltic Dry Index is in free fall. Shipping shares are crashing. Will anybody care about US inflation in six months? The White House is crafting the Bush bail-out, an instant helicopter drop worth 1pc of GDP. Congress is not going to get in the way. "Everyone should put their ideological baggage aside and try to pump money into the economy to get things going," said Charles Schumer, Senate Banking chairman.

Spending is no cure. It will add to imbalances that have already degraded the US economy from top creditor to top debtor in a generation. But a double-shot of fiscal and monetary stimulus, laced with moral hazard, can stabilise credit. Note that the US commercial paper market finally stopped disintegrating last week. It added $35bn.

Yet if the storm is peaking in the US, it has hardly begun in Europe. Bernard Connolly, global strategist at Banque AIG, says euro-losses may surpass the US debacle. "The next really big shock to financial markets is likely to be the risk of collapse in the EMU credit bubble: the private sector credit consequences are likely to be catastrophic," he said.

Budget deficits must stay below 3pc of GDP, on pain of fines. Germany once breached this with impunity, but that was before Angela Merkel appeared. Virtuous again, Germany now demands rigour. Since France and Italy are already nearing the 3pc buffer, they may have to tighten into a downturn. Monetary bail-outs are not allowed either, at least not until the German bloc gives a green light to the European Central Bank.

We are a decade into EMU. The outcome is what Bundesbank sceptics feared. Interest rates have been far too low for Club Med and Ireland, fuelling property booms. These have burst, are bursting, or will burst. The victims are beached with current account deficits of 10pc of GDP in Spain, 13pc in Greece. The "Nordics" have surpluses, at Club Med expense. Italy and Spain have lost 30pc in labour competitiveness against Germany under EMU. France has lost 20pc. An attempt to deflate these countries back to balance will run into revolt.

Hedge funds are already circling. One has set up a Euro Divergence Fund. BNP Paribas said spreads on Club Med debt will soar this year to levels never seen in the euro-zone. "The markets are going to punish wrongdoing," said Hans Redeker, the bank's currency chief. "The politicians in Italy and Spain do not seem to realise how deep-rooted their problems are. They may have to cut real wages," he said.

"While tensions can be camouflaged during economic upswings, they surface during downswings. All failed currency unions were abandoned during times of economic stress," said the bank.

We are nearing the moment when the ECB must decide whether it is a bank or the political guardian of the EU Project. It cannot be both. The monetary crunch needed to restrain German wage deals after the rail workers won 11pc will crucify Spain.

Over 40,000 estate agents closed doors in Spain last year. Property prices are dropping in Madrid, Barcelona, and Seville. Spanish banks are issuing mortgage bonds to use as collateral at the ECB's window, without even trying to sell them on the open market. La Gaceta said this "abuse" has reached €40bn.

The ECB has taken the political pulse of Latin Europe and concluded that rigour is now too dangerous. It will face a hostile troika of Paris, Madrid and Rome if it persists, risking EMU schism. Trumped by politics, the Germanic hawks have climbed down.

The euro fell hard last week. It is the start of a long slide to levels that reflect a sluggish, half-reformed bloc in demographic decline. The euro must be weak, or it will break. Whatever happens, it is already too late to avoid the Latin Crisis of 2008.

http://tiny.cc/cRTXW

Watched that Cramer video on Cramer Rages on Banks: 'Where's the SEC?!'

I think he's losing his voice and he's looking tired...

"There's only one triple-A, and those are the guys that are fixing your tire on the I-95 when your car breaks down."

"if I scared the hell out of you in August, you got out at 14,000."

"The fed could care less about me. I'm just some pop off joker who made a lot of money in a hedge fund who's on a TV show. I am nothing to them.

lol.

Are the markets open in the US tomorrow? I thought it was a holiday.

US Markets are closed tomorrow. It will be interesting to see what happens in the US markets after Asia and Europe go through 2 sessions.

They're closed....no brakes.

"I'm sorry, I don't know how to stop this thing"
- The Wizard of Oz

Let gold yell for you
By The Mogambo Guru

The Economist magazine implies that we ought to start taking some defensive action, and maybe putting in some barbed wire on that exposed left flank out by the garage, by reporting that "America's jobless rate is now 0.6 percentage points above the cyclical trough reached in March 2007."

If you are like me, you yawned and were bored at such a measly increase, and that means it must be time for a snack, but you don't have anything tasty at hand, and all the other employees have started hiding their lunches from me. What to do?

My actual second thought is that my blood sugar is too low because my first thought was to just attack them, throw them aside, and ransack their desks until I find something yummy to eat, and keep this search-and-consume mission going, desk after desk and cubicle after cubicle, until I pass the point where marginal utility equals marginal cost; the hassle just ain't worth another Twinkie or candy bar.

But I was saved from both strenuous activity and further musings along that line when the article went on to say that the significance of this piddly little 0.6% move, which is probably just a statistical rounding error as far as I am concerned, is much more than that, in that Merrill Lynch pointed out that, "At no point in the past 60 years has the unemployment rate risen by more than half a percentage point from its trough without the economy slipping into a recession." Oops!

Maybe it is because of that blood sugar thing, or maybe out of envy that the Economist magazine has such spread and influence while I am stuck here in this stupid little closet, cloistered "away from the other employees" at their stupid request, and nobody ever listens to me, but I feel compelled to get right in their faces to remind Merrill Lynch and the Economist magazine that ALSO "at no time in the last 60 years" has the definition of recession been so grossly distorted by the fact that the miserable squirt Alan Greenspan and the equally miserable Michael Boskin came up with all those inventive ways to discount inflation by "adjusting" prices for changes in quality (the car costs twice as much, but you get fancy hubcaps!) or potential utility (the computer costs twice as much, but is assumed to have gone up in value because it is twice as fast but costs less than double!), which is a real stupid load of crap because you still use your faster computer to goof off at work, playing games of solitaire at the same slow speed and downloading pornography, which slows everything down because the computer still has to go around compacting files and looking for places to store it all.

The effect is that the rise in nominal GDP is not adjusted for the full effects of inflation, making GDP look bigger than it is. For example, if Mogambo Enterprises sold 10 widgets last year for a dollar apiece, then Mogambo GDP was $10. If this year Mogambo Enterprises sells only 8 widgets, but at $2 apiece, it looks like we made money! We had total revenue of $16, whereas last year we only booked $10! Everybody is happy until my boss realizes that inflation was 100%, and so Mogambo Enterprises had a real, inflation-adjusted loss of 20%!

This must be the reason why I never seem to tire of screeching my Loud Mogambo Disagreement (LMD) with the ridiculous idea of "investing for the long term" and putting your money into common stocks to fund your retirement. Only idiots could possibly believe that investors as a group can take more out of a bucket than they put in it.

But it is a hard slog to convince people of something contrary to what everyone seems to agree on, even though there is not one shred of evidence that such a preposterous notion could possibly be true, and my throat is raw and sore from yelling and calling people idiots for believing something so Utterly, Utterly Stupid (UUS).

Now, I save my energy, as I have a chart from chartoftheday.com, which "illustrates the Dow adjusted for inflation since 1925". As they say, "There are several points of interest. For one, when adjusted for inflation, the bear market that concluded in the early 1980s was almost as severe as the one that concluded in the early 1930s. It is also interesting to note that the inflation-adjusted Dow is now less than three times higher than where it was in 1929 and a little over double where it was in 1965. Not that spectacular a performance considering the time frames involved."

Then they go on to show how the damned Alan Greenspan and his despicable Federal Reserve created so much monetary inflation that all that money and debt slopped over into everything. Chartoftheday.com continues, "However, the magnitude of the bull market of 1982 to 1999 (even when adjusted for inflation) was truly of historic proportions. While the Dow is currently more than 1,000 points above the dot-com peak that occurred eight years ago, today's chart does illustrate that on an inflation-adjusted basis the Dow still trades below its 1999 peak."

So nobody made any money in the stock market in over eight years! Hahaha! "Investing for the long term"! Hahaha! "Investing for retirement"! Hahahahaha! What idiocy!

And what the chart shows, but nobody is saying, is that it wasn't until 1960 that the Dow rose high enough to equal the very peak in 1929. "Investing for the long term"! Hahaha!

In short, inflation ruins everything, and yelling about it won't make it better. You have to let gold yell for you.

Richard Daughty is general partner and COO for Smith Consultant Group, serving the financial and medical communities, and the editor of The Mogambo Guru economic newsletter - an avocational exercise to heap disrespect on those who desperately deserve it.

Republished with permission from The Daily Reckoning. Copyright 2008, The Daily Reckoning.

http://tinyurl.com/2ut2qq

Jan 19, 2008

Drunk in a bankrupt world
By Chan Akya

An oft-told story about drunks relates the instance of a passer-by asking a muddled and tipsy wanderer what he is looking for under a streetlight, only to be told that the inebriate lost some keys in the nearby bush but is looking under the light because, well, there is light around.

In much the same way, politicians and central bankers are stumbling around aimlessly blaming any convenient target for the problems faced by their constituents. They need some help in connecting the dots; here then is an attempt towards the objective. In this article, I will examine the common thread running between five different stories that surfaced this week:
• Mitt Romney's pledge to save Michigan's auto industry, that apparently won him the Republican nomination from the state.
• Mounting credit losses and attendant capital raising by US banks.
• The World Bank's most recent acknowledgment of the corruption that plagues most of its projects, this time involving healthcare projects in India.
• China's further tightening of lending conditions at its commercial banks even as it announces explicit price curbs on key food and other products.
• The launch in India of the world's cheapest car.

On the face of it, there is not much linking these stories. The state of Michigan, for example, plays host to America's once-mighty automotive industry. That's not the only reason it is in the news these days - the state also has the dubious distinction of being in the top five most delinquent states for personal finance (you know, credit card debt repayment, mortgage repayment and all that sort of thing).

Things are so bad that some economist wags are calling the state Michi-Gone: yes, humor is among the various talents that economists do not possess. It is easy to make the link between the declines of the auto industry and the personal wealth of the state's citizens, but that's not the full story.

Add to this the question of why the auto companies squandered their hard-won prosperity from the nineties (Of black swans and greedy oilmen, Asia Times Online, January 5, 2008) and a more complex picture emerges. With a strong US dollar that was helped along by billions in so-called safe-haven flows following the Asian financial crisis, America simply had too much money, which is usually the first condition for capital misallocation. That is what led banks and smaller financial companies to lend willy-nilly for mortgages, credit cards and the like essentially to people chasing the American dream - ie a house of your own with a two-car garage and excessive cholesterol intake…….

http://tinyurl.com/2s8x76

Nasty stuff. Nikkei and Hang Seng down almost 4 percent at this point.

Bill asks the question, "will the bears run south-east like in 2000-2002 or will they run south like 1987?"

So I ran 24 years on the DJIA. On my puny little chart 87 looks like a little blip, but you can see the relative magnitude of the drop and it shows up nicely in the RSI chart which I could enlarge. I would say that our current decline looks more like 87 than 2000-2002, more precipitous and direct than 2000-2002.
Since many of us find RSI useful, in 87 the RSI at the bottom was 44. Friday the RSI was 47. On 9/1/2002 it was 38. Bill's call of a 1000 (or more) down day is certainly a possibility by looking at the chart.
It would be worthwhile to see if you have longterm charts available.

Does anyone have any advice for a new convert to Interactive Brokers? I've used Scottrade for a few years, then switched to E-trade about a year ago, and now I'm switching to IB.

Quentusrex,

Re IB:

- TWS (IB Trader's Workstation) is a professional tool but may prove a little intimidating at first. It's a true professional platform; Traders/brokers working with IB or outsourcing their platform from IB use the very same software.

- Do take the time to go through the manual and the tutorials; Types of orders, features, everything...

- Activate your paper-trading account so you can try the features without putting capital at risk.

Other than that...is there any particular IB/TWS aspect you'd like some comment on?

BTW - Your options trading explanations are great. Please keep them up!

Hi,

The floor is gone here in Europe.

Dax down 4,77% by mid morning.

One can only wonder what will happen with the US open tomorrow if this goes on for another day.

5%, 7%, 8% gap down? Who knows... Maybe this will bring the capitulation crash that was being called for.

Cheers,

Has anybody noticed the collapse of the 3-yr bond yield?

http://finance.yahoo.com/bonds/composite_bond_rates

In the euro zone:

http://www.ecb.int/stats/money/yc/html/index.en.html

I've not read this article yet, but I will. It is a new entry from Engdahl that I be some of Bill's readers may find of interest. http://www.globalresearch.ca/index.php?context=va&aid=7813

I've not read this article yet, but I will. It is a new entry from Engdahl that I believe some of Bill's readers may find of interest. http://www.globalresearch.ca/index.php?context=va&aid=7813

http://tinyurl.com/y2ut7r

There's a storm a-brewin'

India down almost 7 1/2%
Moscow down 6 3/4%
DAX 5 1/2%
London almost 4%

Bill,

Simply, an outstanding WIR. Your comments are a must read for every serious investor/trader.

While every WIR is manna from the heavens, this week's report is perhaps the most important one in months.

Thank you.

Good morning.

The ANALysts are either taking the day off or are busy selling their holdings, so there are no Cara 100 Ratings Changes to report.

Here are the Cara 100 stocks that are reporting earnings this week:

Tuesday:

Before the Bell : JNJ, SU

Wednesday:

Before the Bell : EXC, UTX
After the Close : QCOM

Thursday:

Before the Bell: NOK
After the Close: IBKR

-------------------------------------------------

Have fun in what should prove to be a most interesting week.

Leisa,

Thank you for the article link.

Great article, and actaly great website.

Cheers,