Financial topics

[John]

I wrote in July that Illinois wasn't paying its bills.

See the "Additional Links" section of:

** 4-Jul-10 News -- From which country did the U.S. win independence?
** http://www.generationaldynamics.com/cgi ... 04#e100704


** 16-Jul-10 News -- Health care plan damages the economy
** http://www.generationaldynamics.com/cgi ... 16#e100716

In the last reference, I quoted statistics that showed, based on CDS
prices, that Illinois' probability of default within five years was
24.21%. That's a lot farther out than the end of March.

Since 1929, the world has become much more skillful at papering over
problems for a while, while the underlying problems keep getting
worse. At some point there has to be a crash, but I don't know if
anything can be done to pinpoint it.

John

[Higgenbotham]

I would agree that making observations about what a market has done in the past does not have high predictive value. It can have some, but not as much as making observations about systems that are simple, definable and linear. Markets are extremely "noisy" and are too complex and nonlinear for interpretation to be confined solely to a past pattern or even hundreds of patterns. Within a similar context, it indicates a potential. There would be a large range of error on it. Taleb would say we too often see things that are random and assign an outsized probability to a similar outcome. Katie's MACD that John mentioned is a good example. A valid observation that might be made is that there are people who are assigning outsized weight to this likely random pattern and therefore that is skewing the market higher. We don't know by how much, but thousands of similar observations can add up to having a feel and some ability to predict if enough accurate observation and thought is put into it. In making a comparison between a subprime debt problem versus a sovereign debt problem, the valid indicators in both cases have to be defined and observed in real time. If that is indeed a major force driving market movement, then the market can be predicted somewhat. When a problem is brewing ahead of time, there are people who know it. When Ohio Life failed in 1857, very few would have known that it would be Ohio Life or when. On the other hand, now that things have been set up so that a mid sized entity failing can set off a panic, there will be many more people who do know ahead of time and their behavior patterns can be observed in real time. That's why I observed and mentioned the ISEE value of 24 on Friday. Whether Taleb understands this or not is not known to me. Still, making an observation like that has to be put into the context of thousands of other observations.

[Higgenbotham]

I wrote in July that Illinois wasn't paying its bills.

In the last reference, I quoted statistics that showed, based on CDS
prices, that Illinois' probability of default within five years was
24.21%. That's a lot farther out than the end of March.

Since 1929, the world has become much more skillful at papering over
problems for a while, while the underlying problems keep getting
worse. At some point there has to be a crash, but I don't know if
anything can be done to pinpoint it.

John

A couple lines before I mentioned Illinois, I had written that the markets are focusing on the fact that the federal government isn't raising taxes as being a positive. Meanwhile, there is a taxation problem brewing that the markets haven't focused on until just recently, which is the states. Now that is coming to the fore as Illinois simply must raise taxes. Back in July, the worst of the panic had temporarily passed but the problem in Illinois was ongoing, of course. For awhile, Illinois could keep borrowing money by not paying vendors who were effectively in most cases giving Illinois a loan and were willing to continue doing so. That would be expansive in some sense, but once Illinois starts to raise taxes it's sort of like the credit card company saying that they're going to require some of the money be paid back. If a lot of vendors refused to do business with Illinois, it would have the same effect, and my guess is what forced this issue was that many more vendors were starting to withdraw. I had read that a couple weeks ago.

I don't think a crash will come by the end of March, but the probability looks to be rising from very small to significant. I may be overestimating it when I say 10%. It's important not to underestimate the resilience of a system and those in charge. At the same time, there are limits on what they can do and we can be sure that Illinois would never raise taxes unless they've hit some kind of a wall where there is no other option. Doing that may lower their CDS price, but it will also suck a lot of money out of the system.

[Higgenbotham]

There's an afterthought about Illinois I hadn't considered before. Let's say a business has a contract with Illinois and the state owes the business money. Due to this, the business becomes short of cash. The business then goes to its bank and requests to borrow money. The loan is readily granted because the bank sees it as pretty much risk free.

Along about December, though, there began to be general concerns about the municipal bond market. Banks in Illinois may have become concerned about this and made decisions to not grant any further loans to businesses who contract with Illinois. If several banks simultaneously made such a decision, which is likely, the besieged businesses may have called the Comptroller's office and informed the Comptroller that they were at the end of their rope as far as being able to grant any more credit to the state. The Comptroller may have then met with the governor and told him that taxes would need to be raised as interest rates in the muni bond market and Illinois' credit rating would not allow the entire sums needed to be borrowed.

[John]

Riots in Dhaka today, as huge Bangladesh stock market bubble appears to
be bursting, and stock market is crashing.

http://www.ibtimes.com/articles/99203/2 ... -riots.htm

John

[Higgenbotham]

Riots in Dhaka today, as huge Bangladesh stock market bubble appears to
be bursting, and stock market is crashing.

http://www.ibtimes.com/articles/99203/2 ... -riots.htm

John

Thanks, John. This reminds me of something I've been thinking about lately. Back in 2009, I had stated that the US stock market would likely turn down in August. And it did temporarily turn down from a high in the S&P of 1018 or so before continuing higher. Since then, the 1010-1040 area has formed a floor.

Along about that time, Didier Sornette and his group said that the Chinese stock market bubble would burst and that was discussed in detail here. That did occur, and the Chinese stock market made its high around August 7, 2009 and has been falling ever since. Back in 2007, both the US and Chinese stock markets made their highs in October and both fell together.

Which is one thing that has led me to believe that the Fed has been successful in manipulating US stock prices. It seems that every time there is a minor panic, the market goes down to the 1010-1040 area and then bounces to a higher high.

Now everyone and their brother can see how important that level is. So my thinking is that is another possibility for how a panic could become very severe - that if the 1010 "floor" gives way, the market could crash.

That fits in with some of the other comments being made. Faith in the Fed pretty much equates to faith that the Fed can keep the S&P above 1000 because we all know that the Fed is the reason why it is staying above 1000.

But, at the same time, we're beginning to notice that some of the markets in Asia like China and Bangladesh and I believe India comes to mind are running into trouble and that's even though their economies have supposedly been growing faster and are generally regarded as being more healthy.

Another thing I noted today was that Jim Rogers, who has been an outspoken critic of Fed policy and who has characterized the dollar as "a terribly flawed currency", has stated that he is long the dollar and believes it can go higher for weeks or months.

[burt]

Panic Number 1 was the November 26, 2009 Dubai panic. The S&P futures fell about 50 points overnight. I was out of town and turned the TV on the next morning when I got up. The newscasters were in complete, utter panic. I called my brokerage office and the woman who answered was hyperventilating and babbling. She's been in the business for decades, so that really surprised me. That was the end of the panic. It lasted less than a day.

Panic Number 2 started on January 20, 2010 and lasted until February 5, 2010. This panic mostly concerned Greece as an isolated issue. The S&P fell 110 points during this panic. The initial part of the panic was very sharp and lasted 3 days. By the time the panic ended, the mood on the Internet trading boards that weekend was black black. Everyone was sure the market was going to crash. That was the end of the panic.

Panic number 3 started on April 27, 2010 and lasted until July 1, 2010 (or possibly May 25, 2010). This panic concerned Greece and more generally European debt. The S&P fell 210 points during this panic. The initial part of the panic was very sharp and lasted 10 (calendar) days. I don't know much about the end of the panic because I had covered all my shorts a few days before and wasn't trading. But we can be pretty sure that the mood at the end of the panic was similar to the first two.

Sorry no time to write before...

Very nice observation, I studied a lot the last one, and I concluded from the TYPE of panic, that the "market" was probably going to move higher (and it did).
I make a BIG difference between "panic" and "crash". For me (be let's see) we are in a bear rally, an important one which can go until mid-2011 or 2012, I'll come back on that subject later on, when I have time.

Just a remark: I don't remember the first panic you noted, and I cannot find it on any chart, can you help me to find it.

Having stated these facts, I'll move into the interpretation and opinion portion. To begin with, there's a very obvious pattern. During each panic, twice as many points are lost on the S&P as during the previous panic. When I said 400 points could be lost in the next panic, I hadn't considered that. But we can see that the pattern indicates that the next panic could be that severe. Another obvious pattern is that most of the loss occurs during the first few days of the panic. So it can be readily seen that if previous patterns hold, nearly 400 points could be lost on the S&P within 30 days.

The next obvious point for discussion would be: How in the world could nearly 400 points be lost on the S&P within 30 days? I'll go into that separately later, but let's see what everyone thinks about the above first.

That could be a very intersting idea I noted nowhere else and that could lead to broadening top triangle (should be a Diamond).
This is a new idea for me, I'll follow it.
What interests me the most is that you have the nice idea to start form a human psychology (the one of the panic), and I wrote before panic in not enough for a crash, it has to happen at a certain time of the curve.
Also I would like to precise that even a "crash" is NOT a reversal.
What is important today is "Is the bear market rally" a "bear market rally" and has it topped, any other question, for me is irrelevant, so don't panic (panic doesn't help to think)

[burt]

Along about that time, Didier Sornette and his group said that the Chinese stock market bubble would burst and that was discussed in detail here. That did occur, and the Chinese stock market made its high around August 7, 2009 and has been falling ever since. Back in 2007, both the US and Chinese stock markets made their highs in October and both fell together.

Just a remark, don't mix the SSEC indice (the one you make reference to) which is used as a SPECULATIVE Index (see blog of Michael PETTIS on seekalpha, who is one of the best professor on the chinese market) and a "true" index like the FXI, for example, which hasn't topped yet.

Which is one thing that has led me to believe that the Fed has been successful in manipulating US stock prices. It seems that every time there is a minor panic, the market goes down to the 1010-1040 area and then bounces to a higher high.

I do not believe the Fed has the power of manipulating anything exept on the short term, its actions are mostly psychological.
Yes the range 1010-1040 is VERY important, and if the "panic" is before or after that level it has to be interpreted in a different way.

But, at the same time, we're beginning to notice that some of the markets in Asia like China and Bangladesh and I believe India comes to mind are running into trouble and that's even though their economies have supposedly been growing faster and are generally regarded as being more healthy.

Bangladesh is one thing India is another, yet we have real estate bubbles in China and in India, but the politics and the banks are VERY different in that 2 countries (you have to take into account somewhere taht China is a feodal state which has VERY different attitudes).

Another thing I noted today was that Jim Rogers, who has been an outspoken critic of Fed policy and who has characterized the dollar as "a terribly flawed currency", has stated that he is long the dollar and believes it can go higher for weeks or months.

I'm not so sure that Jim Rogers has a very good score in anticipating the markets.

The dollar story is something very complicated, part of the value of the dollar comes from the number of its aircraft carriers abroad (this is part of the value of any "money" for the past 3000 years, don't look at only at the economical value, this would be only PART of the problem)

Regards

[Higgenbotham]

I had mentioned Alcoa recently. Alcoa released their earnings last night. I don't study any one stock or subject in great detail, but did note that Alcoa stated their input costs are rising. Alcoa is trading lower before the open this morning.

Alcoa will be a good test as to whether investors believe we are in inflation or deflation. Alcoa has swung to profit and if things are inflationary, in the future, they can pass on their increased raw material costs and make even more profit due to the future inflation. If the future is deflationary, then they won't be able to do that and the price of the stock should fall.

[John]

The Dhaka Stock Exchange is up 15% today, almost wiping out the last
two days losses.

This looks like the 1929 Wall Street pattern.

> The recovery in the stock market comes after Bangladesh’s
> Securities and Exchange Commission extended the limit that
> investors could borrow from brokers, according to a statement on
> its website.

> http://blogs.wsj.com/exchange/2011/01/1 ... -recovers/

Sounds like the perfect solution to the problem!

John