Financial topics

[Higgenbotham]

Well today was the most bullish day we've had so far during the decline. Massive volume, a key reversal, end of day strength, all the major indexes made it to positive territory after a massive sell off (even though only the NASDAQ closed positive). The VIX went over 100, demonstrating an intense amount of fear not seen in decades. Again purely from a traders perspective, these are the types of things you would expect to see at a bottom. I do not by any means think this is "THE" bottom, but again looking back at history, in the '29 to '32 crash, we had massive rallies about every 6 months, and they generally lasted months, not days. So this is what you should expect. That doesn't mean it is safe to buy stocks, by any means. In fact, this is the mechanism by which (as John has pointed out) the market extracts every last dime from almost everyone, haha.

My best guess is that you are correct this time and stocks will rally for a few days, or maybe even a few weeks or months. I'm not trying to make a prediction though. But let's see if maximum ruin holds and those who study the markets get fooled!

According to what I know, a key reversal must be a positive close, but close enough. To me, this looks like a temporary reversal that will follow through higher at least 1-3 days.

This is not a recommendation to buy stocks!

[John]

My best guess is that you are correct this time and stocks will rally for a few days, or maybe even a few weeks or months.

How on earth could that possibly happen, when P/E ratios are in the 20s, and
corporate earnings are still falling????

John

[ojavaid]

Great interview with Paul Volcker on Charlie Rose.

http://calculatedrisk.blogspot.com/2008 ... -paul.html

[wvbill]

Next step will be an attempt by the "bankers" to establish an International Central Bank and an International Currency.

They are trying to get control of all the world's money -- it would be a disaster.

The only long term solution is to get rid of cenrtal banks and fractional reserve banking. Growth, then would be based on saving instead of debt -- with virtually no inflation other than what is consistent with real growth.

We must not allow the "bankers" to get more control.

Bill

[MarshAviator]

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Good luck to all. Stay safe.
But seriously, don't go overboard. Idiots (and kids) with guns kill people accidentally (or intentionally) and get locked up. Cash, gold, and guns get stolen. Canned goods taste like crap and you'll probably throw them out before eating them (you can try to give them to a homeless shelter, but the homeless will throw them out too, haha). The world is not, and will not, come to an end. The majority will always be gainfully employed, and that majority will always be around to support those who are not (whether they want to or not). Crazy stuff like divorcing your wife to take out 401k money also sounds insane to me. Work with the company to try to insist that safer funds be added, or use the money market if you feel you must get out of whatever funds they have.
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While I agree that we have to guard against going overboard, There are some actions that are prudent.
1) Responsible firearms ownership is a plus, get training if you don't have it, get a safe to store it, practice etc.
2) Canned goods are not the only choice;lots of other options exist and have for 100's of years, newer options such as freeze dried foods, nitrogen packed grains etc. In any case normal events like Katrina and Gustav, earthquakes, power outages etc. exist and should be planned for even in "Normal" times, certainly in times like these some level of both short and long term preparation is warranted.
3) If you don't know first aid and CPR take a class, knowing does a lot to calm a person. The more you are ready to face unknown circumstances the less likely you are to get caught up in the panic.
4) Study mass responses to natural disasters such as hurricanes, a little bit a prep means a tremendous difference in outcomes. I lived through three major events and it changes you, suspect a lot of people are going to say that about the first decade of 2000's.

It was stated that the Majority of people will remain employed;can I have your guarantee ? This is HIGHLY unlikely.
Perhaps 30% to 50% of most jobs relate to things that are not needed in any real way (i.e. shopping mall activities, travel for fun, nice and valuable, but not necessities).
The U.S. in particular is MUCH less prepared to cope than in 1929. Most of the businesses would go under even if they had no debt, without access to large amounts of credit. Cash on hand is a thing to be minimized, doesn't yield a return etc.
At least 50% of the U.S. economy is based on people buying things they don't need and only buying due to constant reminders from the Ad sector.

Things are just now really beginning to break the awareness of the masses; wonder how available many of the steps you have to prepare will be possible when mass awareness of the problem is present. It is very much like preparing for hurricanes in the Gulf of Mexico states (where I live) you can't find a battery anywhere once the warning hits the media, most grocery stores are bare in 48 hours. You need time to learn skills like first aid.

Now add to the financial panic a war and you have real difficult time preparing in any meaningful way.

Lastly keeping some cash available (100's of dollars, not 10K, 100K etc.) would be a good idea, you never know if there is another "banking Holiday" what if any other medium of exchange will exist apart from barter.
Gold for short term use is silly, what are you going to do;file off some dust for a loaf a bread?

Some of the Generational Dynamics theory indicates a tendency to unify with a crisis, but I wonder if the unity will necessarily be the entire U.S. ? or will some form of regional grouping take place ?

Lots of reason to take sober, well planned and reasoned out steps to be more self sufficient and less system dependent.
There is both short and long term risk of utter economic breakdown, at some point either the entire US or regions will regenerate,restore order and rebuild, but until then you had better be ready.

As for our 401K's they are mostly toast. Retirement is when you die (at least for the boomer generation), I can't even see our lame congress going along with tax exempt (deferred) status to invest in equity markets, maybe some form of government sponsored bonds, but stocks, that option just left town.

I have no specific economic advise; but basic needs are as they have been for thousands of years;air,water,food,shelter. While no one should Expect the worst, you should plan for it.

[Higgenbotham]

My best guess is that you are correct this time and stocks will rally for a few days, or maybe even a few weeks or months.

How on earth could that possibly happen, when P/E ratios are in the 20s, and
corporate earnings are still falling????

John

I can't really distill decades of experience into a few paragraphs or pages. And as I implied, I don't know if that experience is worth anything. However, some of that study is of history that I have not experienced, so it may be worth something.

One thing I believe is going on at this particular moment is that there is an interplay between asset classes. This week I was looking for signs and signals that this interplay would become a dominant factor in the dynamics of the markets. I can give examples later.

One thing that could have been predicted a few weeks ago was that investors would reflexively go to the safety of cash once a panic began to take hold. We also knew that at some point there would be forced liquidation. The forced liquidation would be seen most in markets that are highly leveraged. The stock market isn't one of those markets as was true in the 1920s, but the commodity markets are. Another thing that may have been predicted was that once the panic began to take hold and reflexive actions were taken, that people would begin to question those actions. For example, one might ask how safe is this money market fund really? Are Federal Reserve notes really safe? If someone panicked in the 1920s and sold everything, then went to the bank to withdraw their money, those notes were as good as gold. Not so with Federal Reserve Notes today. We need only look at the Fed's balance sheet to prove that. So while people would have been safe and sound filling their mattress in 1929, it is more complicated today.

We've talked about treasury only money market accounts here. Well, I read something very interesting this week, something I was completely unaware of. It was on a web site written by Jim Sinclair and he said he got a call from an elderly lady who had some money in a treasury only money market account. She could not get her money out. The reason was that the money market fund was actually composed of synthetic derivatives of treasury bills and not treasury bills themselves.

Now let's say as an example, that I am in a 401K. I'm not but am trying to put myself in the place of those who are or in any similar situation. Looking at the alternatives, maybe there is a money market fund that is composed of 20% junk commercial paper. I don't know what the actual figures might be, 10% or 40% for all I know. So I'm thinking to myself, well, that $100,000 I have in this money market fund may only be worth $80,000 or $90,000 or $60,000, or I may not be able to get my money out at all at some point, who knows. But if I take the money that is in this fund and buy stocks, I can still get $100,000 worth of stocks with it. And again, I don't know the numbers or the reality of particular situations as I have not encountered any actual example. But if there is danger that money market funds get reduced in value or locked up, then effectively the PE of the stock market has been reduced against those alternatives. And people are becoming aware of that. One might way, well, you may think so but no, the average guy on the street does not know this yet. That's not really the question though. The question is when does the astute investor who has laid aside large blocks of cash believe that this awareness will begin to manifest? Out of many questions besides this, of course. There are dozens or even hundreds of factors we can discuss from PEs to the election.

Regarding forced liquidation, and what a temporary bottom and its after effects might look like, I will do another post on that later.

[Higgenbotham]

My best guess is that you are correct this time and stocks will rally for a few days, or maybe even a few weeks or months.

How on earth could that possibly happen, when P/E ratios are in the 20s, and
corporate earnings are still falling????

John

I should probably go back to this question of PEs first. I kind of covered that in the last post by talking generally about how PEs might be weighed against other assets classes and then gave the example of money market funds.

Another way to approach this is to look at specific stocks. I made a list of stocks that I thought astute investors might take a look at once they got ready to bargain hunt. One example, Apple Computer. Apple Computer hit a low on Friday of 85 and closed up about 10%. I think it closed around 96. The last 4 quarters of earnings are $5.12 from what I remember, so that would make the PE around 19. But what I had identified that an astute investor might look at is the fact that Apple has 23.45 in cash on its books and no debt. So if Apple paid that 23.45 out to investors or invested it into new income generating businesses, the PE would remain unchanged. So let's say an investor bought Apple at 85 and to keep it simple Apple paid that cash out. We know they won't do that, but that effectively makes the price of the stock 62 and the PE 12. I can't find hundreds of examples where this situation exists, but there are quite a few. Most of them exist in the technology area, and the Nasdaq was up on Friday.

Anyway, I compiled a list of companies like Apple that I tbought investors would buy for various reasons once they felt the panic and forced liquidation in the stock market subsided and smart investors began to take over. Day after day, those stocks got hammered because people were just selling everything. Finally, on Friday, as the market turned up, this time those stocks got bought and most of them were up substantially by the end of the day.

So that's just one signal I can describe that I noticed in the stock arena, but that in itself was not enough to convince me that the market had temporarily turned. And I'm only talking about a 1-3 day rally from here to start with. But I think it has the potential to go further than that like Gordo said.

You know, you've posted many times about the talking heads asking if capitulation is here. In the 1920's stocks were margined to the hilt--I remember reading that accounts were margined as much as 98%. Today a stock margin account is margined at 50%. But of course, hedge funds can be margined to much much higher levels and they invest in all kinds of things. So one thing I've been looking for is a sign or signal that the hedge funds and other similar players have capitulated. We can only guess what these funds may have been up to their necks in, but looking at the biggest bubbles in commodities might be a good place to start. How about oil or silver? I think oil ran up about 15 fold from 1998 to 2008 and silver ran up about 5 fold, but the last 12 months were crazy, just like stocks in 1929. Although silver is not nearly as large of a market as oil, it is instructive to look at for a number of reasons. When the stock market crashed in 1929 and all of the margin leverage got unwound, stocks lost about 20% in 2 days or so. I can't remember the exact figures. A similar thing may have happened in oil and silver on Friday and, to a lesser extent, gold. Oil lost about 10% of it's value on Friday, silver 20%, and gold around 10% before recovering some at the end of the day. In my opinion, the commodity bubbles may be popping in very similar fashion to 1929, with oil and silver down over 50% since their highs this year, and maybe the final debt liquidation having occurred on Friday.

John, I could go on and on but these are some ideas I have out of dozens. What Gordo posted was all good stuff and we could spend many paragraphs and pages discussing his ideas too.

[John]

Some questions from a web site reader:

> 1) What happened in 1987 to start the false panic, exactly?

> 2) My credit card balance just about never reaches even half my
> limit. And my new landlord does not accept credit cards, so about
> a third of what I pay by credit card is now by check. As I once
> told you, I scrupulously pay my total balance on each bill, and
> have done so since I got a card several years ago. Do I have to
> worry about losing credit?

The panic of 1987 was triggered by some chaotic (in the sense of
Chaos Theory) event that nobody knows, to my knowledge.

I have no idea what models the credit card companies are using these
days. I know that they're desperate for cash, but they also believe
that the worst will be over soon, so they're rejecting more
customers, but retaining the ones they believe will make them money.
Whether that will affect you personally, I don't know.

Sincerely,

John

John J. Xenakis
E-mail: john@GenerationalDynamics.com
Web site: http://www.GenerationalDynamics.com
Forum: http://www.GenerationalDynamics.com/forum

[mannfm11]

Here is my two cents. For one, yesterday wasn't a key reversal day , which is an outside day followed by an inside day or something of that order. Yesterday was a day where a new interday low was made and a new closing low was made, continuing the downtrend. I am beginning to wonder if the computer didn't break and create the 300 point gain we saw for all of 3 seconds, as +300 materialized out of even and back to even in about 5 minutes. Lost in all of this is the fact the Dow fell 438 points from its high between 3:30 and 3:35 Eastern to the close at 4:00. If the market had lost 438 points on Friday, it would have been another headline, a 5% loss, but it only lost that in the last 25 minutes so it was a non-story. I am not sure what is more astounding, the rally or the loss that followed it. It was clear that the bulls have been planning late day rallies for months now to attempt to turn the psychology.

John is onto something and I am facinated with it. I have always known we would have another depression and another war after those that lived through the last one were dead or too old for younger people to listen to. But, even so, most old people didn't know what happened. History has been rewritten, as Bernanke employs faulty history on his theories. John posted a paper called "The Bubble that Broke the World", linked to the mises.org page. This kills the idea that Smoot Hawley caused the depression by restraining trade when in fact we financed our trade like China is financing our trade in reverse, Wall Street was creating the loans for our exports. This is all what Minskey called Ponzi financing.

The peak of the 1929 bubble and the 1966 bubble saw dividends on the SPX at 3%. We have not gotten that high yet, though we are getting close. The peak value of the SPX in 1929 on a true financial basis was lower than we are now. Where are the bargains? Portfolio theory destroyed the bargains, as the portfolio return became the return of its components. The theory is stronger than the reality. The ideas bear markets are done after so much decline, that recessions last so and so time, that the market does X after the Fed does Y is more real to these people that what is happening. They don't understand liquidations, where the liquidators are either broke and being liqudated by their creditors or they are selling fast as they can to keep from going broke. Most of the public I have heard has repeatedly told me how they were going to get in and get rich on the dip. They were telling me this at Dow 12,500 and I told them under no uncertain terms were they going to get rich, but instead go broke. The same is probably true of those that plunge in now.

I don't believe many in markets have ever understood liquidations. Some of us have seen going out of business sales, but if those people could get market, they would just pick up the phone and sell it. Stock is a push of a button or a phone call away from being sold. If I need my money to pay for my real estate or sell and I can sell stock, why sell the real estate in distress? You might say the stock is in distress if you are an idiot permabull, but try to sell a piece of real estate on the spot for market? Selling real estate at prices that correspond to the current stock market prices is called finding a bigger fool anyhow.

But, what if the entity with stock and other assets is a big hedge fund and it has been ordered by its lender to cut its line of credit down from $10 billion to $8 billion because its $500 million in capital is too low for comfort? Or, its $2 billion in capital has suddenly become $1 billion and $5 billion in debt is too much? What if the bank is insolvent and needs to call some loans to perform on another duty? What if the entity is a broker being financed by the Federal reserve and rapidly going broke in its attempt to support the market? I think this could be behind the manufactured move up and sell off at the end of the day. They suspended shorts and that suspended the real power to gain followthrough.

The selling is forced. Hedge funds are bellying up and have to unwind. Some of their customers want or need their money. People drawing out of their IRA's have to sell more stock to take what they need. The exponential ball of growth has reversed into the exponential ball of shrinkage.

We have a breakaway decline. This happens in inflated commodities all the time. The half way point is the logical point of support, Dow 7000 or so, SPX 790 or so, Nasdaq 1400 or so. The model for this kind of bursted bubble is Japan or 1929. The US could fare worse due to the fact that we are liquidating as it is to foreigners that we owe. Absent international credit, there could be even more liquidation selling. We are looking at a long bear and a long recession.

John, I am also much like you in that I am growing tired of the guys that think they know how to fix this and what wasn't done 80 years ago. It was all done 80 years ago. That is what creates a bubble of this size, government complicity. Hoover did what they would do today to the extent he could, but I don't believe people were so egotisical back then to believe they could defeat math. FDR made it worse, not better, as the market and economy had already bottomed by the time he came into office. The banking crisis was more a factor of what was fixed in 2003 in Japan, some acting as if they were alive when they weren't, but there was little restored. One thing I buy into is this isn't 1987 or 1974 and not many that went through 1974 are in the game today. This is a trend that has lasted a year and was front ran by government action all the way down. They passed the bill and the market then collapsed.

[John]

A question from a web site reader:

> Question about your P/E and S&P graphs...when the P/E is
> declining (2004-2008) meaning stocks are getting less expensive,
> the S&P graph is going up. Seems like a contradiction. Did an
> increase in earnings during that period cause the P/E value to
> decline?

Yes. Corporate earnings grew at double digit rates for several
years, until the third quarter of 2007, when earnings growth crashed
and became negative.

Sincerely,

John

John J. Xenakis
E-mail: john@GenerationalDynamics.com
Web site: http://www.GenerationalDynamics.com
Forum: http://www.GenerationalDynamics.com/forum