Trillion is the New Billion

September 20, 2008
Add 7 and 5, you get 12. In this credit and financial collapse, the estimated total of the faith and credit of the United States government dollars thrown at this problem is now going to be at the very least $1.2 Trillion. That is, $500 Billion already 'injected' by the Federal Reserve plus another $700 Billion for the new magic Federal market-making agency for toxic derivatives of mortgage backed securities, such as credit default swaps.


The 'clean cash' situation has gotten so thin that the Federal Reserve Bank has just asked for $100 Billion more to add to its $800 Billion in reserves, since they were down to less than $300 Billion of non-toxic dollars. Make that a $1.3 Trillion total. I am sure that this total will grow significantly in the next several days.


As the political Congress draws the legislation, the urge to go beyond saving the homeowner and their local bank and their local over-leveraged local industries (auto industry ?) will bring the attitude, "Well, while we are doing this financial sytem/industry bailout, a few other industries could use some help."


With fear of runs on banks atrophying the lending hearts of the nation's bankers who are hoarding cash, we hope these elected leaders recognize that the financial patient has two wounds, a financial system head wound and a gaping gut wound in the local retail and housing market.
The "no shorting financial stocks" rule implemented this week coupled with the prospect of a bailout reversed and then buoyed the markets into the weekend.

I don't believe the ban on shorting was necessary or useful. I believe the long term forward view of this newly created tool has too many pot holes for anything resembling "an effective measure". To all of us here, it closely resembles the 'buying time' and resting that occurred in at the end of October 1929.

At the end of October that year, the famed Black Thursday, October 24, 1929 was followed by an even worse week that included even higher volume. On Black Tuesday, October 29, 2008, the Dow Jones had lost nearly 40% of their value in 41 sessions from the all time high, Dow 381, on September 3. The last week of October, the market's drop lost more value than the entire annual Federal budget for 1929. The men on the floor were exhausted and after stocks rising a bit on Wednesday and Thursday, the 30th and 31st, the exchanges declared a Market Holiday, and closed on Friday, the November 1st session.


If the ban on shorting financials spurs more buying in the coming sessions, we will remain long. Our Time Locus dates of the 16th, 17th and 18th proved incredibly accurate, as usual. The week before had the Time Locus, September 10th, as a turn which resulted in a volatile lateral track into the 16th and the FOMC keeping rates flat.


With the prospect of the ban in effect until Congress issues its legislation, potentially until November 2nd, the markets will trade. But will it be true trading? Has this ban created an unseen hazard in the future? Is this the beginning of the C phase of the upward corrective phase from July - the phase 2 - from the May highs? What will it look like once the selling completes when the ban is lifted?


We ARE NOT predicting the next Depression but we see the similarity of market conditions, rising and spreading economic troubles. We remember that the history of markets is actually the history of human behavior, played out in a marketplace. And, We the People, the Traders and Investors, have not changed much over time. We have simply become technically better and faster at repeating the history we forget or never learned.


This is what the 50% retracement in 1929 into April 17, 1930, the 2 phase and subsequent decline, looked like in those surreal days of trading in 1929. The inset shows a similar action to the recent drops and reversals. We still have a major Time Locus for April 15, 2009.






So, how do you trade the lifting of the ban? Probably short, but maybe long. Right now, let's see what these administration and Congressional leaders put in the cake mix. Do you think politics will replace all of the flour and baking powder to produce a cake that never rises? I hope not. So, don't short the cake yet.


Never short the greatness and hearts of the American people. We always seem to get through the best and worst of times.


God bless America.
WBB