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

Global Markets Down Strongly

TODAY - We are publishing these comments from our membership site (delayed a wee bit). Patience and a clear head will keep your perspective real and sound. WBB

0145 EDT
Some will criticize the Fed and Bernanke for any reason that comes to mind. But remember, that this is a game of NOW - not yesterday. Many screamed about lowering interest rates faster/earlier/ more dramatically, but that wasn't the solution. It may have helped for a few days but not for long.

If a derivative cannot be valued nor traded for price discovery, then what is it worth? How much should the Fed secure to liquidate something no-one knows its tradable or even intrinsic value? This is the nature of the Sword of Damocles hanging over the Fed Chairman, the man who studied the causes and federal government acts that caused Crash of 1929 and the Depression (thank goodness he studied it). But remember that there was the causes to study like the effects the Republican Smoot-Hawley Bill that Hoover was against but eventually signed. There were no solutions to study, except letting the markets fall to near zero and then wait 25 years for them to recover.

So we have Bernanke sitting under the Sword of Damocles trying to untangle this financial hairball that the fat cat bankers and their well-healed customers have coughed up. The hairball must be lueined now! Yes, lueined or loosened. Luein is the absolutely perfect word. It was the word used by the oracle who proclaimed that he who would luein the cryptic knot of Midas at Gordium would conquer and rule all of known Asia. The brilliant tried for 100's of years but it was Alexander who tried too but realized that it did not matter how the Gordian Knot was loosened. He took his sword and cut it open with one blow to reveal all of the ends to the cornel bark strips inside the knot holding the chariot to the post.

So I say Bernanke should quickly grab that Sword of Damocles overhead and boldly slice through this knotted Gordian hairball of global financial enigmas. Either let the markets crash, or guarantee every strip of cornel bark in this hairball by opening the world's first global financial pawn shop.

Its a viability or solvency question now. Nothing more, nothing less. Solvency of every government and corporation around the world is on the butcher's block. Its that dramatic. I have restrained my words before today but it is time to state it clearly. That is what is at risk here and now. This is the source of my sincere "editorial" rah rah. If you are over 40 years, you know what October 1987 was like. This is a much broader global market. We can't stop the boulder if it gets going and crescendos into a rock slide.

We will continue to update throughout the day and potentially after the closing.

A man named Tom wrote about this banking crisis before it happened, and I like his perception.

"I believe that banking institutions are more dangerous to our liberties than standing armies. If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around [the banks] will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered. The issuing power should be taken from the banks and restored to the people, to whom it properly belongs."

We can all agree that banks are not inherently evil but they do effect the way we live. The man who wrote that 200 years ago understood and had the vision but was opposed by Hamilton, a central banking advocate. That man was Thomas Jefferson in 1802.
We will get through all this and be the better for it all, mates.
WBB

0131 EDT
A comment about all this leverage - A bank can theoretically and in practice accept a deposit $1,000 by a retail customer, and with current reserve requirements of 5,5%, can turn that $1,000, in multiple iterations of lending transactions, into $17,000 worth of loans to the asset side of their balance sheet. That is a normal banking function of leveraging 17:1 on the assumption that all the loans will not go under at the same time, even if they were not collateralized properly.

But, using the Carlyle Fund as an example of abusing the bundled mortgages, they had bundled loans instruments and re-leveraged them into an unrecognizable derivatives that had leverage of 32 to 36 to one. Yes, 36:1! No wonder they listed on the tiny Amsterdam Exchange.

0121 EDT
We will likely enter 100% short at the opening today unless something persuades us to elect a lower level for the position. Same routine and plan - feed the models, watch the reaction to the data, timing, structures, sentiments, volumes, momentums etc. At times like this, remember to avoid the urging of greed - set your targets and exit as your plan prescribes.
_______

The problem with the J.P. Morgan all stock purchase of Bear Stearns for $236 million (with an 'm') is that similar investment banks are now extremely vulnerable to be taken under too - Lehman for one example. At $2 a share, its an amazing turn of events since Bear closed at $30 on Friday.
_______

The Fed releases Industrial Production data at 0915 EDT Monday morning. They have seen the data and it potentially is not supportive of a growing economy.
_______

With an estimated $750 trillion, yes, Trillion, of collateralized debt derivatives, the Fed and the USA federal government is on the edge of a dire state of affairs here. If only 1/2 of 1 % of the $750 Trillion default - well, how does one handle the domino effect with an economy of $3 Trillion?

What I believe is occurring here is a Fed trying to find more thumbs to plug a financial dike. I hope something they do works but these are not the measures that will prevent a panic. The Fed and the U.S. Treasury and the U.S. Congress must get in front of the growing wave.
They all must categorically affirm that they will be the buyer and seller in this broken derivative market.

In effect, they must open wide the doors to the world's largest financial Pawn Shop. The Fed's invitation to the global financial markets should begin with the last stanza of the Lazarus poem on the great lady standing in the New York harbor.

"Give me your tired, your poor,Your huddled masses [of CDO's] yearning to breathe [trade] free,The wretched refuse of your teeming shore.Send these, the homeless, tempest-tost to me,I lift my lamp beside the golden door!" Emma Lazarus, The New Colossus 1883
[] by WBB
_______
Editorial-
This amazing and marvelous country can do it. It has saved the world several times before. The cynics and America haters are always wrong. Always! They have never erected a statue to honour the cynical, the hater and others of their ilk. Give it time and the USA will pull it out again. No doubts mate.

Every crisis has its opportunities and ours is to be short the indexes here and short the USD, for awhile. WBB

1115 EDT
CNBC has initiated Special Coverage tonight with the latest Fed cuts to bail Bear Stearns out of liquidity jail, and as Asia is down quite strongly.
AORD - down 2.5%+
NIKK - down 4%+
Hang Seng - down 4.85%+
Shanghai - down 2.4%+
Korea - down 3.58%+
WBB

1050 EDT - Sunday night
http://www.federalreserve.gov/newsevents/press/monetary/20080316a.htm

Press Release Release Date: March 16, 2008
For immediate release

The Federal Reserve on Sunday announced two initiatives designed to bolster market liquidity and promote orderly market functioning. Liquid, well-functioning markets are essential for the promotion of economic growth.

First, the Federal Reserve Board voted unanimously to authorize the Federal Reserve Bank of New York to create a lending facility to improve the ability of primary dealers to provide financing to participants in securitization markets. This facility will be available for business on Monday, March 17. It will be in place for at least six months and may be extended as conditions warrant. Credit extended to primary dealers under this facility may be collateralized by a broad range of investment-grade debt securities. The interest rate charged on such credit will be the same as the primary credit rate, or discount rate, at the Federal Reserve Bank of New York.
Second, the Federal Reserve Board unanimously approved a request by the Federal Reserve Bank of New York to decrease the primary credit rate from 3-1/2 percent to 3-1/4 percent, effective immediately. This step lowers the spread of the primary credit rate over the Federal Open Market Committee’s target federal funds rate to 1/4 percentage point. The Board also approved an increase in the maximum maturity of primary credit loans to 90 days from 30 days.
The Board also approved the financing arrangement announced by JPMorgan Chase & Co. and The Bear Stearns Companies Inc.

We will update through the morning as the EUR/USD has broken out again to new highs.

WBB

Friday, Nov. 2 - Reversal

Here is an excerpt from today's comments.

November 2, 2007

1630 EDT
The markets close on a rally based on a rumor of staffing changes, then the announcement of a weekend meeting at Citi. We don't see a low for Citi for several months - potentially in April 2008. It may be a swing trade, but we would not hold Citi until it touches another extremely oversold level above $31 in the months ahead.
WBB

1530 EDT
We will exit our short index Swing positions in the three indexes at today's closing. Time Loci have been updated for all indexes and ETF's.

We will enter 100% long in the Swing positions for SPX, Dow and RUT at today's closing.

We will enter 100% long in the NDX Swing position but we expect a slightly lower low in Monday's morning session for NDX. Positioning for NDX may wait for completion of the current downward intraday structure. Further, we expect a higher opening for all four indexes we trade at TimerTrac.

We are expecting to see upward action for the next 3-5 trading days.

Bernanke speaks twice next week and once before the Joint Economic Committee at the Capitol.

*** The EUR/USD may not be your trading vehicle but we expect that attention to how and what it reacts to next week will point to the track for the U.S. Dollar for weeks to come. Thursday's expectations for the European Central Bank's announcement is critical to a sustainable upward move in U.S. indexes.

WBB

Chart from www.stockcharts.com