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.
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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.
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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.
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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
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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

FOMC Day - September 18, 2007

September 18, 2007
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FOMC Day

We expect the normal lateral pre-announcement track for the indexes today. We still believe that the FOMC will not change rates, but if Fed Funds is lowered we would prefer a 25 basis point cut.

Credit Liquidity Crisis - Rate Cuts Are Not the Way Out

Let's repeat a lesser known fact. The Federal Reserve does not regulate banks. It regulates bank holding companies. It uses an indirect tool, interest rates, to attempt to control the supply and availability of money and credit in this economy.

The Federal Reserve does not control or regulate the investment banks, like Goldman Sachs, or brokers, like Merrill Lynch. National banks, investment banks and brokers created this financial bubble. They loved it when their bubble was growing and glowing. Now, they just don't want to use their own capital to clean up their mess when the bubble burst.

They want to use our Federal government's capital mop and bucket.

Big Cut - Big Bear?

If the FOMC lowers by more than 25 basis points, then we may have to re-evaluate our view of a continuing Bull market. If you wonder about what would make me turn neutral to bearish for the longer term, it is a big rate reduction. The financial credit/liquidity seizure is a normal event in cyclical markets. It just occurs that this year's event is in the CDO market. Same story but different economic sector.

The "cleansing" must and will come, with or without a rate cut.

In past decades, the American economy was self-sustaining and self-fulfilling. The gradual change to its economic influence on other global economies today took about 50 years. Current domestic economic and federal policies affect significant changes around the globe in foreign domestic economies.

The British Northern Rock Bank story is a minor example of the ripples that come from this country's economic events. The credit crisis will not be solved by rate cuts, nor by a change in Federal Reserve monetary policy. The financial creators of these debt instruments must resolve this problem by publicly purging or writing down these assets. The investors in these credit vehicles will have to take their losses, and then make their way into the future.

Capitalism is not a panacea of endless profitable gambits.

Capitalism renews itself by shedding excess and, that shedding comes packaged with pain to those who invest in risk that fails. The shedding produces a leaner and more innovative, more expansive economy. The expansion filters deeper and deeper into the lives of all who live under the tent of a free economy. The benefits to the individual as well as to the economy, must be measured against the risk taken to achieve those rewards.

The perceived risks in the CDO investment market turned out to have a severe penalty measured against the modestly higher rates of return that are available in a U.S. Treasury risk free investment. Investors believed the creators and promoters of the fancy financial exotica. Most investors could not explain the risks nor understand the consequences of those risks becoming real.

Rate Cut Mania

Which has been hyped more, the credit crisis and the imminent collapse of the U.S. economy, or, that a Fed Funds rate cut of any amount will solve all of the financial and CDO market pricing problems? The two lies are Big Lies.

Big Lies shrouded in mystery, preached by latter day sainted economists and other media pundits who are believed by the masses, if they are heard often enough without counter arguments. Attitudes and behaviors are changed. People begin to wonder if disaster awaits them in the near future.

Isn't it a bit unusual that the creators of the problem are announcing the problem and its severity, while in the same sentence demanding the solution they have devised?

Nobody asks, "Who wins and who loses, if we do what you say to do? Who wins and who pays if your problem is solved?" These global financiers will answer questions only after you pay to fix their problem. It's the least they can do right.

Repeat - "It's a correction in a Bull Market."

If the FOMC cuts rates today, I believe that the correction may last longer and may drive index prices deeper than necessary. It doesn't automate the end of the Bull, but it might.
What does a rate cut really mean? It doesn't mean that real interest rates are too high. A rate cut does not mean that this economy has suddenly turned from growth to contraction in just 8 weeks.

A rate cut today will be seen as a concession to those who are unwilling to help themselves, but are able to take their own measures to solve their problems. "It is too painful!", they say. They want the Fed to kill the American economic goose that's been laying golden eggs, because they are sure the goose has a reproducible gold factory in its gut, instead of a gizzard.

The Federal Reserve will be seen as weak.

What a big rate cut will mean to the global markets is this: Sell U.S. dollar-denominated assets now! The $US will take a hard hit. Then the Asian carry trade adds to the slide in U.S. equities. The Yen goes home. Then, the perfect storm is waiting for the first real misstep by the Fed or the government to launch an out of control spiral downward.

This economy is not dying.

The U.S. economy is still slogging along quite well. Don't believe it? Then you don't know the American economic mystery or Americans themselves. Nothing stops them. Nothing. Some regions of the country aren't doing well like Michigan and Ohio. Some regional construction is well below the rates of 2005, like in parts of California and Florida. All are victims of their recent excesses and successes. Recovery for those in trouble depends on how they correct the causes of their troubles.

If Americans or their economy appear to be slowing or stopped, it's because they are down shifting to climb the next mountain of adversity. The only effective adversary the American people have is their own apathy. "We have met the enemy. It is us."

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I hope for no rate cut before the correction ends. Let the market's nature takes its course. After the correction, a rate cut will be okay but irrelevant to the American markets. Currency markets and foreign investors will still sell $US denominated assets, but it will be into a rising bull.

Forgotten lessons have to be re-learned don't they.

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As with any outcome today, we will be trading it.

We continue to expect 10-year Treasury Note yield to touch at least 3.94% and potentially 3.80%.

Let's see what reaction the P.P.I. brings before the opening.


W. B. Busin