Financial topics

[Higgenbotham]

Dear Higgie,

Futures are up tonight.

http://www.bloomberg.com/markets/stocks/futures.html

What do you think is going to happen tomorrow?

By the way, do you ever sleep?

John

I don't know what will happen tomorrow. Sometimes I have a feel for it and sometimes I don't. The failure to take out 1016 on September S&P futures early Friday morning was key to me.

I slept like a rock from March thru the middle of July. Bears sleep well during hibernation. I mentioned to someone on Saturday that I should have slept for another month. It would have saved me a few bucks.

When I trade I often wake up when the markets make a big move up overnight. If I have stops in, a lot of times I will wake up right before my stops get hit or right as they are getting hit. I haven't used any stops this time. Last night I slept through most of the big drop in Asia.

[Higgenbotham]

I doubled my short position yesterday at 987 on the S&P futures. It hovered around that level for several hours and I went to sleep. I woke up at 3:30 A.M. and Shanghai was down another 4.3%, much to my surprise. As everyone who reads this forum knows, I was expecting the bubbles in Shanghai and New York to burst in August but even I was surprised to see what happened last night. The action in Shanghai carried the US futures down about 1%. After seeing that, I place a break even stop on the futures I shorted yesterday (stop at 986.75). Despite having guessed that these bubbles would burst and being short, my net worth is still down 1.9% on this trade as of the last quote I saw this morning.

Shanghai has now lost 20% since August 4.

Will Wall Street collectively realize this mess is unsalvageable and hit the panic button today? I have no idea but cannot see how a panic will not occur at this point.

[John]

Will Wall Street collectively realize this mess is unsalvageable and hit the panic button today? I have no idea but cannot see how a panic will not occur at this point.

Well, don't forget that the Fed or the Chinese could announce some new
liquidity program. I think that those band-aids have run their course,
but it's always possible that one more will work for a little while.

John

[Higgenbotham]

Will Wall Street collectively realize this mess is unsalvageable and hit the panic button today? I have no idea but cannot see how a panic will not occur at this point.

Well, don't forget that the Fed or the Chinese could announce some new
liquidity program. I think that those band-aids have run their course,
but it's always possible that one more will work for a little while.

John

They had better hurry if they are going to do that, but I still don't see how that will convince Wall Street that sales are going to pick up and earnings will improve. Main Street is not responding to stimulus programs as it has in the past 6 decades and the economic data is proving that almost beyond a shadow of a doubt at this point.

[JonLaw]

I think the stock market is a sideshow. It's literally being supported by trillions of dollars in guarantees from the Federal Government. The real action seems to be in the credit markets.

The U.S. economy is dependent on continuous creation of massive amounts of credit to continue to "grow".

The only entity creating enough credit to keep the economy "growing" right now is the Federal Government through issuance of new debt.

At the moment, there is no problem with demand for U.S. debt.

A significant portion of the total credit market debt is eventually going to go to debt heaven, either through default or inflation.

That's not happening right now.

[Higgenbotham]

I think the stock market is a sideshow. It's literally being supported by trillions of dollars in guarantees from the Federal Government. The real action seems to be in the credit markets.

I see the Fed and the Federal Government as having suported the credit markets, which indirectly supported the stock market for the past few months. For now, that's been OK, but looking ahead, the stock market needs more than that. It needs sales and earnings to pick up. PE ratios are too high. While they were doing the pump, PEs were disregarded because it was thought the earnings would come.

I've read about some concerns regarding government debt auctions recently. It seems the dealers bought up some 7 year notes in order to cover the auction, then they were dumped off to the Fed via their QE program. I haven't researched that much.

Anyway, to my way of thinking the stock market is now center stage, but the vast majority would agree with what you said about it being a side show.

I've been stopped out of the futures shorts I added yesterday.

[John]

Dear Higgie,

> From a GD Maximum Ruin perspective, the purpose of the undulating
> action that lasted for 8 days at the 1930 high and 9 days at this
> high is to get as many shorts as possible to barf up their
> positions. I do believe fundamentals are starting to take over and
> the undulating action can't continue or it would. Granted, I
> thought the Shanghai bubble had more staying power and New York
> would lead it down as happened in 2007. At that time, New York led
> Shanghai by 10 days. This time, at least so far, Shanghai has led
> New York by 3 days.

One thing I've noticed, as the rally continues for another day, is
that the mainstream financial pundits are expecting a correction of
about 10% or so, so the idea of SOME stock market plunge is not
limited to this web site.

What you've been describing is a "reverse capitulation" situation,
where what's required is for all the shorts to give up, as you
suggest. However, with the widespread expectation of a market
correction, many of the shorts may be hanging on by their fingernails,
waiting for the correction. So it's possible that the rally will
continue for a while longer, until there's a lot more capitulation.

Sincerely,

John

[Higgenbotham]

Dear Higgie,

One thing I've noticed, as the rally continues for another day, is
that the mainstream financial pundits are expecting a correction of
about 10% or so, so the idea of SOME stock market plunge is not
limited to this web site.

What you've been describing is a "reverse capitulation" situation,
where what's required is for all the shorts to give up, as you
suggest. However, with the widespread expectation of a market
correction, many of the shorts may be hanging on by their fingernails,
waiting for the correction. So it's possible that the rally will
continue for a while longer, until there's a lot more capitulation.

Sincerely,

John

I've been trying to gauge whether there are any shorts left to speak of. At this point, I don't see many. As a good example, read this at

yelnick.typepad.com

[[ See "Final Surge?" at http://yelnick.typepad.com/yelnick/2009 ... surge.html - John]]

He gets an update from Prechter (well known long term bear) called the STU (short term update) and you can read about the bulletins that came out this afternoon. I'm seeing that type of thing a lot today - dyed in the wool bears looking for one more high (possibly).

What you are seeing could very well be the next stage of Maximum Ruin. It's more about what the bulls are thinking in my estimation and gives them a reason to lighten up and wait for a pullback or wait to get in instead of buying now. I've seen this type of thing before that you're talking about with the pundits. Generally, when a "bull market gets confirmed" in the eyes of the pundits they then begin to hope for a buying opportunity and prep themselves up for that. The idea there is for everyone to get ready to buy the dip. Then when they do the floor falls out from under them. 10% is quite a setup because that's a long way down and will suck a lot of people in.

Just my idea, but my attempt to add to my shorts failed and I will remain with my original position for now. I'm positioned to absorb more new highs but don't believe it will happen at this point. The fundamentals are just too darned heavy.

[John]

This morning on CNBC, Art Cashin gave two reasons for yesterday's
rally:

• Mostly short covering.
• A rumor, around noon on Wednesday, that the Administration was
  preparing a new stimulus package.

John

[Higgenbotham]

This morning on CNBC, Art Cashin gave two reasons for yesterday's
rally:

• Mostly short covering.
• A rumor, around noon on Wednesday, that the Administration was
  preparing a new stimulus package.

John

Thanks, John, I don't watch any CNBC, but that makes sense. I also read that oil inventories being down had many believing that oil usage was up and hence economic activity was picking up. Digging into the inventory numbers shows that a reduction in imports was responsible for the drop in inventories.