Hurricane Hank to Pick Up Where Gustav Left Off? ~ The Risk Averse Alert

Friday, September 05, 2008

Hurricane Hank to Pick Up Where Gustav Left Off?

Is macro dope Cramer leading his herd of dumb deer onto the tracks for a better view of the light at the end of the tunnel ... a light which instead might be an approaching freight train?

This Don King of hyped-up monetarist promotions went on the air tonight ranting once again about the need for postponing a financial reckoning that has been decades in the making ... having reached a critical crescendo last year with the collapse of the sub-prime mortgage market.

Yo, Jimbo! Open your eyes. Hyper-inflating our way to financial prosperity is a dead trade, dude.

It does not matter who is "backstopping" the mountain of distressed credits leveraging our grotesquely imbalanced economy. The monetary juice you implore federal authorities to apply has been transformed into toxic poison now that the accelerating breakdown of globalization can no longer be masked by some new bubble's inflation. If the massive infusion of liquidity since last year's credit market breakdown has not convinced you of this, then you ignore the stock market's reaction over the past year at your own peril, pal.

Still, you think today's rally in financials (XLF +3.6%) suggests something big is afoot. And your monetarist monkey friend at PIMCO, Bill Gross, also is calling for a GSE takeover ... which according to you — the hyper-inflationary Siren's call ... the King Kong of liquidity rage — is now 12 days overdue.

Obviously, tonight's Mad Money show was taped before the market closed, because after-market we got wind Treasury might announce a major GSE restructuring plan sometime this weekend.

Bubble Boy must be elated, because he believes a Treasury backstop of FNM and FRE will be nothing but bullish for equities. Of course, he also is on record saying financials bottomed on July 15, 2008. You might say, then, he has a vested interest in believing magic elixirs might perpetuate the status quo, which feat to date has eluded Wall Street despite several extraordinary measures taken thus far to grease the financial system with liquidity well on the way to being served up in Wiemar Germany-sized portions.

It is being reported that, "many in Washington and on Wall Street hadn't expected Treasury Secretary Henry Paulson to intervene unless the companies had trouble issuing debt to fund their operations." I find this interesting.

Now, granted, spreads on GSE debt relative to Treasuries have widened lately. Yet as far as I know GSEs have had no trouble issuing their paper.

So, then, what's the sudden hurry? What grave problem has arisen? Why the need for a massive take-down of the two biggest players in the mortgage market?

Well, apparently the problem extends well beyond the GSEs and right into the heart of the global financial system. I will let Ellen Brown explain. She just wrote a very informative article titled, "Take a Load Off Fannie: Bailout or Nationalization for the Mortgage Giants?"

We also learn that, "the Mortgage Bankers Association [reported Friday] that more than 4 million American homeowners with a mortgage, a record 9 percent, were either behind on their payments or in foreclosure at the end of June." This gets right down to both the physical and practical heart of the matter.

Physically, delinquencies are a symptom of a breakdown ... the consequences of what globalization has wrought.

Then, practically, we are talking about peoples' lives. So, although we can expect a whole lot of lip service to this end, will whatever plan Secretary Paulson hatches amount to a GSE take-down a la Bear Stearns? ... the next best thing offering Wall Street a massive capital infusion following a failed attempt at hijacking Social Security in 2005? ... a means of gaining control over a physical asset whose financing can be recycled again and again (shades of "The Jungle" by Upton Sinclair)?

This, really, strikes at the essence of the larger question Ellen Brown addresses in her article.

So, keep an eye on Washington. Send your Senators and Representative a link to Ellen's article. Let them know nationalization is the proven, American way Congress provides more than lip service to the People they serve.

To get a better sense of political possibilities one might become acquainted with FDR's coyness — despite repeated appeals from the Hoover administration that he join the President in sanctioning actions designed to appease financial markets — prior to his inauguration in March, 1933.

Even if Treasury's plan to restructure the GSEs moves forward, it will by no means change physical reality. Mortgage credit growth (and credit of all types) must contract because the physical capacity necessary for servicing debt is, in fact, rapidly deteriorating. Eight straight months of contracting employment is but another symptom of breakdown.

So, Jim Cramer, Bill Gross, Paul McCulley, Steve Forbes and all the other monetarist monkeys plainly might be in for a rude shock, methinks. It's the breakdown, stupid.

At this point, then, one might err to forget the lesson of Tuesday's failed "Gustav relief rally." Truth is the market's current technical position suggests that, should Monday morning see a burst of buying on optimism over the masters of monetary magic having finally saved the day, this too might last all of 15 minutes. What's more, the wave of selling to follow could be rather pronounced.

OEX 5-min

There are a couple reasons I suspect this possibility...

First, you see a typical RSI configuration coinciding with a declining impulse wave ... at least the 80% of it already formed ... since Tuesday's opening burst of Gustav-mania.

But what of the possibility Monday rockets higher ... assuming the Henry Potter Paulson plan freeing the GSEs to become Wall Street's toxic waste dump ... all at taxpayer expense, of course ... meets the light of day?

This simply raises the probability the decline since Tuesday is incomplete, then. And this means there could be much more selling to come.


This week's pick-up in volume is unlike anything seen during the first half of April '08 ... which might slightly alter my projected outlook in Anticipating the Downside in a Pause That Refreshes. At the time I did not suppose July's low might be decisively taken out. Now, however, I do (assuming Uncle Sam fulfills Cramer's liquidity fantasy).

For the record I continue assuming the market is correcting its May 19, 2008 - July 15, 2008 decline. So, even if July's low is taken out, I would subsequently expect a bounce carrying the S&P 100 above its August 11, 2008 peak.

Longer-term — assuming last October's peak began a major bear market — picture the S&P 100's 200-day moving average acting as a barrier for many months to come. And expect a couple periods over the next year when the index rallies up to it.

If, indeed, a major bear market is underway, keep in mind it still is early in the game. So, a whole lot of to and fro bouncing ... possibly with a downward bias ... might be the order of the day until this time next year (2009).

Then, in periods when the S&P 100 is falling away from its 200-day moving average ... sometimes more, sometimes less ... consider what one might coincidently expect on the RSI and MACD fronts.

Right now, MACD suggests the S&P 100 might be poised for a smack down below its July 15th low. Yet at bottom I would anticipate an MACD reading better (i.e. higher) than its respective July low ... that is if a subsequent bounce above August 11th's peak is in order.

RSI is another story. Last week's descent into solid sell-side territory likewise supports the case further selling might likely hit the market. At bottom, though, I would not be surprised if RSI fell below its July low.

The above technical scenario could then present a fine set up for a subsequent bounce to the S&P 100's 200-day moving average.


What is with the relative complacency displayed by the Volatility Index? Might this circumstance substantiate my near-term outlook? I suspect it does...

Fast Money
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