Can $700 Billion End Gnashing of Teeth on Wall Street? ~ The Risk Averse Alert

Friday, October 03, 2008

Can $700 Billion End Gnashing of Teeth on Wall Street?

"It is today impossible to comprehend the full ramifications from The Bust in Wall Street Finance. Yet we can be rather certain that much less Credit and liquidity will be directed to the asset markets, and at the same time there will be significantly less Credit Availability for riskier loans – for the household, business, financial and the government sectors. Few appreciate that these dynamics are extremely problematic for the U.S. Bubble economy – an economy that had come to a large extent to be governed by asset-based and high-risk lending. These dynamics are at the heart of today’s imploding markets.

"[O]ur maladjusted economic system will only be sustained by somewhere in the neighborhood of $2.0 TN of new Credit. It’s simply not going to happen. And while $700bn from Washington would seem like an enormous amount of support – in reality it’s nowhere close to the amount necessary for systemic stabilization."

— Doug Noland, Credit Bubble Bulletin, October 3, 2008

It appears today's stock market reaction to the $700 billion bailout bill confirms Doug Noland's conclusion. Many a monetarist monkey must be wringing their hands tonight.

No sooner had the bill passed the House of Representatives, demands for more monetarist monkey business were ratcheted up, laced with a good measure of fantasy, of course.

("... the real work begins on rethinking everything from the structure to the regulation of our financial markets." Unfortunately, before any of this can happen, Diane, the financial industry will have to pull a "Get out of Jail" card from the Community Chest.)

The "real work" will be the fast approaching bankruptcy reorganization.

Among all the Congressional Representatives who rose to speak today on the bailout bill, it appears only Ron Paul understands just how near we are to a bust and, quite possibly, a Great Calamity.

Yet we should not let this modern-day Jeffersonian cause us to get too far ahead of the fright curve. Because, indeed, if ever there were a market characterized by much gnashing of teeth typical at decisive turning points, this is it.

Way back when (6.25.08) — after it became apparent no crash event would coincide with the capitulation I [correctly] had been forecasting — what I thought more likely to unfold is precisely what has developed. Amazing! Check this out...

OEX 5-min

The above chart accompanied my June 25, 2008 post. This was the day before the market cratered and registered its worst Advance-Decline differential of the entire decline from May 19 - July 15, 2008.

Now, behold...


So, what do you think?

Well, you're only as good as your last forecast. I'm not panicking.

There is just one thing missing right now ... or at least so it seems. (Come to think of it, though, this "missing link" actually stands to reason.) It is confirmation of bottom via "The Squeaky Indicator." Here's what I said on June 25th...

"I am willing to bet the last thing Maria Bartiromo will be is 'hot for action' following a prolonged, tortuous decline to my tentative S&P 100 objective in the vicinity of 520."

Well, if you watch tonight's Closing Bell video, she's not moaning. However, her guests are. Like Washington, these guys are more or less paralyzed with panic. They see the right conditions favorable for buying right before their eyes, but they are reluctant to pull the trigger.

As for Maria, what can we say? She must be a glutton from punishment. Comes with the territory, I guess, when your birthday is on September 11th. The Street has to beat the market senseless before she'll ever turn downbeat. That's how it was in October '02.

October '02... That was a BIG turning point ... which is not what I am looking for. Rather, what's in store here is a bounce — albeit possibly the biggest this year — not some major reversal of fortune. So, it's no wonder Maria still is Squeaky, Queen of the Casino. (Say that fast 3 times)

I will never forget back in March 2000 when Gregg Hymowitz said something to the effect that, valuations in tech stocks "don't matter." This was during an interview on CNBC while he was on a skiing vacation in Colorado with his family. Funny thing, too, he was wearing rose colored glasses! I kid you not.

(If you click the image of the book cover above, you can learn more about what others were saying in Y2k, including our boy Shemp.)

The point here is emotional biases at inflection points often bring analytical confusion. Right now it seems there is much despair over what little reason buyers apparently have to enter the market. I appreciate this concern, however I also recognize the trap of buying into it (no pun intended).

$700 billion might be woefully inadequate in the grand scheme of grotesquely leveraged credit markets, but here in the eye of the Great Credit Market Hurricane it should be enough to light a fire anyway.

Cramer shares some interesting ideas tonight. I thought his micro-macro observations were at least worth thinking about. But his 401(k) strategy is so LAME.

Still, big picture, he's bearish. Well, at least that's the case tonight. Of course, this applies only to traders. However, with regard to a trade I am not at all negative.

In fact, if I were running his Mad Money show, I'd turn that Bull button into a "Licking My Chops" clip. That's really what trading prospects are looking like right now...

Mama. I see Ultra Long index tracking ETFs in my future... Fast Money
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Greg said...

Tom, I have been following you with great interest. I enjoy reading you insight and share your values and many of your opinions. Your technical analysis is certainly compelling. And don't get me wrong, I'm not posting this to criticize you. I'm just pointing out that we will have to get over some hurdles Monday and the current over leveraged condition of the world banking system Here is an article just published by Forbes : Next: The Mother of All Bank Runs?" (I couldn't insert hyperlink) and see also Wachovia faced 'silent' bank run; FDIC forced sale and NYSE Announces Fourth-Quarter 2008 Circuit-Breaker Levels And in Europe : Greece joins bailout stampede as Germany vows no blank cheques and NY Times "Crisis could be at Global Tipping Point" .

Monday is settlement day for derivatives. See Financial Times article Settlement Day Approaches for Derivatives.,Authorised=false.html? . Derivative settlements Monday have the potential to cause a stock market collapse with panic selling and a futher panic run on banks and money market accounts.

Just my 2 cents worth.

TC said...

(I couldn't copy your links, Greg. They were truncated. Here's instructions for embedding hyperlinks in comments.)

No doubt selling could come in Monday! However, I would say given the circus we just witnessed in getting this $700 bn bailout through Congress, there is a vested interest motivated to make it work. Since 1/4 of what's been allocated to the TARP is available to the top 5 UK banks, there's reason to think the Brits have been placated for the time being and won't play spoilers. We'll see.

Technically speaking, a day possibly even worse than last Monday (9.29.08) could develop. This is not technically "impossible." However, I consider the risk of collapse ... bank runs ... global chaos, etc. relatively diminished here. There's just so much fear built into the marketplace right now and so much technical deterioration now having been followed by divergences coinciding with indexes declining to new lows that I am dubious of the possibility a financial and/or economic and/or market collapse could imminently unfold here.

Likewise, considering how hedge funds prior to Q4 start had been building capital for satisfying redemptions, this probably goes some way to explaining last Monday's drop. With Q4 now under way, hedge funds continuing to drain capital might be less likely. Who knows? Maybe redemptions hedge funds face here at the start of Q4 will not be as pronounced as was feared, particularly given rescue now in place. Maybe some measure of confidence actually will be restored, at least for a while.