The Risk Averse Alert

"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...




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... © The Risk Averse Alert — Advocating a patient, disciplined approach to stock market investing. Overriding objective is limiting financial risk. Minimizing investment capital loss is a priority. Analysis centers on the stock market's path of least resistance. Long-term, this drives a simple strategy for safely investing a 401(k) for maximum profit. Intermediate-term, investing with stock index tracking-ETFs (both their long and short varieties) is advanced. Short-term, stock index options occasionally offer extraordinary profit opportunities when the stock market is moving along its projected path. Nothing is set in stone. Nor is the stock market's path of least resistance always known. More often than not, there are no stock index option positions recommended. There's an easy way to boost your investment discipline... Get Real-Time Trade Notification!