Financial Chaos Continues as The Bear Rages On!!!

WHICH WAY THIS MARKET IS HEADED

 

 

 

 As you can see from the charts above we are witnessing never-before-seen market action—it is like climbing the tallest tree during a hurricane—it’s quite a ride if you live to tell about it!

 

Friday was an all time record for volume at 19.6 billion shares across all markets. Because of the rebound advancing to declining volume was 2:3 and not a clear lopsided capitulation event. Thursday was a massive 1:13 in favor of decliners and could have been the perfect setup for a capitulation event on Friday—but it didn’t happen—which means we probably have lower lows to come. That said we could still see a tradable rebound next week—it’s just that it’s a good bet that the rebound will fail.Friday’s 1,018-point range on the Dow was an all-time record. In percentage terms it was the worst week in Dow history— worse than both the 1987 and the 1929 crashes. The Dow lost -18.15% for the week and at the low it was down -3601 points or -31% in just the last three weeks. Friday’s opening dip hit a low of 7882 and a level not seen since March of 2003.Believe it or not there is a guy out there that was trading the last time things got this hairy. Irving Kahn is the 102-year-old chairman of Kahn Brothers, a New York investment firm. Kahn, who has been profiled in Barron’s, is one of the few professional investors who not only remembers the 1929 market crash but who sold short prior to that famed downturn. He thinks stocks generally look attractive at these valuations but he’d avoid those “that had a bubble in them.”  Amazing. To be alive and have a sharp mind at 102 has to be a record in itself—more power to you Irving!However just like the crash in ’29 as dramatic as last week’s action was the fundamentals tells us we’re only in the early stages of this meltdown. A gigantic tsunami of stock redemptions and forced liquidations is hitting the market–and it’s not over yet. Unlike 1987, where the U.S. markets crashed on failed portfolio insurance schemes (long stocks and short stock futures), this crash is a redemption crash of hedge funds and mutual funds caused by forced margin selling. Unlike 1987, the stock market does not have many market makers to put their money at risk on these sell-offs–ninety percent of stocks are being traded electronically without a human middleman.  The forced liquidation was extremely evident in the markets this past week. In the first 20 minutes of the futures market Friday crude prices fell -$5 on 10 times the average volume. It was clearly a massive position dump by major funds. When the equity markets opened any stock with a high stock price was crushed. Exxon (XOM) dropped another $10 to $56 and this was on top of a -$9 drop on Thursday. The same was true for Chevron and Conoco. Google lost $20 intraday before rebounding to close positive. Heck even ‘safe haven’ gold lost -94 intraday before rebounding at the close.  The size and scale of redemptions is what is making this sell off different than anything that has gone before. In 1987, hedge funds had $100 billion, or so, and mutual funds less than $1 trillion in stock funds. Before the crash started last week, hedge funds had $2 trillion and mutual funds $5.6 trillion in stock funds. That is 20 times more hedge fund money and five times more mutual fund money subject to forced liquidation.Shareholders took $43.3 billion from stock funds and $8.8 billion from bond funds in the week ended Oct. 8, according to data compiled by TrimTabs Investment Research. The exodus followed $72.3 billion of outflows in September, the most in a single month ever.With the market falling so hard so fast, we face the real potential of a huge bear market rally that could be triggered at any time. The G8 is pulling out every trick in the book to reverse the course of this out-of-control crisis even as you read this and if the markets buy it that snap-back rally could start this week.But the carnage is far from over because the economy has only begun to feel the pressure of a world-wide slowdown. This global recession will take world GDP growth under 2% to 3%, and a G8 global recession will cut 3% to 4% off the developed world GDP. That contraction has to be priced into stocks—in other words $70 per share in earnings on the S&P 500 versus the $94 now estimated by Wall Street It’s only when we get earnings in-line with reality, a better handle on who exactly owes what in the $50 trillion credit default swaps still outstanding, and some significant relief in credit markets that we’ll see a sustainable rally—and that could take awhile.The big problem is that it really does take money to make the world go ‘round and in spite of a new bail-out plan announced ever fifteen minutes nobody beside the government wants to lend—and it’s dramatically affecting the business world. Micron reported this past week that many of their customers are facing a cutoff of capital as bank funding dries up—customers can’t even pay for the chips they’ve already received and now Micron is having to lay-off 2800 people. American Express said on Friday that 18% of small businesses were in danger of failing due to a sudden lack of financing. A survey out Friday showed that banks making loans had dropped by -60% over the last six months and were at levels not seen since the late 70s—thirty years ago! Money is drying up at a faster rate than ever before in this crisis and it’s no wonder the heads of nations met this weekend for a world-wide bail-out.In addition to business financing evaporating individuals are feeling the crunch as well. Countrywide notified one million customers last week that their home equity line of credit had been canceled. Despite the bailout Washington Mutual is also notifying customers that they will not have access to any unused credit on their cards or home equity loans. If you had a card with $10,000 in credit and a $4000 balance then your new credit line is $4000 with no more credit available.With two-thirds of the US economy dependent on the consumer we’ve only seen the tip of the economic downturn. A GM car dealer in the business for 30 years reported on Friday that business was down 50% from August levels because he could not get financing for customers and shoppers even if they did want to commit to a big debt on a car in this economy.This is not an average bear market but a bear caused by the collapse of the global financial system so this one holds the potential to be much more severe. There have been 12 bear markets since 1890. An average bear market falls -33.8% but the worst went to -60%. October 10th was the one-year anniversary of the market high in 2007 at 14167 on the Dow. Over the last 12 months the Dow has declined -39.6% to Friday’s close at 8551. On an average basis we should be near a bottom but the cause of the problem has not been fixed. Investors typically come off the sidelines before the economy recovers but nearly everyone believes the economy has fallen off a cliff over the last month—and the economic reports coming out this week should confirm it. We are far from an economic bottom and that suggests there will be lower lows ahead. October is known as the bear killer month because of the number of bear market bottoms in October and we could very easily see a rebound—but the key is to use it as a shorting opportunity because the majority of the economic damage has yet to be felt. Even though there is going to be some rough sledding ahead for the economy there is one group that is doing very well right now, and will probably continue to—and the good news is you are in that group!  Bloomberg ran an article this week reporting that the same credit-market rout that sent stocks to the steepest loss in two decades is also making it the best year ever for options traders. The plunge in the markets has driven the Chicago Board Options Exchange Volatility Index, a measure of how much options cost, to the highest level in its 18-year history. The all-time high in the VIX meant investors paid 2 1/2 times more for S&P 500 options than they did in 2007, based on its average level last year. The measure, calculated from the prices paid for S&P 500 options, has exceeded 30 for 16 consecutive days, the longest streak since 2002. September’s market gyrations sent trading of options on U.S. stocks, indexes and exchange-traded funds to an all-time high of 375 million contracts, according to the Chicago-based Options Clearing Corp. Volume was almost double the figure from a year earlier. “People are nervous and they want protection for their portfolio, so they’ll pay a premium,” said Adam Stern, who oversees more than $1 billion at AM Investment Partners, a New York-based hedge fund that invests in options. Fortunately we’ve been the recipients of some of that newly rich premium as we’ve sold out of our positions in the past few weeks—and there will be more of the same dead ahead.This coming week looks to be plenty wild as the big earnings numbers start to be released—we’ll see earnings from the major tech leaders and a few financials. Intel reports on Tuesday followed by Ebay, IBM and GOOG. Key financial reporting will be JPM, WFC, MER, C and COF. It’s doubtful anyone will beat estimates and we are probably going to see quite a few companies miss their targets.We’ve already got a pretty good indication with the company that has widely been considered a proxy for the entire economy—General Electric. GE reported earnings on Friday that fell -22%. The earnings of 43 cents hit GE’s own lowered forecast and they blamed the drop on its struggling finance division. Even GE has had to raise capital by selling $15 billion in stock and an additional $3 billion in preferred shares to Warren Buffett. This could be a story we see repeated in various forms quite frequently coming right up.That said the short selling ban has been lifted which means we could see a short-covering rally this week if the latest bail-out plans get any traction—Get ready to GO SHORT ON ANY BIG RALLY i will keep you alert on entries .. Good Trades All

% Rates To Rise – Borrow What You Can!!!

The dollar is in some serious trouble right now and the US is about to go into a swirling riptide of economic chaos.  The credit crisis is freezing up the borrowing of money and will eventually will lead to hear interest rates. Interest rates are a reflection of supply and demand , the more people that want to borow and the less people that want to loan means pay up on rates, not nly will this lead to higher rates but it will mean a weaker dollar or buying power . How do we make money off of this?  The Eurodollar futures market is the rates at which you receive interest on your money in the bank , so by selling Short the Euro  dollar futures contracts you are basically borrowing money at the current rate that the bank is willing to pay depositors. This is the European bank rate not the US rates. Lets borrow a half a million dollars worth of money and SELL 5 DEC 09 Eurodollar Futures contract which are trading at 96.70 this is equal to 100-96.70=3.30% for about a year and 3 months worth of time as rates climb every one % rate point pays out $2500 or on 5 positions $12500 so if rates go to 5.30 and the Eurodollar drops to 94.70 then we are winning $25000, I will buy the 5 DEC 09 EuroDollar Calls OPTIONS  to protect my loan at a strike price of 97.50 or 2.5% on the loan rate. This will act as insurance and will cost us 15 pts at $25 a pt times 5 positions or around $1875  in money and will limit our risk to  $12500 on the trade. We can always adjust the position later and lower our loan costs , This is a longer term trade and I believe will be profitable , by buying this insurance we will be borrowing the money at a cost basis of 3.45%. I will keep you posted on what to do with the position as we start to move in either way.  I love our positions in the Dow Jones Options we are holding and looking sweet as the BAILOUT program is only a band-aid on a much bigger problem . Hold steady on the Long Auzzie $ and Short Yen Futures positions as well as our Dow JONES Option Positions. Rates are on the rise borrow what you can …  Please if you read this and dont understand leave a comment or contact me…..Good Trades All

Can You Follow Me Here? I’m $$$$$$

I wanted to go over the trade recommendations Ive made since I started this blog and advise you on the current open positions we are holding.  I will use an example of trading 1 unit which would require around 10k in the account. First the bad news , one Gold futures trade that lost around $900. The option trades on the DOW JONES INDUSTRIAL AVERAGES options positions would have seen the following results.  On the first NOVEMBER set of option trades we sold a 11500 call for $3500 and bought the 11800 call for $1500 which resulted in a credit of $2000, with that $2000 we bought the 11300 November DOW puts  and 3 days later we closed out the 11500 call for $400 which resulted in a PROFIT of $1600. We also closed out the 11300 November Dow puts for $10000 for a profit of $8000. The next move was  after I called the bottom in my post” dont be short here” we stayed with the 11800 call so after the rally back up we resold the November 11500 Dow Jones Call again for $2000 and re-bought the 11300 November Dow Jones put option for  $2500. This left us short the market again. Then in my post “cautiously bullish” we closed out the 11500 Dow call for $500 this was a profit of of $2000 and we sold the 10500 put for $6000. So our open positions are this….. We own the 11300 November Dow Jones  puts for $2500 and sold the 10500 November Dow Jones puts for $6000 this leaves us a  credit of $3500 and the potential for another $8000. This is called a BEAR PUT DEBIT SPREAD although due to my impecable timing we end up with a credit instead of a debit. We also still own the November 11800 Call option straight out. So at this point we are still cautiously BULLISH based on our postions with a net profit in the bank of  $14500, our open postions value is around $5000 so our total account value at this time would be our original $10000 plus $14500 plus our open position value of around $5000, bringing our account up to $28500 including our Gold Futures loss.. minus fees. Not bad for 2 weeks worth of trading . Where do we go from here?  Im going to stay with the positons I have and continue to look for this market to rally back up for this week, on a hard dip to around 11000 or under I will come out with a new recommendation to sell the 11300 November puts we own and roll them down to the 10600 November Dow puts but lets wait til we see what happens til then over all i would say we are in fine shape and hold the course . I like the dollar short here tonite and I would be looking to start buying the Auzzie dollar and sell the Jap Yen against it on the futures . I think the commodities have seen enough of a correction for now and the Auzzie dollar is a commodity based currency . The Jap Yen should weaken against the other currencies due to low rates and slow economy there. If you dont understand any of this or need clarification please comment or contact me so I can explain it to you. Good Trades All and Happy New Year to all the Jewish people out there:)…