3SOF

bloomberg was interviewing on of the multimillionaire guys, I don't remember his name but he mentioned something along the lines that in 2008 there will be another big decline due to subprime loans (5year ARM) due next year for interest 5yr adjustment.

so should we be having a shorter outlook considering future market decline due to these additional 5 year ARM loans due next year for a interest adjustment?

Economists like Paul Samuelson, Alan Greenspan, etc., say basically there are 3 possible
scenarios:
1) Moderate recession in 2008.
2) Worldwide banks may dump huge amounts of $$$ to reestablish markets
     and optimistic prognosis of world growth.
3) Markets might live with inflation above central banks targets.

You can choose the option you like or a combo, and decide the risk/rewards
you can handle.

The Federal Reserve cut the discount rate to 5.75 percent from 6.75 percent. This is a symbolic action as the discount window is nowadays rarely used, but it does indicate that a cut in the fed funds rate is being considered. The discount rate is the overnight rate at which the Fed lends to banks if they have a shortfall, while the more widely used fed funds rate (5.25%) is the lower rate at which banks lend overnight to each other.

While the Fed's actions will ensure the stability of the banking system it is unlikely to reverse the course of the market. Banks are likely to re-assess their risk exposure and many forms of credit will become more expensive. Tighter credit will affect sales - so there may well be a long term effect, but it will take months before we can assess the impact on earnings.

The Dow Jones Industrial Average tested the lower border of the trend channel at 12800 before recovering sharply. Sharp rallies in a bear-trend cannot be trusted and we should wait for a second test that respects the lower channel border. Twiggs Money Flow continues with a large bearish divergence; a break of the downward trendline would indicate that distribution is ending.

Talk that the FED will cut the FED funds rate at or before the September 18th meeting will probably keep the general market going north.

Today there were several bad news out, with more problems in mortgage lending and a German bank saying it is getting harder to get loans from foreign banks, and yet the futures reversed course in the morning and the DAX is actually higher now after being down a lot in the morning.

This feels like all the credit problems are the past now, everybody knows about them and they've been discounted. Buffet agrees, as he has been buying financial assets (like a big position in Bank of America) and there are rumors he's preparing to buy certain assets, including mortgage assets, from CountryWide Financial, the largest US mortgage lender, which has been in severe trouble.

From a technical standpoint, the first test for the SPY will only come at $147.48, when it meets the short term descending trendline on the chart below.

Interesting article 
=============================


The Croesus Chronicles
My, How Fast Liquidity Disappeared
Robert Lenzner, 08.20.07, 2:23 PM ET

The Garden of Eden began to look like a perfect storm until the Fed acted last Friday.

We experienced a host of "Black Swans" that spooked the equity markets. We are now experiencing a temporary reprieve that will enable the de-leveraging of credit to continue.

On Thursday, Aug. 16, Christopher Wood, emerging markets analyst at CLSA (an affiliate of Crédit Lyonnais), predicted that "the world is nowhere yet near the peak of the fear that will be generated by the unwinding of the credit bubble."

Mark well the shocking events that led to a panic in credit markets that triggered a panic in the stock market. Bear Stearns (nyse: BSC - news - people ) hedge funds froze up. Goldman Sachs (nyse: GS - news - people ) had to inject $2 billion of its own money into its hedge fund to maintain solvency. BNP Paribas (other-otc: BNPQY - news - people ), the sixth-largest bank in the world, refused to honor obligations because it could not properly value its holdings.

And so on. In just several trading sessions, shares of the Powers That Be of Higher Finance--Morgan Stanley (nyse: MS - news - people ), JPMorgan Chase (nyse: JPM - news - people ), Citigroup (nyse: C - news - people ), Goldman Sachs, Merrill Lynch (nyse: MER - news - people ) and Lehman Brothers (nyse: LEH - news - people )--lost over 20% of their value in the stock market. Until Friday's partial bailout, that's a bear market in financial stocks by any definition.

But beware: The repricing of risk is not finished.

A hodgepodge of foreign investors--banks in Asia and Europe--own various species of subprime debt, and as the rating agencies downgrade this paper, they will have to mark it to market. J. Kyle Bass, managing partner of Hayman Capital in Dallas, predicted on July 30 that the highly leveraged mezzanine paper of the CDO (collateralized debt obligations) structures "will fetch bids of around 10 cents on the dollar, creating what he calls an "ensuing horror show."

This "horror show" will take time to work its way through the financial system. Expect to see huge losses taken by banks and other investors around the globe that will underscore the excesses of the past few years of reaching for yield without a clear understanding of what they were buying.

Then there's the troubling symbiosis of hedge funds and investment banks.

The banks have lent billions to hedge funds that hold illiquid and highly leveraged assets and need to raise money to meet the demands of banks for more collateral. Second, the banks are still warehousing loans to private equity houses for multibillion-dollar leveraged buyout deals that are stymied for the moment.

AS CLSA's Wood put it last week in Greed and Fear, his investment letter: "It is crucial that market discipline is reasserted in the profligate behavior that had become commonplace in the credit world."

There's blame all around for this "profligate behavior." First, there's the mortgage banks that lent 100% of the purchase price of a home without demanding income and net worth statements from the buyer. Then there are the naive buyers who believed they'd get an easy ride on easy credit conditions.

Thirdly, there are the investment banks and commercial banks that gathered the lousy mortgages together and sold packages of them indiscriminately to investors. Finally, there are the rating agencies that were paid scads of money to give credit ratings without truly understanding the paper they were valuing.

Now, for predictions by Croesus:

The Fed will continue to ease credit conditions due to the disappearance of liquidity. The Eurodollar futures market is discounting a full percentage point (100 basis points) cut in the federal funds rate from 5.25% to 4.25% by March 2008. Whether that will save the US economy from recession is anyone's guess. Housing will continue to deteriorate, and this will feed through into weaker personal consumption.

As John Plender, the thoughtful Financial Times columnist, put it over the weekend: "If an economy is robust but unsoundly financed, it will not stay robust for long." Well, the robust days are over for the time being. Gains in average hourly earnings peaked out early in 2007 at a 4.3% annual rate.

Next prediction: The rating agencies and the world of structured finance will get a black eye and require investigation by Congress. A horde of investors will pull their money from a horde of hedge funds, and some of the worst hit will close their doors. A portion of the private equity deals will be delayed, at minimum, and some will never be done. A reform of the tax on private equity--from "carried interest" to ordinary income--won't happen, as it will be seen as damaging the stock market's underpinnings.

The markets will continue to be volatile, especially the stock market in the U.S., where the requirement for an uptick on a stock before it can be shorted has been removed by the deregulators, who have enabled sharp, violent downdrafts in the market by hedge funds and other professional bears. A terrible mistake.

In the credit markets, credit derivative swap indexes will continue to offer brilliant ways to price murky markets, to hedge risk and disperse around the globe. These indexes will give derivatives a good name as they serve as benchmarks for pricing debt markets, in the same manner as the Dow Jones industrial average and the Standard & Poor's 500 are indexes for pricing the stock market.

Watch the debt markets for signs of what to expect in the stock market. The debt markets are twice as large as global equity markets, over $100 trillion, compared with $50 trillion. They are an early warning sign of troubles ahead.

If de-leveraging in the credit markets has a long way to go--and I believe it does--then expect more downdrafts in the equity markets. The Bernanke reprieve may be a way to lighten up exposure if the updraft continues.

Today the so-called TED spread, between three-month Treasuries and the London Interbank Offered Rate, soared to 300 basis points, up from its usual 20 basis points. This is an indication that the market is still worried about the financial condition of the world's largest banks (see chart below).

An interesting article about the bearishness outthere and what that means for the general market:

Short course

the recent bounce is soon finished....today it gaps up the QQQQ ist 48.00 pre market....it looks like distribution to me....the bounce volume is getting weaker every day....and will be interesting how the MA 50 resistence reacts.......down from here...maybe buying QID today if things turn red...

Quote from: ket1390 on August 23, 2007, 06:45:29 AM
the recent bounce is soon finished....today it gaps up the QQQQ ist 48.00 pre market....it looks like distribution to me....the bounce volume is getting weaker every day....and will be interesting how the MA 50 resistence reacts.......down from here...maybe buying QID today if things turn red...

Hi ket1390, thanks for your general market view.

It seems to me that the market is actually making a very painful (for the bear's majority) breakaway gap of its short term descending trendline. The way I see the chart unfolding, I guess this could be an inverted Head & Shoulders bottom, with the current bullish move ending below $150.59, and then another down move to make the 2nd shoulder around $142 - $143 (in the SPY), and then a move to new all time highs by the end of the year.

Of course, it could play out differently, but I remain a long term bull in this market.

hi david
in the past weeks was the volume much higher on red days than on green days....thats not positive in my view.

all major indizes are below the MA50....now they re gonna attack this indicator....i am not long until we stay a couple of days over this important indicator....if we reject from the MA 50 resistence i am staying more bearish...then it s a confirmed bearish sign.

Quote from: ket1390 on August 23, 2007, 07:14:09 AM
hi david
in the past weeks was the volume much higher on red days than on green days....thats not positive in my view.

all major indizes are below the MA50....now they re gonna attack this indicator....i am not long until we stay a couple of days over this important indicator....if we reject from the MA 50 resistence i am staying more bearish...then it s a confirmed bearish sign.

Volume being lower now is actually bullish, not bearish. I have a technical analysis book which has an entire 11 page chapter on how to analyze volumes, let me go get it ... here it is, two situations:

- A sustained decline suddenly gets faster and sharper, with much higher volumes.

Interpretation: The end of the negative trend is in sight, stopping or reversing. As with situation 3, it is an exhaustion phenomenon, now called "selling climax". The sharp increase in volume will mean that there are already many buyers, attracted by the lower prices, therefore stopping the decline.

- After a selling climax, prices start trending up, but with lower volume

This is a classic way to end a bear market or big correction. The rise is made with lower volumes because the dominant pessimism didn't allow the appearance of a significant number of buyers. But, if despite the pessimism, prices are climbing, it means there are less sellers now. Potential sellers already sold and are holding cash. The pressure is on the demand side now.

Combining the two I get to the conclusion that the bottom was made on the August 16th selling climax. Now, I don't know if we'll trend to new highs right away or if the inverted H&S scenario I've laid will play out. Either way, it won't change my attitude towards the market, which is to hold my shares through all the turbulence, with the expectation of a new all time high later in the year or early next year.

yeah you are right...here a 5year monthly chart of the QQQQ nothing damaged yet....a montly close below 45 could be a topic where it s getting bearish on this index.

I've just posted an update to my SPX Analysis:
http://www.3stocksonfire.org/trading/index.php?topic=10180.msg104653#msg104653

regards

Punk Ziegel is out saying that mortgage business may have accounted for 1/3 of  Lehman Brothers profits at one point.

it that is true -- and is true for other brokerage firms -- earnings are going to be a DISASTER.

it could come into play in the financials.

The QQQQ reacted negatively after touching its short term descending trendline as you can see on the chart below:



As for the SPY, as we can read on Ramsburg's analysis, it's still not conclusive:



I actually hope/expect the market to go down to the S2 area, because that's where I'm planning to buy 4 new holdings for the Main Portfolio, filling up the truck. Not because I think the general market trend is crucial for those specific companies future, but because I guess  then it will be easier to identify four stocks that have short and long term appreciation potential, so that they can help push up the Main to a nice close for 2007, say, in the 15-25% profit range?

This is my current view and strategy.

I'm going to take one week off for vacations, because clearly my productivity hasn't been as I would like it to be, it's so damn hot here in Portugal now. My wife and kids have also been requesting this week for long.

Anyway, I'll write about this in the daily newsletter.

See you folks

I just posted a quick update to my SPX Technical Analysis here:
http://www.3stocksonfire.org/trading/index.php?topic=10180.msg104750#msg104750

regards,