Market Discussion

[Ramsburg]

Thanks gents, applauds to each of you for educating me.  And lets hope that the S&P and Nasdaq are the more imporant indices in this case.  Will also be interesting to see what David thinks... perhaps we can also get some good ole technical analysis from Rams too!

Hi toky and everybody,

This last weeks have been demoralizing for any mid/long term strategy, the SPX just turned negative for the year and our Main Portfolio is just up +5% but ugly at this time…

Anyway, and for technical analysis purposes only, I don’t think we have a confirmed bear market like some people are saying. Ok, SPX below the EMA-200, both EMA200 and 50 with negative tendency at the moment, huge sell off, weak dolar, weak macro developments, lots of pessimism, etc…

I rather thing this is a HUGE consolidation movement, something no so unusual but definitively scary… Sometimes the market just has to do what is necessary to hurt the majority of the players, wash positions from both sides of the trenches and keep up with the trend.
Last month and before, the market washed away most short positions when hitting new all time highs, and also many people that sold August sell-off jumped again for the long side… now this horrible sell off, and the shorts are back in town and the October buyers are selling their positions…

But still, the main reference I’m looking for the SPX is the long term ascending support; the same that had stopped August plunge. This reference is approximately at 1406 right now, this exact location is not important, but instead a range nearby. Even in a worst case scenario, we only have a technical bear market confirmed with a close below August lows… and even then it may be a Baskerville signal…

Adding up this scenarios with the general ultra-pessimism, we generally have a good entry point.

In other words, I’m scared like anybody else on the long side… but still very confident this is just (another) rough market moment.

In attach this 2 charts for the SPX (short term + long term)

Best regards to all !

[Rmagos]

Hi everybody
This is an article found in the "TELEGRAPH"

The global credit crisis has hit Asia with a vengeance for the first time, triggering a massive flight to safety as investors across the region pull out of risky assets.

Yields on three-month deposits in China and Korea have plummeted to near 1pc in a spectacular fall over recent days, caused by panic withdrawls from money market funds and credit derivatives.

"This is a severe warning sign," said Hans Redeker, currency chief at BNP Paribas. "Asia ignored the credit crunch in August but now we're seeing the poison beginning to paralyse the whole global economy," he said.

Korean and Chinese three-month yields have fallen from 4pc to 1pc in a matter of days in a eerie replay of events in late August when flight from banks and the US commercial paper markets caused yields on three-month Treasuries to falls at the fastest rate ever recorded. Asian investors appear to be opting for deposit accounts with government guarantees.

It is unclear what prompted this latest "heart attack" in the credit system, though rumours abound that Asian banks have yet to own up to their share of the expected $400bn to $500bn losses from the US mortgage debacle.

Stock markets were battered across the region. The Hang Seng index in Hong Kong fell 4.15pc, while Tokyo's Nikkei slumped to the lowest level in a year and a half, dragged down by the shares of the 'Seven Samurai' exporters.

Asian jitters set off fresh turmoil on Europe's credit markets. The iTraxx index measuring default insurance on bank and insurance bonds hit an all-time high of 63.5.

"The whole financial market is in turmoil with Bund-Swap-Spreads going through the roof," said Andrew Guy, director of ADG Capital Management.

Marcus Schuler, director of credit marketing at Deutsche Bank, said spreads on low-grade European bonds had been jumping ten basis points a day for the last week. "There's been risk aversion across the board," he said.

In a rare move, the European Covered Bond Council said it was suspending trading of mortgage-linked bonds in the inter-bank-market owing to the "undue over-acceleration in the widening of spreads".

Abbey National today cancelled its sale of covered bonds, the third company to withdraw an issue this week.

Charles Dumas, chief strategist for Lombard Street Research, said credit woes had led to an alarming spike in the 'Ted spread' between commercial Libor and US Treasury bills, now near 150 basis points. "Libor is at a premium to T-bills not matched the great crash in 1987," he said.

Mr Redcker said the flight from risk has led to a sudden unwinding of the $1,200bn yen "carry trade" as hedge funds and Japanese investors close risky positions. The yen has snapped back violently from yen118 to yen108 against the dollar since early October, with similar moves against other Anglo-Saxon currencies.

"We're seeing a liquidation of the carry trade. For years it created liquidity for global equities in an upward spiral, but this has now turned into a downward spiral. Base metal prices are falling, which that tells us that Asia may not be as strong as we thought," he said.

Copper prices fell 6.4 percent in Shanghai today. It follows data showing China's copper imports fell 4.4pc in October, a sign that central bank moves to choke off credit is starting to slow runaway investment in heavy industry and construction.

Jerry Lou, China analyst for Morgan Stanley, said the Shanghai bourse -- already down 15pc -- was now the word's "biggest valuation bubble". "Lessons from Japan in the late 1980s show that once the stock market starts to head down, earnings and multiple contraction can together crush the market like a market rolling downhill," he said.

http://www.telegraph.co.uk/money/main.jhtml;jsessionid=AH3N3IOTOUD11QFIQMGSFF4AVCBQWIV0?xml=/money/2007/11/21/bcnasia121.xml

[berloga]

Oh, I see some sharp debates have been going on here! I agree with the other posters about having the neccessity to the short term stability of the 3SOF portfolio. I like the long-term approach, but unfortunately, I cannot own all of the stocks offered here due to my portfolio limitations. Hence, if I miss a 10-bagger, all my other investments may become meaningless. Therefore, having a 2nd portfolio with 5-10 positions filled targeting short-term gain could uplift the moral here. The dodgy Chinese stocks could be traded there. The riskier the business, the less likelihood must be for it to play into the Main. David, would you address this please? Thanks much!

  In regards to the comment made by Leaira... It is not tactful. I understand she's young, but nevertheless. It's the same as saying to a femishing person that you've just had a nice dinner. Also, I don't see the reason to believe her that she made 134% this year. Or maybe I can, but perhaps she lost 70% last year? Who knows? She does not come here often, as Tokyo noticed. And, there is a difference between a business owner, like capricho, suggesting to check the competition himself, or a customer doing it for him. Will you consider selling cheese in someone else's cheese shop?

  In any case, losing money is not good, but losinng yourself is even worse. Let's help David collectively to adjust the pace of this website to provide more dynamics and introduce some short-term strategies to balance the investment.

  OK, I am off to eat the rabbit (I don't like turkey). Au revoir!

[setravis]

The DJIA continues to look like a ball bouncing down a hill,
It continues to look for a place to stop. The 13,000 support level has been penetrated twice now, and there is more bouncing downward due.
The next level of support, and perhaps the bottom, will be at 12,750, probably sometime next week, before a reversing near-term rally can get going.

The intermediate-term downtrend is in charge. It eroded further yesterday by all its measures.
Dove further into its oversold zone, but can still go down more.

The near-term trend indicators have tried several times in the last two weeks to kick up the market indices and each time have failed to sustain any significant rally.
The action of both trend indicators signals that the market indices' downhill rolling ball has not found a place to rest and until it does no meaningful rally can ensue. However, with all of the indicators in or near their oversold territories, it is reasonable to expect a bottom in the DJIA 12,750 area.

The trade-term trends are adding enough bounce every day that the prudent buyer of stocks will wait for the bottom of this intermediate-term trend to be clearly established before jumping into long positions with abandon. Seemingly there currently remains much economic uncertainty about a credit crisis-triggered future recession and other factors for equity value discounting from fear to be replaced by enthusiastic outlooks. It has now been estimated that the sub-prime loan debacle created $400 billion in bad loans, and financial institutions have yet to own up publicly to a quarter of that amount. That alone casts a continuing pall over equity valuations, and until it is lifted the stock market is going to have a difficult time rallying.

[tokyopua]

The DJIA continues to look like a ball bouncing down a hill,
It continues to look for a place to stop. The 13,000 support level has been penetrated twice now, and there is more bouncing downward due.
The next level of support, and perhaps the bottom, will be at 12,750, probably sometime next week, before a reversing near-term rally can get going.

The intermediate-term downtrend is in charge. It eroded further yesterday by all its measures.
Dove further into its oversold zone, but can still go down more.

The near-term trend indicators have tried several times in the last two weeks to kick up the market indices and each time have failed to sustain any significant rally.
The action of both trend indicators signals that the market indices' downhill rolling ball has not found a place to rest and until it does no meaningful rally can ensue. However, with all of the indicators in or near their oversold territories, it is reasonable to expect a bottom in the DJIA 12,750 area.

The trade-term trends are adding enough bounce every day that the prudent buyer of stocks will wait for the bottom of this intermediate-term trend to be clearly established before jumping into long positions with abandon. Seemingly there currently remains much economic uncertainty about a credit crisis-triggered future recession and other factors for equity value discounting from fear to be replaced by enthusiastic outlooks. It has now been estimated that the sub-prime loan debacle created $400 billion in bad loans, and financial institutions have yet to own up publicly to a quarter of that amount. That alone casts a continuing pall over equity valuations, and until it is lifted the stock market is going to have a difficult time rallying.

I think we have all noted that the DOW chart has broken down but that the S&P is more important and hasnt yet broken down.  However, once concern I have is that the DOW was benefiting from globalization, and that is our main argument as to why things should continue to be bullish longer term. 

So am I wrong about the DOW being so tied to globalization and thus less of a proxy for it, or can we draw another trend line in a different way that shows the DOW to still be in an uptrend, etc.?

[mbaugh]

One concern I have is the fact that the main credit problems we are facing are not limited to just the US market but all markets worldwide which makes this a global problem that has not happened before.  It seems everyone in the world has some form of money in the sub-prime mess and is causing a major credit strain world-wide.  I realize past expereince and history shows that the markets tend to recover, but all the recoveries vary in length of time.  We do not know how long this market will take to recover since we really don't know the extent of the damage since many experts believe the mortgage problems will only get worse since the adjustable rates will begin to take effect in the next several of months causing the foreclosure rates to sky rocket even higher.  This market could stall for a long-time.  Here's a link from Stockcharts that I have followed for awhile and it tends to be right on the money.  This link is updated everyday.  http://stockcharts.com/def/servlet/Favorites.CServlet?obj=ID1886603

All I'm saying is that we need to be a little more cautious and maybe hold a ultrashort index to offset the drawdowns on the stocks we own.  Believe me, I want to be wrong and see the market rally but when I see stocks like TBSI and EXM fall like they did it makes me wonder why the big funds don't buy since these stocks are ultra cheap now.  Based on the link above, the bearish view of the S&P chart shows a very steep decline if things don't improve soon.

Right now the markets need some new developments such as the Black Friday sales #, and so far I'm hearing good reports such as Shop Tracs 8% increase over last years #'s.  We'll see on Monday!  Good Night!

[stocky]

All the bearish drum beating is to force Fed into lowering rates. When the fed lower rates inflation creeps in the system. When that happens it jacks up the prices and profits. Over time the profts increases Year over Year [note even if their is no growth, inflation means you made more paper money then when their was less inflation last year] and we see the corresponding increase in prices. In such case do you want to stay out or short, what would be your portfolio look like.

Now this is very simplistic explanation but something to think about. Personally, I would like the Fed to stop messing with interest rate and thus stop pushing Dollar lower.

[la-onda]

enjoy reading:
The Financial Tsunami: Sub-Prime Mortgage Debt is but the Tip of the Iceberg

By F. William Engdahl

Global Research, November 23, 2007

Part 1: Deutsche Bank's painful lesson                 

Even experienced banker friends tell me that they think the worst of the US banking troubles are over and that things are slowly getting back to normal. What is lacking in their rosy optimism is the realization of the scale of the ongoing deterioration in credit markets globally, centered in the American asset-backed securities market, and especially in the market for CDO's—Collateralized Debt Obligations and CMO's—Collateralized Mortgage Obligations. By now every serious reader has heard the term "It's a crisis in Sub-Prime US home mortgage debt." What almost no one I know understands is that the Sub-Prime problem is but the tip of a colossal iceberg that is in a slow meltdown. I offer one recent example to illustrate my point that the "Financial Tsunami" is only beginning.

Deutsche Bank got a hard shock a few days ago when a judge in the state of Ohio in the USA made a ruling that the bank had no legal right to foreclose on 14 homes whose owners had failed to keep current in their monthly mortgage payments. Now this might sound like small beer for Deutsche Bank, one of the world's largest banks with over €1.1 trillion (Billionen) in assets worldwide. As Hilmar Kopper used to say, "peanuts." It's not at all peanuts, however, for the Anglo-Saxon banking world and its European allies like Deutsche Bank, BNP Paribas, Barclays Bank, HSBC or others. Why?

A US Federal Judge, C.A. Boyko in Federal District Court in Cleveland Ohio ruled to dismiss a claim by Deutsche Bank National Trust Company. DB's US subsidiary was seeking to take possession of 14 homes from Cleveland residents living in them, in order to claim the assets.

Here comes the hair in the soup. The Judge asked DB to show documents proving legal title to the 14 homes. DB could not. All DB attorneys could show was a document showing only an "intent to convey the rights in the mortgages." They could not produce the actual mortgage, the heart of Western property rights since the Magna Charta of not longer.

Again why could Deutsche Bank not show the 14 mortgages on the 14 homes? Because they live in the exotic new world of "global securitization", where banks like DB or Citigroup buy tens of thousands of mortgages from small local lending banks, "bundle" them into Jumbo new securities which then are rated by Moody's or Standard & Poors or Fitch, and sell them as bonds to pension funds or other banks or private investors who naively believed they were buying bonds rated AAA, the highest, and never realized that their "bundle" of say 1,000 different home mortgages, contained maybe 20% or 200 mortgages rated "sub-prime," i.e. of dubious credit quality.

Indeed the profits being earned in the past seven years by the world's largest financial players from Goldman Sachs to Morgan Stanley to HSBC, Chase, and yes, Deutsche Bank, were so staggering, few bothered to open the risk models used by the professionals who bundled the mortgages. Certainly not the Big Three rating companies who had a criminal conflict of interest in giving top debt ratings. That changed abruptly last August and since then the major banks have issued one after another report of disastrous "sub-prime" losses.

A new unexpected factor

The Ohio ruling that dismissed DB's claim to foreclose and take back the 14 homes for non-payment, is far more than bad luck for the bank of Josef Ackermann. It is an earth-shaking precedent for all banks holding what they had thought were collateral in form of real estate property.

How this? Because of the complex structure of asset-backed securities and the widely dispersed ownership of mortgage securities (not actual mortgages but the securities based on same) no one is yet able to identify who precisely holds the physical mortgage document. Oops! A tiny legal detail our Wall Street Rocket Scientist derivatives experts ignored when they were bundling and issuing hundreds of billions of dollars worth of CMO's in the past six or seven years. As of January 2007 some $6.5 trillion of securitized mortgage debt was outstanding in the United States. That's a lot by any measure!

In the Ohio case Deutsche Bank is acting as "Trustee" for "securitization pools" or groups of disparate investors who may reside anywhere. But the Trustee never got the legal document known as the mortgage. Judge Boyko ordered DB to prove they were the owners of the mortgages or notes and they could not. DB could only argue that the banks had foreclosed on such cases for years without challenge. The Judge then declared that the banks "seem to adopt the attitude that since they have been doing this for so long, unchallenged, this practice equates with legal compliance. Finally put to the test," the Judge concluded, "their weak legal arguments compel the court to stop them at the gate." Deutsche Bank has refused comment.

What next?

As news of this legal precedent spreads across the USA like a California brushfire, hundreds of thousands of struggling homeowners who took the bait in times of historically low interest rates to buy a home with often, no money paid down, and the first 2 years with extremely low interest rate in what are known as "interest only" Adjustable Rate Mortgages (ARMs), now face exploding mortgage monthly payments at just the point the US economy is sinking into severe recession. (I regret the plethora of abbreviations used here but it is the fault of Wall Street bankers not this author).

The peak period of the US real estate bubble which began in about 2002 when Alan Greenspan began the most aggressive series of rate cuts in Federal Reserve history was 2005-2006. Greenspan's intent, as he admitted at the time, was to replace the Dot.com internet stock bubble with a real estate home investment and lending bubble. He argued that was the only way to keep the US economy from deep recession. In retrospect a recession in 2002 would have been far milder and less damaging than what we now face.

Of course, Greenspan has since safely retired, written his memoirs and handed the control (and blame) of the mess over to a young ex-Princeton professor, Ben Bernanke. As a Princeton graduate, I can say I would never trust monetary policy for the world's most powerful central bank in the hands of a Princeton economics professor. Keep them in their ivy-covered towers.

Now the last phase of every speculative bubble is the one where the animal juices get the most excited. This has been the case with every major speculative bubble since the Holland Tulip speculation of the 1630's to the South Sea Bubble of 1720 to the 1929 Wall Street crash. It was true as well with the US 2002-2007 Real Estate bubble. In the last two years of the boom in selling real estate loans, banks were convinced they could resell the mortgage loans to a Wall Street financial house who would bundle it with thousands of good better and worse quality mortgage loans and resell them as Collateralized Mortgage Obligation bonds. In the flush of greed, banks became increasingly reckless of the credit worthiness of the prospective home owners. In many cases they did not even bother to check if the person was employed. Who cares? It will be resold and securitized and the risk of mortgage default was historically low.

That was in 2005. The most Sub-prime mortgages written with Adjustable Rate Mortgage contracts were written between 2005-2006, the last and most furious phase of the US bubble. Now a whole new wave of mortgage defaults is about to explode onto the scene beginning January 2008. Between December 2007 and July 1, 2008 more than $690 Billion in mortgages will face an interest rate jump according to the contract terms of the ARMs written two years before. That means market interest rates for those mortgages will explode monthly payments just as recession drives incomes down. Hundreds of thousands of homeowners will be forced to do the last resort of any homeowner: stop monthly mortgage payments.

Here is where the Ohio court decision guarantees that the next phase of the US mortgage crisis will assume Tsunami dimension. If the Ohio Deutsche Bank precedent holds in the appeal to the Supreme Court, millions of homes will be in default but the banks prevented from seizing them as collateral assets to resell. Robert Shiller of Yale, the controversial and often correct author of the book, Irrational Exuberance, predicting the 2001-2 Dot.com stock crash, estimates US housing prices could fall as much as 50% in some areas given how home prices have diverged relative to rents.

The $690 billion worth of "interest only" ARMs due for interest rate hike between now and July 2008 are by and large not Sub-prime but a little higher quality, but only just. There are a total of $1.4 trillion in "interest only" ARMs according to the US research firm, First American Loan Performance. A recent study calculates that, as these ARMs face staggering higher interest costs in the next 9 months, more than $325 billion of the loans will default leaving 1 million property owners in technical mortgage default. But if banks are unable to reclaim the homes as assets to offset the non-performing mortgages, the US banking system and a chunk of the global banking system faces a financial gridlock that will make events to date truly "peanuts" by comparison.

We will discuss the global geo-political implications of this in our next report, The Financial Tsunami: Part 2.

F. William Engdahl is the author of A Century of War: Anglo-American Oil Politics and the New World Order. He is a Research Associate of the Centre for Research on Globalization (CRG).  His most recent book, which has just been released by Global Research is Seeds of Destruction, The Hidden Agenda of Genetic Manipulation.

[tokyopua]

One concern I have is the fact that the main credit problems we are facing are not limited to just the US market but all markets worldwide which makes this a global problem that has not happened before.  It seems everyone in the world has some form of money in the sub-prime mess and is causing a major credit strain world-wide.  I realize past expereince and history shows that the markets tend to recover, but all the recoveries vary in length of time.  We do not know how long this market will take to recover since we really don't know the extent of the damage since many experts believe the mortgage problems will only get worse since the adjustable rates will begin to take effect in the next several of months causing the foreclosure rates to sky rocket even higher.  This market could stall for a long-time.  Here's a link from Stockcharts that I have followed for awhile and it tends to be right on the money.  This link is updated everyday.  http://stockcharts.com/def/servlet/Favorites.CServlet?obj=ID1886603

All I'm saying is that we need to be a little more cautious and maybe hold a ultrashort index to offset the drawdowns on   the stocks we own.  Believe me, I want to be wrong and see the market rally but when I see stocks like TBSI and EXM fall like they did it makes me wonder why the big funds don't buy since these stocks are ultra cheap now.  Based on the link above, the bearish view of the S&P chart shows a very steep decline if things don't improve soon.

Right now the markets need some new developments such as the Black Friday sales #, and so far I'm hearing good reports such as Shop Tracs 8% increase over last years #'s.  We'll see on Monday!  Good Night!

Hi mbaugh, thanks for sharing that link.  Do you know what line the "Green Line" is in their charts, is it the 50dma, etc?

Also, in a number of places they expect "one more rally"  but I wasnt sure if that is before Nov. 23, or after, as even though it was on low volume due to the shortened day Friday, the market could be said to have rallied.  So I guess my question amounts to asking whether they wrote this after market close on Friday, or before?

[stocky]

The judge must be smoking something. If the idea of mortgage reselling is negated then you should be similarly worried about the margin account and stocks that you are holding weither for actual amount or in margin. The reason b/c these stocks are loaned in quite a complex fashion.

A simple argument against the absence of a single mortgage holder is that if there can be more than one title holders or lease holders why not multiple mortgage holders, even down to minute percentages. Infact any loan above 417,000 usually have atleast two different mortgages. If I can get away with paying mortgage or loosing house b/c their is no single mortgage, then its the most absurd thing I had ever heard since I learned 2 + 2 = 1 + 1 + 1 + 1. And I am sure that the only thing the banks may now need to do would be 'Mortgage Trail', should be a piece of cake. If their is legal loop hole then I think Govt can jump in to plug.

To me drum beating of this kind is a very clear sign that Wall St want to create enough fear to force Fed into making the bad decision of lowering interest rates. The market has already priced in these well known issues. The worst hit sectors, the banks, are actually getting accumulated by none less then Warren Buffet, in the form of Wachovia and UBS. Also if the transport sector is such a poor place to be then why again Warren Buffet is grabbing any Railroad share that he can lay hand on. Just few points to consider before selling your shares dirt cheap to the Big Money.

[tokyopua]

enjoy reading:
The Financial Tsunami: Sub-Prime Mortgage Debt is but the Tip of the Iceberg

By F. William Engdahl

Global Research, November 23, 2007

Part 1: Deutsche Bank's painful lesson                 

Even experienced banker friends tell me that they think the worst of the US banking troubles are over and that things are slowly getting back to normal. What is lacking in their rosy optimism is the realization of the scale of the ongoing deterioration in credit markets globally, centered in the American asset-backed securities market, and especially in the market for CDO's—Collateralized Debt Obligations and CMO's—Collateralized Mortgage Obligations. By now every serious reader has heard the term "It's a crisis in Sub-Prime US home mortgage debt." What almost no one I know understands is that the Sub-Prime problem is but the tip of a colossal iceberg that is in a slow meltdown. I offer one recent example to illustrate my point that the "Financial Tsunami" is only beginning.

Deutsche Bank got a hard shock a few days ago when a judge in the state of Ohio in the USA made a ruling that the bank had no legal right to foreclose on 14 homes whose owners had failed to keep current in their monthly mortgage payments. Now this might sound like small beer for Deutsche Bank, one of the world's largest banks with over €1.1 trillion (Billionen) in assets worldwide. As Hilmar Kopper used to say, "peanuts." It's not at all peanuts, however, for the Anglo-Saxon banking world and its European allies like Deutsche Bank, BNP Paribas, Barclays Bank, HSBC or others. Why?

A US Federal Judge, C.A. Boyko in Federal District Court in Cleveland Ohio ruled to dismiss a claim by Deutsche Bank National Trust Company. DB's US subsidiary was seeking to take possession of 14 homes from Cleveland residents living in them, in order to claim the assets.

Here comes the hair in the soup. The Judge asked DB to show documents proving legal title to the 14 homes. DB could not. All DB attorneys could show was a document showing only an "intent to convey the rights in the mortgages." They could not produce the actual mortgage, the heart of Western property rights since the Magna Charta of not longer.

Again why could Deutsche Bank not show the 14 mortgages on the 14 homes? Because they live in the exotic new world of "global securitization", where banks like DB or Citigroup buy tens of thousands of mortgages from small local lending banks, "bundle" them into Jumbo new securities which then are rated by Moody's or Standard & Poors or Fitch, and sell them as bonds to pension funds or other banks or private investors who naively believed they were buying bonds rated AAA, the highest, and never realized that their "bundle" of say 1,000 different home mortgages, contained maybe 20% or 200 mortgages rated "sub-prime," i.e. of dubious credit quality.

Indeed the profits being earned in the past seven years by the world's largest financial players from Goldman Sachs to Morgan Stanley to HSBC, Chase, and yes, Deutsche Bank, were so staggering, few bothered to open the risk models used by the professionals who bundled the mortgages. Certainly not the Big Three rating companies who had a criminal conflict of interest in giving top debt ratings. That changed abruptly last August and since then the major banks have issued one after another report of disastrous "sub-prime" losses.

A new unexpected factor

The Ohio ruling that dismissed DB's claim to foreclose and take back the 14 homes for non-payment, is far more than bad luck for the bank of Josef Ackermann. It is an earth-shaking precedent for all banks holding what they had thought were collateral in form of real estate property.

How this? Because of the complex structure of asset-backed securities and the widely dispersed ownership of mortgage securities (not actual mortgages but the securities based on same) no one is yet able to identify who precisely holds the physical mortgage document. Oops! A tiny legal detail our Wall Street Rocket Scientist derivatives experts ignored when they were bundling and issuing hundreds of billions of dollars worth of CMO's in the past six or seven years. As of January 2007 some $6.5 trillion of securitized mortgage debt was outstanding in the United States. That's a lot by any measure!

In the Ohio case Deutsche Bank is acting as "Trustee" for "securitization pools" or groups of disparate investors who may reside anywhere. But the Trustee never got the legal document known as the mortgage. Judge Boyko ordered DB to prove they were the owners of the mortgages or notes and they could not. DB could only argue that the banks had foreclosed on such cases for years without challenge. The Judge then declared that the banks "seem to adopt the attitude that since they have been doing this for so long, unchallenged, this practice equates with legal compliance. Finally put to the test," the Judge concluded, "their weak legal arguments compel the court to stop them at the gate." Deutsche Bank has refused comment.

What next?

As news of this legal precedent spreads across the USA like a California brushfire, hundreds of thousands of struggling homeowners who took the bait in times of historically low interest rates to buy a home with often, no money paid down, and the first 2 years with extremely low interest rate in what are known as "interest only" Adjustable Rate Mortgages (ARMs), now face exploding mortgage monthly payments at just the point the US economy is sinking into severe recession. (I regret the plethora of abbreviations used here but it is the fault of Wall Street bankers not this author).

The peak period of the US real estate bubble which began in about 2002 when Alan Greenspan began the most aggressive series of rate cuts in Federal Reserve history was 2005-2006. Greenspan's intent, as he admitted at the time, was to replace the Dot.com internet stock bubble with a real estate home investment and lending bubble. He argued that was the only way to keep the US economy from deep recession. In retrospect a recession in 2002 would have been far milder and less damaging than what we now face.

Of course, Greenspan has since safely retired, written his memoirs and handed the control (and blame) of the mess over to a young ex-Princeton professor, Ben Bernanke. As a Princeton graduate, I can say I would never trust monetary policy for the world's most powerful central bank in the hands of a Princeton economics professor. Keep them in their ivy-covered towers.

Now the last phase of every speculative bubble is the one where the animal juices get the most excited. This has been the case with every major speculative bubble since the Holland Tulip speculation of the 1630's to the South Sea Bubble of 1720 to the 1929 Wall Street crash. It was true as well with the US 2002-2007 Real Estate bubble. In the last two years of the boom in selling real estate loans, banks were convinced they could resell the mortgage loans to a Wall Street financial house who would bundle it with thousands of good better and worse quality mortgage loans and resell them as Collateralized Mortgage Obligation bonds. In the flush of greed, banks became increasingly reckless of the credit worthiness of the prospective home owners. In many cases they did not even bother to check if the person was employed. Who cares? It will be resold and securitized and the risk of mortgage default was historically low.

That was in 2005. The most Sub-prime mortgages written with Adjustable Rate Mortgage contracts were written between 2005-2006, the last and most furious phase of the US bubble. Now a whole new wave of mortgage defaults is about to explode onto the scene beginning January 2008. Between December 2007 and July 1, 2008 more than $690 Billion in mortgages will face an interest rate jump according to the contract terms of the ARMs written two years before. That means market interest rates for those mortgages will explode monthly payments just as recession drives incomes down. Hundreds of thousands of homeowners will be forced to do the last resort of any homeowner: stop monthly mortgage payments.

Here is where the Ohio court decision guarantees that the next phase of the US mortgage crisis will assume Tsunami dimension. If the Ohio Deutsche Bank precedent holds in the appeal to the Supreme Court, millions of homes will be in default but the banks prevented from seizing them as collateral assets to resell. Robert Shiller of Yale, the controversial and often correct author of the book, Irrational Exuberance, predicting the 2001-2 Dot.com stock crash, estimates US housing prices could fall as much as 50% in some areas given how home prices have diverged relative to rents.

The $690 billion worth of "interest only" ARMs due for interest rate hike between now and July 2008 are by and large not Sub-prime but a little higher quality, but only just. There are a total of $1.4 trillion in "interest only" ARMs according to the US research firm, First American Loan Performance. A recent study calculates that, as these ARMs face staggering higher interest costs in the next 9 months, more than $325 billion of the loans will default leaving 1 million property owners in technical mortgage default. But if banks are unable to reclaim the homes as assets to offset the non-performing mortgages, the US banking system and a chunk of the global banking system faces a financial gridlock that will make events to date truly "peanuts" by comparison.

We will discuss the global geo-political implications of this in our next report, The Financial Tsunami: Part 2.

F. William Engdahl is the author of A Century of War: Anglo-American Oil Politics and the New World Order. He is a Research Associate of the Centre for Research on Globalization (CRG).  His most recent book, which has just been released by Global Research is Seeds of Destruction, The Hidden Agenda of Genetic Manipulation.

The guy sounds like a bit of a sensationalist and conspiracy theorist, given he also published this last thing about the hidden agena of Genetic Manipulation lol.  The other thing that makes his argument a bit tenuous is that its centered around this one recent court case.  

What if Ohio is the only court in the US to take this stance, what if that judgement is appealed by DB and overturned, what if Deutsche Bank can get the mortgage titles somewhere (clearly they do exist), etc.  

Its good to be concerned and cautious (I am right now), and the CDOs do sound like they could be a big problem, but this Tsunami stuff sounds too much like Global Thermonuclear War type scenario and needs stronger arguments than one court case that was ruled on a few days ago and hasnt even been appealed yet or commented on by DB.  

[mbaugh]

One concern I have is the fact that the main credit problems we are facing are not limited to just the US market but all markets worldwide which makes this a global problem that has not happened before.  It seems everyone in the world has some form of money in the sub-prime mess and is causing a major credit strain world-wide.  I realize past expereince and history shows that the markets tend to recover, but all the recoveries vary in length of time.  We do not know how long this market will take to recover since we really don't know the extent of the damage since many experts believe the mortgage problems will only get worse since the adjustable rates will begin to take effect in the next several of months causing the foreclosure rates to sky rocket even higher.  This market could stall for a long-time.  Here's a link from Stockcharts that I have followed for awhile and it tends to be right on the money.  This link is updated everyday.  http://stockcharts.com/def/servlet/Favorites.CServlet?obj=ID1886603

All I'm saying is that we need to be a little more cautious and maybe hold a ultrashort index to offset the drawdowns on   the stocks we own.  Believe me, I want to be wrong and see the market rally but when I see stocks like TBSI and EXM fall like they did it makes me wonder why the big funds don't buy since these stocks are ultra cheap now.  Based on the link above, the bearish view of the S&P chart shows a very steep decline if things don't improve soon.

Right now the markets need some new developments such as the Black Friday sales #, and so far I'm hearing good reports such as Shop Tracs 8% increase over last years #'s.  We'll see on Monday!  Good Night!

Hi mbaugh, thanks for sharing that link.  Do you know what line the "Green Line" is in their charts, is it the 50dma, etc?

Also, in a number of places they expect "one more rally"  but I wasnt sure if that is before Nov. 23, or after, as even though it was on low volume due to the shortened day Friday, the market could be said to have rallied.  So I guess my question amounts to asking whether they wrote this after market close on Friday, or before?

I have no idea what the green line is.  The charts are updated everyday after the markets close.  I've been following it for several months and it has been very precise.  maybe David can figure out the magic green line.

[kslifka]

One concern I have is the fact that the main credit problems we are facing are not limited to just the US market but all markets worldwide which makes this a global problem that has not happened before.  It seems everyone in the world has some form of money in the sub-prime mess and is causing a major credit strain world-wide.  I realize past expereince and history shows that the markets tend to recover, but all the recoveries vary in length of time.  We do not know how long this market will take to recover since we really don't know the extent of the damage since many experts believe the mortgage problems will only get worse since the adjustable rates will begin to take effect in the next several of months causing the foreclosure rates to sky rocket even higher.  This market could stall for a long-time.  Here's a link from Stockcharts that I have followed for awhile and it tends to be right on the money.  This link is updated everyday.  http://stockcharts.com/def/servlet/Favorites.CServlet?obj=ID1886603

All I'm saying is that we need to be a little more cautious and maybe hold a ultrashort index to offset the drawdowns on   the stocks we own.  Believe me, I want to be wrong and see the market rally but when I see stocks like TBSI and EXM fall like they did it makes me wonder why the big funds don't buy since these stocks are ultra cheap now.  Based on the link above, the bearish view of the S&P chart shows a very steep decline if things don't improve soon.

Right now the markets need some new developments such as the Black Friday sales #, and so far I'm hearing good reports such as Shop Tracs 8% increase over last years #'s.  We'll see on Monday!  Good Night!

Hi mbaugh, thanks for sharing that link.  Do you know what line the "Green Line" is in their charts, is it the 50dma, etc?

Also, in a number of places they expect "one more rally"  but I wasnt sure if that is before Nov. 23, or after, as even though it was on low volume due to the shortened day Friday, the market could be said to have rallied.  So I guess my question amounts to asking whether they wrote this after market close on Friday, or before?

I have no idea what the green line is.  The charts are updated everyday after the markets close.  I've been following it for several months and it has been very precise.  maybe David can figure out the magic green line.

It looks like the green line in those charts (Blue line on mine) is the 50ema on the weekly chart.
But if you look back over the past 3 years...if you had sold below the "MAGIC LINE" you would have sold at the low.      I really don't see this logic.

[tokyopua]

One concern I have is the fact that the main credit problems we are facing are not limited to just the US market but all markets worldwide which makes this a global problem that has not happened before.  It seems everyone in the world has some form of money in the sub-prime mess and is causing a major credit strain world-wide.  I realize past expereince and history shows that the markets tend to recover, but all the recoveries vary in length of time.  We do not know how long this market will take to recover since we really don't know the extent of the damage since many experts believe the mortgage problems will only get worse since the adjustable rates will begin to take effect in the next several of months causing the foreclosure rates to sky rocket even higher.  This market could stall for a long-time.  Here's a link from Stockcharts that I have followed for awhile and it tends to be right on the money.  This link is updated everyday.  http://stockcharts.com/def/servlet/Favorites.CServlet?obj=ID1886603

All I'm saying is that we need to be a little more cautious and maybe hold a ultrashort index to offset the drawdowns on   the stocks we own.  Believe me, I want to be wrong and see the market rally but when I see stocks like TBSI and EXM fall like they did it makes me wonder why the big funds don't buy since these stocks are ultra cheap now.  Based on the link above, the bearish view of the S&P chart shows a very steep decline if things don't improve soon.

Right now the markets need some new developments such as the Black Friday sales #, and so far I'm hearing good reports such as Shop Tracs 8% increase over last years #'s.  We'll see on Monday!  Good Night!

Hi mbaugh, thanks for sharing that link.  Do you know what line the "Green Line" is in their charts, is it the 50dma, etc?

Also, in a number of places they expect "one more rally"  but I wasnt sure if that is before Nov. 23, or after, as even though it was on low volume due to the shortened day Friday, the market could be said to have rallied.  So I guess my question amounts to asking whether they wrote this after market close on Friday, or before?

I have no idea what the green line is.  The charts are updated everyday after the markets close.  I've been following it for several months and it has been very precise.  maybe David can figure out the magic green line.

It looks like the green line in those charts (Blue line on mine) is the 50ema on the weekly chart.
But if you look back over the past 3 years...if you had sold below the "MAGIC LINE" you would have sold at the low.      I really don't see this logic.

I seem to recall in some cases they were saying to sell way "above the green line" and buy at the green line, but also "sell on closes below the green line" but clearly as you say there were a number of times where it rallied right after that, and you would have sold at the absolute low?

[la-onda]

Retailers Post Robust Start to Holidays
Saturday November 24, 10:33 pm ET
By Anne D'Innocenzio, AP Business Writer
Nation's Retailers Post a Robust Start to the Holiday Season, Research Group Says

NEW YORK (AP) -- The nation's retailers had a robust start to the holiday shopping season, according to results announced Saturday by a national research group that tracks sales at retail outlets across the country. According to ShopperTrak RCT Corp., which tracks sales at more than 50,000 retail outlets, total sales rose 8.3 percent to about $10.3 billion on Friday, the day after Thanksgiving, compared with $9.5 billion on the same day a year ago. ShopperTrak had expected an increase of no more than 4 percent to 5 percent.

"This is a really strong number. ... You can't have a good season unless it starts well," said Bill Martin, co-founder of ShopperTrak, citing strength across all regions. "It's very encouraging. When you look at September and October, shoppers weren't in the stores."

In a separate statement released Saturday, J.C. Penney Co. reported "strong performance across all merchandise categories," including fine jewelry, outerwear, and young men's and children's assortments. But the department store chain cautioned, "while we are encouraged by our strong start, it is still early in the holiday season, and we are mindful of the headwinds consumers are facing."

J.C. Penney, Wal-Mart Stores Inc. and other major retailers are expected to report same-store results for November on Dec. 6. Same-store sales are those at stores opened at least a year and are considered a key indicator of a retailer's strength.

The upbeat reports were encouraging since merchants have been struggling with anemic sales in recent months, as shoppers, particularly in the middle and lower-income brackets, were becoming more frugal amid higher gas and food prices and an escalating credit crunch.

In an apparent sign of desperation, the nation's stores ushered in the official start of the holiday shopping season on Friday with expanded hours, including midnight openings, and a blitz of early morning specials that were more generous than a year ago. J.C. Penney and Kohl's Corp. opened at 4 a.m., an hour earlier than a year ago.

The strategy appears to have worked, as shoppers jammed stores in record numbers for early morning deals on Friday. Martin noted that judging by the strong figures on Friday, stores were able to sustain strong sales throughout the day. He said he's counting on strong traffic throughout the weekend as many stores, including Macy's Inc., are continuing with special deals. While Black Friday -- so named because it was traditionally when the surge of shopping made stores profitable -- starts holiday shopping, it is not considered a bellwether for the season. However, merchants see Black Friday as setting an important tone to the overall season: What consumers see that day influences where they will shop for the rest of the year.
Last year, retailers had a good start during the Thanksgiving weekend, but many stores struggled in December, and a shopping surge just before and after Christmas wasn't enough to make up for lost sales.

This year, the Washington-based National Retail Federation predicted that total holiday sales would be up 4 percent for the combined November and December period, the slowest growth since a 1.3 percent rise in 2002. Holiday sales rose 4.6 percent in 2006 and growth has averaged 4.8 percent over the last decade.