Market Discussion

[tokyopua]

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.

This is encouraging news, thanks for posting it.  As they said, its too early to call the entire retail season, but it should help stocks tomorrow at least not to come off their Friday gains so much, and maybe even go up a little!  Im still hoping for an end of year rally, this is a step in the right direction!
 

[terainvestment]

The logic could be: Buying when it touches the green line"? :-)

[tokyopua]

Another tough day in the market, SPY just touched its ascending trend line as drawn in Rams recent post on the SPY.  Kinda landed with a thud on it actually, not a pretty candle. 

On the "good side" volume was down a lot, especially considering Friday had already been a low volume day so we might have expected volume to make up for that today. 

Fed is going to inject more funds to help banks and calm markets, so this could be the low we have been waiting for.  Low volume today sets us up for a good oversold rally on strong volume.  Famous last words lol, I thought today should be about even and instead it was another tank...

[tokyopua]

The logic could be: Buying when it touches the green line"? :-)

It does seem they are buying, they bought QLD today apparently, they must think this is the bottom...

[capricho]

It's hard to think positive long term when being slaughtered like this on a seemingly daily basis and with no end in sight over the damage the credit crisis is having. I am really loath to come out negative for the year as I am sure anyone is. Every time I think the market will rebound because it's oversold it doesn't and instead it goes deeper into the red. This REALLY sucks.

Regaining the losses on picks like TBSI will take lots of patience and if those losses continue at the current rate then it's game over. Placing stops may not be a bad idea and neither is getting an inverse fund as a hedge. I was really pleased last night when reports of Black Friday came in strong and I had anticipated a nice pop today as a result. But instead we get another 2 point loss. This market is just incredibly bearish. Where's Santa?

[kslifka]

I don't like the the selling pressure into the close the past few weeks.  This has got to change to reverse the downtrend.

But...I believe there will be one hell of a short sqeeze coming this week. 
Maybe even tomorrow.

[pinoleropuro]

I listened to a local CNBC radio guy I never heard before. He was said something along the lines that if the S&P500 doesn't go below 1372 we would have a great market come back, but if 1372 was broken he was recomending adding to the market short positions. 
now the S&P500 did not close below1372 so I am hoping this is a good sign.
any thoughts?
Thanks.

[Houlahan]

kslifka, I had the same thought! There will be a wave of short squeezes when the market.. finally... for real.....rallies. Not sure about this week, but I feel stronger about next week.
I am shorting one stock...C.

[capricho]

Another doom and gloom article I came across from Daily Kos:

Housing-credit crisis exposing the rotten core of American Markets and Economy
by reform
Sun Nov 25, 2007 at 11:44:25 PM PST

The recent downturn in housing and the accompanying mortgage security crisis are merely the exposed tip of the deep irresponsibility at the center of our financial and political markets. The housing downturn is a superficial crisis that has exposed the fundamental financial imbalances produced by the incompentence and greed at the center of our economy. These imbalances are threatening to trigger a global crisis.

Although the fed's recent reductions in the Overnight and Discount Rates are large, rate reductions alone can not solve the underlying problems below the housing and mortgate security downturns. The rate reductions are a bone that the fed threw to the stock market. The recent fed rate reductions have accelerated, not diminished the actual crisis.

In normal times, these fed moves might work. Wall Street will not know what the mortgage securities are worth until the real estate market stabilizes, and that will not happen for at least 18 months. Sales in the real estate market depend on mortgage securities to fund their loans. The interest rates on real estate depend on the perceived risks and relative values of the mortgage securities. The fed reductions would normally reduce risk to all of the players in this chain of market relationships. If times were normal.

Rate reductions would be ok, if the US were alone in world and lived in a bubble. But at least 20% of American debt has foreign funding sources. China, England, and Saudi Arabia are holding trillions of dollars in their national reserves that are plunging in value. The fed's rate reductions, while propping up domestic credit, are accelerating fall of American securities, and American credit-worthiness across global markets.

The real problem, below our domestic and foreign credit crisis, is that the fundamental engine of American profitability is based on rates of growth that have proven to be unsustainable in the present, let alone into the future. These unsustainable growth rates have been fueled and funded by low-wage foreign labor, low interest foreign loans, and economic trickery with our retirement money. It appears that our citizens are rejecting the unlimited movement of foreign labor into the US, and our foreign lenders are looking to reduce their exposure in dollars.

During the last 20 years housing prices have been rising rapidly on a spiraling updraft of housing prices. To the forces of demographic growth and cheap money, another key source of funds behind this economic updraft is the massive amounts of liquidity injected into the equities market when Congress deferred taxes on stock investments made for retirement purposes. This alone pumped 40 billion a month into equities during the height of the dot-com boom.

Rising housing prices have been supported by this ever-expanding supply of market liquidity and credit to maintain upward pressure on prices. Between 1989 and now, this combination of economic tricks was sufficient to steadily push housing prices up. The 401k mutual fund money has also distorted the value of stocks, pushing equity prices higher than honest valuation merits, and contributing significantly to the dot-com bubble.

This monthly flow of tens of billions of 401k money into equities has also contribuited significantly to the speculative character of today's market. Despite this massive liquidity, the upper limit of housing price growth has been reached. At this point it appears that there is not enough liquidity nor credit in the US, or any will in global market, to maintain upward pressure on housing prices. The housing market reached the size where there was not enough buyers, nor credit, to continue further expansion.

This rise in housing prices has been going on for decades, but was supercharged after the dot-com bust. It was after the bust that the housing bubble was initiated to carry the economy across the down time of the dot-com bust.

After starting the housing bubble, Greenspan had five years to bring rates up sufficiently to quash the radical speculation in housing, defend the international value of the dollar, and build a sufficient rate cushion to allow future rate cuts in a downturn like the one we are now facing. Greenspan failed to respond.

The reason we are in this crisis now is that Greenspan did not raise interest rates enough as the economy rose out of the dot-com bust, but instead kept rates low, and ran the housing bubble through the roof.

This allowed speculation to seriously distort housing and housing securities while simultanously weakening the dollar. By not raising rates during the housing run-up, the fed now finds itself poised between a weak dollar and a weak market while maintaining historically low interest rates. This position neutralizes the ability of rate cuts to productively stimulate markets without seriously damaging the value of the dollar.

This means that housing prices for the last 20 years have had nothing to do with actual demand or value. Prices were established and driven upward by debt-based speculation, rather than responsible investment. The housing run-up was based on naked speculation fueled by cheap money.

We are experiencing an rather rapid reversion of prices in the housing market from speculation back to prices based on the level of sales that can be supported by the actual wealth of average individuals in society, and what they can responsibly purchase.

Unfortunately for our housing market, the middle and lower classes have been stripped of their share of the national wealth during the last 30 years, and are incapable of restarting the housing market, let alone maintain consumer consumption on their diminished share of the nation's wealth without a fat line of cheap credit.

The reversion of prices to normal market conditions has not only exposed millions of homeowners to foreclosure and made the value of all mortgage based securities uncertain, but it has triggered a global "moment," a global realization that the American markets and financial system are not properly valuing assets, or responsibly structuring credit and growth.

This has made it vitally important to every player in the global economy, including nations, global investors, and global business interests, to immediately ascertain the actual value of all American assets, especially the dollar. This realization has exposed all american assets, especially the dollar, to a radical reevaluation across global markets.

Although the Fed's recent rate reductions have marginally shored up domestic credit markets, they have destabilized the international institutions holding mortgage securities by significantly undermining the value of their dollar holdings. This has damaged global confidence in the dollar, and has intensified the necessity for international financial institutions to reassess not just the value of the dollar, but the centrality of its role in international transactions.

This does not matter as much to domestic financial institutions, but it puts international holders of dollar-denominated securities in a position of getting screwed by either outcome: If the securities fail, they are screwed, and if the securities are preserved by devaluing the dollar, they are also screwed.

The fed's rate reductions were the final trigger that caused global markets to finally seriously reassess the value of the dollar, after over a decade of weakness. This reevaluation has in turn exposed the fact that the massive US corporate profits taken during the last 10 years have been made in an economy that is drowning itself in debt.

The recent massive downturn in the dollar signals the world has had a change in their perception of not just the dollar, but of the American economy itself. This has caused such a precipitous drop in the dollar that major players can no longer just reevaluate the value of the dollar, but are now reassessing the dollar's central position in global markets.

Why we are here

The American expansion during the last 30 years can be characterized as a frenzy of consumer consumption married to a frenzy of corporate profits. The consumer and corporate elements of the expansion are connected at the hip, both in economic, as well as psychological terms. Each side requires the greed, ignorance, and justification of the other side to maintain its own position.

Consumption and profit are, in fact, different manifestations of the same selfish irresponsibility. The consumer mentality expresses lower class selfishness by exposing that "our" working class has accepted debt shopping and "consumption," as the nature and goal of life. Simultaneously, our massive expansion has revealed that our elite and business classes consider the nature and goal of life to be the pursuit of unbridled growth, profit, and power.

Both sides of our great expansion, the worker and the businessman, are dependent on gross consumption, debt, and irresponsible "profits" for their mutual existence. Both sides of this sick equation have been based on nothing more than irresponsible growth, fueled by massive demographic expansion, funded by irresponsible speculation.

This irresponsible expansion has created a vast American private debt that exceeds our ability to repay, either today, or out of projected future profits. The bursting of the housing bubble has made this very clear to all disinterested observers.

In other words, our expansion, and the profits generated by the corporations for the last 20 years, have been funded by expanding consumer debt, which until recently was collateralized by the speculative growth in the value of the housing and equities markets, not by actual economic growth and expansion of the wealth of consumers.

Although our population growth is very real, the real growth in the overall wealth of our country has been a mirage funded by sub-prime loans and cheap money.

The last 30 years of massive demographic and economic growth has been used as cover by our corporate aristocracy to put aside our democratic practices, and loot our economy, drain our infrastructure, and move the bulk of the wealth of our country from the bottom and middle to the top. That is the real root of our housing, credit, and currency crisis.

Our country has plunged itself into an unsustainable downward spiral of massive debt to fuel this 30 year upward spiral of profit and physical expansion that pushed corporate profits and consumer consumption to historical levels. Now the world is going to balance the books, because we have refused to.

The result is that the housing bubble is triggering a cascading collapse that is traveling through our set of nested economic imbalances. The bursting of the housing bubble has sparked a mortgage crisis which has initiated a credit crisis which is triggering a reevaluation of all dollar-denominated assets in the world.

At the end of this cycle, we are going to find that our inability to face our housing, mortgage, and credit bubbles has significantly diminished the willingness of foreigners to finance American consumer credit. It started in housing, moved into credit, and is now collapsing the value of the dollar.

This in turn has exposed the world to the sad fact that American corporate profits are being sucked out of an economy that is, and has been, losing money.

So, independent of the vastly expanding profits of the corporations, the ultimate basis of American profit has been exposed as a pyramid scheme based on the availability of ever-expanding debt to payback previous debt. This is now common knowledge among global investors. The inevitable result, which we are now experiencing, is that the value of the dollar is shrinking faster than corporations can increase their profits to offset the actual loss of value.

The Fed's infusions of cash and lowering of the discount rate will do nothing to re inflate the speculative bubble in housing, nor will it give the market clarity as to the actual value of the mortgage securities. But it will accelerate the dollar's loss of value, which will have the overall effect of tightening, rather than loosening, credit.

The only thing that will save millions of families from foreclosure and mortgage securities from collapsing, is for housing prices to continue rising in value. That's not going to happen.

The real estate market can no longer depend on the middle-class to pull up the nation by its own bootstraps, as the middle-class has been robbed of their share of the national wealth.

Credit for the real estate market is no longer based on national or local conditions. American credit is now subject to, and dependent upon, the changing global estimation of the value of the dollar, and the risks associated with dealing in dollars, to obtain funds for consumer credit. The world is not only demanding America pay more for the credit necessary to maintain our consumer spending, but they are making much less money available to fund American debt.

These dollars, which would normally loaned back to the US by our dependent trading partners, are now being invested in better, more secure opportunities.

It appears that the big holders of dollars are dumping them on the market, not by selling dollars, but by buying huge amounts of global commodities with their excess dollars. I believe that the recent large price movements in global commodities indicate that the big global players are offloading massive amounts of dollars into commodities such as oil, copper, wheat, gold, and a range of other commodities.

It looks to me like the Brits, Arabs, and Chinese are selling dollars without going through the foreign exchange markets by buying commodities that they will later sell for anything but dollars.

These radical increases in all global commodities prices are working through the markets as I write, and are a direct indication in the global loss of confidence in the dollar.

Long before housing could stabilize, in a couple of years from now, the shocks from the housing and credit markets on the global economy pose a significant likelihood that the value of the dollar will drop sufficiently to limiting the credit available to restart housing, thereby stifiling any housing recovery, and putting significant downward pressure on our economy for years to come.

The net result of all this will be a significant decline in American economic activity accompanied by a significant upturn in prices. This portends a long downturn, not just for the American housing market, but of American consumption itself.

It appears to me that we are heading into a significant downturn that will be followed by an extended period of stagflation.

We are entering a very dangerous situation where it is highly possible that the world will retract a significant amount of our credit until our economy, rather than our corporations, actually becomes profitable.

The fed's hands are effectively tied. If the fed raises rates, the dollar will proportionally stabilize, but the housing speculators will scream in pain. If the fed drops rates, the dollar will plunge, and our domestic party will continue for a bit longer, as the world burns dollars around us.

The fed is damned if they do, and damned if they don't, raise rates.

At this time two things are clear: Housing will continue to fall for 18 months to 2 years, and the credit crisis will deepen in response to the fall in value of both housing and the dollar.

At this point no amount of Fed intervention will prevent the various markets from falling precipitously. The failures of the housing, auto, credit markets and the collaspe of the dollar will eventually pull the dow down to between 6800 and 7200. I see this as the market level that our actual economic activity will support. I see us hitting this low by June of 2008.

American economic weakness presents a significant risk of bringing down unstable foreign economies, such as China, and likewise, economic disruptions in China could cause even greater disruptions in our housing, credit, and currency markets that would make our present imbalances seem insignificant.

Our indebtedness and economic trickery is exposing the whole world to a significant risk of a sustained global downturn in economic activity, if not an outright global depression.

But nobody really knows just how these massive American debt imbalances will work out. The disturbing fact is that the US is not doing a damn thing to address or change the fundamental causes of our dangerous position: Irresponsible growth based on speculation.

That's where we are right now, between a rock and a hard place. Uncertainty and instability will characterize the markets until the US stops buying on credit and moves the basis of consumption off debt.

This is why the Fed's pumping the financial markets with cash, and dropping the interest rates are so disturbing. Rather than paying the bills, and only growing responsibly from now on, the fed is trying to grow our way out of this jam with cheap money, when it was our irresponsible growth based on cheap money that brought us to this crisis.

Unfortunately for our corporate devils and their consumer minions, we have run out of the money, energy and water with which to grow out of the hole our previous growth has put us in. We are tapped out, and this era of irresponsible speculative growth is officially over.

It's time to pay the bills

The Fed cannot stop the global markets from reevaluating American housing, American credit-worthiness, the dollar, and ultimately the global role of the dollar. Consequently, the value of all assets based on the dollar are now uncertain.

This reevaluation is now reverberating around the all of world's interdependent markets. It will only slowdown and stabilize when the repayment rate on our debt exceeds the rate at which we are borrowing.

And that's not going to happen voluntarily.

Hang on tight, this is going to be a crazy ride.

[AussieTrader]

A few days ago I opened hedge positions on the SPX and a few weakened companies within the S&P500. I say hedged because I was still holding long positions (such as some 3SoF) and was not looking to sell those at this stage. Hedging just gives a bit of insurance if you see short term downwards action within an otherwise longer term upwards market or vice versa.

That said I haven't yet closed my hedge positions, I don't think we are 'out of correction' just yet. Indeed who knows it may be just the start of bearish period.

Regardless of market direction, there are many trading vehicles / strategies to enable you to profit / hedge or remain even available to you. 3SoF mostly plays the long side, that means you are guaranteed to get into periods of 'drawdown' on your equity when the market is not in your favour, that is a fact you can take to the bank.

Cheers

I am still 'hedged'

My SPY 'hedge' is now more weighted to the short side than the long. Speculatively I shorted BIDU strength today. Internets are pretty much the only strong participants out there, they can't swim against the trend for too long. I see more lows before highs (over what timeframe, well that is the unknown). Here are a couple of SPY charts for perusal: Short term with downtrend, longer term at key 'support'.

[kslifka]

I listened to a local CNBC radio guy I never heard before. He was said something along the lines that if the S&P500 doesn't go below 1372 we would have a great market come back, but if 1372 was broken he was recomending adding to the market short positions. 
now the S&P500 did not close below1372 so I am hoping this is a good sign.
any thoughts?
Thanks.

I guess that CNBC guy was talking about the lowest close set back last February which was actually 1374.

Monday's close of 1407 for the S&P500 matched the close set back on August 15th and also hit a steep trendline going back to July of 2006.

But I have to say...looking back at chart history and trend-lines for the broad markets...and subsequent market direction doesn't always hold true .

[kslifka]

Well wouldn't you know...look who's coming to rescue Citibank.

http://biz.yahoo.com/ap/071126/citigroup_abu_dhabi.html

Citi Sells Stake to Abu Dhabi Fund
Monday November 26, 11:51 pm ET
By Joseph Altman, AP Business Writer
Abu Dhabi's Sovereign Fund Agrees to Invest $7.5 Billion for a 4.9 Percent Stake in Citigroup

NEW YORK (AP) -- Citigroup said late Monday that the Abu Dhabi Investment Authority will invest $7.5 billion in the nation's largest bank, offering needed capital to offset big losses from mortgages and other investments.

ADVERTISEMENT
The cash from the sovereign investment fund of the Gulf Arab state, which has been a beneficiary of this year's surge in oil prices, will be convertible into no more than 4.9 percent of Citigroup Inc.'s equity. Citigroup characterized the investment as passive and said the fund will not be able to name any board members to the bank.

The Investment Authority would become one of Citi's largest shareholders.

The Abu Dhabi investment, which was expected to close within the next several days, will be considered Tier 1 capital for regulatory purposes, helping Citi reach its goal of returning to its target capital ratios in the first half of 2008, the bank said.

Citigroup's shares have lost about 45 percent of their value since the beginning of this year, wiping away $124 billion in market capitalization, as the drumbeat of bad news about its investment losses has mounted.

"We see in Citi a highly respected company with a premier brand and with tremendous opportunities for growth," said the Investment Authority's managing director, Sheikh Ahmed Bin Zayed Al Nahayan. "This investment reflects our confidence in Citi's potential to build shareholder value."

Charles Prince stepped down as Citigroup's chairman and chief executive on Nov. 4, the same day Citi announced that it will likely write down the value of its portfolio by $8 billion to $11 billion in the fourth quarter.

In the third quarter, the bank's exposure to assets tied to subprime mortgages led to a loss of about $6.5 billion.

The Investment Authority will receive equity units that pay an 11 percent annual yield until they are converted into Citigroup common shares at a price of up to $37.24 a share between March 15, 2010, and Sept. 15, 2011.

The investment is the latest by sovereign funds in the Middle East that have been building up their overseas investments recently, many of them on the back of oil prices that have risen more than 60 percent this year and have brought the region record cash flows.

Dubai International Capital, which is owned by the ruler of that booming Persian Gulf city-state, announced earlier Monday that it has acquired a stake of undisclosed size in the Japanese electronics and media company Sony Corp. Its other investments this year included acquiring a 3.12 percent of European Aeronautic Defence & Space Co., which builds Airbus commercial planes and military aircraft. The firm also holds stakes in Daimler AG and British bank HSBC Holdings PLC.

Many companies have welcomed such investments because the funds tend to be stable investors, but some U.S. officials have expressed concern that their acquisitions could target sensitive industries with links to national security.

Abu Dhabi's move recalls the early 1990s investment in Citi made by Saudi Prince Alwaleed bin Talal. After Citi made some losing bets on U.S. real estate and Latin America, Alwaleed bought a stake in the bank for less than $600 million that has since ballooned into several billions of dollars.

The Abu Dhabi investment, which was expected to close within the next several days, comes at a time when Citi is trying to reassure investors amid heavy credit-related losses and its search for a new CEO.

"This investment, from one of the world's leading and most sophisticated equity investors, provides further capital to allow Citi to pursue attractive opportunities to grow its business," Acting Chief Executive Win Bischoff said in a statement.

Citi shares fell $1, or 3.2 percent, to close at $30.70 Monday after hitting a five-year low earlier in the day.

"This investment also enables us to access capital in an efficient manner, and is consistent with our strategy of maintaining a balance sheet that benefits from highly diverse sources of funding in terms of both geography and type of security," Bischoff said.

[tokyopua]

Another doom and gloom article I came across from Daily Kos:

Housing-credit crisis exposing the rotten core of American Markets and Economy
by reform
Sun Nov 25, 2007 at 11:44:25 PM PST

The recent downturn in housing and the accompanying mortgage security crisis are merely the exposed tip of the deep irresponsibility at the center of our financial and political markets. The housing downturn is a superficial crisis that has exposed the fundamental financial imbalances produced by the incompentence and greed at the center of our economy. These imbalances are threatening to trigger a global crisis.

Although the fed's recent reductions in the Overnight and Discount Rates are large, rate reductions alone can not solve the underlying problems below the housing and mortgate security downturns. The rate reductions are a bone that the fed threw to the stock market. The recent fed rate reductions have accelerated, not diminished the actual crisis.

In normal times, these fed moves might work. Wall Street will not know what the mortgage securities are worth until the real estate market stabilizes, and that will not happen for at least 18 months. Sales in the real estate market depend on mortgage securities to fund their loans. The interest rates on real estate depend on the perceived risks and relative values of the mortgage securities. The fed reductions would normally reduce risk to all of the players in this chain of market relationships. If times were normal.

Rate reductions would be ok, if the US were alone in world and lived in a bubble. But at least 20% of American debt has foreign funding sources. China, England, and Saudi Arabia are holding trillions of dollars in their national reserves that are plunging in value. The fed's rate reductions, while propping up domestic credit, are accelerating fall of American securities, and American credit-worthiness across global markets.

The real problem, below our domestic and foreign credit crisis, is that the fundamental engine of American profitability is based on rates of growth that have proven to be unsustainable in the present, let alone into the future. These unsustainable growth rates have been fueled and funded by low-wage foreign labor, low interest foreign loans, and economic trickery with our retirement money. It appears that our citizens are rejecting the unlimited movement of foreign labor into the US, and our foreign lenders are looking to reduce their exposure in dollars.

During the last 20 years housing prices have been rising rapidly on a spiraling updraft of housing prices. To the forces of demographic growth and cheap money, another key source of funds behind this economic updraft is the massive amounts of liquidity injected into the equities market when Congress deferred taxes on stock investments made for retirement purposes. This alone pumped 40 billion a month into equities during the height of the dot-com boom.

Rising housing prices have been supported by this ever-expanding supply of market liquidity and credit to maintain upward pressure on prices. Between 1989 and now, this combination of economic tricks was sufficient to steadily push housing prices up. The 401k mutual fund money has also distorted the value of stocks, pushing equity prices higher than honest valuation merits, and contributing significantly to the dot-com bubble.

This monthly flow of tens of billions of 401k money into equities has also contribuited significantly to the speculative character of today's market. Despite this massive liquidity, the upper limit of housing price growth has been reached. At this point it appears that there is not enough liquidity nor credit in the US, or any will in global market, to maintain upward pressure on housing prices. The housing market reached the size where there was not enough buyers, nor credit, to continue further expansion.

This rise in housing prices has been going on for decades, but was supercharged after the dot-com bust. It was after the bust that the housing bubble was initiated to carry the economy across the down time of the dot-com bust.

After starting the housing bubble, Greenspan had five years to bring rates up sufficiently to quash the radical speculation in housing, defend the international value of the dollar, and build a sufficient rate cushion to allow future rate cuts in a downturn like the one we are now facing. Greenspan failed to respond.

The reason we are in this crisis now is that Greenspan did not raise interest rates enough as the economy rose out of the dot-com bust, but instead kept rates low, and ran the housing bubble through the roof.

This allowed speculation to seriously distort housing and housing securities while simultanously weakening the dollar. By not raising rates during the housing run-up, the fed now finds itself poised between a weak dollar and a weak market while maintaining historically low interest rates. This position neutralizes the ability of rate cuts to productively stimulate markets without seriously damaging the value of the dollar.

This means that housing prices for the last 20 years have had nothing to do with actual demand or value. Prices were established and driven upward by debt-based speculation, rather than responsible investment. The housing run-up was based on naked speculation fueled by cheap money.

We are experiencing an rather rapid reversion of prices in the housing market from speculation back to prices based on the level of sales that can be supported by the actual wealth of average individuals in society, and what they can responsibly purchase.

Unfortunately for our housing market, the middle and lower classes have been stripped of their share of the national wealth during the last 30 years, and are incapable of restarting the housing market, let alone maintain consumer consumption on their diminished share of the nation's wealth without a fat line of cheap credit.

The reversion of prices to normal market conditions has not only exposed millions of homeowners to foreclosure and made the value of all mortgage based securities uncertain, but it has triggered a global "moment," a global realization that the American markets and financial system are not properly valuing assets, or responsibly structuring credit and growth.

This has made it vitally important to every player in the global economy, including nations, global investors, and global business interests, to immediately ascertain the actual value of all American assets, especially the dollar. This realization has exposed all american assets, especially the dollar, to a radical reevaluation across global markets.

Although the Fed's recent rate reductions have marginally shored up domestic credit markets, they have destabilized the international institutions holding mortgage securities by significantly undermining the value of their dollar holdings. This has damaged global confidence in the dollar, and has intensified the necessity for international financial institutions to reassess not just the value of the dollar, but the centrality of its role in international transactions.

This does not matter as much to domestic financial institutions, but it puts international holders of dollar-denominated securities in a position of getting screwed by either outcome: If the securities fail, they are screwed, and if the securities are preserved by devaluing the dollar, they are also screwed.

The fed's rate reductions were the final trigger that caused global markets to finally seriously reassess the value of the dollar, after over a decade of weakness. This reevaluation has in turn exposed the fact that the massive US corporate profits taken during the last 10 years have been made in an economy that is drowning itself in debt.

The recent massive downturn in the dollar signals the world has had a change in their perception of not just the dollar, but of the American economy itself. This has caused such a precipitous drop in the dollar that major players can no longer just reevaluate the value of the dollar, but are now reassessing the dollar's central position in global markets.

Why we are here

The American expansion during the last 30 years can be characterized as a frenzy of consumer consumption married to a frenzy of corporate profits. The consumer and corporate elements of the expansion are connected at the hip, both in economic, as well as psychological terms. Each side requires the greed, ignorance, and justification of the other side to maintain its own position.

Consumption and profit are, in fact, different manifestations of the same selfish irresponsibility. The consumer mentality expresses lower class selfishness by exposing that "our" working class has accepted debt shopping and "consumption," as the nature and goal of life. Simultaneously, our massive expansion has revealed that our elite and business classes consider the nature and goal of life to be the pursuit of unbridled growth, profit, and power.

Both sides of our great expansion, the worker and the businessman, are dependent on gross consumption, debt, and irresponsible "profits" for their mutual existence. Both sides of this sick equation have been based on nothing more than irresponsible growth, fueled by massive demographic expansion, funded by irresponsible speculation.

This irresponsible expansion has created a vast American private debt that exceeds our ability to repay, either today, or out of projected future profits. The bursting of the housing bubble has made this very clear to all disinterested observers.

In other words, our expansion, and the profits generated by the corporations for the last 20 years, have been funded by expanding consumer debt, which until recently was collateralized by the speculative growth in the value of the housing and equities markets, not by actual economic growth and expansion of the wealth of consumers.

Although our population growth is very real, the real growth in the overall wealth of our country has been a mirage funded by sub-prime loans and cheap money.

The last 30 years of massive demographic and economic growth has been used as cover by our corporate aristocracy to put aside our democratic practices, and loot our economy, drain our infrastructure, and move the bulk of the wealth of our country from the bottom and middle to the top. That is the real root of our housing, credit, and currency crisis.

Our country has plunged itself into an unsustainable downward spiral of massive debt to fuel this 30 year upward spiral of profit and physical expansion that pushed corporate profits and consumer consumption to historical levels. Now the world is going to balance the books, because we have refused to.

The result is that the housing bubble is triggering a cascading collapse that is traveling through our set of nested economic imbalances. The bursting of the housing bubble has sparked a mortgage crisis which has initiated a credit crisis which is triggering a reevaluation of all dollar-denominated assets in the world.

At the end of this cycle, we are going to find that our inability to face our housing, mortgage, and credit bubbles has significantly diminished the willingness of foreigners to finance American consumer credit. It started in housing, moved into credit, and is now collapsing the value of the dollar.

This in turn has exposed the world to the sad fact that American corporate profits are being sucked out of an economy that is, and has been, losing money.

So, independent of the vastly expanding profits of the corporations, the ultimate basis of American profit has been exposed as a pyramid scheme based on the availability of ever-expanding debt to payback previous debt. This is now common knowledge among global investors. The inevitable result, which we are now experiencing, is that the value of the dollar is shrinking faster than corporations can increase their profits to offset the actual loss of value.

The Fed's infusions of cash and lowering of the discount rate will do nothing to re inflate the speculative bubble in housing, nor will it give the market clarity as to the actual value of the mortgage securities. But it will accelerate the dollar's loss of value, which will have the overall effect of tightening, rather than loosening, credit.

The only thing that will save millions of families from foreclosure and mortgage securities from collapsing, is for housing prices to continue rising in value. That's not going to happen.

The real estate market can no longer depend on the middle-class to pull up the nation by its own bootstraps, as the middle-class has been robbed of their share of the national wealth.

Credit for the real estate market is no longer based on national or local conditions. American credit is now subject to, and dependent upon, the changing global estimation of the value of the dollar, and the risks associated with dealing in dollars, to obtain funds for consumer credit. The world is not only demanding America pay more for the credit necessary to maintain our consumer spending, but they are making much less money available to fund American debt.

These dollars, which would normally loaned back to the US by our dependent trading partners, are now being invested in better, more secure opportunities.

It appears that the big holders of dollars are dumping them on the market, not by selling dollars, but by buying huge amounts of global commodities with their excess dollars. I believe that the recent large price movements in global commodities indicate that the big global players are offloading massive amounts of dollars into commodities such as oil, copper, wheat, gold, and a range of other commodities.

It looks to me like the Brits, Arabs, and Chinese are selling dollars without going through the foreign exchange markets by buying commodities that they will later sell for anything but dollars.

These radical increases in all global commodities prices are working through the markets as I write, and are a direct indication in the global loss of confidence in the dollar.

Long before housing could stabilize, in a couple of years from now, the shocks from the housing and credit markets on the global economy pose a significant likelihood that the value of the dollar will drop sufficiently to limiting the credit available to restart housing, thereby stifiling any housing recovery, and putting significant downward pressure on our economy for years to come.

The net result of all this will be a significant decline in American economic activity accompanied by a significant upturn in prices. This portends a long downturn, not just for the American housing market, but of American consumption itself.

It appears to me that we are heading into a significant downturn that will be followed by an extended period of stagflation.

We are entering a very dangerous situation where it is highly possible that the world will retract a significant amount of our credit until our economy, rather than our corporations, actually becomes profitable.

The fed's hands are effectively tied. If the fed raises rates, the dollar will proportionally stabilize, but the housing speculators will scream in pain. If the fed drops rates, the dollar will plunge, and our domestic party will continue for a bit longer, as the world burns dollars around us.

The fed is damned if they do, and damned if they don't, raise rates.

At this time two things are clear: Housing will continue to fall for 18 months to 2 years, and the credit crisis will deepen in response to the fall in value of both housing and the dollar.

At this point no amount of Fed intervention will prevent the various markets from falling precipitously. The failures of the housing, auto, credit markets and the collaspe of the dollar will eventually pull the dow down to between 6800 and 7200. I see this as the market level that our actual economic activity will support. I see us hitting this low by June of 2008.

American economic weakness presents a significant risk of bringing down unstable foreign economies, such as China, and likewise, economic disruptions in China could cause even greater disruptions in our housing, credit, and currency markets that would make our present imbalances seem insignificant.

Our indebtedness and economic trickery is exposing the whole world to a significant risk of a sustained global downturn in economic activity, if not an outright global depression.

But nobody really knows just how these massive American debt imbalances will work out. The disturbing fact is that the US is not doing a damn thing to address or change the fundamental causes of our dangerous position: Irresponsible growth based on speculation.

That's where we are right now, between a rock and a hard place. Uncertainty and instability will characterize the markets until the US stops buying on credit and moves the basis of consumption off debt.

This is why the Fed's pumping the financial markets with cash, and dropping the interest rates are so disturbing. Rather than paying the bills, and only growing responsibly from now on, the fed is trying to grow our way out of this jam with cheap money, when it was our irresponsible growth based on cheap money that brought us to this crisis.

Unfortunately for our corporate devils and their consumer minions, we have run out of the money, energy and water with which to grow out of the hole our previous growth has put us in. We are tapped out, and this era of irresponsible speculative growth is officially over.

It's time to pay the bills

The Fed cannot stop the global markets from reevaluating American housing, American credit-worthiness, the dollar, and ultimately the global role of the dollar. Consequently, the value of all assets based on the dollar are now uncertain.

This reevaluation is now reverberating around the all of world's interdependent markets. It will only slowdown and stabilize when the repayment rate on our debt exceeds the rate at which we are borrowing.

And that's not going to happen voluntarily.

Hang on tight, this is going to be a crazy ride.

I had difficulty following the logic he used to get from one paragraph to another in many cases, the arguments didnt fully hold water.  For example, if low rates caused the housing bubble, how come Japan doesnt have an insane housing bubble, I know a guy there who has a 1.5% mortgage!  Sure they were coming off a housing bubble in the late 80s, but they have had 2 decades of super low interest rates, and this article is saying the same amount of time with "low" rates caused the housing bubble.  So Japan should by the same argument have a housing bubble much larger than ours, but there is none, houses are moderately priced there.

Also, calling the corporations devils shows too much pre-existing negative bias on the part of the author.  Corporations are the way humans band together around the world and make new products and inovations that drive profitability, sure there are greedy people in them but they are the cornerstone of our economic system, they are not "devils".  I like it when they make me profit, but I dont call them "angels" for that reason as that would be too biased the opposite way.  And his prediction of the Dow going to 6800 in 7 months from now?  Seems a bit overblown.

I think things can be bad but this guy is another spooky doom and gloom guy, clearly its not all *that* bad lol.   And even it were, we read these exact same kind of articles left and right in February, and what happened to the market since then?  We are still above the lows of that period.

[tokyopua]

Thanks for sharing that link!  Guess those crazy Arabs didnt get the memo worth $7.5 billion to them below from Daily Kos that the Dow is going to 6800 in the next 7 monhts 

Well wouldn't you know...look who's coming to rescue Citibank.

http://biz.yahoo.com/ap/071126/citigroup_abu_dhabi.html

Citi Sells Stake to Abu Dhabi Fund
Monday November 26, 11:51 pm ET
By Joseph Altman, AP Business Writer
Abu Dhabi's Sovereign Fund Agrees to Invest $7.5 Billion for a 4.9 Percent Stake in Citigroup

NEW YORK (AP) -- Citigroup said late Monday that the Abu Dhabi Investment Authority will invest $7.5 billion in the nation's largest bank, offering needed capital to offset big losses from mortgages and other investments.

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The cash from the sovereign investment fund of the Gulf Arab state, which has been a beneficiary of this year's surge in oil prices, will be convertible into no more than 4.9 percent of Citigroup Inc.'s equity. Citigroup characterized the investment as passive and said the fund will not be able to name any board members to the bank.

The Investment Authority would become one of Citi's largest shareholders.

The Abu Dhabi investment, which was expected to close within the next several days, will be considered Tier 1 capital for regulatory purposes, helping Citi reach its goal of returning to its target capital ratios in the first half of 2008, the bank said.

Citigroup's shares have lost about 45 percent of their value since the beginning of this year, wiping away $124 billion in market capitalization, as the drumbeat of bad news about its investment losses has mounted.

"We see in Citi a highly respected company with a premier brand and with tremendous opportunities for growth," said the Investment Authority's managing director, Sheikh Ahmed Bin Zayed Al Nahayan. "This investment reflects our confidence in Citi's potential to build shareholder value."

Charles Prince stepped down as Citigroup's chairman and chief executive on Nov. 4, the same day Citi announced that it will likely write down the value of its portfolio by $8 billion to $11 billion in the fourth quarter.

In the third quarter, the bank's exposure to assets tied to subprime mortgages led to a loss of about $6.5 billion.

The Investment Authority will receive equity units that pay an 11 percent annual yield until they are converted into Citigroup common shares at a price of up to $37.24 a share between March 15, 2010, and Sept. 15, 2011.

The investment is the latest by sovereign funds in the Middle East that have been building up their overseas investments recently, many of them on the back of oil prices that have risen more than 60 percent this year and have brought the region record cash flows.

Dubai International Capital, which is owned by the ruler of that booming Persian Gulf city-state, announced earlier Monday that it has acquired a stake of undisclosed size in the Japanese electronics and media company Sony Corp. Its other investments this year included acquiring a 3.12 percent of European Aeronautic Defence & Space Co., which builds Airbus commercial planes and military aircraft. The firm also holds stakes in Daimler AG and British bank HSBC Holdings PLC.

Many companies have welcomed such investments because the funds tend to be stable investors, but some U.S. officials have expressed concern that their acquisitions could target sensitive industries with links to national security.

Abu Dhabi's move recalls the early 1990s investment in Citi made by Saudi Prince Alwaleed bin Talal. After Citi made some losing bets on U.S. real estate and Latin America, Alwaleed bought a stake in the bank for less than $600 million that has since ballooned into several billions of dollars.

The Abu Dhabi investment, which was expected to close within the next several days, comes at a time when Citi is trying to reassure investors amid heavy credit-related losses and its search for a new CEO.

"This investment, from one of the world's leading and most sophisticated equity investors, provides further capital to allow Citi to pursue attractive opportunities to grow its business," Acting Chief Executive Win Bischoff said in a statement.

Citi shares fell $1, or 3.2 percent, to close at $30.70 Monday after hitting a five-year low earlier in the day.

"This investment also enables us to access capital in an efficient manner, and is consistent with our strategy of maintaining a balance sheet that benefits from highly diverse sources of funding in terms of both geography and type of security," Bischoff said.

[tokyopua]

A few days ago I opened hedge positions on the SPX and a few weakened companies within the S&P500. I say hedged because I was still holding long positions (such as some 3SoF) and was not looking to sell those at this stage. Hedging just gives a bit of insurance if you see short term downwards action within an otherwise longer term upwards market or vice versa.

That said I haven't yet closed my hedge positions, I don't think we are 'out of correction' just yet. Indeed who knows it may be just the start of bearish period.

Regardless of market direction, there are many trading vehicles / strategies to enable you to profit / hedge or remain even available to you. 3SoF mostly plays the long side, that means you are guaranteed to get into periods of 'drawdown' on your equity when the market is not in your favour, that is a fact you can take to the bank.

Cheers

I am still 'hedged'

My SPY 'hedge' is now more weighted to the short side than the long. Speculatively I shorted BIDU strength today. Internets are pretty much the only strong participants out there, they can't swim against the trend for too long. I see more lows before highs (over what timeframe, well that is the unknown). Here are a couple of SPY charts for perusal: Short term with downtrend, longer term at key 'support'.

So you say you see more lows before highs, does that mean you are still long term bullish despite all this credit crunch news, etc.?