by Ren Richardson

Today’s move on the S&P dropped us below 2002’s lows. Funny how we’ve declined about 13% in two days and yet the coverage doesn’t seem as shocked or as dire as it did late Sep/early Oct. A number of traders/managers have remarked that they consider it rather scary we have taken out 2002’s lows. But we still have yet to witness real panic selling. Fear is present but not capitulation. The drops have been, for the most part, too methodical, too orderly. However, this move below that key support might trigger automatic sells and if it does lead in any way to downdraft selling, I would be a buyer. (Brian adds: agreed. It’s eerie that we’ve had no trading halts or circuit breakers.)

Everyone thought that Oct lows would be putting in a bottom. (I was buying afternoon of 10/10 but when the rally didn’t follow through, I got out.) The tape is anemic, it’s unhealthy. But now that we have taken out that bottom, any panic selling could be a good entry time since everyone is expecting further declines now. You know my belief, however. We could get a stong rally out of this support break….but longer term I think we have no reason to sustain it.

The long term trend line on the S&P going back to 1932 is at approx 540-560 now (see attached graph). Every time we have tested that line (4 times in the worst bear markets since then) has been, obviously, a great time to buy stock. I don’t see us reaching that trend line in this current decline. But I certainly think it is possible we could reach it in 2009.

Be a trader-buyer on fear selling here. This is what usually produces big rallies. But be a long term investor if we get down to that trendline. If we break the trendline, buy a tent, a ham radio, fuel, and I’ll meet you in the mountains.

Well, given the moribund performances of the supremely educated GS, WFC, C, BAC, WAMUQ, USB, JPM,  

- oh and the petitio principii of the U.S. Federal Reserve, perhaps now is a suitable time to step away from charting agnostics and entertain (or be entertained by) the market wizards that peep and mutter with divination.  

Here is the horo(r)scope for the S&P 500 (wait - this must be read aloud in a whisper with one eye closed while your other eye almost closed and your chin is in the air and your accent mimics a gypsy [or dracula]).

“I see you had a hectic childhood. You moved around alot before you found stability at age 12. Twelve is an important number to you, isn’t it?”

“Ah, and what is this? You blossomed and grew tenfold -but something happened at the end of that growth spurt. You stagflated and oscillated in what was some kind of mid-life economic cycle. The number 100 has two meanings, in the first case it represents the zone of your twenty year struggle; in the second case it is your triumphal increment of movement from then on - but beware of pride, for those movements can just as easily be downward.”

“Recently you have a Gemini top of equal heights. This could mean many things. If you fall below 750, your future is a quick death. If you can stay in the 750-1500 range, all will be well.”

Many Americans shop around for a good broker (lowest commissions, best executions, etc.) and some Americans shop casino’s for “the loosest slots,” but I’ve never met anyone that shops around for the best exchange. If someone did shop the world for the best stock exchanges looking for the most bullish pools of stocks, here is what they would discover: (found at the World Federation of Exchanges)

The common stereotypes that come to mind when considering Tehran and Colombia are guns and drugs. Which makes a lot of sense right now. In the earlier Great Depression, industries/producers of vice did extraordinarily well.

While I couldn’t find any Iranian stocks traded on the U.S. exchanges, here is the one and only Colombian ADR to consider. If you review the fundamentals of it, you may wonder why its price is going down. If you don’t get it, let me reiterate: it isn’t about the cards, it’s about the house.

[begin sarcasm]
“This is the best! We now have key to a high probability/high profitability/low risk trade on AIG! If we buy right now, we will be following ”the big money” in to a stock that is sure to go up! After all, its success is now implicitly backed by the U.S. government - just like Fannie Mae and Freddie Mac! All that we need to do now is to get out when the Fed gets out!”
[end sarcasm, begin criticism]

The exit strategy proposed is the most asinine that I have ever seen. It is called a “discretionary exit” and it is the same one that I have witnessed fail THOUSANDS of times. As a former investments educator I knew that a student was doomed when this conversation played out:

“When will you exit the investment?” I ask.
“When I’m making money.” they respond.
“What if the company goes down?” I counter.
“Then I’ll sell it.” they say.
“What will you use as the indicator and signal to exit for a loss?” I ask.
They get very quiet and respond “I don’t know.”
“That’s one problem.” I say.

Then…

I would then ask “What if it goes up?”
They would say “Then I’ll sell it.”
I would continue “What if it only goes up a penny? What if it goes up a hundred dollars? What if it goes up and then goes back down below break even? What will you use as the indicator and signal to exit for a profit?”
They would get very quiet and say “I don’t know, the more the better…”

Bottom line: All risk takers must plan their trades and trade their plans. All risk takers must comprehensively plan for every contingency or they are more susceptible to fallible decisions due to the emotions that cloud good judgement.

How many Fed Chairmen have espoused the maxim that “Nobody can time the market.”? And yet in the closing line of the plan for AIG, they have the arrogance to assume a discretionary exit, essentially, “When the time is right.” and “When they feel like it.” This is a recipe for disaster or domestic equity dominance by the U.S. Government. Pick your poison.

I don’t care if they Fed felt forced into the trade, if they can’t articulate an exact exit, who will force them out? It certainly won’t be AIG. 
[end criticism] 

[begin dark, cynical, German rap song "Exit Strategie"]

[end ranting article]

by Ren Richardson

The only thing that I did not particularly like about Van Tharp’s article was his repeated use of anecdotes. “Someone told me the other day….,” “I was just informed that…,” “My understanding is…..” etc. All of these stories were used to convey an air of direness. Activity at the Port of Long Beach is 15% of normal (or so he’s heard) and that means we are in for food shortages. I don’t put the prospect of real food shortages and supply chain disruptions past this economic environment but those conjectures need a little more meat behind them. I think much of the data we saw from Mr. Zimmerman yesterday was enough information to persuade us to at least flip open the plastic cover of the red switch that sounds the 5 alarm economic warning.
 
However, I do agree with you that Zimmerman seemed to take a “kid gloves” approach with his presentation. I don’t know if that was just because it was a stock presentation or because he knew he was presenting to MBA students (we know they are capable of handling only so much information that doesn’t fit with a model or the past). I wanted to take him aside afterwards and say, “Here’s $100. So what’s the real deal?”
 
One of the things that worries me about the scale of Fed action is that we create some kind of economic creature that we have never seen before. An economic mutation that defies the typical relationships we think are supposed to hold. In the Depression we saw severe deflation and that is what economists expect when the GDP shrinks as much as it did. And strong growth correlates with increasing risks of higher inflation. But is it impossible that we could see slowing growth, rising unemployment and severe inflation? We witnessed it in the 1970’s and had to come up with a new name for the phenomenon. I think the ingredients are in the mixing bowl to make that look period tame by comparison.
 
Flushing the system with cash will not necessarily create jobs or spur growth. In my view, the risk is that IF the stimulus works, it has a high probability of fostering bubbles, perhaps multiples of them. From a fundamental perspective, a bubble is a phenomenon in which too much cash is chasing too few assets in too short a period of time. Real growth - i.e. real wealth creation - is a slow moving process because it is driven at the end of the day by increases in productivity, technology, or population. It is not driven by cash stimuli. That is the risk of success. But the bigger risk is the risk of failure. We flush the system with cash trying to get credit flowing, jobs created, and industry humming. Yet the economy doesn’t respond except in the form of drastically increasing prices. Companies continue to cut forces, banks continue to keep lending standards tight, consumers significantly cut back and cease investing, but inflation starts to ramp up out of control, driven by a number of dollars in the system that has 12 zeros after it (and the lack of a deliberate plan to know how or when to suck those dollars out). It would defy almost all economic relationships that we expect to hold. Then we would be in the real dilemma of not only facing a depressed economy, but having no idea what to do next.
 
Pump cash into the system? Did that to four orders of magnitude greater than ever before. Cut rates? They could be at zero here shortly. Tell people that all we have to fear is fear itself? Did that too but we still don’t realize that, when it comes to the economy, fear IS worth fearing more than anything else. It just baffles me that some of the smartest people on earth will absolutely max out the only available tools they have without any kind of plan for what happens if they don’t work.
 
The idea of a bankrupted US seems more possible every day. And here is the real kicker: more and more economists (including Richard Fisher of the Fed that I mentioned yesterday) are saying that Social Security and Medicare obligations are going to make the numbers of this crisis look paltry.