Traderbill's Financial Markets Weblog

 …those are two separate titles. Revulsion was the original based on Friday’s selloff that had 1342 new 52 week lows and just 52 new highs…coincidental like the 666.66 low Friday on the Russell 2000. Yesterday TB got up and did some research on Bloomberg noting the precipitous drop in the global markets while the US markets took the day off. This morning he turned on the market to see the Dow futures -535 points!  …couldn’t find what the limits are now but that is huge in any market but especially overnight trading. Take a drink of coffee before you look at the overnight markets section…and be sitting down! The only thing ’similar’ to this that TB has ever seen is Oct. ‘87…but this is no 1987 crash…which was over almost before it began…this is what happens when you experience incredible leverage allowing credit default swaps alone to rise to $46 TRILLION. Here are some other causes that TB has discussed at length.

*Hedge funds running 10x leverage and funds of funds leveraging 10x producing as much as 100x.

*A housing market that had become an ATM for home owners to replace their equity with cars, vacations and most of all debt.

*Wall Street that aided and abetted (don’t forget the commercial banks role in this), the destruction of credit thru flawed assumptions that they were diversified and then hedged with derivatives like CDS.

*Regulators from the Fed to OFHEO (GSE regulators) to bank examiners to the SEC being totally derelict of their responsibilities in their zeal to replace one bubble (stocks) with another (housing). There are no more bubbles to create.

*The strength of the yen causing an unwinding of the yen carry trade and that is happening in spades now. It is this deleveraging of incredibly leveraged markets that means that there is no safe harbor…except government bonds…for now.

On Friday, Bush in an impromptu press conference prior to leaving the Middle East said the economy is healthy but could experience a slowdown…is he the last man on the face of the earth to not get it? Then Treasury Secretary Paulson and Economic Advisor Lazear in an almost Laurel and Hardy half hour press conference (waste of time), that yielded no details of their plan. Any stimulus package will be too slow and so far is way too small. Now do you see what was wrong with making those temporary tax cuts to avoid a recession in 2001 permanent? If a temporary cut can’t be eliminated for fear of being accused of raising taxes (remember that Kudlow and Laffer) think zero is the right rate…and the rich get richer and they say the Dems are guilty of class warfare? they created it!

Meanwhile, CEO’s strip the assets for their own game while the stewards (the board of directors) sit back and give them all that they want…at the expense of the employees and shareholders. Where else but America can the CEO of a company that is on the verge of bankruptcy due to its own creation of bad loans while the CEO/founder pulled his money out by selling stock even as the price is plunging. Now that CEO, Angelo Mozilla, is going to reap perhaps $100 million as the company is rescued by Bank of America…not so fast Angelo…with the declines now BofA is rethinking the terms…good news except that too takes confidence out of the markets. Also, foreign sovereign investors are pumping in capital to our largest financial institutions…and Schumer, Rangle and others who were opposed to Dubai running our ports are greeting them with open arms…so long as they don’t exert control. What? If a few hedge funds can force management to do their bidding…stock buybacks instead of paying dividends for example…you don’t think a long term investor with a significant stake can apply pressure? Are we nuts?

A friend made an interesting conspiracy theory comment: what if the sovereigns are selling stock to drive the price down so they can then put in more money at a much cheaper price…certainly cheaper than any other investor can…they buy at a discount to the market value, with more perks and the price is adjusted down if the stock price continues to decline or the company has to raise more capital. What the @#%$?

Lastly, there is Jim Cramer…veteran of two incredible and irresponsible rants against the Fed…and now his very own solution to the problem…guess the movie about him, Mad Money has empowered him. TB has to wonder how empowered he will be now that his disciples are losing their money? You go, Jim!

In one sense TB agrees with him. As stated last week, Bernanke’s problem is he wants to be liked and believes that to do that he must provide a roadmap to Wall Street…totally counter to Paul Volcker who just did it and Alan Greenspan who never made a statement that anyone understood…they just thought they did! But Volcker brought us 30 years of low inflation and prosperity while Greenspan reacted positively to the 1987 crash but clearly recognized yet failed to act on the two biggest bubbles the world has ever seen…the last one dwarfing the first.

Lower rates take off some of the pressure but they do not, will not, and cannot stop deleveraging!

When TB got up he was going to predict a down day…then he saw the overnight markets and knew that was a given. The rate cuts by the Fed…will other central banks like BOE and ECB follow suit…were a good thing but more like a bandaid. While it is going to be ugly today and may even get uglier, TB recalls being paralyzed in the Oct. ‘87 crash…and that was the right thing to do…panic will not help…stay calm!