Mission The Federal Reserve System is the central bank of the United States. It was founded by Congress in 1913 to provide the nation with a safer, more flexible, and more stable monetary and financial system. Over the years, its role in banking and the economy has expanded.

Today, the Federal Reserve's duties fall into four general areas:

conducting the nation's monetary policy by influencing the monetary and credit conditions in the economy in pursuit of maximum employment, stable prices, and moderate long-term interest rates supervising and regulating banking institutions to ensure the safety and soundness of the nation's banking and financial system and to protect the credit rights of consumers maintaining the stability of the financial system and containing systemic risk that may arise in financial markets providing financial services to depository institutions, the U.S. government, and foreign official institutions, including playing a major role in operating the nation's payments systemClearly, you have a wide latitude to exercise that mission. I argue that the Fed has carried out the latter (providing financial services) and been an abject failure in providing stable prices, regulating the banking and financial system, and containing systemic risk. In the midst of a credit cycle collapse of epic proportions, Bernanke wanting to continue to pay lip-service to inflation monitoring is just lunacy. SAY NOTHING, BEN, and try to do your job!The point being that rational behavior (controlling individual and corporate debt) becomes difficult under conditions where overall debt to GDP is extreme and transparency of the banking system poor. The BAILOUT didn't fix anything and isn't a handout to Wall Street as much as desperation psychology move, although (rare for me to acknowledge) not politically motivated.I highly recommend Warburton's book to all market students. It appears to be in limited supply.Good trading and great risk management to all.Educational use only. Never intended as investment advice.

TED Spread Update: Binary Risk

by noreply@blogger.com (TBA)
5 Oct 2008 at 8:55am
The TED Spread helps us measure credit risk.Here's the current data. The TED Spread has exploded upward.The risk remains BINARY, that the market has a 'delayed reaction' and temporary celebration of the Congressional lying down like dogs because the ECONOMIC GRAND POOBAHS told them to (or else we have Martial Law), or the market tanks because CREDIT makes the world go round.Add in the likelihood of a coordinated central bank rate cut and possible financial system 'guarantees' and anything could happen, at least in the short run.Good trading and great risk management to all.Educational use only. Never intended as investment advice.

United States of Bernanke and Paulson

by noreply@blogger.com (TBA)
5 Oct 2008 at 8:00am
Click charts to ENLARGE.Key Words/ Taglines: Stock trading, investment, central banking, cash flow, dividends, technical analysis, fundamental analysis, top down investingWhere is the pain trade?First, annoying technical guys like me are going to point out possible bottoms (like 1077 on the Fibonacci retrace). THERE is no STONE TABLET that shows up with Fib values or anything else. These are just 'decision zones' for technically biased speculators.Second, the sectors tell us a lot. As I pointed out last night (back home from San Francisco to my usual tools), the SPDR sectors are ALL NEGATIVE. Why should I rush to call a bottom amidst technical weakness? Fear of missing a rally isn't despair about market conditions, and I'm still reading 'fear of missing'...Among the CHOSEN ONES, here are some 5 day price changes. You'll notice how Deere, Southern Copper, Apple, First Solar, and the Brazil ETF all lost OVER 20 PERCENT last week. For those who thought Apple was a "one decision stock" (buy and keep forever), I'll show you a stock that basically broke up our investment club years ago._________________________________________________The investment club had bought Sun Micro (then SUNW) at about 9, and owned around 300 shares as I recall. We had somewhere between 12 and 14 members, and when we agreed to put a stop on SUNW at 100 (it was trading about 118), three members quit because there was no reason to sell. The rest is history._______________________________________________________There are plenty of other examples of similar tales from the dot com era.Last week there were four among 239 industry groups that made at least a six week low and CLOSED above their open for the week...FOOD Major Diversified, Midwest banks, Southeast Banks, and Savings and Loans. Only the latter actually rose on the week.We are in a NEW PARADIGM, as in THIS TIME IT'S DIFFERENT.We are in a new era of Socialism of Finance (we'll see how far that takes us)We are in a global recession if not a depression (we've done the word parsing thing already)We may or may not have crossed the Rubicon of LACK OF TRUST in the Federal Reserve/Central Banks (I'm already way over on the other side of the river on that one)We don't know if we are at ZERO HOURWe do know that debt in fact does matter, after hearing from many that it doesn'tI'm taking my time and making my list of horribly trashed STOCKS from COMPANIES that have real assets, low debt, and potentially can pay dividends from their real cash flow from real earnings.Here's a partial list of companies that meet some of the criteria that I will be watching. I don't own any of them, and I will be taking my time trying to understand the new rules of living in a socialist empire, the United States of Bernanke and Paulson.Good trading and great risk management to all.Educational use only. Never intended as investment advice.

Nothing But the Truth

by noreply@blogger.com (TBA)
4 Oct 2008 at 9:41pm
Wouldn't it be great if our leaders could lead from the truth, with honor and dignity? If they could, how would we respond, with indignation or forgiveness, so that we might actually be able to believe them and move forward? For example, Ben Bernanke could come forth with a press conference beginning with this statement:"Yes, we have problems. We have serious economic and structural problems. We have built our economy on a flawed foundation, not of savings and organic growth, but on debt and financial engineering. Yes, we central bankers know why we arrived at this destination, and we share at least part of the responsibility. We 'cured' the problems of the past with solutions that isolated parts of the problems, but did so under that mountain of debt and derivatives that the bond market embraced. Not only the American but global economy believed our creation that now has left us struggling for solutions. We became economic Pygmalions, narcissists who believed we moved the earth.We have a slowing economy and in fact, we have a recession. We have too much debt and too little employment. The models that we use like the birth-death job model and the adjustments that systematically alter inflation like substitution, weighting, and hedonics are flawed. We didn't just live in an imperfect world; we made it more imperfect.But we can do better. We must do better. Effective immediately, we are lowering the Federal Funds rate 75 basis points, in conjunction with the economic recovery bill passed last week. We are focusing on growth, on helping restart America with job creation and will work to support the President and Congress to develop a comprehensive program to improve the financial infrastructure to help us move forward. We will restore transparency to the banking system and work to reign in the unchecked and under-regulated derivatives that have resulted in the destruction of the pillars of the mortgage industry and much of the investment banking system as we knew it."I know that we will never hear anything like that in a world of unchecked ego and where acknowledging error is greeted as stupidity not atonement. But perhaps the Bernankes, Paulsons, and Franks could consider more humility and less hubris a starting point.For now, I encourage Warburton's advice in "Debt and Delusion" to be sound, control debt and maintain liquidity for that rainy day that has arrived.Good trading and great risk management to all.Educational use only. Never intended as investment advice.

Hope Is Still Not an Investment Strategy

by noreply@blogger.com (TBA)
4 Oct 2008 at 5:56pm
Click charts to ENLARGE.Of the many observations we've shared, the most important may have been 'correlation' as many charts, foreign and domestic indexes, as well as SP500 sectors have traded similarly. In many ways, this SIMPLIFIES our work.Our job isn't to be 'bearish' or 'bullish' but rather to do what the market is doing.The major LONG ETFs by volume are taking a ferocious beating.____________________________________For example, looking at the SP500 sectors, every one is below the downsloping 20 and 50 period moving averages. XLF, XLP, XLV, and TTH have not made new lows, but aren't particularly strong either.A handful of members of the CHOSEN ONES live above the 200 day moving average._____________________________________________________But back to our earlier point, the simplest approach (during severe correlation) is to look at multiple time frame analysis of the SP500 (ETF SPY). We should also be aware that shorting financials will ostensibly resume on October 8th.Price has simply retreated and has made lower lows. There is no new pattern, the trend is negative, and (time) we are in the twelfth month of a bear market.From a Fib standpoint, the SPY has retraced almost to the Fibonacci .618 level. So, IF it were to bounce, some might argue 'aha'.SPY peaked at 157.52. The DeMark TD Absolute .618 retrace is 97.34 and the TD Absolute .5 retrace would be 88.76. There is no new DeMark Sequential (tm) pattern._______________________________SPY Weekly. We can see that SPY has been 'channeling' down, with the most recent decline exceeding the previous decline (if we wanted to invoke a two-step pattern)...the stochastics weekly direction remains negative. Volume has been supportive on the downside._________________________________________This daily chart of the SPY since February shows not only the downtrend, but also the relative performance with the SPY outdoing China (FXI), India, Latin America, and Russia. "Do you feel lucky, Punk? Well, do 'ya?"Obviously price continues to make new lows, the market is very oversold, and the trend is down.The old saw about market weakness end of day and end of week being hallmarks of a bear market applies.A lot of investors are struggling. The Financial Times reported this weekend that one of Citadel's largest hedge funds is down 18 percent. Many funds were down over 10 percent in September alone (personal communication).Indicator madness?Here's a great Stockcharts chart of the SP500 that has some fascinating features.Despite all the weakness, RSI(14) isn't extended.ADX(14) is trending strongly (negative)Average true range tends to peak at lows and trough at highs.So what do we know and what does it mean?Correlation has simplified our analysis.The SP500 has strongly trended southVolume has supported the direction of the trend.Long-term charts (weekly, monthly) have been the most useful.The issue at hand is the amplification of market weakness by the credit crisis resulting in delinquencies and defaults and the unknown unknown of magnification by derivatives. Derivatives truly are the financial weapons of mass destruction that have been game changers. At the burden of being repetitive, our economic leaders have an oversight failure of biblical proportions, extending back a decade with Greenspan ignoring the derivatives risk and his successor Professor Bernanke blowing the analysis and treatment of his 'area of expertise'.When Congressman are told that failure to throw 700 billion dollars of taxpayer money at a problem may result in martial law, whom do you believe about systemic stability?Improvements should show up in credit spreads as well as (of course) price. Monitoring stocks with high debt to equity ratios that need to regularly 'turn over' debt should be an 'easier' way for investors to see how market participants' time preferences are playing out.Good trading and great risk management to all.Educational use only. Never intended as investment advice.

Free Market?

by noreply@blogger.com (TBA)
3 Oct 2008 at 10:43pm
Taglines: Martial law, stock market, investing, Congressional testimonyIs this the America we love?Good trading and great risk management to all.Educational use only. Never intended as investment advice.

Southern Exposure

by noreply@blogger.com (TBA)
3 Oct 2008 at 6:18pm
Congress passes the BAILOUT and gets another deflation day, with US stocks, foreign stocks, oil, gold, and even the dollar down.California needs 7 billion dollars ASAP, and Complexity Theory (per sources) says nothing good happening for now.More of the lame? The Dow Industrials makes new closing lows on supportive (distribution) volume.Sector Inspector.It didn't matter...even the 'defensives' staples, utilities, healthcare all took it on the chin.What's working? Cash, shorts, and nothing else. Weekly charts have pointed the way. Congress caved in to Wall Street, with crisis management ruling the day, and if they keep it up, maybe we'll all be looking for caves.The credit crisis remains unresolved, as the total lack of transparency that prevents banks from lending to each other hasn't changed. What has changed? I showed that this morning with the MASSIVE EXPANSION of the Fed balance sheet, with poorer quality assets. BAILOUT BEN strikes again.At least the Alcatraz tour was great.Good trading and great risk management to all.Educational use only. Never intended as investment advice.

Waterloo

by noreply@blogger.com (TBA)
3 Oct 2008 at 7:18am
Okay, so I'm no accounting genius either. Maybe readers can help. Halloween cometh, so scary beomes de rigeur. Check out the Federal Reserve balance sheet. My take is:BloatFar poorer credit quality (about 30 percent Treasuries versus 60)Rapid expansionJust feels like a "giant sucking sound" to me.Here are a couple of quick through click throughs of superpower items:CandlesPoint and figureSo we have declining asset values and declining credit quality. Who cares about that technical stuff? Let me get back to you on that.Good trading and great risk management to all.Educational use only. Never intended as investment advice.

Point and Go Figure

by noreply@blogger.com (TBA)
2 Oct 2008 at 10:07pm
Click charts to ENLARGERemarkably, THREE of the SPDR Sector ETFs are POSITIVE by point-and-figure charts. The question is whether XLF, XLP, and XLY have the strength to overcome the negativity and primacy of the indexes.Example: XLF (SPDR Financial Sector ETF)_______________________________________________________Note that EVERY ONE of the these major US and foreign markets is NEGATIVE by point and figure.For daytrading purposes, one can try to trade either trend or counter-trend, but trying to short is so difficult with profoundly oversold markets. I'll reiterate two quotes of note:It can be easier to make more money being bearish in a bull market than in a bear market (subject to sharp counter-trend rallies)The only effective HEDGE can sometimes be selling longs.The Dow Industrials point-and-figure chart. With exrreme volatility, one could be correct (on a reversal) and see a volatility collapse render options worthless. This is a really dangerous trade setup in that regard._________________________________________________Good trading and great risk management to all.Educational use only. Never intended as investment advice.

No Green Day for Green Day

by noreply@blogger.com (TBA)
2 Oct 2008 at 6:49pm
Click charts to ENLARGE.Wake me up when September ends? Pretty much everything is getting smacked down now, even on the historically strong early days of the month. We're moving past psychology to something more tangible, reality.With falling earnings estimates, credit woes, housing weakness, auto non-sales, and dazed and confused financial leadership, the best investors are hiding underneath the table in the fetal position. It's truly sad that we are in an untenable position currently, bereft of leadership in stocks, in the Treasury and the Fed, and of course on the political front.We're past decisions of growth or value, and seeing forced selling.The SPX (weekly) hits new closing lows.___________________Ditto for the Russell 2000. All King Paulson's men haven't been able to get out of the dumpster.____________________________________The transports are making lower lows but not yet taken out the yearly lows.___________________________________Commodities? The Goldman Sachs Commodity ETF (GSG) can't get a bid and has a way to go (about 38) for a 50 percent retrace off highs.____________________________________________Another loser of a day, but at least I had a ferry ride to Sausalito and a picturesque lunch overlooking San Francisco Bay.Good trading and great risk management to all.Educational use only. Never intended as investment advice

Questions

by noreply@blogger.com (TBA)
2 Oct 2008 at 12:27pm
1. How does the bailout impact the distressed homeowner?2. What do the banks say they need to restart lending?3. How will the bailout affect yield curve speculation?4. How useful are the technicals in assessing 'bottoms' (not very)?5. Is 'as goes GM so goes the nation' obsolete? (Maybe not)6. Where is the Bernanke bunker? Will Punxatawnee Ben emerge soon?7. What are the proposals to keep the credit crisis from extending (yada yada yada)?8. How do state and municipal budget deficits figure into this?9. Will major pension funds have shortfalls?10.When can you start buying financials?11.Who's too big to fail now (C, JPM, BAC, GS)?12. Does the "debt doesn't matter" crowd crawl out from the rock, ever?13. Why am I worried about the US financial system?high rate of govt bond issuance to GDPhigh rate of govt bond issuance to moneylow national savings ratehigh proportion of foreign ownership (kindness of strangers)unrestrained derivative base (deleveraging happening)declining credit quality (putative)Are we not at a hard to measure risk for massive bond market shock under a variety of stressors (foreign capital repatriation, war, commodity price resurgence, etc)?The markets are getting creamed. Must we ask why?Good trading and great risk management to all.Educational use only. Never intended as investment advice.

Tambourines and Elephants

by noreply@blogger.com (TBA)
2 Oct 2008 at 7:56am
Click charts to ENLARGE.The Senate, amidst much fanfare, has loaded the BAILOUT bill up with goodies in hopes that visions of sugarplums will dance in the House's heads.The twin anathema of Congress, spending cuts and tax increases, are nowhere to be found; it's spend, spend, spend your way to prosperity. The solution for desperate times always means profligate living.The bad choices attached to immediate gratification (inevitably attached to increased indebtedness) that GOT US INTO THIS naturally are the solution. Maybe some miraculous rally allowing the financials to sprint instantly to nirvana (attached to additional equity offerings for recapitalization and dilution) are planned. The last shareholders to the party get doubly fleeced, paying for the BAILOUT and for their INVESTMENT MISBEHAVIOR.So where do we stand? Victor Frankl wrote about the meaning of life in "Man's Search for Meaning". Life centered on the triad of relationships, work, and suffering. Although suffering is universally experienced in life, man works diligently to avoid it and its consequences. So we seek the repeal of the business cycle, the separation of action from consequences, and disavow panics, manias, crashes, depression, and now recession. Two weeks ago the economy was fundamentally sound. Now it's in the shitter. Strange days indeed."There is nothing cheaper than free advice. There is nothing easier than spending someone else's money." The Senate says "trust us." I grab my wallet. The socialist revolution continues.Good trading and great risk management to allEducational use only. Never intended as investment advice.

Scope-a-Dope...Where We Are

by noreply@blogger.com (TBA)
1 Oct 2008 at 11:52pm
The four legs of the investment stool include:Fundamentals: earnings trajectory, interest rates, balance sheet and credit quality, to name someTechnicals: price, pattern, trend, and timeAsset allocation: hard to get at directlySentiment: measurable via a variety of indicatorsIn the midst of the BAILOUT debate, we must recognize the multiple moving parts involved. The immediate results could be a sentiment shift, although my uninformed expectation would not be a longer-term asset shift by sophisticated institutional investors who will trade around positions but want core beliefs reinforced (e.g. real change in credit conditions).The question of whether taxpayer funding (Congressional action) to mitigate the credit crunch intersects real concerns about existing CREDIT QUALITY. The massive long-term credit expansion hsa defied inflation expectations (flawed data notwithstanding) but surely markets recognize the inverse relationship between credit availability and quality.Is deleveraging expected to increase financials' profits (no) but solvency (yes)? Do potential shocks (commodity, international conflicts, debt) hold less sway (no)? How will the bond markets ultimately respond? My presumption is that the ten year yield will fall reflecting global economic weakness.How will the US Dollar respond? Will it see debt destruction (writeoffs) and appreciate? Or will the Fed attempt to monetize the new debt, printing dollars to pay for "troubled assets" and ultimately weaken? Watching how precious metals trade relative to the dollar may be helpful. Sophisticated investors will watch breadth and other internals as well as credit spreads to gauge whether the BAILOUT ultimately succeeds (doubtful in my opinion).One investment strategist I know likened today's investment challenge to being a NASA engineer during the lunar landings.Good trading and great risk management to all.Educational use only. Never intended as investment advice. Not a registered investment advisor. Not an economist; just a student of the game.

What is Working?

by noreply@blogger.com (TBA)
1 Oct 2008 at 9:27pm
While I'm watching the Angels-Sox, I'll run through any charts 'working', for simplicity, with closes above the 20 and 50 period averages. I'm using the MARKETS, SECTORS, STOCK template from an earlier blog.If I were trading this week, I'd be looking for entries with nearby support to optimize risk control. First pullbacks within trends (Landry style) can often be lower risk.GLD...this is 'consolidating' for now. If my interest rate cut AFTER bailout theory holds, this could be a winner.US Sectors: nothing working but XLF and XLP the bestFinancials: BAC, C, JPM, MER working...LEH and WM off the boardChina: LFCConsumer: CHD, KMB, PG...I don't like VFC not workingDividend: excluding the financials, PFEEnergy: XOM (extended for my taste)Medical/Biotech: PFE; a lot of stuff viciously oversoldMetals: nil on my listRetail: nil, but WMT the bestTech: nil, but MSFT the bestTransports: nil, but a question of a tradable bottomUtilities: D, EDWater: AWR, CTWS, SJW, SWWCQuestions I ask myself at this point:Can it trade contrary to a 'down' market?Is it capital intensive? (Can it get funding?)How discretionary is it?Is it attached to some "depth charges' (e.g. autos, homes)?Can I control risk (is it optionable, does it have logical support)?Will hedge funds see it as something they can hold?Good trading and great risk management to all.Educational use only. Never intended as investment advice

MUST READ: Mark to Market Musings from The Big Picture

by noreply@blogger.com (TBA)
1 Oct 2008 at 8:00pm
"Pain is fear leaving the body." No pain here.Frankly, this is nauseating.(disclosure long selected financial index calls)Good trading and great risk management to all.Educational use only. Never intended as investment advice.

Potpourri and Help for Politicians

by noreply@blogger.com (TBA)
1 Oct 2008 at 6:10pm
Click charts to ENLARGE.The Wilshire Total Market Index fell slightly ahead of the ongoing BAILOUT debate and vote.______________________The more important weekly chart shows price declining and MACD reflected DOWN living BELOW the ZERO line (negative).________________________________________________We're focused on the BAILOUT not the problem. "Investment" has positive connotations, but times exist when investing becomes MALINVESTMENT, if capital may be scarce or growth suspect. Should the current bailout be expected to resolve the credit logjam and create tangible growth, or rather increase confidence and do nothing to REFORM the derivatives CRISIS, that is, Buffett's financial weapons of mass destruction?I'd appreciate our alleged financial overlords such as Paulson, Bernanke, and Cox describe some of the measures they propose to help preserve the integrity of the financial system, and safeguard the markets from a derivative-based meltdown.What I expect to see includes:A total ban on shortingProhibition of new put contractsA Fed rate cut AFTER the BAILOUT, because they don't want to be seen as weakening the pressure on Congress...probably with multinational rate cutsA followup DEMAND on taxpayers for additional capital for recapitalizing the financial systemEfforts to further weaken oversight of FASB and the GAO (mark-to-market is fine as long as it INCREASES corporate profits...but when the reverse happens, it is unfair and deceptive In other words, the rules will change, not in the direction of improving oversight and transparency but rather in "rigging the game" at least until the problem is transferred to the next administration...because NOBODY knows the magnitude of derivative risk, the simplest approach is to dance around the problem.Today we saw the 'Bullitt' chase sight, the 'Mrs. Doubtfire' house, and everything from City Hall to Golden Gate Park, Pacific Heights, the Painted Ladies, the Golden Gate Bridge, and many key San Francisco landmarks. So, I had no eyes on the market, but gladly remain partially hedged to the downside with a position giving me potential upside exposure.Good trading and great risk management to all.Educational use only. Never intended as investment advice.

What's in a Name?

by noreply@blogger.com (TBA)
1 Oct 2008 at 7:20am
Click charts to ENLARGE.Euphemisms have an expanding role in modern society. A fire on the Russian space station was 'the unplanned burning of an oxygen container'. Recessions were born of 'depression' that replaced 19th century 'panic'. And the gubmint wants to push RESCUE plan instead of BAILOUT.The root causes of the problems vary from leverage (or gearing), to unrestrained credit expansion, to philosophy (ownership society), poor business practices, to both lack of oversight and unaccountability by the Fed. Greenspan had 9/11- like warnings in the late 1990s and waived them off. Bernanke simply never saw the iceberg.The bailout bill doesn't address the core of the crisis. It relieves some of the symptoms, like another fix for a heroin addict or ibuprofen for a herniated disk (like mine). Why not address the problem? Too painful and the impact too immediate. The gubmint runs on tax revenue including income taxes and capital gains, both in full retreat. Tell the public you've fixed the problem and move on?The ten-year yield, headed for 2.5%? Will our creditors accept that? What does that mean for the yield curve?Is the bull market in Treasuries ovah? I'm not willing to bet either side.___________________________________________________The best bet on the board has been volatility, and one we need to keep our eyes on. It's the all out war on deflation, the smart bomb that kills people and sometimes, but not always stuff.Good trading and great risk management to all.Educational use only. Never intended as investment advice. Long caution.

What Would Gann Say?

by noreply@blogger.com (TBA)
30 Sep 2008 at 10:09pm
Click charts to ENLARGE.The great and inscrutable W.D. Gann used something he called 3-day charts. A nascent trend change might include three consecutive days of higher lows and higher highs. A downtrend might start with three lower lows. In early September, the SPY crosses the 50 day MA (blue) AND makes three lower lows...since then NO highs have exceeded that high and the SPY has taken pain. Something to think about.Currently, while the media focuses on the BAILOUT, the markets are likely to remain problematics until credit spreads improve. LIBOR made highs recently. Not good. Failure to remedy the global credit market issues means disaster. Paulson and Bernanke know that, but aren't advertising that, are they?Here are two of the most important people in my life, daughter Julia and Conor, whom you know from his periodic contributions here. The markets are important, but family is number one. El jefe is taking the photo...Good trading and great risk management to all.Educational use only. Never intended as investment advice.

Little Big Horn for Bernanke

by noreply@blogger.com (TBA)
30 Sep 2008 at 5:30pm
What did Ben Bernanke know and when did he know it?Ben Bernanke's track record. "At this juncture . . . the impact on the broader economy and financial markets of the problems in the subprime markets seems likely to be contained," March 28, 2007Bernanke on Housing“Given the fundamental factors in place that should support the demand for housing, we believe the effect of the troubles in the subprime sector on the broader housing market will likely be limited,” May 17, 2007"We do not expect significant spillovers from the subprime market to the rest of the economy or to the financial system." May 17, 2007Bernanke's pedigree, his economic raison d'etre was his historical expertise in depression era economics. Unfortunately, in practice, his analysis and response have lacked insight and scale. His own words betray him. He simply must go.Good trading and great risk management to all.Educational use only. Never intended as investment advice.

Looking Out for Number One

by noreply@blogger.com (TBA)
30 Sep 2008 at 3:51pm
Click charts to ENLARGE.The markets rallied explosively today as the politicians sought cover.Rarely have we seen less statesmanship and more bluster than during the bailout rhetoric debate during the past ten days. First, this is a bailout, not a heroic rescue or an economic recovery plan. Let's review some of the miscreants' behavior:Banks, who failed their fiduciary responsibilitiesCongress, that failed to act and when they have acted have done so in amazingly partisan fashionHenry Paulson, with a remarkable power grab, sniff-test failing plan long on personal aggrandizement and agonizingly short of detailsNancy Pelosi, with an unnecessarily partisan speech on the cusp of a voteHouse Republicans, who hid behind the fig leaf of constituent email as they face difficult election campaigns this fallThe FDIC, which didn't act to raise insured limits earlierPresident Bush, whose powers have eroded by his lame duck statusBarack Obama, who has largely tried to remain on the sidelinesJohn McCain, who tried to insinuate himself into the process to grab creditWall Street, whose resistance to restrictions on compensation while snatching at citizen funds is truly astoundingTout TV, whose parade of Chicken Littles pandering for passage is just more of the lameBen "Blunder" Bernanke, whose stature gets miniaturized daily as the dysfunctional overseer of the Fed mission to provide financial stabilityLet's turn again to Peter Warburton of Debt and Delusion, Central Bank Follies That Threaten Economic Disaster for insight: pp124-125Under the guise of risk management...the increasing acceptance and use of derivative products have galloped ahead of our understanding of their wider implications.Central banks...have abdicated responsibility for the specific task of ensuring that banks' capital is not over-traded using financial derivatives...whereas most on-balance sheet risks are clearly defined, derivatives risks are complex and inter-correlated...Like inept detectives the central bank regulators are liable to arrive on the sceneof a crime long after the damage has been done.A recurrent theme of this chapter has been the participants' desire to conceal and the ease of concealment that financial derivatives allow...accounting standards are as lax as cooked spaghetti. While the GAO and FASB are fighting a lone - and probably losing - battle for tighter reporting stndards...the spread of derivatives users becomes wider and wider.What is clear is that when the next global bear market in equities and bonds arrives, the unwinding of highly geared (leveraged) derivatives positions will trigger financial explosions in every corner of the developed world.Warburton wrote his masterpiece in 1999. Too bad for Professor Bernanke and colleagues that they continued to ignore the risks and exposure three hundred million Americans to their lack of competence. Nothing contained in the discussion really addresses the ONGOING STRUCTURAL RISKS.Good trading and great risk management to all.Educational use only. Never intended as investment advice.

Man, was that not an insane day?

We did a little buying through out the day -- but not a lot.

Toe in the water for a trade . . .

What did you do ?

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I did a podcast with James Reese of Radio Economics

James and I had three prior interviews between September 2005 and February 2007.  You can listen to them here or at the iTunes Music Store.

How accurate were these forecasts -- about markets, the economy, housing, lending and credit?

Sources:

Barry Ritholtz Answers the Four Fundamental Questions about the Crisis  (October 3, 2008)  http://odeo.com/episodes/23451056-Barry-Ritholtz-Answers-the-Four-Fundamental-Questions-about-the-Crisis

iTunes Music Store Podcast (free) http://phobos.apple.com/WebObjects/MZStore.woa/wa/viewPodcast?id=75438319

Radio Economicshttp://radioeconomics.com/1/?p=33

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As I have said in the past, I don't like to harp on any one person. I also don't want to be a Cramer stalker. But DAMN if that headline doesn't smell like a giant buy signal.

The market down 30%, the VIX spiking to 56, and Cramer giving a panicky SELL on TV this morning. We have a 9,500 downside target, and the likelihood of an emergency action makes us want to get long -- at least for a trade . . .

We are putting a toe in the water here.

Source:Jim Cramer: Time to get out of the stock marketMichael InbarTODAYShow.com, October 6, 2008http://www.msnbc.msn.com/id/27045699/

Click here for video

It is those "Dow 10,000" hats CNBC got for all the on air anchors way back in 1999. They sure got a whole lot of use out of them.

The Dow is 9,868 as I type this.

GE breaks syndicate price of $22.20 secondary, and its now off by a full 10% -- at $19.95.

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Dow Industrials, 10 Years

Chart courtesy of FusionIQ, Bloomberg

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As to forecasting forward from here, there are simply too many unknowns and moving parts to say anything with a high degree of confidence.  A lot depends upon the govt response to the credit crisis, to the recession, and other elementsWe could theoretically find support between 9,500-9800, or we could see the bottom drop out any day now With the VIX now over 50 -- the Dow is now off 30% In one year -- I would imagine we are closer to the bottom than to the top.

Markets are looking ugly around the globe. Investors are voting on the bailout plan with their feet. The crisis is now accelerating.

This is a speech I'd like to hear either one of the candidates give. The man who expresses these views (or something close to it) gets my vote:

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My fellow countrymen:

These are indeed extraordinary times. The country is in an economic crisis, housing has been in freefall, we are clearly in a recession, and now credit freeze is  worsening. We are living through what future historians will call The Great Financial Crisis of 2008.

Times such as these call for extraordinary leadership. Unfortunately, such leadership has been in precious short supply in Washington D.C. Our government has been reacting to events, rather than pro-acting. Its been all crisis management -- putting out fires rather than preventing them. We have been on our heels, playing defense. That is not leadership; that is not considering possible events, and planning accordingly.

It is time for this leadership vacuum to be filled.

We have made some positive steps: A $700 billion-dollar bailout plan was passed by Congress last week, and while flawed, it is a first step. It is the biggest bailout bill in America's history. But now is not the time to sit back and wait for results. We need to consider the next steps that must take place as a follow-on to this rescue plan, as well as contingency plan in case things do not go as we hope. Pray for the best, but be prepared for the worst.

We need a "Plan B."

I propose the following: As of this morning, I have sent invitations to our nation's brightest financial and economic thinkers. It doesn't matter if they are in academia, or the private sector, or in government. It matters not to me if they are a Democrat or a Republican or Independent. Your country needs you, and I hope you will answer the call.

It is time for us to get on the offense.

What is needed now is for the intellectual capital in this country to be put to good use. We have many of the world's finest universities, we have unparalleled genius amongst our populace. Rather than merely rely on a hastily crafted on-the-fly  plan, improvised in response to the eruption of crisis, its time we used our brains. We need to be both optimistic, and at the same time, we must always have a contingency plan. A great nation such as ours deserves at least that much.

What we need is our generation's economic equivalent of the Manhattan project. That's what helped the United States and her allies develop the A-bomb and to win WWII.

For the past 8 years, we have ignored our greatest strengths. We have disdained reason and science. We have lived in an imaginary fairytale land, where home prices never went down, where inflation and unemployment were low, and economic growth was strong.

That turned out to be a phantom dream, based upon an illusion.

We now know that much of the growth of the past few years was based on these faulty premises: That we could borrow our way to a better lifestyle, that our financial institutions could speculate their way to profits, that we could deficit spend our way to prosperity. My friends, that is not how you achieve economic greatness. We need to strengthen the economic engine of the United States in every way we can. To do that, the president of the United States needs to take counsel from the wisest men and women in the land.

I invite my opponent to participate in this, to sit side by side with me, and receive counsel from these experts together with me. Whichever one of us win this election next month, he will need to hit the ground running. This crisis is bigger than the election, it's more important than either one of us. It's of great significance to the country, indeed, to the world. (Far greater importance than you would have guessed from the response from the present White House).

In the absence of leadership from the White House, it is incumbent upon the two men seeking that office to show the economic leadership that has been missing.

We are challenged to rise to this occasion. When presented with great challenges, America has always responded with greatness of our own -- and this is one of those times. We are being tested, and we must succeed -- not with just a barely passing grade, but with flying colors and honors appropriate for a great nation.

Given the extent of the financial crisis, and the extraordinary amount of resources that we must bring to bear upon this, in order to prevent this recession from spiraling into something far, far worse, we must leave no stone unturned, no idea unexplored, no action unconsidered.

As a nation, we have weathered terrible crises before: The Depression in 1929, World War 2, Recessions and economic disruption, the attacks of 9/11. The United States has been tested, many times in her past, and has always risen to the occasion every time. The Great Financial Crisis of 2008 is merely another one of those tests that allows the country to demonstrate what its people are capable of -- what we are made of -- what makes us Americans.

This will not be easy. Sacrifices will have to be made. For a period of time, we must put aside our our own self-interest and work together as one nation. There is no room for partisanship. There is no time like the present to embrace our future. And there is no country like the United States of America.

God bless you, and God bless America.

In our office, we've been using the Fusion IQ quant system for so long, we know it inside out. We use it as the basis for our institutional trading and published research (up ~10% for the year).

Subscribers have asked us to include our market and stock commentary -- beyond the pure neutral software application. In addition to the tools index rankings, there is also an "S&P 500 Marketometer" -- an intermediate term gauge of the S&P 500’s internal health. We use this as the basis of our own market review. As requested, we include our own application of the quantitative equity ranking system. This means in addition to the equity, index and sector work, we upload our own technical and macro commentary, too.

My partner Kevin Lane is a well regarded technical analyst who built his reputation recommending Enron and Tyco be shorted long before it was fashionable. He is usually the yin to my yang, bullish to my bearishness. Here is his most recent technical commentary about the S&P500:

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S&P 500 Index (SPX) - Daily Chart (1999 to Present)

As seen above the S&P 500 broke through what was once a solid support area (green lines and maroon dotted circle) in the last few days of trading last week and continued falling.  This support break was critical as it sent a message to market participants that this corrective phase is not yet over.  The next support zone for the S&P 500 now comes into play in the 1,015 to 960 zone (blue dotted lines).  At these lower support levels, particularly the 960 level, we would likely see a powerful rally set up as the S&P 500 would hit support while also being deeply oversold and more than likely have absorbed a massive selling purge.  These aforementioned factors along with a likely new 10-year high in the VIX (if this lower support level is hit) would suggest negative sentiment had peaked.

Trend, Breadth and Momentum are all bearish; Liquidity is bearish to neutral. The only element that is remotely bullish is Sentiment.

As we said to clients early last week (prior to these supports being violated) market internals and momentum were all very negative and the path of least resistance would remain down. 

This still remains the case.

Part I

click for videos

Part II

Part III

Nice depiction of where the pain is being felt most:click for ginormous version

This is obviously having a political effect:click for ginormous version

Sources:For Most Cities, Recession Has ArrivedBILL MARSHNYT,  October 4, 2008http://www.nytimes.com/2008/10/05/weekinreview/05marsh.html

Economic Unrest Shifts Electoral Battlegrounds  ADAM NAGOURNEY and JEFF ZELENYNYT, October 4, 2008http://www.nytimes.com/2008/10/05/us/politics/05map.html

The Sunday New York Times has a very interesting article on Fannie Mae and the current financial crisis. They do a decent job at delving into the complexities of the GSEs, and the many factors that went into the decision making at the senior level of the company. This includes pressure from clients such as Coutrywide CEO Angelo Mozilo, pressure from Congress, and the demands from investors for the company to be more aggressive. Most of all, it looks at the ongoing competitive demands of the market place that Fanny was in.

The key to understanding the GSE story is grasping their role within the bigger picture of the economy and housing sector. While there are some pundits who prefer talking points over reality (Charlies Gasparino, Lawrence Kudlow, James Pethoukoukis, and Jeff Saut all toed the GOP line) I prefer to keep all of my analyses based on the data and facts. Rather than creating historical revisions for partisan reasons, I prefer to keep it reality based. (I'm an independant, and that's how I roll).

The current housing and credit crises has many, many underlying sources. Its my opinion there were two primary causes leading to the boom and bust in Housing: A nonfeasant Fed, that ignored lending standards, and ultra-low rates.

This nonfeasance under Greenspan allowed banks, thrifts, and mortgage originators to engage in all manner of lending standard abrogations. We have detailed many times the I/O, 2/28, Piggy back, and Ninja type loans here. These never should have been permitted to proliferate the way they did.

The most significant element were the 2/28 APRs, and their put back provision. Just about all of these gave the securitizer/repackager the right to return the loans within 6 (or 12) months if they went into default. Hence, our proposition that the 2002-07 period was unique in the history of finance. If any of these mortgages went bad within 6 months, the undewriter was on the hook.

HOW DIFFERENT WERE LENDING STANDARDS IF YOU ONLY NEED TO ENSURE THE BORROWER WOULDN'T DEFAULT FOR 6 MONTHS VERSUS FINDING BORROWERS WHO WOULDN'T DEFAULT FOR 30 YEARS.

In a rising price environment, 99% of the mortgages were not returned by the securitizers to the originator. From 2001 to 2005, the mortgage firms thrived. However, once prices peaked and reversed, things changed. From 2006-08, Wal Street began putting back mortgages to originators in greater numbers. This led to nearly 300 mortgage firms imploding.

We can blame the lenders, the securitizers, the borrowers, and Fannie/Freddie, but it doesn't matter much. By the time Fannie and Freddie began changing their mortgage buying rules, the Housing boom was already in full gear, and the crash was all but inevitable.

Some people (especially the political hacks) are focusing their energies in the wrong places. According to a recent investigation by Barron's, Fannie's biggest problem was not the subprime mortgages they bought  -- it was the better quality Alt A mortgages that caused their demise:

"As Freddie Mac Chairman and CEO Richard Syron recently put it, the GSEs have been hit by a "100-year storm" in the housing market, accentuated by some higher-risk mortgages that they were forced to buy to meet government affordable-housing targets.

The latter contention is more than disingenuous. A substantial portion of Fannie's and Freddie's credit losses comes from $337 billion and $237 billion, respectively, of Alt-A mortgages that the agencies imprudently bought or guaranteed in recent years to boost their market share. These are mortgages for which little or no attempt was made to verify the borrowers' income or net worth. The principal balances were much higher than those of mortgages typically made to low-income borrowers.

In short, Alt-A mortgages were a hallmark of real-estate speculation in the ex-urbs of Las Vegas or Los Angeles, not predatory lending to low-income folks in the inner cities."

Only pure partisans take as gospel the statements of an embattled CEO whose own words are belied by the firm's balance sheet and P&L statements.

What about the ultra low rates? Consider that the Greenspan Fed maintained a 1.75% Fed fund for 33 months (December 2001 to September 2004), a 1.25% for 21 months (November 2002 to August 2004), and lastly, a 1% Fed funds rate for 12+ months, (June 2003 to June 2004). That was fuel for the fire, and fed the boom even more, sending prices skyward.

And not just here . . . As the central bank for the largest economy in the world, the Fed's rate action had repercussions in Housing markets everywhere. Rate cuts here richocheted around the world, sending home prices upwards globally.

Fed Fund Rates, 1974-2008

Note the circled area of detail is the chart above, in its historical context

Fed Fund Rates, 2000-2008

As to the credit crisis, it too, has many many  proximate causes, but the two I focus upon as having the greatest impact was exempting CDOs from any sort of regulatory scrutiny (Commodities Futures Modernization Act of 2000) and the payola scandal of the rating agencies Moody's, Fitch, S&P slapping Triple AAA ratings on all manner of junk paper.

In order to fully understand the housing and credit crisis, one needs to understand a bit of history in the housing market. To that end consider this timeline:1987 Federal Reserve cuts rates 1989 Housing Market peaks1996  Prior purchases get to breakeven1997  Housing Taxpayer Relief Act1998 3 Rate Cuts1995-2000 -- Big stock market gains2001 Rate cuts from 6% down to 1.75%2002 More rate cuts to 1.25%2003 one final cut to 1% 

Follow the timeline: Home sales and prices cycled up post '87 market crash -- they peaked in 1989, and for the next 7 years, they slid down to sideways. A 1989 house buyer did not get back to break even until 1996/97. (See chart above)

A few other factors impacted housing: In 1997, the Taxpayer Relief Act that dropped capital gains to 20% from 28%, and also exempted the first $500,000 for married couples selling house (allowable once every two years).  Around that time,the stock market boom and tech dot com bubble was in full throat.  That put ALOT of money in people's hands in 1997, 98, 99 and Q1 of 2000. In the late 1990s, I had many discussions with clients, real estate agents and traders about the equities into house rotation: Take some equity profits off the table and then trade up in real estate. Consider these S&P500 gains in the markets: 1995=34%, '96=20%, '97=31%, '98=27%, and from Oct '99 to March 2000, the Nasdaq was up 100%.

The folks who want to place the entire crisis at FNM/FRE 's doorstep miss the point -- and let me hasten to add that I was never a fan of the company, and we were short FNM from over a year ago, at $42+ -- these people seem to miss all of the big picture issues, and are focsing on minor factor and outright irrelevancies. This was not a "social engineering" experiment, as the radical right has called it. This was extreme short sightedness.

Fannie Mae was not a government entity, they were an independent, publicly traded, private sector firm. They were allowed to borrow at better rates than banks as a GSE. They bought what they did in an attempt top grab share and profits. If they came under pressure from Congress -- or Angelo Mozilo, or hedge fund investors -- it was because they were trying to capture market share and profits and maintain an advantageous position in the marketplace.

Consider:

"The chief executive of the mortgage giant Freddie Mac rejected internal warnings that could have protected the company from some of the financial crises now engulfing it, according to more than two dozen current and former high-ranking executives and others.

That chief executive, Richard F. Syron, in 2004 received a memo from Freddie Mac’s chief risk officer warning him that the firm was financing questionable loans that threatened its financial health.

Now consider the key points from the NYT article today:

• Company was in disarray after an accounting scandal;

• New CEO came on board in 2004;

• Competitors were "snatching lucrative parts" and market share away;

• Between 2001-04, the subprime mortgage market grew from $160 to $540 billion

• Between 2005-08, Fannie purchased or guaranteed at least $270 billion in loans to risky borrowers. 

• By 2004, Fannie had lost 56% of its loan-reselling business to Wall Street;

• Angelo Mozilo, Countrywide Financial CEO, the nation’s largest mortgage lender, threatened to end their partnership unless Fannie started buying Countrywide’s riskier loans;

• Congress was pressuring for more loans to low-income borrowers;

• Hedge fund managers and other investors pressured Fannie executives that the company was not taking enough risk in pursuing profits;

• Like many other firms, Fannie’s computer systems did a poor job of analyzing risky loans;

• Between 2005-07 -- afte rthe market's peak -- Fannie's acquisitions of mortgages with less than 10% down payments almost tripled;

• Fannie expanded in hot real estate areas like California and Florida;

• From 2004-06, Fannie operated without a permanent chief risk officer;

As I have said repeatedly, Fannie and Freddie were cogs in the great housing machinery, and they bear some responsibility for the current debacle. But to claim they were the most significant factors misses the true tale of our twin Housing and Credit debacles.

Fannie has been around since 1938, Freddie since 1968, the CRA has been around since 1977 -- suddenly, all of housing goes to hell in 2005, and then credit collapses 2 years after -- and the best explanation some people can come up with is Fannie, Freddie and CRA?  Gee, isn't that rather odd -- especially after 70 years?

Then there is the international issue: If Fannie and Freddie and the 1977 CRA (and amendments) are to blame for the US boom and bust, how did the rest of the world end up with a housing boom too? Why did prices and sales go skyward in the UK, France, Spain, Ireland, Australia, etc.?  They had no CRA, or a Fannie Mae, or a  Freddie Mac, -- so then what caused their housing boom?

The short answer: Ultra low rates, securitization, and perhaps some of our homegrown, innovative lending standards. 

While I understand that reducing the complexities of economic history into bumper sticker phrases is politically expedient, it does not help us understand the root cause of the problems. And, it gets ibn the way of helping us fashion a solution for the future. Hence, why I hold the weasels who are attempting to obscure reality and rewrite history in such disdain.

For the non-partisan, non hacks amongst you, for the policy makers and academics and economists who are truly interested in how this came to pass, and what we can do to fix it, the bottom line remains: The CRA was irrelevant to the current crisis, and Fannie Mae and Freddie Mac were mere cogs in a very complex financial machine, with many moving parts.

But the primary cause of the mess? Not even close . . .

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click for bigger graphic

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Previously:How Washington Failed to Rein In Fannie, Freddie (September 14, 2008)    http://bigpicture.typepad.com/comments/2008/09/how-washington.htmlFreddie's Risk Officer: CEO Ignored Warning Signs (August 05, 2008)   http://bigpicture.typepad.com/comments/2008/08/freddies-risk-o.htmlHis Name is Mudd (August 20, 2008)http://bigpicture.typepad.com/comments/2008/08/perilous-pursui.html

Fannie Mae Looks Like Hell (November 16, 2007)http://bigpicture.typepad.com/comments/2007/11/fannie-mae-look.html

Sources:Pressured to Take More Risk, Fannie Hit a Tipping PointCHARLES DUHIGGNYT, October 5, 2008http://www.nytimes.com/2008/10/05/business/05fannie.htmlAt Freddie Mac, Chief Discarded Warning SignsCHARLES DUHIGGNYT,  August 5, 2008 http://www.nytimes.com/2008/08/05/business/05freddie.html

The Endgame Nears For Fannie and Freddie   JONATHAN R. LAING   Barron's August 18, 2008http://online.barrons.com/article/SB121884860106946277.html

The bears sure do love taking this market apart on Mondays. The hope for positive catalysts over the weekend and subsequent disappointment makes for an all too easy trade in this fear-filled environment. And, yes, for what it is worth, I think the afternoon reversal was generated by short-covering (i.e. profit-taking by the bears) than any real buying interest. As you might imagine, the sentiment and technical indicators are literally off the charts suggesting we're going to see.....[READ]

This pretty much sums up the mood of the moment:

Good morning. Markets around the world are under heavy selling pressure this morning and premarket futures indicate we're set for an approximate -2% gap down at the open.

Over the weekend, Europe didn't reach an accord on bailouts and instead each country is handling the fall outs on their own. In addition, no coordinated worldwide interest rate cuts have been announced which is what people wanted and expected over the weekend. In response, the Fed just announced that it will add up to $900 billion dollars of liquidity in the market among other measures but still no rate cut.

Premarket gainers: SLXP, IRF, SIL, IMCL, PGNX, FEED, GOLD, UIS, EBAY, GSS, IAR, EGO, HL, & AUY.

Premarket losers: FRP, FMC, FNM, FRE, RBS, LNCR, TMA, ATPG, JNY, ALJ, SDTH, NCC, MT, POT, SOV, IMMR, CLNE, SOLF, JASO, FLEX, AIG, BCS, BAC, ETFC, WB, C, AAUK, FSLR, ALU, GE, DRYS, CLR, SID, TRN, YZC, & KEY.

The economic calendar has nothing on it today, so trading will be impacted by any new headlines from the Fed and the whatever headlines we see regarding the financials. With the market closing at its lows on Friday and this morning's gap down, at a minimum we'll need to see the opening levels hold this morning.

In spite of all of the gloom and doom, let's go make it a great week!

In spite of every hope and effort to the contrary, we closed them out at our lows. Not even the passing of the bailout bill and rampant rumors of rate cuts over the coming weekend was enough to save this tape.

For the week, the S&P 500 declined -9.38%, Dow -7.34%, the Nasdaq -10.81%, and the Russell 2000 -12.12%. Indeed, a year's worth of losses in just one quick week.

Once again everything "ultra" short provided the most bang for the buck. Pull up the charts of SMN, SKK, SRS, SIJ, TWM, DUG, & SDD and you'll see +25% gains just over the past five trading sessions. What a great time to be a bear. Enjoy it while it lasts my furry friends.

Next week we can look forward to more speeches by Bernanke & Co. along with updates on Consumer Credit, Pending Home Sales, Chain Store Sales, Wholesale Trade, Import & Export data, and what should be one heck of a report - the Treasury Budget as third quarter earnings season fast approaches.

Rest up this weekend. Like usual, we're going to need to bring our "A" game to the table next week to make the most of this market mayhem. See you then!

It's been a couple of weeks and it is time to open up the old mailbag. Topics I'll cover in this week's mailbag are:

The TED Spread

How I've Been Protecting Investments

A Data Mining Tool For Those With Deep Pockets

The Importance Of Trading Experience

Screening For YTD Winners

It's Time To Kill My Timing Indicator

What Will Bring Buyers & Confidence Back

Recommendations For Investing In The Market Now

How To Spot A Reversal Instead Of A Bounce

My Thought On the TIPS

Where I'm Keeping My Cash

Handling Gap Opens

Ramifications From The Ban On Shorting

Moving On After A Major Trading Loss

Leverage Kills

A Quick Review Of SmartStops

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Good morning. Continuing the trend of negative reports on the economy, a larger than expected 159,000 jobs were lost last month with an unemployment rate staying at 6.1%. Oddly enough, premarket futures did not fall on the news as Wall Street is thrilled to see that Well Fargo is buying Wachovia in a stock-for-stock transaction. In premarket trading, a number of financial stocks are in rally mode as traders think a M&A wave is about to hit the sector once the bailout bill gets passed.

Meanwhile, as a sign that the credit crisis if far from over, yesterday Governor Arnold Schwarzenegger warned Hank Paulson that the state of California might need an emergency loan of as much as $7 billion from the federal government within weeks to stay afloat.

Premarket gainers: WB, PMI, NCC, GGP, ABK, SOV, AIB, LYG, HIG, FITB, MTRX, CPST, RF, SPAR, AIG, BCS, HUN, YGE, SFI, VSE, BZH, CS, EP, TMA, EP, GPN, SQNM, DB, S, RTP, & LINE

Premarket losers: MGA, PENN, LWSN, MRVC, C, ASMI, FMCN, STLD, ADBE, OVTI, IBN, ALU, & AEG.

Just like Monday, today the market's focus will be on Washington ahead of the bailout vote. It appears that some lawmakers have changed their opinion and will pass the bill, but as we've seen, you just never know until the vote comes in at 12:30PM. Before the vote, we have the ISM non-manufacturing survey which is likely to be as negative as the other economic reports we've seen this week.

Given this week's trading, we definitely have a trading range developing with this week's low and highs and a breakout either way (especially on the upside) could generate a counter-trend rally. We'll see how it plays out both ahead and after the vote. Ideally, we want to see the market rally upon bad news and this morning's nonchalant reaction to the jobs report is noteworthy. Premarket futures currently indicate a positive start and even gained upside traction after the jobs data was released.

Have a great Friday!

It was another "fun" day at the trading desk as we gave up most of this week's bounce and returned back to those Monday lows.

I've seen my fair share of nasty markets, but this one has to be right up there with the best. Fear, frustration, confusion, and despair are running rampant and I'm working over time to stay one step ahead of the declines and trying my best to get one step ahead of this beast. The market seems to be trying to price in a full blown recession and that along with some forced selling by the hedge fund crowd is really making things tough.

Needless to say, I've been taking my lumps this week (i.e. getting stopped out early and often), but I'm still staying upbeat and opportunistic which is all you can do in this environment. The other way (stick your head in sand, throw in the towel, get bearish amid all of the fear) doesn't look like the most difficult trade.

In the end, I frequently remind myself that I've been here before, and as long as I keep the downside risk in check, protect capital, and keep plugging away I'll be positioned right when it matters most. No, this is never easy, but making money rarely is in the market. We've all forgotten that these past few years, and this has been a tough reminder for some, but we'll make it. Keep that chin up and stay focused! Better days are ahead.

Bailout Bill 2.0

Now that the government has been terrified into rubber-stamping the bailout, what happens now?

The Depression of 2008? Don't Count on It!

As credit crisis spiraled, alarm led to action

How Monday could have been worse

The hedge fund blues are just beginning

Observers question