# Is this the crash coming right at us?



## Buffettology (28 July 2007)

I have to say ladies and gentlemen, I was a bear a few months ago, but kept taking short positions to try and get in and out as quick as possible so I could avoid a crash (as I beleived one was definately on its way).  With the very minor correction lately (we have lost a few hundred points), and with the US falling another 1.5% on Friday, could this coming week see us plummet?  

I personally think it looks likely, but just how big will it be?  I cant see us sliding below 5500, though worse things have happened...........

Opinions?

On a side note, I reduced 60% of my portfolio in stocks, down to about 40%, so a crash wouldnt be too bad at all.  Currently I am only holding JST and EQN and JST performed relatively well last week.


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## Fab (28 July 2007)

I believe it is a welcome correction , I am not too sure about a crash yet but the large drop in recent days is making me a bit nervous.
The reason I think there is still some upside to this market is that August result season is starting next week and broadly results are forecast to be good or very good so that should keep shares on the way up. Also that might be dampen if interest rate goes up.
Miners are not expensive but some industrials are. The problem is the OZ market has followed the US one in its fall and it has been accross the board which I don't think is justify so if the market keeps falling , there will be some very nice bargain


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## Bushman (28 July 2007)

Buffettology said:


> I have to say ladies and gentlemen, I was a bear a few months ago, but kept taking short positions to try and get in and out as quick as possible so I could avoid a crash (as I beleived one was definately on its way).  With the very minor correction lately (we have lost a few hundred points), and with the US falling another 1.5% on Friday, could this coming week see us plummet?
> 
> I personally think it looks likely, but just how big will it be?  I cant see us sliding below 5500, though worse things have happened...........
> 
> ...




What would be your trigger for the plummet? Presumably another big fall on the Dow? What is you recovery timeframe for this? Is the consequence a short term correction, longer term bear market? The Dow fall will be based on (insert useful commentary here).  

Based on what I have read it is a shorter term correction taking its lead from the US. It may well be an indicator of longer term issues with the US 'credit bubble' with as yet unspecified consequences but for the moment I am going to focus on the facts that I have read:

1. In the US, they recorded GDP growth for the quarter. The underlying economy is stable and robust and will soldier one for the moment; 
2. Various US hedge funds have gone under due to exposure to the sub prime (read high risk) credit market. However I believe there are statements out there from the US Treasurer that the risk is 'contained'. But then again he would say that. 
3. There will be a downturn in mergers and acquisitions in the US (and thus presumably in Australia) due to the end of 'cheap debt' in the States. This has taken out a 'takeover' premium in the US (and presumably Australian) market;   
4. I believe the Chinese indices were actually up on Friday. 
5. There may well be an interest rate rise this week. 
6. The Wesfarmers takeover of Coles could fall over if the monthly average Wesfarmers share price falls below $40. This could send a shock through the market that the Aussie takeover season is over.
7. AUD has lost some ground to the USD but this is a good thing for our commodities exports.
8. ?

Otherwise this is all starting to sound like the end of the world is nigh that you hear dishevelled men holding placards shouting from street corners.


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## Wysiwyg (28 July 2007)

I wonder what, if any, effect there will be on  base/precious metal prices.If these hold their ground or aren`t effected too much then a correction and not a crash it will be.In my opinion off course.


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## bean (28 July 2007)

Wysiwyg said:


> I wonder what, if any, effect there will be on  base/precious metal prices.If these hold their ground or aren`t effected too much then a correction and not a crash it will be.In my opinion off course.




To begin with they will follow the market.  Precious metals will recover the fastest.  US Will drop interest rates next meeting.  Australia will not raise interest rates.

And the US market next week.  Well if Monday is down.  Tuesday could be the biggest move of the year...decade!!!  The direction ???
Why ??? because if monday is down then all stops will be out to stop a CRASH on Tuesday
Up/down volume will be similar levels to 1987. 

Monday if down will be the 3rd day in a row.  Crash Protection team will be hard at work at some stage.  The Dow however is at another support level will that hold? Then next level probably the magic 13000


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## wayneL (28 July 2007)

bean said:


> US Will drop interest rates next meeting.  Australia will not raise interest rates.



I doubt the CBs will be that freakin' stupid. If they do do that, they are opting for eventual financial Armageddon. The best thing they can do is raise. There will be much pain and squawking, but that will be far preferable than trying to prop up the credit bubble, which will have much more dire outcomes.


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## Smurf1976 (28 July 2007)

In my opinion the correction will be followed by another round of central bank printing. I won't even start to worry unless the Dow falls more than 10% from its peak.

That said, obviously there are some sectors of the stock and other markets to keep well away from. Anything that is normally bought with large amounts of borrowed money seems likely to become somewhat harder to buy given the debt turmoil. 

I bought one stock on Friday and have two buy orders open at the moment. Now all I need is a short, sharp panic to get them filled. These stocks are all long term (several years) investments by the way. I'd be more worried about the market if I were a short term trader.


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## BSD (28 July 2007)

Just another transfer of money from the impatient to the patient and from the overleveraged to the liquid. 

Syncronised global growth and the third biggest economy growing at 12% per annum. 

Look at the real economy instead of the debt market panic in the US. Metals are unchanged over the last three days of panic and RIO and BHP are down 15%from their highs. 

Plenty of rubbish deserves to be dumped. But gosh I love being being able to buy high-quality assets at fire sale prices. 

Pity the over-leveraged and then buy their assets.


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## wayneL (28 July 2007)

BSD said:


> fire sale prices.



LOL Not Yet


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## BSD (28 July 2007)

wayneL said:


> LOL Not Yet




Not yet for most - but gee we are getting warmer with the SPI down another 80 and the panic merchants running wild. 

I love the smell of margin calls in the morning


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## Enoch (28 July 2007)

Wayne,

Printing liquidity is definitely the preferred approach taken by Central Banks around the world. 

Things would have to be pretty bad for them to cut interest rates, howver, I wouldn't discount it altogether. 

Cutting interest rates was the option preferred by Mr Magoo (Greenspan) after 9/11.

Both strategies will be inflationary and Gold is likely to fly?

However Gold may drop over the short term as it may get caught up in the debacle.

I think central banks are in more of a bind now as Greenspan had the luxury of lower base/precious metals and energy prices so he was able to lower interest rates in a much lower inflationary environment.

Today they don't have that luxury.

Regards
Enoch


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## wayneL (29 July 2007)

Enoch said:


> Wayne,
> 
> Printing liquidity is definitely the preferred approach taken by Central Banks around the world.
> 
> ...



Yes, and that's why I'm so pissed off at Greedscam and the CBs. The economy was cycling into recession (A healthy recession IMO) at that point. Had it been allowed to happen naturally we would now have a solid platform for growth into the next 15 years and importantly no overpriced assets, no credit bubble,  no ridiculous and sociologically damaging housing bubble.

In my view they have %$#@ed up big time.

As a result of their actions we face the real possibility of a complete credit implosion and severe recession, if not depression.

Nice work @55holes.


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## BSD (29 July 2007)

http://www.smh.com.au/news/business/everybody-is-guessing/2007/07/27/1185339258962.html


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## wavepicker (29 July 2007)

I find it interesting how the financial press or even various individuals look for "reasons" to justify what the market did a particular day, week or period. Sometimes there are quite obvious reasons that cause minor or macro moves such as event. Other times there is nothing. So what causes the market to do what it did?? Would it have done it anyway over the longer term? For example Sept 11 caused a huge downward move that was actually a capitulation. But the market was trending down anyway before Sept 11, so further along in time would have it kept trending down even if Sep 11 didn't happen?

So one can can only come to one conclusion, the market will do what it wants to when it wants to. The forces that move the market are internal, dynamic and feed upon themselves. However every now again we get these equity events caused by major news such as Sep 11 that cause very sharp, short and furious "pseudo waves"

The economic activity lags the market not leads it. Think this is silly??  The crash of 29 came before the great depression. The crash of 87 came before the the recession of the early 90's. The Nikkei225 in Japan crashed before the economic deflation in Japan. Put simply, the market has the first and the last word, everything else follows.

Cheers


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## Uncle Festivus (29 July 2007)

It is always interesting to see the word 'bargain' and the phrase 'the market always rises' pop up in these 'corrections'. These are both valid presumptions based on historical precedents of capitalism as we know it. What if we were to stand back and have a really good look at the big picture, and try to trace these periods of prosperity & correction to determine precisely what is the driving force, and if it is sustainable indefinatly. 

The problem we now face is the fact that the financial lubrication eg currencies in circulation today are in excess of the requirements for sustained & steady growth. This is also compounded by the use of margin & derivatives, which grow exponentially each year to the point where nobody really knows if there is actual 'real' money to back them all, all the while the average dollar in Joe Citizens' wallet is getting worthless every day.

The normal capitalistic purges to 'reset' things have been indefinitly delayed due to either human weakness or political expediancy. 

Notice how many charts there are with the blow off top surge formation going around eg share markets, property, antiques, art (Aboriginal dot paintings???) etc

And Japan, the former economic miracle & now world banker supplying zero percent funds to fuel asset bubbles, relegated to the global backwaters for more than a decade now - is this an example of the end game of capitalism, though in isolation? What if it synchronises on a global scale - contagion?

Are we better off now, or are we living to work?

Humans have just gotten too smart for their own good.

It may actually _be_ different this time?


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## Ken (29 July 2007)

If you had have sold everything on the last correction you would have sold stocks at these prices.

BHP $25
OXR $2.70
ZFX $15
COE $.42 cents
RIO $70

Todays prices:

BHP $35
OXR $3.60
ZFX $18
COE 75 cents
RIO $90


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## nizar (29 July 2007)

wavepicker said:


> I find it interesting how the financial press or even various individuals look for "reasons" to justify what the market did a particular day, week or period. Sometimes there are quite obvious reasons that cause minor or macro moves such as event. Other times there is nothing. So what causes the market to do what it did?? Would it have done it anyway over the longer term? For example Sept 11 caused a huge downward move that was actually a capitulation. But the market was trending down anyway before Sept 11, so further along in time would have it kept trending down even if Sep 11 didn't happen?
> 
> *So one can can only come to one conclusion, the market will do what it wants to when it wants to. The forces that move the market are internal, dynamic and feed upon themselves. *However every now again we get these equity events caused by major news such as Sep 11 that cause very sharp, short and furious "pseudo waves"
> 
> ...





Solid post Wavepicker.
I agree wholly.

Just one point on individuals explaining market movements.

On thursday when the DOW rose about 90pts, the report on marketwatch was that because the oil price rose, that carried Exxon and as a result the market went up.

But when the DOW falls because of the oil price rising (more usual case), its because higher oil prices leads to inflation and higher interst rates.

I got a laugh out of that one! LOL  

Gotta love analysts. I remmeber one bloke was calling for a US correction since October 2006, it never happened, so month after month, he would give his reasons. Then after what happend in late Feb, the same guy came on CNBC beating his chest, saying he had been expecting this for months. He wasnt wrong of course, he was just early 

I seriously hope these guys dont trade off their analysis


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## Bushman (29 July 2007)

Ken said:


> If you had have sold everything on the last correction you would have sold stocks at these prices.
> 
> BHP $25
> OXR $2.70
> ...




It is a good point Ken and one I have been grappling with for the last few days. I am meant to be studying for my FINSIA Finance course so writing my musings on the global capital markets is a great way to procrastinate! 

Everyone needs to ask themselves three questions:
1. What is the time horizon for my investment? Some people invest for retirment, some for 5 year horizons, some for 1 year horizons and some trade on a day to day basis. If you are a day trader, a correction is a big deal. If you are in it for the longer haul, the events of the last few days should not cause you any concern. I know it gets trotted out a lot, but share prices are listed in on a real time basis vs property which is not. Hence shares have a perception of volatility on a short term basis when in fact the longer term trend is growth. Anyone charting their share portfolio on a +12 month basis should still be in a healthy position.
2. Is your asset portfolio sufficiently diversified to allow for your individual tolerance of risk? From the sounds of it on this forum, there has been a flight back to cash in the short term due to a perceived riskier equities market.
3. What is your outlook for the global economy? It is a global economy now due to the increasing acceptance of capitalisation as being the dominant system for wealth distribution. But the point is, as of today, the US is still a dominant part of the global economy and the behaviour of the US consumer is the key barometer of the health of the dominant economy.

It is an interesting period of time this. It has been a great learning experience as well. Up to this point I have focused solely in the first two questions without focusing too much on the third question apart from accepting as a given that China is booming so commodities are in demand. Too simplistic a view. 

I will re-assess my position when the next round of US GDP and housing indices come out. 

I think you definitely learn a heck of a lot more when your portfolio is read opposed to green. Fear can be a good thing as well. 

Thanks for all the great contributions by the way. It has helped immeasurably to answer my key questions.

Now back to studying about 'Property Market Sectors'. Groan...


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## professor_frink (29 July 2007)

bushman said:
			
		

> Everyone needs to ask themselves three questions:
> 1. What is the time horizon for my investment? Some people invest for retirment, some for 5 year horizons, some for 1 year horizons and some trade on a day to day basis. If you are a day trader, a correction is a big deal.




yes, the past week has been a pretty big deal for me. The volatility the past week has been huge. Opportunities like this don't come around too often in a bullmarket


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## YOUNG_TRADER (29 July 2007)

I know this will sound strange,

But I just updated my portfolio value as of close Friday and its actually up 25% since last Friday!

Thankyou CUL and RMI 

Aren't corporate profits still good?

Isn't the world still expected to have excellent GDP growth?

Isn't China, India and the rest of Asia's demand for raw commodities still there?

If anything this shake up has only helped the resources sector, why?

Well fundamentally its the banks/lenders etc that should feel the brunt of this as the concerns are to do with subprime woes and the ability to do deals, raise debt etc, so if I were an Insto I'd be cashing out of these sectors and looking at the sector whose fundamentals haven't changed since last week ...........

You know the one which is struggling to keep up with demand, the one which is experiencing set back after setback in bringing production online

But then thats just me


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## vert (29 July 2007)

agree with you YT my portfolio went up last week to 
was also able to pick up some more of a stock at a price which i thought wouldnt be seen again before news comes out 
there is still some great small caps out there that will make some good gains


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## krisbarry (29 July 2007)

My portfolio actually went up too, so I am very impressed that on such a horrid week to walk away in a better position.

The correction (not crash) is almost over...1 more day in the red, and then we are off to reach new highs over coming months.


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## chops_a_must (29 July 2007)

YOUNG_TRADER said:


> Aren't corporate profits still good?
> 
> Isn't the world still expected to have excellent GDP growth?
> 
> ...




Agree with you YT. Although small caps will find it harder to raise new capital. This is definitely the time to get into mid/ large cap materials with solid cash flows.

I've been saying for months this is the time to be getting out of financials, because this is without doubt the top of their long term cycle. But what really bugs me, is that this correction has seen bigger drops in materials than anything else. Now, maybe I'm retarded, but what the hell does the sub-prime mortgage disaster have to do with my QGC for instance?  Plus a dive in the AUD is even better for aussie resources. At some point people will realise this, and my strategy of looking at domestic (in demand) material stocks will prove to be a good one I am sure.



Uncle Festivus said:


> The problem we now face is the fact that the financial lubrication eg currencies in circulation today are in excess of the requirements for sustained & steady growth. This is also compounded by the use of margin & derivatives, which grow exponentially each year to the point where nobody really knows if there is actual 'real' money to back them all, all the while the average dollar in Joe Citizens' wallet is getting worthless every day.




The irony is, there is a flight to cash. The carry trades are being unwound. This is doubly bad for gold, and as such, I have all but exited my gold positions.

I think this whole thing is overdone though. Interest rates are still low, corporate debt is good, and the defaults are not (as yet) in important sectors. In a couple of weeks people will realise profits are still good and in many stocks, dividends are still grouse.


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## Uncle Festivus (29 July 2007)

The poor old sub-prime sector is getting all the bad press and blame when in fact it is but a small portion of the problem, in fact a victim of a much larger structural problem in the US. What is telling is that while the sub-primes account for some 20% of loans, nearly all of the listed home builders are reporting massive losses. This can't be attributable to sub-primes alone. As the loan 'honeymoon' periods slowly roll over to higher rates this is then moving along & up the loan class categories to affect more and more of the consuming classes. This isn't over for a while yet. Keep an eye on home builders going bust & consumer credit (cards?)going through the roof for danger signs?


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## YOUNG_TRADER (29 July 2007)

Stop_the_clock said:


> My portfolio actually went up too, so I am very impressed that on such a horrid week to walk away in a better position.
> 
> The correction (not crash) is almost over...1 more day in the red, and then we are off to reach new highs over coming months.




Your portfolio went up? But on the 21st ie last Saturday you posted



Stop_the_clock said:


> I am out of the market for a few days, so I wouldn't mind a correction, I hope that you could all help me out with my request...It only takes a slight global sell down




So when did you re-buy your portfolio?


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## Pommiegranite (29 July 2007)

YOUNG_TRADER said:


> Your portfolio went up? But on the 21st ie last Saturday you posted
> 
> 
> 
> So when did you re-buy your portfolio?





Oh...just read this on Hotcopper to back up STC that he sold:

*Subject:*re: blood and guts all over the floor...*Stock Code:*ASX - ASX LIMITED*Posted:*28/07/07 16:35*Hotcopper Radio:*ASX on BoardRoom Radio*Posted By:*krisbarry1*Views:*503*Post #:*184021 (In Reply to msg #184016 from pecora)*Sentiment:*Buy*IP:*124.177.xxx.xxx*Voluntary Disclosure:*No Stock HeldI am fully is cash and have been for just over a week, I will re-invest in the market on Monday.

I am so glad I was out of the market and have saved myeslf from at least a 320 point fall...so I am well ahead of many investors...good luck and happy buying Monday!*WGP - drilling 10 wells in Kentucky USA, as we speak, searching for gushing oil*


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## shinobi346 (29 July 2007)

haha, mines up too mostly thanks to RMI and CUL. Thanks YT. 

I think tomorrow may be a slaughterhouse but hopefully things will recover soon. I've divested mostly out of the US, with CEMEX helping me along by prying RIN out of my hands. I hope its a thorn in their sides.


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## chansw (29 July 2007)

chops_a_must said:


> I've been saying for months this is the time to be getting out of financials, because this is without doubt the top of their long term cycle. But what really bugs me, is that this correction has seen bigger drops in materials than anything else. Now, maybe I'm retarded, but what the hell does the sub-prime mortgage disaster have to do with my QGC for instance?  Plus a dive in the AUD is even better for aussie resources. At some point people will realise this, and my strategy of looking at domestic (in demand) material stocks will prove to be a good one I am sure.



I agree, too. Not just QGC, what is that to do with Foster's (FGL)? People drink a lot in happy times and even more in depressed times. :bier:


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## Pommiegranite (29 July 2007)

chansw said:


> I agree, too. Not just QGC, what is that to do with Foster's (FGL)? People drink a lot in happy times and even more in depressed times. :bier:




A panic, by its very definition, is irrational. So, I don't think it really matters what sector you are holding. A sell off will hit all sectors. Some more than others, but it will affect all sectors in a negative manner.


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## krisbarry (29 July 2007)

Pommiegranite said:


> Oh...just read this on Hotcopper to back up STC that he sold:
> 
> *Subject:*re: blood and guts all over the floor...*Stock Code:*ASX - ASX LIMITED*Posted:*28/07/07 16:35*Hotcopper Radio:*ASX on BoardRoom Radio*Posted By:*krisbarry1*Views:*503*Post #:*184021 (In Reply to msg #184016 from pecora)*Sentiment:*Buy*IP:*124.177.xxx.xxx*Voluntary Disclosure:*No Stock HeldI am fully is cash and have been for just over a week, I will re-invest in the market on Monday.
> 
> I am so glad I was out of the market and have saved myeslf from at least a 320 point fall...so I am well ahead of many investors...good luck and happy buying Monday!*WGP - drilling 10 wells in Kentucky USA, as we speak, searching for gushing oil*




My superannuation is fully out of the market (cash) - due to switching funds but my personal share portfolio is in WGP, so am I am telling the truth you dill!


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## Pommiegranite (29 July 2007)

Stop_the_clock said:


> My superannuation is fully out of the market (cash) - due to switching funds but my personal share portfolio is in WGP, so am I am telling the truth you dill!




Nope...I still don't belive a word you say. :screwy:

What do you expect?

Back on topic...best of luck with the crash. Hope you double your $475


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## moneymajix (29 July 2007)

A couple of interesting articles


http://www.atimes.com/atimes/Front_Page.html 
25 July 
A bright outlook for commodities 
By Walter T Molano 




http://www.atimes.com/atimes/South_Asia/IG17Df02.html


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## krisbarry (29 July 2007)

Pommiegranite said:


> Nope...I still don't belive a word you say. :screwy:
> 
> What do you expect?
> 
> Back on topic...best of luck with the crash. Hope you double your $475





LOL...believe what you want to believe...after all this is cyberworld where anything goes....ahh what the heck I am a trillionaire then...how do like them apples.

Ohh I just told a big fat lie, no I sleep in the parklands on a park bench with 5 cents to my name...now that is more like it


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## BIG BWACULL (29 July 2007)

See below


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## BIG BWACULL (29 July 2007)

Stop_the_clock said:


> LOL...believe what you want to believe...after all this is cyberworld where anything goes....ahh what the heck I am a trillionaire then...how do like them apples.
> 
> Ohh I just told a big fat lie, no I sleep in the parklands on a park bench with 5 cents to my name...now that is more like it



So your the one stole my laptop with wireless, My park bench with a chain on it and the 5 cents i glued to the bench
As for the crash I'll be here :hide: with money on the table 
Check them cahounies (not sure of spelling but suppose to be apples that Hang from my tree heh heh lol)


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## Buffettology (1 August 2007)

I used to try and think why a correction may be coming, but the market is always irrational.  Though, it was obvious the bull market was in its third and final phase, and that a correction was well and truly on the way.  We now see it, and after today, just how low can it go?  I went bargain hunting yesterday, after the US rose, however I did not expect what happened today.  Luckily Im still about 40% cash, so I will wait and see what happens, and grab some further bargains should this fall continue.  Currently I beleive SDG is a decent price.


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## Wysiwyg (1 August 2007)

I have held and I see a lot of selling.A sell to me at present would mean less capital to manage for the rest of the financial year.I really don`t see the point of selling at a loss unless you score the el cheapo entry price somewhere else.Nothing is more infuriating than selling at the bottom of the decline but we all do it at some stage.


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## Ken (1 August 2007)

Price targets I'd be happy with if I was looking to buy.

BHP $25, RIO $68, OXR $2.60, ZFX at $15.00, WPL $35

Geeze I would back the truck up at those prices....

If the price of Oil, and base metals fall sharply, this is where we are heading.

Can I see it happening. You never say never....  if prices got to those levels I would be very surprised considering the forward looking PE ratios.


The correction will last longer than expected, just like the rises went further than we thought.

All in all, there is no timing the market perfectly, so if you can buy along a the time line at value, I think that is the best method if your investing a lot of money.

Averaging out your entry points. 

NAB at 400 $37
NAB at 600 $34
NAB aat 400 $36

On a 5 year chart this is just a minor blip.


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## Pommiegranite (5 August 2007)

2 questions...any takers with crystal balls?:

1. If the fed cuts interest rates next week, will this be enough to reduce volatility in the markets?

2. At what point will Australian commodity exploration stocks 'bottom' out?....surely when the market cap is less than the balance sheet?


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## nizar (5 August 2007)

Pommiegranite said:


> 2 questions...any takers with crystal balls?:
> 
> 1. If the fed cuts interest rates next week, will this be enough to reduce volatility in the markets?
> 
> 2. At what point will Australian commodity exploration stocks 'bottom' out?....surely when the market cap is less than the balance sheet?





Umm i'll have a go with no.1.

I agree with you and think volatility will be reduced if Fed cuts rates, so instead of having large swings, it'll just be one-way traffic -- South


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## dhukka (5 August 2007)

Pommiegranite said:


> 2 questions...any takers with crystal balls?:
> 
> 1. If the fed cuts interest rates next week, will this be enough to reduce volatility in the markets?
> 
> 2. At what point will Australian commodity exploration stocks 'bottom' out?....surely when the market cap is less than the balance sheet?




You don't need a crystal ball for the first question. The Fed will not cut interest rates next week. If they do I'll eat my hat. Below is a picture of my hat. 

Even if they did it would not take the volatility out of markets. The damage of the credit bubble is in motion. Cutting interest rates now would be more detrimental to the US economy in the long run.


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## professor_frink (5 August 2007)

Pommiegranite said:


> 2 questions...any takers with crystal balls?:
> 
> 1. If the fed cuts interest rates next week, will this be enough to reduce volatility in the markets?
> 
> 2. At what point will Australian commodity exploration stocks 'bottom' out?....surely when the market cap is less than the balance sheet?




My very uneducated opinion on number 1-

If the fed cut next week, it could be seen as an admission that there is a very serious problem in the U.S economy. I can't see that being taken well by the market.


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## wayneL (5 August 2007)

Reduction of US interest rates.

If so (and I wouldn't discount the possibility) The Fourth Horseman of the Apocalypse will go and get his horse out the stable and start saddling up.

The interest rate obsessed muppets like Jim "please cut interest rates Mr Bernanke" Cramer would probably start buying with ears pinned back initially, but this would be adding material to the already critical mass of of U235. One shock and:


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## Smurf1976 (5 August 2007)

Pommiegranite said:


> 2 questions...any takers with crystal balls?:
> 
> 1. If the fed cuts interest rates next week, will this be enough to reduce volatility in the markets?



1. If I cut out exercise next week and take up smoking and eating take away every day, will this be enough to reduce the chest pains I've been experiencing?

Odds are it will work. But not in the way most would hope.


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## Pommiegranite (5 August 2007)

Love the analogy!

Here's one of my own:

There is a hurricane coming - bigger than Katrina.

We have 2 choices:

1. Hide upstairs in our bathtubs until the storm passes hoping to survive, because we are attached to our homes (stocks).

2. Get the heck outta New Orleans (market), come back at a later date, with the ability to pick up the pieces as we are still in once piece (capital preserved).

I've already got the 12 kids in the back of the ute and have headed out of Dodge. The only question is, 'when is hurricane season over?'


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## wayneL (5 August 2007)

Pommiegranite said:


> Love the analogy!
> 
> Here's one of my own:
> 
> ...




3. Be a storm rider. Day trade the volatility. 

It's standard procedure for me, crashes, earning season, etc.


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## wayneL (5 August 2007)

wayneL said:


> 3. Be a storm rider. Day trade the volatility.
> 
> It's standard procedure for me, crashes, earning season, etc.



Day Trading gets a bad rap from lots of folks who don't understand how it works, or have tried and been spanked.

I've posted this before, it's a from a blog post from a guy with mountains of credibility


> Ernest Chan
> 
> Ernie is a quantitative trader and consultant who helps his clients implement automated, statistical trading strategies. He can be reached through www.epchan.com. Ernie has worked as a quantitative researcher and trader in various investment banks (Morgan Stanley, Credit Suisse First Boston, Maple Securities) and hedge funds (Mapleridge Capital, Millennium Partners, MANE Fund Management) since 1996. He has a Ph.D. in physics from Cornell University.



and had this to say about day trading


> ...Which brings me to day-trading. In the popular press, day-trading has been given a bad-name. Everyone seems to think that those people who sit in sordid offices buying and selling stocks every minute and never holding over-night positions are no better than gamblers. And we all know how gamblers end up, right? Let me tell you a little secret: in my years working for hedge funds and prop-trading groups in investment banks, I have seen all kinds of trading strategies. In 100% of the cases, traders who have achieved spectacularly high Sharpe ratio (like 6 or higher), with minimal drawdown, are day-traders.




Source http://epchan.blogspot.com/2007/02/in-praise-of-day-trading.html


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## explod (5 August 2007)

Any move by the US Fed on interests rates will hasten the inevitable.

The US dollar index has been in an overall down trend for about five years.  The significance of the moment is that,, the Index is at its lowest point in 30 years (since the measurement began) 80 is the last support, it is at about 80.04 at the moment.   It has hit on this point twice in the last fortnight and back about 2003/04.   A break below this point will see pandimonium as countries holding US dollars try to exit.    China I think holds about 40% and have been doing their darndest to hold things up.

Putting interest rates up will be the final straw for US homeowners.    One of the worst issues is that many of the homeowners invest in the very funds etc. that back the money for the subprime lending.   Armageddon alright, there is a crude saying "brace yourself Bessy" well unless you know otherwise (Burffetology "know") then you better beleive we will have a very rought ride sometime soon.

Rates will stay on hold, they cant make a decision, but the market soon will


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## Wysiwyg (5 August 2007)

> ...Which brings me to day-trading. In the popular press, day-trading has been given a bad-name. Everyone seems to think that those people who sit in sordid offices buying and selling stocks every minute and never holding over-night positions are no better than gamblers. And we all know how gamblers end up, right? Let me tell you a little secret: in my years working for hedge funds and prop-trading groups in investment banks, I have seen all kinds of trading strategies. In 100% of the cases, traders who have achieved spectacularly high Sharpe ratio (like 6 or higher), with minimal drawdown, are day-traders.




This comment could also mean the shearers need more sheep.


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## explod (5 August 2007)

Having been a shearer 40 years ago I still keep in touch. (verbal only) I understand the real situation is the opposit, that the sheep need more shearers, that I could still get a job at it and most doing it are older than I at 61.

Sorry I missed the pun, but go short the US dollar and long on gold IMHO


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## Wysiwyg (5 August 2007)

explod said:


> Having been a shearer 40 years ago I still keep in touch. (verbal only) I understand the real situation is the opposit, that the sheep need more shearers, that I could still get a job at it and most doing it are older than I at 61.
> 
> Sorry I missed the pun, but go short the US dollar and long on gold IMHO





Ah yes...in the days when "a merino ram could sell for hundreds of thousands of dollars."

Times have changed.


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## explod (5 August 2007)

Dollar Set to Crumble from the Sub-Prime Market Fallout

By John Lee      
Aug 3 2007 4:27PM

www.goldmau.com 

In our March GoldInsider newsletter I wrote the following piece:

“The Subprime Market and Blatant Market Support:

You must have heard about the subprime loan fallout by now. New Century Financials, America’s second largest sub-prime lender, was delisted so I could not grab the chart, but here is the company’s sister, Novastar, which is not far behind. The pace of the fall out is startling to say the least. These are $billion companies listed on NYSE. So what’s the story all about?


Updated Novastar Chart to July 2007

Non-bank companies like New Century and Novastar provide mortgages to lesser qualified home buyers, charging interest rates of around 10% instead of 6%. Then, they packaged those mortgages and sold them either to institutions or bigger mortgage houses such GM or Countrywide at 9%.  Those non-bank mortgage lenders borrow money from banks at a lower rate and lend to consumers at higher rate to make a profit. They rely on credit from banks to operate.

New Century’s mortgage production for 2006 was $60 billion. I would estimate the sub-prime mortgage market to be around 100 to 200 billion. This is nothing to sneeze at considering this is directly related to money creation. With America’s M3 growing at 1 to 2 trillion a year, 200 billion accounts for 10% of money creation and the hole, or the void must be filled.  It’s not a trivial issue.

What’s more, while those companies carry their own portfolio of mortgages, they sell most of the mortgages they create. Thus the problem doesn’t resolve itself upon the fallout of the subprime lenders, as many of those faulty mortgages have already passed onto the big lenders and institutions. This is a double whammy to the big lenders as they not only have lost a source of revenue/referral, but the quality of their existing portfolio of loans is in doubt. 

The extent of the problem is unknown and I don’t think we will ever know. GM or Countrywide, however, cannot fail and issues with bad debt can be fixed by the Fed. There is surprisingly little disclosure from the banks regarding derivatives or CMO (collateralized mortgage obligations), paving the way for an easy fix by Bernanke, who can simply replace questionable CMO “assets” on GM’s balance sheet with dollars issued by the Fed. Under the disguise of structured products, there is no telling or predicting damage by outsiders.

I am also very surprised by how well the market has held up. Typically with a down leg like that seen on Feb 27, another leg down leg should ensue within three days.  This didn’t happen and the Dow is very resilient above 12,000. I watched the tape all day on March 5 and 6 and saw steady buying, which in my view is quite inexplicable – who would be buying while Asia is down some 4% the night before and while the problem could potentially jolt the financial system? What was interesting to me was that as mysterious buying surfaced gold quickly rebounded; perhaps the blatant market support left such distaste in some trader’s minds that they resorted to gold to make a statement? 

My view is that the Fed will print their way out of every and all trouble. There is no other way.  Subsequently I see an interest rate cut as early as April by as much as 50 basis points to keep the money creation continuing. We have passed the point of no return. There is going to be no Volcker (who raised interest rates to double digits to save the fiat system). This is going to be very bullish for gold.”

August 3rd Update:

Since our last update, 3 mortgage related hedge funds from Bear Sterns totaling $16 billion had collapsed. American Home Mortgage Corp, the second largest non-bank mortgage lender, accounting for 2% of all newly issued mortgages had tanked 80%+ in one week as banks have refused to provide more credit to them. 


The Deutsche Industriebank AG German fund involving American mortgages and financial obligations of US$11.07 billion required the government bail out. Australian Macquarie Fortress Investments, worth $873 million, was forced to sell assets to avoid breaching its loan agreements. And Europe’s biggest bank, HSBC, is to write off $11 billion to cover mounting losses in its troubled American offshoot, HSBC Finance Corporation.

Dow closed up 150 points on Wednesday, with American home mortgage issued warning on Tuesday afternoon. We find such market action incongruent and can only conclude that Plunge Protection Team was at work.

The conclusion from this is three fold:

The Fed will not be able to raise interest rate. Doing so will cause systemic collapse of all USD debt markets.

The Fed will bail out any mortgage problems, amounting between $100 billion to perhaps over $200 billion, estimated by analysts at Financial Times.

Plunge Protection Team is likely to guard equity and bond markets with fresh, newly minted liquidity. This will only further reduce the investor appetite towards US dollars. There is now disdainful taste in holding those hot dollar potatoes. 
Technically dollar index is set to break down beneath 80 shortly. Gold is antithesis to the dollar, and gold’s breakout over $700/oz is imminent.


John Lee,
CFA john@maucapital.com 


Sorry that the charts did not copy over but the words written tell the story.  You can track the rest via the web address disclosed.    Cheers explod


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