Is this the crash coming right at us?

[dhukka]

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.

 

[professor_frink]

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.

 

[wayneL]

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:

 

[Smurf1976]

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.

 

[Pommiegranite]

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?'

 

[wayneL]

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?'

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

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

 

[wayneL]

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

 

[explod]

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

 

[Wysiwyg]

...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.

 

[explod]

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

 

[Wysiwyg]

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.

 

[explod]

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