Herd Defying.

People are social animals, and have powerful instincts urging them to “get along” and “go with the flow". People think inductively, as almost all people do. They assume that the people ahead of them know what they're doing, and thus rely on them to do the “thinking” for them.” This is how compression (outsizing risk) and major market tops/bottoms are formed: The last buyers/sellers -- the most buyers/sellers -- are buying/selling just because everyone else is.


We must think deductively. There is nothing to lose by going to the opposite. This is how some investors avoid major losses, by eventually going against the crowd and reducing risk despite the masses.

By definition, major social change is driven by individuals who go against the crowd. Cows are like us sometimes, like what we have been "conditioned" to think for more than 50 years in the dear land of ours. Everyone is depending on others to think for them and only few dares to break away from the mundane.

So the next time you feel that irresistible urge to get into something because everyone else is, please just stop and think for yourself. Be mindful - like what the Buddhists been practising all along. Think deductively: Put the facts together, as best you can, and draw some conclusions. Question every moves and be inqusitive.

It very well may be that everyone else is right (inductive thinking and empirical evidence certainly have validity), but there are times when making inductive assumptions can be disastrous.

How Long Will This Last ?

As hedge fund redemptions pile up, there is every sort of debt instrument for sale, particularly hybrids (fixed to floating preferreds) and preferred shares.

There are a bunch of funds that used the securities as a funding vehicle. Now they are funding out what happens to perpetual securities when spreads blow out.

The real problem, though, is that selling begets selling. Individuals, jammed full of this stuff, will panic and sell for a tax loss.

Then there are four more problems:

1. Quarter end balance sheet pressures on 9/30.
2. Mutual fund fiscal year ends 10/31.
3. Brokerage firms fiscal year 11/30.
4. Year end 12/31.

I don't see this market rallying until we get past these dates and it will make it awfully tough on those that need capital, which is nearly everyone.

The Weak Survive At The Expense Of The Strong.

A week ago, the United States had the most efficient capital allocation system in the world.

A free-market economy enabled money, credit and resources to be sent to the economic players who needed it. Entrepreneurs could raise money to start new, innovative businesses; researchers could seek out cures for diseases that touch millions of lives, as well as those that afflict just thousands; firms that made enough bad decisions went bankrupt.

The job of regulators were to ensure the system functioned and to set up rules by which honest business could be conducted. It wasn't a perfect system, but it was better than the alternative.

This is the alternative.

When government invades free markets to the extent it has -- specifically in the last 24 hours -- the system ensuring capital gets where it needs to be breaks down. Money is instead doled out to the firms well connected enough in Washington to lobby for handouts.

Beltway bureaucrats have been trying to rewrite this country's economic rules and protect Wall Street from its own mistakes for over a year. Still, the free market prevailed, punishing the firms that made the most egregious bets during the housing boom: Countrywide, Bear Stearns, IndyMac, Merrill Lynch, AIG, Lehman Brothers, National City, Washington Mutual and Wachovia.


According to the once-free market, these firms needed to be wiped out, gobbled up and liquidated, so real economic growth could take hold from a stronger foundation.

Last week, we heard many claim the government's actions -- temporarily banning short selling, the creation of a Treasury Department distressed-asset hedge fund, the establishment of a federal backstop for money markets, to name but a few -- were necessary to prevent a wider financial and economic crisis. The shortsightedness of this argument is astounding.

A couple hundred years ago, Charles Darwin opined that nature has long been engaged in weeding out the weak, protecting the strong. This natural ebb and flow of dominance according to a given species' inherent characteristics has governed the world's socioeconomic landscape for more than 4 billion years.

The actions taken overnight seem to refute Darwin's claim that Mother Nature can manage her own backyard. Adam Smith's invisible hand is capitalist Darwinism, moving the weak aside so the strong can survive.

To take that power away from the market is tantamount to shoving God aside and rewriting the evolutionary playbook.

The effects of these actions, this fundamental ideological shift from capitalism towards socialism, represents a seismic shift in the history of America. The events of the past week -- and what it says about our collective ability to take our lumps, drink our medicine and recognize that the path to the ultimate goal is one littered with hairpin turns and drop away cliffs -- will not be lost on future generations. Gomen of Malaysia ! Hear that 'locheng' ringing in your confused head?! http://www.youtube.com/watch?v=_7XCRpRwz1s

The events of the upcoming months and years, whether we're content to continue to hand over more and more power to the few, elected and non-elected alike, will show the true mettle of the American spirit.

Chasing The Bulls From Here.

“An optimist sees an opportunity in every calamity; a pessimist sees a calamity in every opportunity.” - Winston Churchill.

In my humble opinion, the 1,150 to 1,160 area for the S&P 500 was so crucial for any bullish stance.

If the economy was to go into a further downturn -- where the market might go and the time frame in which it would get there? The important thing to glean is that, of the last 10 recessions, the average downturn in the market was 26%, and the average time frame in which this occurred was 11 months.

From this, I previously concluded that, if the July 2007 top of 1,555 was the peak, it would drop the market to 1,150 by at least June of 2008. Well, as you all know, that didn’t happen. I guess the crystal was cracked.

Then again, on October 11th, 2007, the S&P 500 retested the peak of 1,555 and surpassed it intraday by a measly 21 points (1,576). Consequently, it marked the top by closing the day out at 1,547 in a Bearish Engulfing Key Reversal Day on what counts as high volume for all intents and purposes (1,550) - close enough.

Anyhow, by extrapolating the same numbers from the original “recession” theory, I added 11-months to the peak of October 11th and dropped the market 26% from 1,550. This puts the S&P 500 at 1,147 by September 11th, 2008. (Missed it by ONE week!)

“To miss or not to miss,” my technical scrutiny doesn’t stop there. My real conviction about the infamous 1,150 number stems from 10 years of data.

If on a closing basis the market fails at this level in the coming sessions, for whatever reason and God forbid, we'll have a clear shot below. The next level of support in the S&P 500 is 1,045. That being said, the 1,150 level should more than likely be retested over the next sessions - or days, considering the current volatility. "It ain't over, till it's over !"

As always… Stay tuned, chilled & good luck!

The Seismic Shifts In The Markets.

A new world order is upon us. A seismic shift. An inside out process that is redefining the brokerage intermediary.

There are two ways we can react to this--run from it or embrace it. It's happening either way and the onus is on us to adapt.

The greatest opportunities are bred from the biggest obstacles. The world will look vastly different when we pass through this period but that's the way the world works. From pain will come pleasure, not for all but most certainly for some.


If you look back at the Great Depression, a multitude of multi-billion dollar corporations found their footing.- eg . Disney, Fannie Mae, HP etc..

I'm not a bandwagon guy and I'm won't pile on to the doom and gloom at these levels. Our foresight was well documented and there are no "victory laps" in this market.

And I won't presume that something "entirely more depressing than a recession" is a foregone conclusion, although social mood is seemingly shifting in that direction.

Remember, the stock market crash didn't cause the Great Depression--the Great Depression caused the stock market crash. I offer this as a reminder rather than a prediction and with the best interest of ye faithful in mind.

Lets all see what is happening and prepare for it in kind.

When we discuss societal acrimony, we often say that if you're not part of the solution, you're part of the problem.

When it comes to the future face of finance, the same dynamic will again prove true.

May the force be with you!

More Collateral Damage.

Only so many angels can dance on the head of pin, but in the end you can only use so much leverage until it bites back. You can only deleverage so much without enough capital in the system before you get the kind of collateral damage we are getting this morning.

Just like the heaviness in the market prior to September 7 years ago, it seems as if the persistent selling and hitting of bids every time an upspike showed up this September was telegraphing this morning's turmoil.

Somehow, somebody somewhere wasn't minding the store as the ground has shifted in the last year, culminating in a fall event once again. It is an historic day and one can only wonder how the "culture" will change going forward, as institution after institution and industry after industry is caught in the grip of a 100-year flood and an echo of The Rich Man's Panic in 1907.

That financial crisis and panic played out over one year, from peak to trough.

Technically the market appears to be headed for a date with destiny, toward 50% of the 2002/2007 range near 1170ish S&P. However, a measured move counts to 1155ish and potential lower Head & Shoulder targets loom dependent on what happens in this very important time frame between now and the end of November.

The Street is shell-shocked as the audio and speed is picked up on this slow motion car crash we've called the equity market over the last year. Of course, Rome wasn't burnt in a day.

It's been like a swarm of locusts of speculators and vultures attacking the investment banks today. You've gotta wonder about the dovetailing of the removal of the uptick rule and the implosion of the financial weapons of mass destruction. You've gotta wonder why more deleveraging did not occur in 2008. You've gotta wonder about Wall Street executives telling us everything is ok. Is it a wonder we have a crisis of confidence? You've gotta wonder about the masters of the universe doing everything wrong.

Conclusion: The old adage "Surprises happen in the direction of the trend" is more than a cliché, as difficult as it is often to position as a for the payday. From the last pivot hight at 1255 S&P, 90 degrees down is 1220. 180 degrees down is 1185. 270 degrees down is 1150 while 360 degrees down is 1120.

I guess if you live long enough you see everything. Laissez- faire is not always fair. A blind man's alchemy of financial engineering and deregulation caused the dislocation.

It's hard to know where the damage is when leverage is involved. That was the lesson of my father's generation. The newspaper headlines are black with "Crisis On Wall Street."

Although it may speak to an interim low, there is no telling how things will play out when panic is in the air.

Translation: let the dust settle. Contrary for the sake of being contrary can mean getting into the tub with a toaster.

Mid-Autumn Festival (中秋節, zhōng qiū jié).

The Mid-Autumn Festival falls on the 15th day of the 8th lunar month (tomorrow will be it, the 14th of Septembar'08) of the Chinese calendar (usually around mid- or late-September in the Gregorian calendar), a date that parallels the Autumn Equinox of the solar calendar. The traditional food of this festival is the mooncake, of which there are many different varieties.

There are so many variations and adaptations of the Mid-Autumn Festival.

One of them, according to a widespread folk tale (not necessarily supported by historical records), the Mid-Autumn Festival commemorates an uprising in China against the Mongol rulers- Khubai Khan of the Yuan Dynasty (1280–1368) in the 14th century. As group gatherings were banned, it was impossible to make plans for a rebellion. Noting that the Mongols did not eat mooncakes, Liu Bowen (劉伯溫) of Zhejiang Province, advisor to the Chinese rebel leader Zhu Yuanzhang, came up with the idea of timing the rebellion to coincide with the Mid-Autumn Festival. He sought permission to distribute thousands of moon cakes to the Chinese residents in the city to : "bless the longevity of the Mongol emperor". Inside each cake, however, was inserted a piece of paper with the message: "Kill the Mongols on the 15th day of the 8th Moon" (八月十五殺韃子). On the night of the Moon Festival, the rebels successfully attacked and overthrew the government. What followed was the establishment of the Ming Dynasty (1368-1644), under Zhu. Henceforth, the Mid-Autumn Festival was celebrated with moon cakes on a national level.

I wonder what would this mean for all the Malaysian celebrating the mooncake festival this year !

除去腐败

"Why are the people Angry? Because of injustice and you endlessly impose your oppressive laws,That is why they can’t take anymore."
~Lao Tzu~

I-Ching's Gua No.43 for September 16.

"本卦兑泽在上，乾天於下。夬含决心，决口，冲溃之意。卦中五阳全力挺进把上面的一阴给予突破。又阳表君子，阴表小人，五阳君子要把一阴的小人给除去。本意为万众皆有心除去腐败!"

I-Ching hexagram Gua No.43 : (Resoluteness, Breakthrough, and/or The Decisive)

An interesting article by Hawkeyejack on predicting the outcome of September 16 consulting I-Ching or the classic " Book of Change".

The “I Ching” or “Book of Change” is acclaimed to be the oldest classics in the world and is older than the Bible and widely regarded as a storehouse of wisdom and philosophy and have acted as a guide for the ancient Kings, Leaders and Scholars. This ancient classic of more than 5000 years old covers all areas from science, mathematics, and psychology and is the earliest binary system that today forms the basis of computing.

Now on consultation from the Classic of Change it generated the Hexagram no. 43 (The text of the I Ching is a set of predictions represented by a set of 64 abstract line arrangements called hexagrams).

The Question here is : “Will Anwar Ibrahim lead Pakatan Rakyat to form the new government of Malaysia by 16th September?”

The I Ching generated Hexagram no.43 (Guai) (Resoluteness, Breakthrough, and/or The Decisive) The various names in English are only attempts to append a relative title to the hexagram in accordance to its ancient text. Please remember that this is a consultation on wisdom and insight to the classic and the question will also need to be understood from a standpoint of representation, haha ok lets try to make it simple is that the dateline September 16 has a sub conscious connotation and carries with it the question of whether there is oncoming change there or thereabout.

We will attempt to go straight to the classic and interpret it as follows censoring out most of the ‘technical formula”. And the judgments will be presented here accordingly.

First the hexagram is made up of two trigram (pic above), the bottom and the top, the bottom trigram represents the Heaven and Clouds, and the top trigram represents the Swamp and Water and sum up it is the waters surging upwards. Interpreted as through the ancients symbol is that of Water surging skywards. In observing the signs the superior man will share his riches with his people and refrain from claiming all the merits.

The judgment accordingly provides you with the present scenario; The ying line (broken line) at the top symbolize the small and evil man occupying the position of the high minister lending his power to maintain a corrupt government and/or it might be a waxen old dynasty ready to vanish away. And the five undivided lines the sage saw the symbol of good order or the new dynasty inevitably to supersede the old.

The subject of the hexagram here is how bad men corrupt and yet powerful are to be put out of the way.

The sages advises that he must openly denounce the criminal in the court, seek to awaken general sympathy, and at the same time goes about his enterprise, conscious of its difficulty and danger. And he who accomplishes the task must do so by the force of his character more than by the force of arms and by producing a general sympathy on his side.

There is also a caution accordingly and that is as follows; He will eventually win, only if he is not already destroyed in the first place by his failure to take into account his varying position at the ever changing time. In the event of misjudgement of Position and Time, the more the Decisive one is, the more disastrous his defeat will be.

The classics advises that you Do not show your Anger, Do not act alone Rally people of your kind around you. Once you have built up your influence and occupy the position of the sovereign, you will win.

“The Cleansing Rain Will Come In Torrents When Enough Clouds Have Accumulated.”

There are other signs and the signs are that of the “Sovereign” the Agong and the classics shows that there is significant inclination to the change and that he will be a support in the most critical moment.

Short US Financials, Long Gold.

Given the continued collapse in the gold mining shares, I thought I'd see where we are in the gold trade.

For the third week in a row, gold has refused to take out its August 15th low, even as the euro has plunged to another new low and the US Dollar Index has made another new high.

At some point, people will begin to connect the dots that gold isn't "the euro" - and it isn't a weak dollar play, either. And that's when the gold complex is going to explode, including the gold mining shares that appear at present to be the most hated equity sector on the planet (even more than subprime mortgage lenders, apparently).

However, I should add that somebody sure seems to be buying the gold mining equities from the hedge funds that are coughing them up. The Rydex gold equity fund has seen an inflow equal to nearly 50% of its assets over the past 5 days, and I understand other gold equity mutual funds are seeing similar inflows. That's the biggest inflow in the face of falling gold mining stock prices that I can recall seeing in years.

That's not "retail buying" going into a gold fund in the face of a horrific decline in gold stocks; those are value-based strong hands buying gold stocks at a time when the XAU/Gold ratio has returned to its all-time low back in 2000, indicating that gold stocks are the cheapest they have ever been relative to gold. Additionally, this is occurring now even as the gold/oil ratio is actually rising (meaning the revenue/cost ratio is moving more and more in the favor of the miners' bottom lines).

I honestly don't know why people are selling miners this time, other than the fact that many hedge funds blew up when Paulson and the SEC pulled their stunt back in July. And liquidation has occurred in many commodity stocks ever since.

Very soon, the Treasury will be forced to nationalize Fannie and Freddie, and the Fed will be easing even more (along with foreign central banks as well). It's inevitable, and it will produce even more global inflation. Bank on it. Where the dollar goes vs. other fiat confetti is irrelevant.

The fact is that gold is rallying in all G7 confetti. And the reason gold is rallying in all currencies is because of just what Paul Volcker said : THE FINANCIAL SYSTEM HAS "BROKEN DOWN." Default or debase... those are the only 2 options, and they both lead to the same place: More inflation and higher gold prices globally.

Get Ready, For "The September Effect".

Watching water spill over the levies in the Ninth Ward in New Orleans was spooky stuff - it looked like a small wall was holding back the entire ocean. I find it miraculous there wasn’t a breach. Nice to know everyone is safe this time!

Over the years, a lot has been made of the so-called January Effect, which is supposed to be a fairly accurate indicator of how the entire year will fare based on the results of the first week of trading in a new year.

Here's an indicator that it believes to be more succinct in predicting the next 12 months. I call it the "September Effect", where the first week of action in September serves as a spot-on harbinger for the next full year of trading.

Last week traders were told to ignore the action as volume was too thin. So those 200 point Dow trading sessions were just examples of how exaggerated the market could be when everyone has gone to the beach or to watch Gustav!

Going back to 2003, if the market is up or flat in the first week of September, it's also been higher for the next year. Conversely, when the first week of last year saw stocks lower by 1.7%, the next 52 weeks were difficult and saw the market tumble 12%.

This week has the right mix of economic data for the market to make a meaningful move. It all cumulates with August jobs data, which is expected to see a net loss of jobs for the seventh time this year (every month).

The general consensus is for a loss of 60,000, which would be well under the average in typical recessions, but not great news by any stretch of the imagination beyond psychology. I would suspect the market will be in a tight trading range until Friday although the bias could be to the upside for a couple of reasons.

- Last week economic data releases were surprisingly better than expected.
- Crude oil looked vulnerable after of Hurricane Gustav and completely collapsed today.

The S&P 500 is positioned to make a major breakout with a close just north of 1,300 on convincing volume. Through that point the index has a pretty clear shot to 1,440, which to me is the big breakout point for a long term rally.