S & P Crash Count.

Dive.., Dive.., Dive... !

This was an interestng read from Bloomberg:

GLG's Roman, NYU's Roubini Predict Hedge Fund Failures, Panic. -By Tom Cahill and Alexis Xydias. 23 Oct, 2008.

Hedge funds closures will eliminate about 30 percent of the industry, and policy makers may need to shut markets for a week or more to stem panic, according to presentations at an investor conference today in London.

"In a fairly Darwinian manner, many hedge funds will simply disappear,'' Emmanuel Roman, co-chief executive officer at GLG Partners Inc., told the Hedge 2008 conference in London. U.S. regulators will "find a way to force regulation,'' said Roman, 45, who runs New York-based GLG with Noam Gottesman, 47. The firm was founded 13 years ago as a unit of Lehman Brothers Holdings Inc. and now manages about $24 billion in assets.

Nouriel Roubini, the New York University Professor who spoke at the same conference, said hundreds of hedge funds will fail as the crisis forces investors to dump assets. "We've reached a situation of sheer panic,'' said Roubini, who predicted the financial crisis in 2006. "Don't be surprised if policy makers need to close down markets for a week or two in coming days.''

Many hedge funds have resisted oversight by the U.S.Securities and Exchange Commission, even as policy makers coordinated global interest-rate cuts and bailed out banks to try and stem the crisis. The hedge fund industry is stumbling through its worst year in two decades and posted its biggest monthly drop for a decade in September.

"There needs to be some scapegoats, and they are going to go hunt people,'' said Roman, who didn't indicate when new U.S.regulation may take effect. Regulation is "overdue,'' he said. In the U.S., "someone can graduate from college on a Friday and start a hedge fund on a Monday.''

Increased regulation and higher borrowing costs will make the hedge-fund business more difficult, Roman said. Still, financial markets have "overshot,'' he said.

In some areas of financial markets, including loans, there are "once-in-a-lifetime opportunities,'' he said. "At somepoint, people will say this isn't 1929 to the power of 10.''

Roubini, a former senior adviser to the U.S. TreasuryDepartment, forecast this Feburary a "catastrophic" financial meltdown that central bankers would fail to prevent and that would lead to the bankruptcy of large banks exposed to mortgages and a"sharp drop'' in equities.

The comments preceded the collapse of Bear Stearns & Cos.and Lehman Brothers Holdings Inc. as well as the government seizure of Freddie Mac and Fannie Mae. The Dow Jones Industrial Average, a benchmark for American equities, has lost 37 percent this year, including its biggest daily drop in more than twenty years on Oct. 15.

He predicted earlier this month that the world's biggest economy will suffer its worst recession in 40 years.

"This is the worst financial crisis in the U.S., Europe and now emerging markets that we've seen in a long time,'' Roubini said. "Things will get much worse before they get better. I fear the worst is ahead of us.''

Developing nations' borrowing costs jumped to the highest in six years today as Belarus joined Hungary, Ukraine and Pakistan in seeking a bailout from the International Monetary Fund to help weather frozen money markets and a slump in commodities. Argentina risks defaulting for the second time this decade.

"There are about a dozen emerging markets that are now insevere financial trouble,'' Roubini said. "Even a small country can have a systemic effect on the global economy,'' he added. "There is not going to be enough IMF money to support them.''

Italian Prime Minister Silvio Berlusconi roiled international markets on Oct. 10, first saying world leaders were discussing shutting down global financial exchanges, and then saying he didn't mean it.

Hedge funds are mostly private pools of capital whose managers participate substantially in the profits from their speculation on whether the price of assets will rise or fall.

Trimming The Hedge Funds.

The Silver Surfer : "Surfing in a declining market, I am looking for high rates of attrition."

Before the market downdraft, there were about 10,000 hedge funds with an estimated value of $1 trillion.

Look for about half of them to disappear - but don't worry. It's healthy.

This is a cleansing process. There's a lot of leverage that's being unwound. A lot of funds are liquidating winners to finance sinners.

Investors pulled about $43 billion out of hedge funds in September. Money under management will continue to decline and funds will continue to take hits in a declining market.

Hedge funds appear to be an acceptable casualty in the eyes of government, as well as those of many small investors. But Main Street won't escape the fallout as the sector contracts.

Hedge funds are a mystery to many individual investors, and are often regarded as being volatile and leveraged to the hilt. The reality is more complex. A hedge fund can take both long and short positions, use arbitrage, buy and sell undervalued securities, trade options or bonds, and take a position in just about any opportunity in any market.

While strategies vary greatly, many funds hedge against market downturns. The goal: Use a range of techniques to reduce risk, boost returns and limit the correlation with equity and bond markets. In short, the means may be buccaneering but the goal is conservative.

Many fretted that risk-happy hedge funds someday would crash the world's financial markets. Instead, it was thumb-sucking mortgage lenders and established investment banks that gave the world a glimpse of Armageddon.

But that doesn't mean hedge funds are in the clear. In fact, hedge funds may be the next sector to fall.

So far, major funds have taken a hit, but haven't been shattered. One reason: The funds were conservatively managed, contrary to their gunslinging image in the general press. Paradoxically, it looks like most hedge funds took fewer risks than some investment banks.

Here's why: Hedge funds, unlike many mortgage lenders, were playing with their own money and were directly accountable to investors. Any misstep by a hedge-fund manager instantly set off howls, while his investment- and mortgage-bank brethren could make bad decisions until they built to tsunami proportions.

But that's changing. The value of publicly traded hedge funds has taken a hit. Man Group, the world's biggest publicly traded hedge fund, has lost about 41% of its value since July.

And things are likely to get worse. Look for hedge funds to take a hit, because the credit crunch means they can no longer leverage investments. The reason: Credit won't be widely available.

Hedge funds had little to do with the underlying conditions that led to the mortgage crash, but nevertheless will face increased restrictions as part of politicians' need to regulate the markets and do something -- anything -- to address the recent turmoil.

The immediate result of new regulation will be less wiggle room for fund managers. This will almost certainly erode returns, and make hedge funds less attractive to investors.

Big Ben and the central bankers will do their best to prevent future bubbles from building in various markets. This may be good news for the economy - but it will take a bite out of hedge funds, because deft managers were adept at chasing inflated asset classes and knowing when to get out, thereby pocketing a nifty profit.

Buyout funds routinely tapped the debt markets to finance the next acquisition. Such businesses can't thrive if debt markets seize up. What's next? Anyone interested in buying some used office furniture from a hedge fund?

The worldwide economic slowdown will hurt major industries, including those buyout funds routinely trolled, such as retailing and manufacturing. That means there will be few, if any, new deals ahead and existing deals may go bad.

The once saucy financial markets will become increasingly dowdy. That means innovative hedge-fund managers will have few chips to play in a game that has largely disappeared.

There will be rough times ahead, but the sun will continue to rise in the east.

Tom Demarks's- Sequential. Tracking "The Red October".

Let's cut the chase.., skip to the end.., get to the nut of it: have we seen the low in the stock market for the year or not? Even if you are not a technician, using Tom Demark's TD-Sequential could help giving you an idea where we are at now.

First, let's go over very quickly the numbers you will see on the chart. These numbers are patterned expressions of selling (or, on the upside, buying) exhaustion that were identified by Tom DeMark more than 30 years ago.

This particular pattern we are discussing is an expression called TD-Sequential, and it consists of two components, a setup and a countdown period. Numerically, the setup is complete at 9, the countdown at 13. These patterns help identify potential selling or buying exhaustion points. They are probabilistic and dynamic, because markets themselves are probabilistic and dynamic.

Now, what do these 9s and 13s really mean? Because we are looking for a market low, let's focus on TD-Sequential Buy Setup and TD-Sequential Buy Countdown.

The TD-Sequential Buy Setup consists of 9 consecutive closes that are lower than the close four price bars earlier. The criteria for "perfecting" the sell setup is that the LOW of price bar 8 OR 9 be below the low of BOTH bars 6 AND 7.

Once a Buy Setup is in place, the TD-Sequential Buy Countdown can then begin. The difference between Buy Setup and Buy Countdown is that Buy Setup compares the current bar's close with the close of the bar four bars earlier, while Buy Countdown compares the current bar's close with the LOW two price bars earlier. Also, unlike Buy Setup, Buy Countdown need not occur on CONSECUTIVE bars.

That is the quick and dirty overview of TD-Sequential. 9s are completed Buy Setups and 13s are completed Buy Countdowns.

The question is, Have we seen the low for the year? I think there is a fairly significant probability that we have not.

Above is the weekly chart of the S&P 500 at its current juncture. Here is my concern. So far, we have not yet recorded a Buy Setup, and are currently on bar 7 of potentially 9. Moreover, in order to "perfect" this Buy Setup (remember, bar 8 OR 9 must have a low that EXCEEDS the low of both bars 6 AND 7), a new low must be made by one of the bars in the next two weeks (next week would potentially be bar 8 and the following potentially bar 9).

What If I'm Wrong?

This view is complicated by numerous buy signals on many of the daily charts of the major indices. But markets, the battles between buyer are seller, are about continually competing timeframes. I believe, looking at these significant market lows, longer-term timeframes tend to have the upper hand at significant market turns. Therefore, my conclusion is we have a high probability of making a new low within the next two weeks.

But I may be wrong. If so, then I do not mind buying the stocks at levels higher than today because if I am wrong about the market's present state, then I will at least be entering the market at a point where risk is lower than I believe it is currently- just a wild idea!

If you would like to learn more about DeMark price exhaustion techniques, I recommend a new book that was recently published by Jason Perl, appropriately titled, "Demark Indicators."

History Will Not Reflect Kindly On Recent Economic Decisions.

“He who learns but does not think is lost. He who thinks but does not learn is in great danger.”--Confucius


A Chinese philosopher said that when it’s obvious goals cannot be reached, don’t adjust the goals—adjust the action steps. Global central banks have taken those lessons to heart.

The construct of capitalism has forever changed and investors are spinning from the insane volatility gripping financial markets. 20% moves in major market averages—session over session—are tough to stomach regardless of your directional bias.

One year ago, when the writing was on the wall as the Dow Jones Industrial Average probed all-time highs, pundits confidently proclaimed there was clear sailing ahead.

Last week, as perception caught up with the daunting reality of debt and derivatives that we’ve been warned of for years, depression was debated across mainstream America.

You can’t blame folks for being confused. We’re past the point where bulls and bears profit or lose. We’ve entered a new world order, a scary stretch where politicians rewrite history on a daily basis in an attempt to escape the devil of deflation.

There are certain things we know for sure. Universal truths, if you will, that can provide clarity amid the confusion. We’ll tackle five themes today with hopes that we’ll shed some light as we together find our way.

Two trading dynamics considered gospel for many years have effectively been debunked. The first was that lower crude would serve as a positive equity catalyst and the second was that a higher dollar would bode well for stocks.

We live in a Wishbone World with dollar-denominated assets on one side and the greenback on the other. One of two things must occur: either the world reserve currency will debase, paving the way towards hyperinflation, or the dollar will strengthen as debt destruction continues it’s natural course.

The U.S. government is attempting to buy the cancer and sell the car crash. The mere perception of “success”—a whiff, if you will—should be enough to shift psychology to the other side of the ride, damaging the dollar and propping stocks higher for a trade.

The hedge fund bubble popped this year and the carnage has been pervasive. On top of regulatory scrutiny and operational restrictions, the correlation of strategies has buried the best in breed well below their high water mark.

An obvious concern is the potential for continued redemptions and forced selling. Many macro portfolios are laced with derivatives and won’t be bailed out by the U.S. government umbrella, introducing the specter of further systemic risk.

Nobody is smarter than the market and I’ve long ago learned that if you don’t stay humble, the market will do it for you. What I’ll say with confidence is that the market tends to follow the path of maximum frustration and rarely rewards herds running aimlessly towards a cliff.

While the process of price discovery is fluid—dependent on a multitude of variables including credit, the dollar and geopolitical strife—it’s my opinion that we’ll look back at last week as the 2008 trading low (not to be confused with a market bottom) before a harsher downside comeuppance arrives next year.

There are two natural paths for financial markets—time and price—and an unenviable destination, that of debt destruction. The sooner we’re allowed to take our medicine rather than being given drugs to mask the disease, the quicker we’ll arrive at a stable foundation for legitimate economic expansion.

We will cycle through this period and arrive at better days and easier trades, although it will take some time. Just as the Internet prophecy proved true—albeit not before the tech crash—so too will the golden age of globalization once debt destruction fully manifests.

The recovery will be led by China, India and other emerging markets and profoundly reward those proactively positioned. Our goal—as investors and as a human race—is to get there in one piece while being kind to each other during the journey.

New Bull Market Defination.

Someone sent me this interesting defination:-


BULL MARKET– A random market movement causing an investor to mistake himself for a financial genius.

New Gold Dream.

Spot gold rose $5.63 to $913.25 Thursday - a new closing high for the move since the September low.

For those keeping score at home, that means the gold price is now above the price of the SPX (909.92) for the first time since having fallen below it in the summer of 1990.

The last time we saw the dollar price of gold rise above the SPX after a long period of being below it was in summer of 1973, after which the price of gold more than tripled over the next year. The gold price would then remain above the SPX price for 17 years, ending in the summer of 1990.

Will we see something similar this time around? (i.e. Will gold tend to outperform stocks for the next decade or so, as it did after the summer of 1973?)

I suspect that’s going to be the case, given the long-term nature of the big secular bear market in stocks that began back in 2000 in “real” terms, and the big secular bull market in gold that began in 1999.

The CNBC folks may tell you that gold is rallying simply because of “panic,” but this would be far from the truth. The market isn’t that stupid. It doesn’t buy gold to hold it close and sleep with it at night because it’s “scared.” The market buys gold to hedge against debasement of fiat currencies and as a store of value.

In this case, we’re seeing gold sniff out what the result of all the Federal money-printing and backstopping in response to the current collapse will eventually result in: An “inflationary holocaust,” as Jim Rogers put it.

There are consequences for every action taken by governments and central banks when they meddle in the markets; in this case, the consequence will be massive inflation going forward.

It may sound a little counterintuitive, since the Fed is responding to “deflationary” forces resulting from the housing bust and the ensuing credit crunch. But at the end of the day, money printing always results in inflation, just as it did following Greenspan’s printathon in response to the stock bubble bursting back in 2000 (which was also “deflationary” at the time, but didn’t turn out that way due to the Fed’s printing).

Let’s not forget that crude oil was $20 back in 2000 and would rally fourfold (to $80) over the next 7 years, before Gentle Ben began running his presses back in 2007. That set crude on another run to $140 in under a year. If that sounds like a parabola, that’s because it is one.

It took the Fed from its inception in 1913 until 1997 to grow its balance sheet the first $500 billion. It then took another 10 years to grow it an additional $500 billion. In the past 3 weeks, the Fed has now grown its balance sheet another $700 billion in an attempt to force the credit markets to unfreeze by the brute force of massive inflation.

This is a classic description of a parabolic money printing, and it sets the stage for an inflationary tsunami going forward.

Buckle up. It’s going to be a wild ride. We always knew how the Fed would respond to this crisis, because it’s how the Fed always responds to financial problems: More money printing.

And it’s going to have a very predictable result too.