Something Evil This Way Comes (Part Deux)

Well that was exciting eh?

I warned people on the snapback......

So its over, and we should all buy stocks, right?

Uh, no.

These sorts of violent snapbacks don't happen in bull markets. They happen in BEAR markets.

This is why Bear markets are so hard to trade, and why most people are best off to sit it out.

If you didn't yet, you just got another opportunity. That opportunity might continue for a while, or it might not, but when it ends..... oh boy.

Key numbers today:

Unemployment continues to ramp, in at 352,000. Given that this is right into the seasonal part-time hiring period for the holidays, that is particularly ominous. Oh, and let's not forget - unemployment is a lagging indicator, which means that if we're seeing it ramp up now, we are almost certainly already in a recession!

3Q GDP came in at 4.9%, right in line. Personal consumption came in at 2.7 .vs. 2.9 expectations (a bit off)

Sears Holdings reported dogsqueeze earnings and were woodshedded immediately, dropping 12% premarket. Hello Grinchmas! Gee, a big retailer can't hit the numbers? I wonder what that means? (Hint: It starts with a "R" for those of you who ride the short bus)

E*Trade gets a Guido loan and marks to market their entire ABS paper - at a SEVENTY PERCENT DISCOUNT!

I don't think anyone is (yet) understanding the impact of this.

Most of E*Trade's portfolio was HELOCs; there were few purchase-money firsts in there.

Let's do a bit of math, ok? You know, the stuff they teach you in FOURTH GRADE - math that appears to be totally beyond the capabilities of the equity "cheerleaders" at CNBS!

In the last four years approximately $6.5 trillion has been MEW'd out and spent on plasma TVs, exotic vacations and other sorts of drivel. IT IS GONE; it did not go into something of value - it was CONSUMED.

Let's use a conservative assumption that 1/3rd - 33% - came from HELOCs, rather than cash-out purchase mortgages or refinances of existing mortgage paper. Probably reasonable.

E*Trade's paper is almost all comprised of this HELOC paper, essentially all of it written in the last three years, and most of it was written to people with significant assets; probably half to their brokerage customers.

That is, most of these HELOCs were written to allegedly "good" credit risks.

Now let's apply some conservative valuation discounts, given that E*Trade just marked the entire thing to market at 30% of face value.

$6.5 trillion X 33% = $2.14 trillion in HELOC paper.
30% of original value = a $1.5 trillion dollar DIRECT LOSS on HELOC paper ALONE.

Oh, this "subprime" problem is only "subprime" and is just a $100 billion problem eh?

This "mark to market" is a very strong indication that every bank and institution out there with this crap on their balance sheet is going to suffer ocular penetration by a stallion!

Guys, this is "The Real Deal."

Remember back a few months ago I said that this was a $1-2 trillion dollar problem in terms of direct losses? That the markets were totally ignoring the reality of this?

Well, guess what - you just got proof that I'm right.

The market is totally ignoring this. We should have tripped the circuit breakers this morning on the Dow, as the figures here are BLATANTLY OBVIOUS.

Those who allegedly know how to "invest" and "trade", APPEAR TO HAVE FAILED FOURTH GRADE MATH!

Now you know WHY the malls were empty Saturday and Sunday. Now you know WHY my local Target had nobody waiting to check out on Sunday evening.

The money flow has evaporated and what was MEWd out and spent is uncollectable!

$100 billion in losses? Ha!

That number - on HELOC's alone - is $1.5 TRILLION.

No, not in derivatives, swaps, etc - direct, hard, real losses.

Oh, and that's just the HELOCs; we haven't gotten to the ALT-A negative-am "purchase" loans yet.

If that's not bad enough, guess what - that money, once paid, is actual capital and can be fractionally lent out again. But what if it disappears? What's the impact on lending?

"Reflate" eh? Uh, no.

The Fed is irrelevant; it is simply impossible for them to change the outcome, and Ben knows it.

Not good.

Here's the technical!