The Market Ticker

It seems that every time the market rallies seemingly "without explanation" that people start talking about this mythical "Plunge Protection Team" (otherwise known as "The President's Working Group") - a group that does exist - as the cause.

Folks, let's dispense with the stupid first - what do you think the odds are of some mythical working group inside the government that manipulates the stock market, slings around billions of dollars to do so, and leaves nary a trace - and yet nobody ever manages to get their hands on one scintella of evidence in the form of a trade confirmation, funds trace, or other piece of evidence that would prove this, and get it to some intrepid blogger (say, for example, me)?

This group would encompass hundreds if not thousands of people with "actual knowledge" too - yet there has been no authoritative leak (with said evidence) since Ronald Reagan's term.

Oh, and this very same government can't manage to hide a cum-stained dress.

Yeah.

Ok.

I believe in Santa Claus and the Easter Bunny too.

So.

Are there times when "excess liquidity" finds itself into the market, and all of a sudden the stock market takes off like a rocket ship - sorta like today?

Yes.

But I thought I just said there was no grand conspiracy?

That's correct - I said that.

This "conspiracy" is nothing of the kind and its hidden in plain sight.

There's even a web site to make it easy for you - it pulls the data from another public web site, over at the New York Federal Reserve Bank. Its called "The Slosh Report".

To understand all this - and to make sense out of both The Petition and The Video, you need to understand how "slosh" works, and how The Fed and interest rates actually work.

I'm going to try to educate you.

Let's hope it works.

The Federal Reserve does not set interest rates. They can't. The market sets interest rates. The Federal Reserve sets a TARGET for overnight borrowing between banks. The only direct borrowing that goes on from The Fed is done at the "Discount Window", and is at a penalty to the open market - so unless you really need to, you don't use that option.

So how does The Fed control rates?

They either add or withdraw money in exchange for securities (typically treasury bonds, but any marketable securities can and sometimes are taken in exchange.) These operations are either temporary (known as "TOMO"s) or permanent ("POMO"s).

A temporary open market operation, as the name implies, expires. That is, if The Fed "injects" $1 billion in a TOMO, it expires (has to be paid back) at some point in the future. The time period might be as short as one day or as long as several - but they are all, in effect, short-term loans, with the time set when they're made.

Now let's recall that money is a "fungible" commodity. That is, one $1 bill has the same value as any other $1 bill - they are totally interchangeable, so long as they are legitimate (not counterfeit!) $1 bills. Likewise, a $1 Federal Reserve Note (what you have in your wallet) is "fungible" in reference to $1 in credit - when you spend $1 on your debit card, an actual federal reserve note does not change hands - $1 of "credit" does. You can walk into your bank and demand that your credit (in the form of an electronic ledger entry) be handed to you in actual federal reserve notes, and it will be - and vice-versa.

So what controls the cost of money (in the form of interest rates charged)?

Simple - supply and demand.

If there is a demand for more money than there is supply, the interest rate charged will rise. If there is more supply than demand, the interest rate will fall. The rate charged will rise or fall until it is in equilibrium with supply for the duration (in this case, overnight between banks) contemplated.

Thus, The Federal Reserve twists their SINGLE knob to either inject or withdraw "slosh" - or excess liquidity - so as to cause the actual interest rate charged between banks to be, as close as they can get, to the intended (published) Federal Funds Rate. (The Treasury department has an identical knob, but they twist it rarely - The Fed twists theirs nearly on a daily basis!)

The target rate and the actual trading range (that is, actual interest charged - both high and low) for any given day is published. You can find it right here.

Now if you look at this table (open it in a new window) you will see that The Fed is not perfect. For example, on 11/6, there was actually borrowing that happened at 2-3/4%, and at 5-1/2%. The average for that day was 4.22%, which is below (by about a quarter point) the target of 4.5%.

This sometimes gives rise to the claim that The Fed has performed a "stealth ease" or a "stealth tightening" - that is, they've allowed (on purpose!) the Effective Rate to be different than the published Target Rate. That might even be true, but it doesn't matter in this particular case.

Here's the gimmick - there was, today, 11.25 Billion in "Agency" paper accepted in a 1-day "TOMO" at the NY Fed. We do not yet know what the target rate was (The Fed is typically one day behind the market in reporting this, as obviously the borrowing happens through the day) but assuming the Fed Funds trading rate was not over the target this was $11.25 billion in extra money that went "sloshing" around the system - today.

Where do you think it went?

Well it could have gone anywhere. But do you think some of it might have gone into affiliates of some of those banks - say, into Hedge Funds? And do you think some of those funds might have bought stocks with it? They might have, eh?

Before you scream "MANIPULATION!" let me point out that this is all done in plain sight and its perfectly legal.

There is no secret, and once someone has money (credit), what they do with it is their business, right? All they give up in return is a promise to pay a given interest rate (and perhaps they post some collateral to get a better rate than they otherwise would.)

But - there's more.

See, we frequently hear that "The Fed injected a record amount of liquidity...." from various people - including some blogs often cited on the forum.

These people are either naive or intentionally misrepresenting what is going on with these operations!

Twice recently such claims were made - including on 11/8 when people were screaming about a "record" $32.75 billion that was "injected."

There's one small problem with these claims.

THEY ARE FALSE.

Remember up above when I said these operations were TEMPORARY? That is, they have to be paid back?

Well guess what - on 11/8 $40 billion of those TOMOs MATURED.

So The Fed, on 11/8, did not inject $32.75 billion.

In fact they withdrew $7.25 billion worth of money from the system!

Now today, they really did add $11.25 billion, and it is reasonable to assume that some part of that money went into the equity markets. In fact, it would be silly to assume otherwise, given the tape we had today.

But here's the rub - tomorrow, all of that, plus more, matures, and unless there is more issued, liquidity will be withdrawn! Further, tomorrow we will find out if, today, the Effective Fed Funds Rate was trading somewhere near the target - in other words, whether the supply was properly balanced or if The Fed played some sort of game.

So now who's the idiot?

Did you buy this rally without knowing that The Fed threw more than $11 billion on the table to be used for "whatever", but that it had to be paid back tomorrow?

If you did indeed buy stocks today, without this knowledge being a part of your computation as to whether today was indeed a "good day to buy", then you are at least somewhat likely to get a nasty surprise in the near future when that liquidity is withdrawn - perhaps as early as tomorrow!

Now there are a couple of possibilities that one must consider for what was a fairly sizable net addition:

• Someone, or a bunch of someones, needed a bunch of money and spiked the Effective Fed Funds Rate. This was responded to by The Fed injecting enough liquidity to meet the demand; we will see this from the EFF data tomorrow as it will show that there were trades made at materially above target (which is what would cause them to perform the injection in the first place) and, the actual average will likely be at least somewhat above the target rate. This is quite bad, when you think about it; it may indicate that some bank was in quite a bit of trouble and needed short-term capital to meet some regulatory requirement...... Is a rally reasonable if one or more banks are potentially at risk of insolvency?
• The Fed decided to spike the punch bowl for a day - but only for a day - and they will withdraw the liquor tomorrow. We will know this if the EFF prints materially BELOW the target rate. Do you buy a rally when the money used for it is going to "disappear" in the immediate future? Or is the smarter move to SELL that rally?

The first is a sign that there was some significant stress somewhere in the banking system that The Fed responded to. The latter is a sign of The Fed attempting to make a "stick save" of a market that was clearly in trouble - not that this sort of thing would hold, but as a quick "prop job" for a day, it can be effective (like a junkie, trying to do this daily quickly winds up with the Effective Fed Funds Rate at or near zero, as available credit overwhelms demand - The Fed becomes irrelevant.)

Everyone within the regulated banking system has as part of their mandate the orderly operation of the markets. You can argue over whether such an "intervention" (via clearly published and public means) is legitimate or not, regardless of whether it was to "stick save" one bank, ten banks, or simply the equity markets, but what you can't argue with is that the mandate exists - because it does.

But - whatever the cause was, the money injected today is only good for one day and has to be paid back tomorrow - in full, with interest!

So - the next time some "magical" market rally appears out of nowhere, before you scream and holler about "The PPT" go check The Slosh Report.

Then - use your brain.

BEFORE you place your trades.

This week, and next, I am going to be unable to post daily Tickers.

In fact, this week you'll be lucky to get a Technical out of me on a daily basis, and next week, forget it - I'm on vacation - and while I will have Internet access, I have zero intention of actually using it with any sort of regularity.

I may be able to do a weekend update like this next weekend.

Maybe.

This last week was the week of bad things if you were long equities. Not only did the financials continue to get pounded, but the rollover I've been seeing start in Tech came to fruition, wiping out a huge part of the year's gains - in one week. This is likely to continue.

In addition we finally got some attention being paid to Sir Bucky. He's in trouble. We should have had attention paid to this months ago, but heh, you never can count on the "useful idiots" in the mainstream media to pay attention until after the horses are all out of the barn. Witness their terrific performance during the Tech Wreck of 2000.

What's got their attention now with Sir Bucks-a-Little? This base-jumping chart:



What is there to say about this other than "oh God"?

Despite protests to the contrary, The Fed really is responsible for this. Causation might not be found in correlation, but after the third or fourth event, can you really keep ignoring the evidence right in front of your face? I think not.

Like all other things supply and demand sets the price of a Buck in the world. And right now, there is too much supply and too little demand. The price falls until equilibrium is re-established.

This is the fallacy in the Bernanke claim that "The Treasury is the only one who speaks to the dollar."

Horsecrap!

This, coming from a man who claims to have a PhD in economics? Is that pronounced "Piled Higher and Deeper"?

BenDover certainly understands simple supply and demand, and he, with his cohorts at The Fed, have a big knob they can twist to adjust supply. The "Fed Funds Target" is the most visible indicator, but it is in fact not the knob - the knob is found in the TOMO and POMO operations (open market operations, temporary and permanent) that control how much liquidity The Fed allows to slosh around in the system.

By draining that pool - leaving the slosh pit dry - supply would be removed and, at a given level of demand - the price would rise.

BenDover cannot "stimulate demand" into a crashing economic landscape. It is simply not possible. This is where BenDover gets it all wrong in his "thesis" that The Depression could have been averted if The Fed had only opened the spigot wider.

See, if people refuse to trust one another because they believe (or worse, know) that the other guy is hiding something nasty off their books where it can't be seen, and thus can't quantify the risk of an explosion at an inopportune time, then there is nothing you can do to "stimulate" the economy.

You can try to blow (another) bubble but in the face of mistrust it fails because the "hole in the other side" is that lack of trust. Without it the air leaks out faster than you can pump it in.

Severe economic disruptions - events outside of the normal business cycle - cannot be stopped once they give birth. The opportunity to deal with this and prevent it happened back when Enron imploded - regulators correctly pinpointed the use of "off balance sheet" transactions, such as the Enron "barge deals", as wildly-improper abuses of accounting which led to the "rapid disassembly" of the Enron empire.

But that opportunity was squandered post-Enron, and the big Wall Street firms sauntered down the road of off-balance-sheet conduits, SIVs, and "credit enhancement" - all, in my view, active acts of fraud.

Now the gig is up.

There are really only two paths forward for Ben, Treasury and company:

• They can force these institutions to take their marks now and either formally cut all of these "SIVs" and "Conduits" loose - forever - or take them all back onto their balance sheets. At the same time they can refuse to allow these shenanigans in the future, with the threat of immediate regulatory actions including seizures of the banks involved should it occur in the future. In addition, they can require that "credit scoring" of debt instruments be rendered invalid unless paid for by the buyer, and insist that Reg-FD apply to all such offerings. Finally, they can drain the liquidity pool by raising the Fed Funds target and defending it as necessary, starting with an immediate, intra-meeting reversal of the last cut - or a public statement that come December, it will be reversed. This will rain down asteroids upon Wall Street, but while it will punch holes in many of these firms' balance sheets it will likely not kill most of them.
• They can try to continue to twist the liquidity knob. But, without cleaning out the trash nobody will step up and do anything useful with the liquidity. It will slosh and sit, and absent demand, excess supply will only further depress The Dollar. Our economy will go in the toilet as punishing credit contraction and import prices continue to ramp. Real purchasing power for Americans will contract by 50% or more over the next couple of years.

There comes a point where the rest of the world no longer is willing to play along with this fraudulent scheme, as their US investments depreciate by the day and their ability to export goods to us to finance their investments disappear.

Import price ramps - even from "pegged" nations like China - are already apparent. This last month's data, printed last week, confirmed what is now a six month trend of rapidly-accelerating import price inflation.

This trend will continue until and unless we address the confidence and excess liquidity problems!

Trichet and others are now warning of a potential economic war if our nation does not stop the shenanigans immediately.

They are right - and we are wrong - on this one. It is time for The Administration to get off its ass and act - put in place real reforms, force marks to market and get rid of the SIV-cum-AIDS nonsense.

Our financial system must have its integrity restored.

The Petition is a part of that.

But it is only a part.

We, as Americans, must force politicians to answer to this problem. Neither of the political parties want to talk about it - during the last two debates I wanted there was the inevitable attempt to either brush off nearly-$100 a barrel oil or blame it on "Bush-and-company."

Both approaches are wrong.

The simple fact of the matter is that until and unless America chooses to bring out its trash in the financial markets and force those institutions who tried to hide risk to bring it back on their balance sheets and appropriately account for it, the slide will continue.

At some point - perhaps in the next few days or weeks - that slide will truly gain legs.

When it does, you will see a selloff of breathtaking proportions across both equities and bonds as the "hot money" decides that while the door is very small, and there are many in the theatre, with flames licking at the curtains they can either try to get out and possibly die or certainly die by staying put.

That event, if and when it comes, will be truly something to behold - from a distance.

Like a nuclear blast, it will be awe-inspiring - so long as you're not too close.

Our economy is in big trouble folks.

Really, really big trouble.

Today import prices came in with more than a double-digit increase year/over/year, and 1.8% up on the month.

Uh, guys. Psst - INFLATION.

The Fed cannot cut into this data. No frapping way.

What's far worse is the data out of China on imports. Up until May, it was deflationary (that is, import prices paid from China were trending down.) In May that reversed and since then has been accelerating precipitously. Why? Primarily because all those people who make 20 cents an hour over there want to make 30, so they can buy some Nikes. This upward pressure inevitably leads to higher unit labor costs which is then forced through the pipeline. We have a long way to go in this regard; the era of our inflation being held down by cheap imports is over, and from here things only get worse.

No matter what Bernanke does going forward, he (and the market, and our economy) loses.

Ben made a critical miscalculation in dropping by 50bips in September; instead, he should have defended the previous target by draining liquidity.

But now we've got a plunging dollar and import prices are ramping. This will show up in headline inflation within a month or two, making further Fed rate cuts impossible.

Ben will be forced to hold or tighten, and both are in fact a tightening, as he will be forced to drain liquidity to defend the target.

There will be no other choice.

Bernanke was clearly unhappy being in front of Congress yesterday. He was stuttering and fidgeting - and dissembling. He got nailed severely with his claim that "inflation is not affected by a weaker dollar", and its going to get very, very difficult for him politically if he tries to cut into the current import prices-paid data. This isn't a couple of month thing any more - it is clearly a trend; six months worth now with respect to China - and at an accelerating pace!

Rising real rates and rising inflation pressures into an overleveraged economy is very bad news.

The only end solution is for asset prices to contract (houses primarily but also the equity markets) so that the "excess" comes out. Unfortunately as "the excess" was paid for with debt and not savings, this is going to bankrupt many consumers and businesses. Those who "levered up", whether personally or corporately, are going to be punished severely.

We are going to get a nasty recession and I won't be eating part of my WSJ on the webcam. Sorry guys, I know you wanted to see it, but I put the odds of being wrong on this one now at something like one in ten.

Months ago I opined that "share buybacks" funded with debt were a likely death sentence when (not if!) this confidence game came apart. That too is going to become clear as all these "great" corporate balance sheets are now having a rude surprise administered to them in the form of margin compression and growth disappearing - including the only "strong" holdout so far - overseas.

This is, roughly, where we are now:

Is that clear enough?

We are now at serious risk of an all-out Bear Market and perhaps a spec-driven market crash. The amount of spec-driven market "ramping" in tech stocks has been enormous with many of the "leading" stocks on the Nasdaq posting 100% gains during the last three to six months.

There is absolutely zero justification for this on the fundamentals of these firms - it is simply the result of too much money chasing too few shares, with an awful lot of that "hot money" having the afterburner of leverage behind it as well. When the "hot money" realizes all of the following it will head for the door faster than the crush of patrons in a theatre that has flames licking the curtains.....

• Import price ramps - especially from China - prevent further rate cuts and demand liquidity drains from The Fed. The Fed is a bank and the banks will not permit the destruction of their assets through hyperinflation. Remember, if inflation exceeds the rate of interest charged then banks lose REAL WEALTH on balance. The inflationary trend is dangerously close to going totally out of control; the last time this got out of hand Volkler had to raise interest rates to punishing levels. Ben is headed for the same box.
• Our problems are bad. The problems that will be faced overseas are FAR WORSE. Overseas economies are dependant on us, not the other way around. When this sinks in the other currencies against which the DX is measured will collapse; this will appear to raise the dollar, but in fact it is the sinking of other currencies. The effect of that will be the total destruction of exporter margins, which is what has held up the segment of the stock market denoted by big international companies. DO NOT BE CAUGHT ON THE WRONG SIDE OF THE DOLLAR TRADE - OR IN THOSE BIG MULTINATIONALS - WHEN THIS SINKS IN!
• Tech will not survive a recession without a 50% EPS haircut at minimum. This alone is likely to result in a fifty percent share price loss among the leadership. I expect to see the QQQQs (and NDX) trade down by twenty percent within the next three to six months. If you are long tech - GET OUT NOW! We've seen this movie before and we know how it ends. If you need a refresher look at the Nasdaq charts from the spring and summer months of 2000. Don't start the crap about "oh these are real companies with real earnings." CISCO WAS A REAL COMPANY WITH REAL EARNINGS IN 2000 AND IT WENT FROM $82 to $14!
• Across all equity market classes - multiple compression is coming. This is the great wealth destroyer for those who are long in the equity markets; it forces all stock prices lower in synchronicity. The last bout of this was seen in 2000-2003; people tried to flee tech and rotate into the S&P thinking that was "safe", only to get hit in the teeth by multiple compression and see their portfolios shredded to ribbons anyway.
• Rate cuts did not in the past and will not this time save the day. Look at January of 2001, specifically, with the "surprise" rate cut and what happened one month later. Don't be an idiot and "buy the dips." Those who bought into that took a 90% loss instead of a 50 or 75% one in the 2000 tech market collapse, as they tried to "average in" on the dips only to have the floor disappear out from under them. This is not 1987 or 1998 when we had a fundamentally healthy economy with a "credit event" - this is more like the 1970s or even 1929 when we have a fundamentally sick, overleveraged economy where fully 7-8% of our GDP has come from unsustainable credit creation - and that tap is now permanently OFF!
• The asset-backed commercial paper market is collapsing - AND IT SHOULD! This is not an "overreaction" by the market. Fact is, ABCP stuffed full of cock-and-bull is and always was a fraud, and now the buyers have figured it out - they ain't coming back. Didn't Bernanke say that this segment of the market was "stabilizing"? Last night the numbers came out from The Fed and they show a near-implosion. This is going to prevent any possibility of leverage being maintained by American business and this de-leveraging will reach across all asset classes, with the worst hits coming from where the leverage has been the highest. This, at present, means financials and commodities. Will Congress grow a set of balls and take a look at hitting him with a perjury indictment? I doubt it - but they should!
• The phrase of the day is likely to soon be "Margin Call gentlemen!" Do not get caught in any room full of Specs when that phone call comes. It won't be pretty.

I am raising my probability of a primary Bear Market indicator being tripped to 50%.

If you cannot trade this market on an active basis and are a "long-term investor" get out and get to high ground. This means short-term treasuries or cash. Cash is an asset class that is widely unappreciated, but it is a legitimate place to hide from a stock-market rout.

Do not be surprised if we get a rally after the end of next week into the start of the Christmas season. Even during bad years - true Bear Markets - we often get a counter-trend rally over the Thanksgiving to Christmas holiday period.

This, if it happens, is not an "all clear" signal; quite to the contrary, and it could abort at any time, especially if the "Black Friday" numbers come in bad.

Beware of the siren song of "foreigners will find everything in our market to be cheap and snap it up." The assumption here is that foreigners will have anything to spend on those assets. Oh sure, the oil-rich Middle East does, but will those other foreigners when their liquidity contracts as the global economy starts to melt? A bet on them doing this is a bet on their economies being just fine while we go down the hole in the center of the toilet!

I have only one thing to say to those who believe it will play out that way: SOLD TO YOU!

Today we took a second run at 1450 in the SPX and on the morning it held. For now.

This is the same pattern we got with 1490; my money is on 1450 falling and then the 1430 target comes into full view.

Below that we are in real trouble with the February lows being all that this market has left as a critical support level.

All of this - if its going to play out - probably does next week. This means that the volatility next week is likely to be outright nauseating.

At this point earnings are basically done, and the S&P posted negative earnings growth for the first time in a long time. In addition we are now starting to see earnings expectations for 4Q coming down, but this is not being widely reported by CNBC and the other cheerleading squads. Gee, I wonder why?

Oh, and if that wasn't enough, The House passed a bill today that would raise taxes on Hedge Funds and other "liquidity partnerships". It also patches the AMT, which is the good news. The White House has threatened a veto, and Senate support is uncertain... we shall see how this plays out.

Put all this together and the odds are not in favor of higher market prices.

But - at least for today - we are still in "correction in a Bull Market" mode...... for now.

My "crash indicators" are, for the first time since August, flashing "caution" signs.

"Caution" means that we could resolve in either of two directions:

• An intermediate-term bottom being put in, with a retracement rally (that has the potential to extend and make new highs, although this is not assured)
• "The real deal" - either a formal Bear Market or an outright credit-led crash.

Crashes, remember guys, always initiate in the credit markets. Always.

And if you want to see what ought to be freaking you out, here are two items that damn well ought to get your attention:

Note the ramps over the last few days. They're nasty, and are now beyond what we saw at "The Depths of Hell" in August.

Credit markets lead folks, equity markets follow.

Don't ride the short bus.

Here's your technical!

Just gotta put the video out here again...... pass it around!

Retail sales..... well, we knew we were going to get those numbers.

Overnight the futures did a cliff-dive initially, then slowly clawed their way back, helped by Ford losing less than forecast.

But then The Bulls had a bit of trouble - see, those retail numbers started to show up. WalMart's numbers were poor at best, and other retailers are generally crappy. Macy's down 1.5%, Ann Taylor poor, Limited had limited results, Gap found an 8% gap (down) in their same-store sales, etc.

McDonalds' continues to post impressive gains. I guess when you can't afford any better........

Everyone is blaming weather for the retail numbers. Yeah, ok. How about "the consumer has no money"? Did you look at the Consumer Credit report? No? Hmmm..... see the previous ticker.

Morgan Stanley claimed a writedown at the "lower end" of expectations. Yeah, ok. Are all the monsters out from under the bed? And how is it that Goldman has all these Level 3 "assets", yet we keep hearing that a huge part of the issue is that many of these Level 3 "assets" in fact have no bid!

Well, look, as an investor/speculator/trader, I have "assets" on my sheet from time to time that have "no bid" too. It sucks when that happens, but "no bid" means that their value is easy to determine - its zero!

The troubling thing here is that we're being told different things from different people and at least one of them has to be lying.

"Accounting" contains the word count. There's a reason for that.

Yet we keep trying to come up with some sort of odd alchemy that supposedly makes the numbers "more accurate".

To that, as a former business owner, I say "nonsense."

MCSNet, my former company, never had a reason to play tricky games with the books. This is one of the advantages of a privately-held company - the shareholders that I had to impress were limited to a handful of people, with the most important one being myself (as the majority stockholder.) And since I couldn't spend money we didn't have, if we failed to impress it was going to do impressive (on the downside) things to my bonus and CapEx budgets!

As I see it, then and now, its very simple - a "thing" has a value only if someone else will pay you some amount of money (or something else of value) in exchange for it - today, right now, right here.

If nobody wants it then the "value" is zero.

Period.

We ran into this at MCSNet from time to time, and believe me, it sucked. Sometimes the "zeros" were relatively harmless, like the 1,000 "customer CD packages" that were rendered obsolete when some of the software. Instant zero. Oops.

Then there were a few big zeros. Those you go over really, really carefully to see if there's any fraud or false claims somewhere that would allow you to stick someone else with it (justly so) rather than eating it yourself. I earned some infamy in the Internet space a number of years ago over one of those deals when I successfully "put back" a really big six-figure potential zero.... guess what - it can and does happen.... let's just leave it at that.

Technically the market is broken. 1490 fell resolutely yesterday like a knife through butter, and then the S&P closed under the 200 DMA.

Here's reality - a technical bounce was totally expected this morning. Whether any of that is going to hold is another matter. The answer - for now - appears to be a big fat NO.

Worse, "The Horseman" - the big cap tech momo stocks - are getting slaughtered today. All of them. The losses are huge and "hot money" doesn't stick around to see how much worse it might get - they run for the door. This is very likely to pick up steam and those huge gains that came from the summer until now are very likely to ALL be given back. If you're long those names, and you know which ones they are, GET OUT.

The ECB held rates steady, but Trichet said that the risks to price stability "are fully confirmed as lying to the upside" - a hawkish statement that I expected (even if many others did not), and threw cold water on the idea that we would be seeing the ECB "follow" The Fed's lead and drop interest rates.

Jobless claims came in a bit below consensus but the 4 week moving average is elevated. Not in "panic" yet, but elevated nonetheless. We shall see how employment holds..... I'm not taking any bets on it being good going forward; employment is always a lagging indicator on economic downturns as CEOs tend to be overly optimistic - after all, you get punished when you say you expect bad results, right? Well, what does firing people say?

Oh, don't look at First Solar (FSLR). Talk about a bubble. Give me a break; a P/E of over 200? Yeah, right. Don't try shorting it though - when this breaks is not possible to say, but that it will - and will crush people who are long - is an absolute certainty. Psst - you do realize that solar power, on a total energy return basis, is a net lose right? The only reason these guys have a market at all is due to government subsidies. If/when those evaporate.......

On the forward-looking side, let's talk about where we are heading.

Debt issuance as a way to "spend" only works until cash flow is exceeded by debt service requirements. At that point the entire pyramid collapses.

We are not there - yet - in the consumer space. We have long since passed it in the Government space, but we're hiding it by keeping our FICA and Medicare liabilities "off balance sheet" (now do you understand why they ignore banks doing the same thing?)

The problem in the consumer space is that we've enabled fraud and avarice to pump the consumer's "presumption" of wealth. Unfortunately this "wealth" has not been real over the last four or five years, but the debt service is real. As the "wealth" contracts - and it both will and must in order for housing to return to historical affordability levels - consumers will exceed the point where debt service exceeds forward cash flow.

That's the "waterfall" moment, and for a few million homeowners, they will or already have reached that point and gone over the abyss.

The bad part of this is the horrifyingly bad advice that people are getting when they find themselves in this box. If you are reading this, or know someone who is, that is facing foreclosure, do not touch your 401k or IRA money, or, for that matter, any other retirement assets! Those are protected in a bankruptcy - if you spend them voluntarily, you're screwed! Instead, get thee to a good bankruptcy lawyer and do what you need to do immediately - do not try to save an impossible situation. You will fail in a contracting credit environment and destroy that which you have every legal right to protect!

While you can blame consumer greed for the mess we're in, that's overly simplistic. If I sell you a car and roll back the odometer, and you as a result buy a car you think is worth $30,000 but it turns out to be worth only $10,000, who's the one at fault when your balance sheet comes up short? The seller of the car who defrauded you.

Yes, you were greedy and thought you had made "a score" buying that car at a "big discount." But the person who actively deceived you is the true monster, because they talked you into taking on debt which you believe was backed by an asset at a certain value, and in fact it was not.

A few days ago I opined on the root of all of this - and now, it appears, at least STATE regulators are getting into the act of going after it. The ugly is that the Federal folks are still fiddling while Rome burns..... you don't think that campaign contributions would be involved in that, do you?

As I reported last night Cuomo is now gunning with his subpoenas at Fannie and Freddie. Not to nail them - but to prove that collusion and fraud was involved in the loans sold to them.

Did you catch Fannie and Freddie's response?

Paraphrased, it was this: "We can and will put back any loan that is found to contain fraud."

Remember my prediction from the spring with regards to loan putbacks?

If the fraud alleged is proved up virtually all of these banks and lenders who sold loans to Fannie and Freddie will be rendered instantly insolvent, as these loans will not only be put back they are also the very ones that are most likely to default!

I will reiterate the prediction I made back in the spring: You are going to see a huge number of banks, thrifts and others seized by the FDIC, and the common stock of those institutions will be worth zero.

As all this unwinds its going to be ugly, and there will be several million consumers who will literally go bust. A trillion a year worth of "consumer spending" is going to evaporate, which is a good 8-9% of GDP, and that's going to remain the case for a while as the adjustment proceeds.

I do not subscribe to either the "Crack up Boom" or "The End of the World as We Know It" theories, although the deflationary scenario looks assured. Simply put, you can't inflate out of this - it would destroy the banks, and that's not going to happen.

But let's not forget that the damage to the banks from the alternative is very real too - just not as bad. As this deflationary pressure builds investment and spending will both contract, and so will the Equity Indices. I am now expecting a thirty percent retrace on the broad indices, and it may get as bad as it did in 2003, with a full retracement of the move up since that time.

Both looks forward are actually far worse than they first appear due to monetary and price inflation - they represent real losses of value of 60-70%. But let's be straight here - there's only one reason to buy a stock in expectation of its price increasing, and that's earnings growth.

The "Global Will Save Us" crowd has their heads on backwards. So do those who are "running away" to Chindia with their money and assets. Those economies are dependant on consumption here and in Europe; they will NOT escape from what is coming and in fact may get hurt far worse than us!

In point of fact I would not want to be anywhere near Chindia when (not if) this comes apart. It is very likely to be extraordinarily violent over there, with those nations resorting to the usual when things get bad and money necessary to pay for critical imports (think food and energy here) scarce. Nations in this position almost always start wars!

My expectation is that India/Pakistan and China are the two worst places to try to "hide" in what is coming. China is very likely to find itself in a horrifyingly bad place with regards to resource needs and their consumer's inability to pay for them. This is how wars start, especially when a resource-rich nation sits just to your north!

Am I predicting major regional conflict? Yep. Sure am. And if you're invested over there, think about what happens if that conflict doesn't remain "conventional." All of the protagonists and antagonists in this game of "oh oh" have nuclear weapons.

Should Pakistan's government fall (and it is looking increasingly likely), with radical muslim interests getting their hands on Pakistan's nukes, Hell on Earth is likely to break loose, as much for economic reasons as geopolitical ones. Should China get squeezed as we see a deep recession in the United States and decide to try to solve its problems by "going North young Chinaman" the odds of that going nuclear are very real.

Consider what happens if Shanghi's stock exchange is vaporized in a ball of fire, then tell me again why you want to be invested over there when all the elements necessary to engender that sort of instability are present.

I think the Dollar is a major problem but my issue with foreign investment is that The United States is actually in a position to be able to pull manufacturing back here and survive. Most other nations are not, especially over in the far east!

Timing? Two to four years. By the middle of next year it will be obvious that we are in a deep, long, deflationary recession as the consumer balance sheet is defaulted or readjusted to account for deflation in home values. I believe we will see real GDP contraction of 6-7%, although you can bet the government will try to hide the truth through manipulation of the statistics.

By next summer the entire "emerging markets" area will be in freefall. I expect you will see a literal implosion in the emerging market stocks. China wants to try to keep all the balls in the air until after the Olympics - I wish them luck, because I don't think its going to happen, and when they come apart it is going to happen with ferocious intensity. Real civil unrest is a possibility, followed by the usual way out for a trapped government.

The US has options available to it that most other nations do not. Canada, for example, has an enormous resource base, and we're friendly. We have an enormous resource base, although we have to take the Greenies and string them up by their toenails first. We'll do it, once gasoline is $5/gallon - the Greenies will be thrown under the bus and then backed over repeatedly just to make sure that the last bit of life is squeezed out.

Then we will develop our oil and gas resources in the Gulf, we will drill off California and the East Coast, and we will recover shale. We will build nuclear plants. We will use the vast landmass out in the desert southwest to install aquaculture-based biomass production to eventually wean us off oil as a transport fuel, moving to biodiesel, using the nuclear plants we build next door to desalinate the water and provide artificial lighting so they can crank 24x7. We will "see the light" and ban gasoline cars, insisting on compression ignition or external-combustion if and when those prove more efficient (e.g. stirling cycle)

This path forward brings us to a carbon-cycle neutral and renewable resource for road and rail transport fuels, along with "heating oil." It leaves us with a nuclear-powered electrical system as we wean ourselves off coal, leaving our coal resources to be turned into petroleum for manufacturing purposes. Our remaining liquid oil (along with conversion from coal) will allow our use of polymers to continue.

Yes, the US will have a tough decade ahead of it. The age of the $30 DVD player will be over, and large price increases for things that currently are built with $2/day labor are in store for us.

But we will be ok, and we're isolated enough - by oceans - that others trying to come and steal our resources are in for a rough ride of it, as there are easier places for them to go to try to meet their needs than the United States.

The trick will be finding ways to stay out of wars that are inevitable in the Asian Theatre, all of which will threaten to go nuclear.

I wouldn't want to be a Japanese housewife, or a Chinaman, or, God forbid, someone living in Taiwan.

Europe will fare no better than us, and may fare worse. Their odds of getting embroiled in the mess over in Asia will be higher than ours, simply because of proximity, but if they can stay out of it they will be ok. If they get dragged into the mess, and there is a decent chance they will, then things will be bad over there too.

I took a lot of risk down this afternoon, mostly because I had a lot of potentially-expiring PUTs that were losing time value by the day, and if we had even a short-term corrective bounce tomorrow I was going to get hurt. So off they come; I can always buy 'em back on a daytrade if we get a good downdraft going again.

Here's your technical.....

Oh oh. I've been prognosticating that The Dollar would be "the real deal" for a while.

Guess what?

It is.

There are times I hate being right.

This is one of them.

I love my country. I despise what Paulson and Bernanke have been doing to Main Street.

Rate Cuts will not save housing or the consumer. Neither of those can be saved. Five trillion dollars over the last four years spent by consumers - all phantom income, all "created" by bubblicious asset inflation enabled by systematic fraud.

Now this has to unwind, and it can't be helped.

General Motors fessed up - and it was ugly. I mean, c'mon, $38 billion in charges, or a loss of nearly sixty-nine dollars a share?! Oh my God! To put some context on this that's nearly twice GM's market cap!

But the "real deal" was overnight comments by Chinese officials that basically said "we're done putting up with the capital losses in the FX markets, along with Bernanke and Paulson catering to the fraudsters instead of putting a stop to that crap", along with what sure looked to me like a very intentional "message".

"The message" came in the form of an absolutely enormous "unload" of dollars that came "all at once" - every dollar cross in the FX markets was hit instantaneously. This had the smell of a multi-billion dollar dump - this was not "trader reaction" to news, it was an event all on its own, coupled with the news as a means of underlining "someone's" point.

Bernanke, Paulson and company have been running around thinking that this would all be "orderly." Uh, bad guess guys.

The nasty that followed was the sudden realization in the carry trade bastions that what they've been doing is both unsafe and unsustainable. After the initial spike at 8:30 PM woke people up the carry folks got rattled severely - and started to unwind positions.

That little "spike" at 8:30 was the warning. The reaction in the market from there has been something else - a steady bleed-off in the Yen/Dollar cross, along with continuing deterioration in all of the other dollar crosses.

The ugly is that we're not just talking about capital losses but now we've got interest rate differentials narrowing so there's little reason for people to hold them!

Yuck, yuck, and more yuck.

Heh Ben! Oh BEEEEEEEEENNNNNNN!

You total IDIOT!

It will be interesting when Congress gets ahold of Ben this time around.

Here's hoping that we can have some HARDBALLS thrown at his nuts - or maybe his head! Enough of this softball nonsense that most of Congress likes to lob towards Master Ben.

And let's not forget our Comrade Paulson. Hank, cut the crap with M-LEC and trying to coddle the Den of Thieves on Wall Street. You need to get out there right now and tell the banks, brokers and others that they need to take their "off balance sheet" games and stuff 'em where the sun doesn't shine, coming clean with both America and investors. That needs to happen right now. If this forces some banks under capital requirements, then so be it - forcibly merge 'em under FDIC authority and flush the bad actors, forcing the executives out into the open where the SEC can have a round or three with them so they can be tried by a jury of their peers.

And who's telling the truth on CNBS? Rick Santelli. He's it when it comes to the truth on the Cheerleader Squad.

Although Haines today put it pretty clearly - $4 gas = recession.

Guess what? You're going to see $4 gasoline by Grinchmas. No doubt about it. We had oil at $60 and gas was higher than it is now. Why? Crack spread compression. That's going to come off, and when it does the gasp you hear will be from drivers who pull into the service station to fill their tanks. We're being buffered from it a bit right now because we're in "shoulder" time for gasoline, when there is still some summer blend gas around and it was refined off the old crude stocks.

Winter blend is all being refined off current delivery, and you can bet prices will be rising. A lot.

Consumer Credit died last month. The wall has been hit. Revolving credit went from 9.3 billion last month to 4.4 this last month, and non-revolving (e.g. cars) went from 6.4 billion to 0.3.

I predicted this back in the spring when the spike started in Credit Card usage. Now credit cards are hitting the wall with "declined" starting to show up more and more often. The "MEW" - Home Equity being grabbed and spent - is over.

The government is finally on it, with NY AG Cuomo getting on the "Subpoena everyone" bandwagon. That he's pointing his gun/pen at Fannie and Freddie is potentially disastrous - especially if he finds something smoking in there. Anyone connected with the fraud had better be warming up their G-IV right now, because this is just the beginning and I predict there will be plenty of perp-walks in the near future.

Don't look at the ABX. Its horrifyingly bad today. So-called "AAA" credit is trading like junk. That's probably because it is....... (Oh, so is the CMBX - if anything, that's worse.)

The "Short Bus" riders were out in force today in the Nasdaq, once again pumping a small handful of stocks. Are you folks in 401ks and IRAs, plus mutual funds, going to wake up? Today we had exactly ONE big momo name up - RIMM.

How long does a stool stay standing with only one remaining leg?

Here is a warning folks - last time this happened, 1999, everyone thought they were smart enough to catch the corner and get the last bit of run out of these stocks. Almost to an individual, those who thought they were smart enough to catch the peak were wrong and got slaughtered by huge gaps down.

PLEASE be smart about this. Earnings projections are coming down, GM just took a huge charge equal to double their market cap, housing is nowhere near a bottom, consumer credit default rates are going up rapidly, and energy prices are skyrocketing while The Fed is cutting rates into a commodity boom to try to "follow" the collapse in credit demand (instead of standing pat or raising and, along with aggressive regulatory action, squeezing out the fraud.)

This is a toxic combination that will blow up in your face. No ifs, ands, buts or maybes.

Here's your technical....