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Wow. Just wow.

The technical today is well worth watching...... overnight got nutty, and that's being polite.

Last night the futures were literally all over the place. There was a creep north on the news that Citibank was going to take its SIVs back on its balance sheet (if there was ever an indication that equity traders ride the short bus, this was it!) followed by a huge dump - 10 handles in a few minutes - after the news crossed that Moody's was hitting them with a credit downgrade. The amusing part of this, of course, is that Citi's alleged reason for taking the SIVs back was to prevent THEM (the SIVs) from being downgraded - so instead, the downgrade got redirected to find itself a new bunghole to home in on!

In any event this change is extremely positive for "clearing" the credit markets. While such moves should cause immediate (and strongly negative) reactions in the share prices of the firms that do it, that's not a bad thing - its a good thing. These firms have "enjoyed" an overly-inflated share price due to keeping this trash hidden, and now that its out in the open its only reasonable to expect that premium to come back off, perhaps quiote violently.

However, the issue in the financial markets as a whole is trust. It is not liquidity and it is not that "Fed Funds is too high."

How can we achieve trust without transparency? We cannot. Citibank's move, irrespective of whether it costs them $5/share in the short term (and it should) is a big move in the right direction, and Vikram Pandit deserves an "attaboy" for it. Yes, I know, it was done because now Citi can head over to the "new and improved discount window" (the term auction facility) to try to fund it in part, Moody's probably sparked it with their threat of a downgrade of the SIVs (which they then redirected to Citibank itself), and the Level 3 problem remains, but that's ok. The motivation, to me, is not relavent. That moves in the right direction are being taken is! Now let's see the Level 3 games stop and we'll be making real progress!

What I want is for the off-balance sheet (and on-balance sheet!) games to end so that the system can clear and trust can be restored. This includes eliminating the "Level 3" baloney; if there is no bid for an asset, it has a value of zero on your balance sheet. Tomorrow, if it has a bid, you can record that. Whatever dislocation we must take in the equity markets in order for this to happen has to occur.

If financial institutions don't quit screwing around and fix this problem we are heading for a 1930's style deflationary credit collapse - indeed, it may be too late to prevent it now, but I refuse to throw in the towel on the attempt until the inevitability of the event becomes clear.

If the deflationary credit collapse does come we'll get the same disclosure - it'll just come via a different form (bankruptcy!), and you'll like it less because the knock-on effects on our economy will be far more severe.

I also want all derivatives forced onto public exchanges, traded with a published bid and ask, and with a clearing corporation such as the OCC in the middle. This will force margin maintenance requirements to be enforced and stop the practice of people writing unlimited numbers of derivative contracts they do not have a prayer in hell of performing on if they go the wrong way on them.

And finally, I want Regulation FD applied to the credit markets. Whatever information you hand to one person you must hand to all. This includes the information that goes into the rating agency models - all of it! If you give it to them, you must give it to a potential buyer. Period.

Do those things and the credit markets can clear. It won't stop a nasty recession but it will stop the incipient downturn from turning into an all-on deflationary collapse in the credit markets.

CPI is out - up 0.8% headline, up 0.3% on core. WOW!

Unadjusted, food and housing rose at more than a 4% annualized rate, with apparel up 3.1% and the real nasty, transportation up 9.6%. Medical care up 5%. Energy was up monstrously, 21.4%. The nasty in the numbers was that the 3 month compound annual rate is now 2.6% with the 12 month annual rate up 2.3%, showing a nasty accelerating trend that is well above The Fed's "informal targets."

We're getting damn close to the Sun there boys..... Feeling warm yet?

Now here's what confounds many, but not me - the dollar is spiking and Gold is collapsing! HUH?

Here's why guys - the FX markets are coming to realize, and quite quickly, that the rest of the world is more screwed than we are! As that realization sinks in guess where you want your money? Yep - in DOLLARS!

Oh, and Gold is selling off too. So much for the "inflationistas" argument that "Gold will go to the mooooooooon!" due to ramping inflation numbers. Nope - because we won't get hyperinflation. We will get a deflationary credit collapse as the credit market chokes off on a GLOBAL scale!

Now there is some argument for whether this is "stagflation" or "a depression." Really, the difference is one of semantics and severity. There's an old saying "if your next door neighbor loses his job that's a recession; when you lose yours its a depression."

But the truth is more complex than that. The difference between "stagflation" and "depression" are one of degree, but not substance. In both cases real borrowing costs go to the moon, goods you need become more expensive (as a percentage of income) to buy and goods that are discretionary or "large capital expenditures" tend to become very cheap due to surplus beyond purchasing capability. Both are marked by tightness in credit and a huge slowdown in production, but there is a difference in degree.

So which are we headed for?

Does it matter?

Its going to suck either way.

In the "amusing idiots" category we're finally starting to see so-called "economists" talking about '08 profit numbers being totally unrealistic. Gee, you guys are only six months behind the curve on that; I've been calling for that since I made the "Grinchmas" call, and said that 3Q profits would suck, 4Q profits will suck, and '08 will be lucky to be positive, especially if this downturn gains some legs.

But now Pimco is saying it, so it might be right. Better late than never I guess!

Here's the technical....

Not that it will help them.

In fact, I fully expect it to flatten their share price - although the market is a funny thing, and it may react exactly the other way.

This evening they announced that they are taking their SIVs back onto their balance sheet, in response to a threatened downgrade by Moody's.

This will do two things almost immediately:

• Hit Citibank's capital ratios. Hard. We're talking about some $50 billion worth of SIVs here in seven separate funds. This is not chump change! In all probability this means a dividend cut - perhaps a substantial one (like in half) and/or major dilution through more stock issuance.
• Destroy any possibility of the "Super-SIV", or M-LEC, from seeing the light of day.

Now why do I say that Citibank has done the "right thing", even though if there is any rationality in the market whatsoever it should result in an immediate $5 or so hit to their share price?

Because the essence of the problem in the credit markets is trust and opacity. By pulling these vehicles back onto the balance sheet Citibank is taking a step towards MORE transparency and restoring trust!

Therefore, no matter how good or bad it is for Citibank, it is the right step for America.

It is also likely to raise pressure in a serious fashion on every other investment bank on Wall Street to do likewise, because with this move Citibank may be the only Investment Bank on Wall Street which a lender can now figure out how to price loans to!

That of course is a tremendous competitive advantage.

One of the concerns I have repeatedly voiced is that we could be headed not for a recession (which I believe is inevitable, and in fact, we are likely already in one) but something far worse, perhaps as bad as a replay of the 1930s. I based this potential on the very real possibility that all of these banks would hold their SIVs out at "arms length" until they blew up, and then would end up eating the backstops - perhaps by force. With nobody able to fairly value the risk that a borrower brings to the table, lending dries up.

The result is a deflationary credit collapse - the more accurate term for what happened in the 1930s.

What most call it "A Depression".

My expectations in this regard were supported by statements such as Citi's in its latest SEC filings, in which it said plainly (and without ambiguity) that it would not take any action that would result in them "recovering" them onto their balance sheet.

What a difference a new CEO makes.

Congratulations Citibank and CEO Vikram Pandit. Even though this should murder your share price, at least in the short and intermediate (months) term, it is the right thing to do.

To the rest of your clowns on Wall Street - how about following suit?

Oh boy.

Retail sales up 1.2%, which would look good except that there was an extra week in there. Overall this looks to be a lackluster print - not disastrously bad, but not stunningly good either.

PPI numbers are not good at all, literally double the expected print at up 3.2%. OUCH. There goes the Fed's ability to play with system liquidity if they don't want the inflation genie out of the bottle. Biggest increase month-over-month since 1973!

(BTW, people can play tin foil pointing to the Fed's "mandate" all they want - the truth is that no bank in their right mind wants the dollars they have on loan inflated away - that has a nasty habit of destroying their profit - nor do the lenders to the banks! Call them "depositors" if you want..... fact is, they're LENDERS! Cost of capital better always be less than return on capital, or you're dead dead dead!)

The futures market reacted immediately and it wasn't particularly good - although there was some bounceback soon after. The currency markets spiked with the dollar strengthening materially; the DLR/Yen cross looked at first blush to be indicating a reversal in the futures, but you have to be careful with that - what really is going on here is that the dollar is actually strengthening - this is the FX markets reacting to the PPI numbers because they smell the noose of tightening liquidity - that is, credit deflation - creeping ever closer to their necks, and that makes the dollar stronger!

The internals on the release were ugly; food was zero, energy up 14.1% (!) Ex-food and energy up 0.4% which annualizes to 4.8% - nasty. Change in finished goods on a 12 month chained basis up 7.2%, which is the second month in a row that it has been very elevated, with the previous month coming in at 6.1%. Intermediate goods were up 3.7% and crude goods up 8.7%, both on the month - both indicating really NASTY CPI numbers having a high probability of showing up in the next month or two.

The 10 (TNX) spiked HARD on the data release, despite the futures being down hard. That's not "flight to risk" (equities); it is the bond market vigilantes forcing the long end higher because suddenly the cost of debt just went up - they'd like a positive rate of real return, thank you very little!

Confounding the "inflationistas" Gold cratered on the futures market, along with Silver. Why? Because the market is telling you that this isn't going to be allowed to get out of control, which means that the "flood the system with liquidity" game is going to be aborted - and the risks are shifting towards deflation, NOT INFLATION.

Some commentators are "cheering" the Fed's "auction gambit" action yesterday, but LIBOR is having very little of it. While spreads have come in significantly the collapse that Bernanke tried to engineer in LIBOR has, at least at this point, proven to be a failure. Whether this will hold up when the auction process actually gets going remains to be seen but the market's first impression, now having had 24 hours to think about it, could best be characterized as one big fat raspberry. In the Euro world (even though they're a part of this with the swap component) EuroLIBOR didn't respond materially at all.

One of my favorite whipping boys, Countrywide Financial, apparently has been subpoenaed by Illinois. This appears to be the new sport - going after the lenders for loan origination practices - and like all good government investigations comes after the damage has been done to both investors and ordinary consumers. It would be nice to see the government be proactive in its regulatory responsibilities once in a while, but that would mean pissing off the big campaign donors and corporate "sponsors", which is why it never happens - its only when the groundswell of pissed of voters exceeds the corporate donations that these investigations get legs.

Nonetheless the list of states coming after the issue is starting to ramp precipitously, which spells bad news for the lenders and ultimately the investment banks that made the mess possible.

The real watershed moment will come when those Wall Street banks start getting their subpoenas. I predict that in the new year this will become a major political issue and due to election-year politics, you can bet that the AGs will start to ramp on the Wall Street "Boyz", likely with disastrous results for them.

The market finished basically flat today, with the Dow up a bit but the Nasdaq 100 and Russell down as much (percentage wise) as the Dow was up. The SPX was basically flat.

Call it a draw between the Bulls and Bears today.

Tomorrow morning we get a plethora of data, including the CPI (both core and headline), industrial production and capacity utilization. Those should make a dent one way or another.

Oh, politics. Why not? All the Democrat candidates are calling for significantly higher taxes on "high net worth" earners, plus corporations. That ought to go over well with the stock market. The interesting part of this is that the dichotomy that may be forming in the Presidential race - it is looking like the improbable - Huckabee - might actually have a shot at the nomination.

That would be quite the contest - a "Tax Raiser" .vs. a guy who is hellbent on enacting The Fair Tax (my personal favorite tax reform, which, by the way, would be INCREDIBLY bullish for the stock market!) - but to vote for him, you have to vote for a hardcore religious conservative.

Hmmmm... do we vote on the economy, on social progress, on the Iraq war..... oh my, that contest, assuming its Huckabee .vs. {ClintonObama}, would be quite the fireworks show.

Here's your technical!

Let's get the bad news out of the way. Oh wait.... its all bad news!

Ok, ok, we'll start with import price inflation.

Up 2.7% .vs. expected 2.4%, and against previous of 1.8%. Hmmmm..... that looks kinda like a near-vertical move - especially with China, which is now running at a double-digit rate.

Oh, and foreclosures? Up 31.8% - in one month. That's good, right? Must be!

The Fed comes out with a plan to provide liquidity in an auction system and swap lines in concert with other central banks. The instantaneous move north in the futures was rocket-like.

The dollar cratered immediately and the FX markets went parabolic too, although both quickly settled down - except for the Yen, which weakened a lot. The Yen's move, however, is more likely attributable to the recession call for Japan which came out overnight (oops); while this might please carry folks I suspect that the carry is far less important than it has been in the past, simply because the extreme volatility in the FX markets has raised the risk of engaging in that game to irrational levels. The intelligent have left for greener pastures; the fools will find out soon enough that you don't get sheared when this goes wrong on you in the next few months - you get skinned.

The Fed's announcement was claimed to "directly attack the liquidity issue"?

Hmmmm...... well, that would be great if there was a liquidity issue. Unfortunately there isn't - the issue is one of trust and solvency. This move was more directly aimed at LIBOR, which has refused to respond to liquidity and "formal" rate targets. Will it collapse LIBOR? It sure did in the short term, and buried a lot of people on the floor. And by the way, those aren't retail investors down there on that floor - they're institutional boys, and more than a couple were carried out on their shields this morning.

"A newer, more open Fed"? Pull my finger. How about a Fed that, if it was a listed public company, would have each and every one of its officers in prison for market manipulation. But heh, when you're The Fed, you can do what you want, right, even if that includes having "unnamed inside sources" initiating conversations intended for publication in the media because you are "dismayed" with the market's reaction to your public actions, as happened with Steve Liesman last night!

Number two, there's a little problem here with The Fed's statement that there will be no disclosure of those who bid on (and win) these auctions!

We've got a problem with trust in that nobody knows who's stuffed full of crap in the banking system, so now we'll provide yet another way for people to hide from it?

All this is going to do is tighten up the sphincter of credit even further because it actually moves the ball the wrong way on the transparency playing field!

I call this play a sack.

You figure out what sort of sack and what's in it.

I doubt you'll need much imagination.

Never mind that later on The Fed said clearly that there would be no net change in the amount of slosh in the system - only the form would be changed. Oh, wait, let's think here.... does that mean that this is all good? Oh I'd think not.....

Don't tell the pumpers in the equity markets about the fact that the problem is that people are hiding the "B" word (that'd be "bankruptcy", or if you prefer, "balance sheet".) The more stupidity they display, the more money I (and those with IQs larger than their shoe size) make!

I love the pumpers on days like this when I can be in front of the computer; I was quite upset yesterday, as the intensity and velocity of the move on the announcement precluded me from getting half of the positions on that I wanted without undue risk. How often do you get a "mulligan" in the market casino? Well, I got one today - thanks boyz!

The unfortunate reality is that Ben And Buddies are trapped. If they attempt to force the financials to take their garbage back onto their balance sheet and lay it bare so we can all see it, the market (and economy) will crater, and several of these institutions will be proven insolvent.

If The Fed does not do this, then the lending sphincter will remain cinched closed, and eventually these non-performing assets will exert enough of a cash flow drain that they will be forced out into the open as the well-putrefied carcass' stench is no longer bearable. At that point the end game happens anyway (insolvency, bankruptcy, pick your favorite word) but this way Ben And Buddies don't get blamed for it.

The bad news is that Door #2 could take years to play out, and in the meantime our economy is choked off.

Down this rabbit hole lies the risk of a deflationary credit collapse and perhaps even a depression instead of an ordinary, if severe, clearing recession.

In the best Washington DC tradition you should fully expect "Ben and Buds" to take the expedient (for them) way out rather than risk being "blamed" for the explosion. Certainly, all evidence now on the table suggests strongly that Bernanke lacks of the statesmanlike qualities of a Paul Volkler necessary to employ the leverage that he does have to do the right thing.

The nasty is that now we get to trade on fundamentals for the next six weeks or so. Yeah, I know, there may be more "Bennie and The Feds" surprises out there, but if this is what they've got and are planning, I'll take it. Tight stops, never hold unprotected positions overnight that you're not willing to get buried on with a 2% or more upward move in a day, and make the same money as many times as possible.

Scalp-trading is insanely profitable on days like this as the moves tend to be stupidly out sized in proportion to what they should be, with all the volatility being created out of thin air by the idiots - including Ben. A 400-point range in the Dow - insane. Thanks Ben.

Here's the technical!

First, mall traffic is well below expectations.

The retailers are now hanging their hat on "last minute" shopping to "save" Christmas.

They obviously haven't figured out what "Declined" means on the XON machine yet.

They will.

The Fed cut 25/25. The market no likey. Now you know what an irrational market is like; you saw it today - the retail sheepies had priced in 50 bips, and when they didn't get it, down she went faster than "Monica on Bill".

Most telling, we broke 1500 on huge volume in the SPX, then blew through 1490 like a knife through butter. The A/D line went in the toilet instantly at more than 10:1 on the decline side.

This is one of the dangers of overreliance on chart analysis without paying attention to the macro picture. Overnight the last real resistance level in the SPX fell, and the chart kids came in this morning and start pushing things up into the announcement - thinking we were DEFINITELY going higher - all the way back to 1576.

Are you now disabused of the notion that "waves make the news"? If not, let me introduce you to an extra-large tube of Preparation "H", which you're going to be needing a lot more of during the next couple of months, as if today wasn't enough for you...... today, you got it raw - sorry.

Oh, and the next Fed meeting? End of January.

No more games until after the first of the year - now we're back to trading on the fundamentals, and the fundamentals suck. Period.

Next up are financial earnings and the fun here is that they're for the 4th quarter and thus must be audited. I would positively love to be a fly on the wall in the boardrooms of these firms right about now. If they've been "managing" their earnings the auditors will be putting a boot on some necks...... about what we need.

Back to The Fed for a minute.

There was much wailing and gnashing of teeth about the market not "getting its 50 bips of crack" today. Let me posit WHY BenDover didn't comply with the market's demands.

Its really simple: IT WON'T HELP.

Huh?

Yep. It will do nothing. The previous 75 bips have done nothing to ease the credit crunch, and no matter how much more Ben applies, it won't help.

That's because the problem isn't found in policy. Its found in fraud, avarice, lies and BS.

Trust cannot return to the lending system until all the garbage is taken back onto balance sheets, marked to market, and the truth is told.

The political costs of The Fed doing this, here and now, after Greenspan turned his head and ignored the game-playing for as long as he did are severe. They likely include failure of at least one, and perhaps several, large investment banks and a huge number of regional and local institutions.

There is an old saying in Washington DC - "If you touch it, any cock-up that results is YOURS!"

So here, as near as I can tell, is Ben's game plan.

• Respond only to short-term commercial credit demand (as The Fed always does with its policy rate) but ignore cries to do something "creative" to "fix" the problem, because the real fix isn't creative or ordinary - but it is simple.
• Don't attempt to mess with the obvious cock-up. If Ben was to issue regulations that these SIVs and such were to be repatriated and marked, he would own the resulting explosion.
• WHEN it blows up, you don't get blamed; "he cut rates", even if not as much as the crack addicts wanted. Greenspan might, Bush might, but Bernanke will not.

So how do you trade this?

Simple - we're in for a nasty, long period of time in the markets. Oh sure, there will be rallies, but there will also be plenty of drops like the one we had today. Being nimble will count.

I remain convinced that my original call from April is good - this will not be over until there is at least one major Wall Street investment bank that is either forcibly reorganized or fails outright.

In the meantime, enjoy the ride - Bear Markets are fun.

Here's your technical!