Bulls, Bears And Pigs - UPDATED

Well well well.

So The Fed comes out with more expansions of throwing their balance sheet to the wind, and the market spikes, then thinks - "heh, wait a second, what are they REALLY trying to pull here?" and pulls back.

Let's remember that everyone - and I do mean everyone - has been running around saying "The Credit Crunch is (mostly) over."

Ok, if that's true, then why did The Fed add 50% to the size of the TAF today (so existing loans could be rolled and more made?) and why are they now willing to take collateralized credit card and auto loans? Houses at least have some security; autos are typically upside-down instantly on issue, and credit card debt is, of course, completely unsecured.

Someone's lying.

Watch what people do, not what they say.

Speaking of liars, it did not take long to figure out what's up. Here 'ya go - this afternoon S&P downgraded Countrywide (NYSE: CFC) citing essentially what I reported on last night regarding BAC not assuming CFC's debt obligations. (sorry, no link yet - will update when I get one - its a flash message so far)

Now this, folks, is much bigger than it looks. Much, much bigger.

See, I'm willing to bet that basically ALL of CFC's packaged MBSs that they haven't been able to peddle off into the secondary market - and only God knows exactly how much that is - plus whatever else of their debt may be packaged up and securitized - is sitting at The Federal Reserve under the TAF! So now, under the rules (assuming The Fed follows them) they are required to "PUT" anything downgraded back on the submitters, and they must either be bought out immediately or replaced. While this probably doesn't cause much impact today, as its the corporate ratings and not the MBS that got hit, how long do you want to gamble that will hold up, when you consider that S&P just said "nuts" to any further ratings on HELOC-based debt in general!

This is just the beginning of the mess.

Eventually, as the insanity continues to unwind, there won't be enough "money good" debt left to support the TAF and other facilities.

Indeed, the announcement that they will take credit card and auto loan debt means that day has already arrived!

Why? Because why would they "expand" the facility to take this unsecured (and loosely secured) debt if there was plenty of solid paper out there that could be pledged?

Fact: The good paper is exhausted - its all pledged. Ben is of course not coming out and saying this, but that's what the facts are.

We are sitting on the edge of that bond market collapse I have been talking about.

As the quality of debt continues to degrade The Fed will be forced to either pull its support or accept lower-quality paper.

The former ends the game and forces all the insolvent institutions underwater.

The latter ends the game because The Bond Market will associate the lower credit quality (properly so!) with our sovereign debt, as when (not if) it fails we the people will be forced to eat it. This results in an immediate ramp in the cost of government debt and, as that's the reference, all other debt follows in rate upward.

This is precisely how we get a 1930s rerun and if Bernanke doesn't purge this crap off The Fed's balance sheet instead of expanding the amount of it he is holding, and Congress doesn't force his hand the risk will continue to rise until an "inflection point" is reached in the bond market.

The question now becomes whether Bernanke wants to choose to end the game and have this happen in a controlled fashion or whether he prefers to have the market choose for him, which will be extraordinarily disorderly in its effects, scope and timing.

The employment number (which The Fed had, by the way) came out and its better than expected - but negative.

Why not down huge? Government hiring. Lots of it. Oh, and a "Birth/Death" adjustment of over a quarter of a million jobs - fictional jobs, I argue.

"Birth/Death" is a model attempt to count small businesses that otherwise don't get counted, and either die or are born. Let me ask you - drive around your town - are small businesses going under or starting up? On balance.

Well, the BLS says they are starting up to the tune of over 250,000 jobs in the last month alone. Do you believe it?

Then let's add that we now have 306,000 people who are now working part-time for "economic reasons." This, by the way, are people who were full-time employed and are now part-time. 306,000. Oh, and that's 849,000 people more than the same time last year. And average weekly earnings were down.

Is all this good?

Well, actually, no its not. Tax receipts are way down at the national level and in fact sales tax receipts are down on a national basis too.

So how did we "birth" all those jobs if nobody paid taxes into the state government from all these allegedly created small businesses?

Folks, Bear Markets are irrational.

Always.

If you do not have sound money management behind your actions in a market like this you will be destroyed - no matter whether you are a Bull or a Bear.

Back in the summer - early August - I wrote a ticker that I called "Come to Jesus".

It is even more important now than it was then. Go back and read it if you've forgotten what I wrote, because I keep seeing people both cheering and crying alternatively in the forum, and its obvious that this hasn't sunk in - never mind that its in the banner and thus right "in your face" every time you log in.

Go back and look at the Bear Market of 2000-2003. There were twenty percent moves in both directions during that market, which is more than enough to destroy your account several times over if you're imprudent and/or leveraged beyond where you should be.

It is not my place to offer investment advice, and as the disclaimers all over the blog and forum point out, I don't. I neither want to run someone else's money nor do I. That's your responsibility.

I don't know how many times I have to pound the table on the fact that most investors are best off in Cash during Bear Markets, not trying to play short.

The reason is simple - Bear Market have a long and storied history of blowing up both Bear and Bull believers accounts!

Now if you wish to believe the numbers in the employment report, with finance allegedly reporting gains in employment, have at it.

If you want to believe that The Fed is expanding its credit window to take credit card asset-backed securities because everything is ok, that's fine too.

If you expect the market to blow up imminently, you may be waiting a long time.

Or not.

The problem is that its virtually impossible to time these things.

So if you're day trading, there's money to be made, if you're quick. If you're not quick, you'll be dead eventually, no matter how right you are. Its just how it works.

If you're not day trading then you come up with your thesis, doing your own work, you stay in a position that cannot get you into margin trouble, and then you sit back and wait to see if you're right or wrong.

If neither of these ideas appeal to you then you're doing the wrong thing being in this market.

This is not going to be over any time soon guys.

If you want an example of what can (and does) happen, look at Sun Microsystems (JAVA). One miss, and its down 17% premarket. Go long? Anyone remember the famous blowup of Apple during the tech wreck? Again - go back and look at historical charts. Its right there guys and dolls.

Apple up 50% in less than two months? On the basis of what? Did they not report margin compression and saturation of one of their key markets - the iPOD? Yes they did. But their stock screams higher.

Amazon? Look at their P/E. I know, they're a tech company. Are they? Or are they a retailer selling an insane multiple?

Is this 1987?

Or is it 2000?

Do you remember what actually happened in 2000?

The tech market blew up but it was followed by a huge rally that lasted four months and recovered the majority of the original losses, only to be followed by an eight month long grueling decline that took the NDX from over 4100 to under 1400!

And if you bought the "dip" at 1300?

You were destroyed, because over the next 18 months you lost nearly half your money AGAIN, with the final plunge going all the way down to 795!

The total losses were about 80% but many people literally lost everything because they bailed at the bottoms from longs and bought the rallies, only to have them blow up and kill them.

The SPX wasn't materially better. In the video last night I pointed to the huge dump in the summer of 01 - before the 9/11 attacks. A criticism levelled in the forum was that there were "obviously" people who knew and were trading ahead of the attacks.

Ok, then explain the March '02 peak at 1175ish to the low at 760 that same year in July, and how well that 36% decline over the space of four months treated you. Where were the terrorist attacks during 2002? Hmmmm....

Next, lets look at the CNBC callers. Did we ever see "puking up stocks" that marks a bottom?

NO.

That never happened.

We priced in "worst case scenarios", according to Piper-Jaffray on CNBC? Where was the selling capitulation? Absent, that's where.

People try to draw parallels to 1987, but is that fair? I think not, for the simple reason that in 1987 there was no economic weakness to go along with the market stupidity.

This time we have the largest credit bubble in the history of the United States - ranking even ahead of the 1920s stupidity - and it has burst.

Folks, there is a real $10 trillion worth of wealth that will be lost among American Consumers in their home values, and a real $2.5-3 trillion in actual credit losses that will be taken.

We've seen $300 billion in derivative losses written down, but near-zero in credit losses thus far.

So before you smile, consider this - if things are so good, and worthy of trading just a few percent off all-time highs in the equity markets, why does The Fed have more than half its balance sheet committed to propping up the credit markets, and why are they taking trash paper as collateral?

If you're not prepared to trade a bear market, get out and sit on your hands. Even if you have big losses here and now, because trading "in anger" will only cost you more, and ultimately, if you keep attempting to do that, you will lose your entire account balance.

Professional traders who remain in the game for any length of time know that the tape is never wrong, and your account is marked to the market every night. Your beliefs are not material to the tape in the short term, but in the end, fundamentals always win out.

The wisest man knows when not to play; greed is fine, but unbridled greed always leads to disaster.

Just ask the house flippers in California.

Or anyone included in the 47.7% increase in bankruptcy filers in the US.