Successful Trading Tips with John Bougearel

This is not the story of the three little bears. This is the story of a stock market crash, the like of which has been far worse than anything seen since 1929-1932. The generally accepted definition about bear markets is that the stock market has to decline 20% or more to qualify. Under that definition, we have seen 3 bear markets condensed into two months.

It is worth noting the the financial system was the epicenter of the first two bear markets following lawmakers Sept 18 proposal to permanently fix the foreclosure crisis with their “No Bank Left Behind” Act. The Plan was so ill-conceived and badly botched, the stock market fell 35% in 15 days and then another 22% in 9 days. The bear market declines feel at a rate greater than 2% a day.

Mitsubishi got a capital injection on October 27 (from the Bank of Japan I believe) and the stock market rallied into the Nov 4 election. The failure of the financial system in September and October, however had spread to the real economy. Banks would not lend, and funding day to day operations came to a halt. It is said that in October 2008, global commerce virtually collapsed throughout the world. The epicenter of the crisis had shifted to the real economy in November.

By November, it became clear the US auto industry was on the brink of bankruptcy, and the CEO’s of the Big Three automakers literally flew hat in hand to Capitol Hill in their private jets ~ begging for taxpayer money. Congress was not amused, and on Nov 19-20 refused their request for $25 billion. Instead lawmakers told the Big Three CEO’s to come back on December 2nd with a Plan that would be viable to get them through the storm.

So far the market is down 22% in 9 days since the Nov 4 election high. Again the rate of change of the post-election high was greater than 2%. Corporate credit spreads are at record levels not seen since 1932 and 1938. Risk of corporate defaults/failure is about one in five, according to my sources. The good news for the broad market is that this 1932 and 1938 marked bear market lows when credit spreads were last so high. The downside is that a lot of companies are slated to die, and unemployment is going to go significantly higher. For the real economy over the next one to three years, that is going to suck. And at some point, these heightened risks real economy could infect the stock market again, and create even lower lows than the ones we are now setting ~ eventually.

Now, should the automakers return to Capitol Hill with a viable plan that can be rubber-stamped by Congress on December 2, this would go quite a long way to shoring up investor confidence. An approved plan means the corporate credit spreads would narrow, and the risk of one in five companies going bankrupt would diminish and the number of projected jobs lost will decline. In the auto-related industries alone, 2.5 million jobs would be at risk if the automakers went bankrupt.

The one thing a politician must do to ensure his or her job is to create jobs or not lose them, especially on Main Street. They therefore have a high interest in doing something for the automakers. Our lawmakers will put up or shut up on Dec 2, and I am betting they put up. That said, risks to the broad market will remain to the downside without a resolution to the auto crisis. My target for the SP500 is 698-700 in the first two weeks of December.

This post is intended to honor and to thank Yves Smith, author of the eminent and highly-esteemed financial blog www.NakedCapitalism.com. On behalf of Yves readership, we all owe you an immense debt of gratitude, Yves. Your relentless chronicling of the global economic collapse and the collateral damage it is causing is horribly appreciated by us all. I present you with this honor Yves on Veteran’s Day, because you are a true veteran hunkered down in the trenches of this crisis. The job you have done over the past few months has been outstanding.

Just look at the moonshot of Yves’ postings in mid-October, folks. At the height of the economic crisis, Yves never missed a beat.

Ground Control to Naked Capitalism
Take your protein pills and put your helmet on
Check ignition and may gods love be with you

This is ground control to Naked Capitalism
You’ve really made the grade
And the papers want to know whose shirts you wear

This is Naked Capitalism to ground control
Im floating in a most peculiar way
And the stars look very different today

Far above the world
Planet earth is blue
And theres nothing I can do
Though Im past one hundred thousand miles
Im feeling very still

I started reading Yves blog during the Sept-Oct crash. Not only did I read all her posts, I read all her comments.Yves blogging community is very robust, with excellent plugged-in contributors. At her peak in mid-Oct, reading 60-70 plus posts a day plus the comments was like reading 1000 pages a week. Only once did Yves complain of burnout. but burnout alone could never stop Yves. Truth be
told, Yves is dynamo whose perseverance and excellence commands our utmost respect. We thank you Yves.

John Bougearel

ps. Yves, I look forward to quieter times, when you only have to post about 30 times a week. I burnt out a little too.

In last night’s report on the forces that will be driving 10 year treasury yields towards 2.5% , I discussed the ramifications of the Fed’s new ZIRP policy introduced by Janet Yellen last night to guard “against the kind of weakness that Japan has experienced for over a decade.”

By adopting the BOJ’s ZIRP policy, the Fed is signaling that we are indeed confronted with worsening economic conditions on a scale comparable to that faced by Japan over the last 18 years. Guess what happened in Japan? Japan’s economy experienced Zero Growth to accompany its Zero Interest Rate Policy ZIRP. The BOJ’s policies did not work. They only served to blow carry trade bubbles throughout the world. Much of that carry trade in the past decade went towards creating the dangerous and speculative bubble in housing. Where will the next carry trade bubble blow towards? Will the outcome be a speculative-driven commodity bubble in the years to come as many market participants anticipate (not immediately of course)?

The bottom line is this: our bubble blowing lawmakers can not legislate where the bubbles they blow go toward. It can’t be forced to go towards real investment, and lending to stimulate the economy. As Richard Kline reminds us, “negative rates make it unprofitable to lend money period! If the world goes ZIRP…a by-product of that is the suffocation of real investment.”

Hey Barney, please get over the loss of $850 billion of taxpayer money asap you just blew and start calculating the size of next installment you will expropriate from taxpayers to subsidize the losses of Wall Street.

We told you this Paulson Plan was a bad idea the way it was structured from the git-go. But did you listen. No, you said, “talk to the hand because the ears don’t want to hear.” Instead of modifying the plan thoughtfully, you went out and bought votes to pass the plan by sweetening the deal for lawmakers with another $150 billion pork paid for by even taxpayer dollars. Just a spoonful of sugar may help the medicine go down for lawmakers, but I promise you this, it became far more offensive and distasteful for the taxpayers you are supposed to represent.

While we all agree something must be done, this latest policy mistake is your fault Barney Frank, you and your fellow lawmakers, not ours. It would behoove you and your cohorts to listen up to the inputs of private market participants who have more than willingly offered their wisdom to establishing appropriate outcomes that are desirable for everyone, not just cash-strapped banks.

The political regime on Capital Hill’s ability to thoughtfully respond to private market participants inputs will be critical towards minimizing the severity of collateral damage. As it stands now, your latest legislation actually prolongs the mess we are in and begins to create another messy bubble.

We might remind you the Paulson Plan was just three pages long, to which you legislators added 447 more pages of pork and proceeded to called it an emergency economic stabilization bill (EESA in its most polite form, TARP as it is commonly referred to )that will stop the bleeding.

The EESA/TARP bill was no more than a substantial piece of garbage, and costly garbage to taxpayers at that. Garbage in begets garbage out, Mr. Frank. When you go back to the drawing board, please give thoughtful consideration to how you structure the next bit of legislation that your constituents will be paying for, so we don’t end up with more messy garbage. We, your constituents simply cannot tolerate garbage any longer from your ilk.

Even the ABA executive director Ed Yingling is complaining to you that “this is not a program the banking industry sought.” Legislators like yourself Mr. Frank, particularly as chairman of the Senate Banking Committee, might think of taking a hint from Mr. Yingling, if not from us ~ your constituents, before you decide to go cramming another $700 billion dollars down the banking industry’s throat.

http://www.bloomberg.com/apps/news?pid=20601087&sid=a8qoddHX5Yiw&refer=worldwide

Longtime readers know that investor and consumer confidence tends to swoon together. That is equities sell off into Consumer Confidence (CC) reports and then rally once the selling pressure from the low Consumer Confidence number wears off. This last occurred on the August Consumer Confidence report. Equities put a short term low in on that day, rallied for a week and then stock prices collapsed on Sept 2. What happened, equities were supposed to rally off that model, right? Simply this: Investor confidence collapsed and a ‘crisis of confidence ensued. Back on my September 4th report I noted that when the CC model turns bearish, investors are signaling they have zero confidence in the stock market and that the stock market would get quite ugly from that point forward.

The next day an ugly NFP report came out disclosing a 0.4% increase in the unemployment rate to 6.1%. This prompted me to write a follow up report titled “There will be little if any upside risks in the stock market for the next month.” Over the course of the past month, the SP500 lost over 400 points or more than 33%. Today I write to tell you now that there will be little if any downside risks to the stock market from today’s low at 844. I say this for the following set of reasons.

First, today the SP500 gapped up several percent higher on strength in the overseas markets, specifically Asian markets. Then the bearish consumer confidence number comes out, and the SP500 sells off 38 points or roughly 4.5%, but it was still 900 points or more than 1% above the previous days low. So, now we have a 1% bull gap low established at 844 in the SP500. That is pretty darn bullish tape action when you consider that today’s CC reading of 38 was the worst reading on record, exceeding the previous record low set in 1974 at 43. I know investor confidence has been utterly and totally destroyed these past two months, but yet the index is up more than 3% a few hours after the worst CC reading on record. The tape is signaling that the bad news is fully priced into the stock market folks. It is up to us to respond accordingly.

Secondly, 844 is the October 1997 Asian Contagion low. See a budding Asian theme developing here? After the Asian contagion low, the stock market promptly rallied to 1200 nine months later. The 1200 target is perfectly consistent with the 1929 crash analog I wrote about this morning that says we rally a minimum of 50% from this week lows ~ or roughly to 1210. Since the stock market is presently trading around 860 around midday after the report, I am laying up a 2% downside risk and 50% upside risk. This is a high probability incredible and unprecedented 25:1 risk reward ratio. That is once in a lifetime ratio to ponder folks.

But as I also said, I have other models that suggest this rally will more than likely be able to challenge roughly 1300 roughly around the time of the Q1 09 earnings season (my best guesstimate at the moment)
Still, I will reiterate once again, that a rally to 1200-1300 in the SP500 is however only a bear market rally. How can the SP500 justify a such a lofty multiple when some analysts expect a double-digit earnings contraction to roughly $75 in 2009?