EMERGENCY RATE CUT COMING

I'm expecting news of an emergency rate cut sometime soon maybe even today. If the market continues this downslide there will be some sort of intervention. We had a rally going this morning but things started falling apart. We are up barely.

WE ARE IN A BEAR MARKET

After having officially broken all types of support - The Dow at around 12700, the S&P at 1400 and the Nasdaq at around 2540 it looks like we are officially in a bear market. Can't argue the facts. Slower growth ahead and a recession on the horizon though by my count we are already in one.

Despite the bearish picture on the horizon I am looking for some type of bounce and even a sustainable rally on the near horizon. I can't help but feel with all the doom and gloom that there will be a strong rally that could life the major indices 3-4% at a minimum. At the moment I am short financials and real estate while having taken a long position in the QLD in anticpation of a bounce in the Nasdaq and the Qs in particular which are down over 12% in the last 10 trading sessions.

NASDAQ 7 DAY LOSING STREAK

After a 7 day losing streak in the Nasdaq in which we've lost over 200 points I expect a sharp bounce either today or tomorrow. There is a gap that needs to be filled at the 2600 level which is a 100 points higher and we may just get there. Its times like this when people are about ready to throw in the towel that sharp rallied occur. And we are extremely oversold on an intermediate term basis. Add that to CES in Vegas which tends to have a positive effect on tech and I would say a bounce in the Nasdaq is forthcoming.

I don't think Howard Schultz returning to the helm of Starbucks is going to help the company anytime soon. Higher commodity costs and increased competition from Dunkin Donuts and especially McDonalds, is killing this coffee shop chain. People have come to their senses and decided paying $4 for a cup coffee is absurd. Disclosure: I don't drink coffee. Hate the stuff.

Jimmy Cayne has come to his senses and decided to step down as CEO of Bear Stearns. Or rather he was 'politely' asked to vacate the chair. Now he can go focus on golf and bridge which he is more suited for rather than making foolish bets with 'real' money.

I sold off my QID position yesterday and went long QLD . Still have SRS SKF. I'm betting on a bounce here before more bloodshed. The Dow could be putting in a double bottom though having tested Novembers lows. Markets don't go down in a straight line though its feels like it sometimes. I love the volatility nonetheless.

BE VERY BEARISH WHEN UNEMPLOYMENT IS AT ITS LOWEST

Many financial commentators over the last few months have pointed out low unemployment/full employment as a sign that the economy is strong . Nonsense ! When unemployment is at its lowest, it only has one way to go and thats up. Today was evidence of this via date showing the highest unemployment/ jobless rate in 2 years. Be bearish when unemployment is at its lowest and bullish when its at its highest. Thats how real money is made in the market. Full employment means things can only get worse. Record unemployment means things can only get better. Thats how you interpret employment data unlike those clowns in the financial media.

On another note, I cannot help but feel we are going to get a bounce in the markets possibly via some rumors of an emergency rate cut or something along those lines. I am looking for a Dow bounce to 13200 in a week or so and the Nasdaq to close its gap at 2600 while the S&P should get up to 1445 or so. I have thus reduced short exposure such as QID SKF SRS and I may buy DDM SSO QLD in anticipation of a bounce.

NOTHING WRONG WITH A RECESSION

I am selling a little of my ultra short positions here. Taking a little profit on QID SRS FXP SKF.

The Chief Marketing Officer at NTRI recently spent $2 million of his own money to buy stock. That says a lot. NTRI is a strong buy under $30.

Now that we've hit $100 oil I think we turn back. I think oil will trade as low as $70 this year especially on the back of a slowing global economy.

The drop in the manufacturing index is essentially telling us we are in a recession. How many more signs do we need before we accept reality. There is nothing wrong with a recession. It's part of the business cycle. Accept it and move on. Stocks will eventualy become super cheap. There will be lots of opportunities to make money on the long side. Financials will eventually bounce back. So will real estate.

TRADING FOR 2008

HAPPY NEW YEAR ! Prosit Neujahr ! Bonne Annee ! Kenourios Chronos ! Feliz Ano ~Nuevo ! S Novim Godom ! Antum salimoun ! Xin Nian Kuai Le ! Naye Varsha Ki Shubhkamanyen !

After an extended break I am ready for 2008 . Looking ahead some of the key themes that I
see are as follows

• Strengthening of the Yen and hence a weakening of the global stock market via unwinding of the Carry Trade ( borrowing Japanese Yen at low rates to speculate in high yielding assets ). The Yen has been making lower highs and lower lows since July.
• Continuation of the banking and mortgage crisis. Subprime is so 2007. 2008 will introduce as to HELOCs ( Home Equity Lines of Credit) , Pay Option ARMs and other fancy mortgage products that are going to be defaulted upon. Watch for an increasing amount of defaults in jumbo loans ( $417,000 +) .
• Credit card and Auto Loan defaults will go through the roof. People making $60,000/yr cannot afford $100,000 cars.
• The bottomless real estate market. Things will not get better in 2008. Infact they will get worse. A large rise in foreclosures in the million dollar plus range. Commercial real estate will suffer too. Watch the Los Angeles and Manhattan real estate markets take big hits.
• Recession. First there was absolute denial , then there was acceptance of perhaps slower growth , than they agreed upon a mild mainly housing based recession and soon they will accept the truth and that is an all out recession. Things will get bad. Very bad.

I may add more to the above list as the day progresses. From the list it may appear that I am overly pessimistic. Truth be told I would love to sound optimistic and act like everything is great like this cheerleader Ben Stein . Unlike Ben however, I live in the real world and see things on a daily basis. I go to regular malls, eat at regular restaurants, talk to regular people and get a sense in general that things are not looking good. Its not too difficult to do the math. The 2003-2007 economic boom was built on cheap easy credit. While credit is not too expensive, it is alot harder to come by.

Less credit = lower spending = economic slowdown/recession.

One does not need to be Einstein to figure this out. People tapped equity from their rising home values to spend. Home prices are heading south. People can't use their homes as a bank any more. Spending is going to have to be done the old fashion way - credit cards or perhaps the old old fashion way - through saving. Americans are maxing out their credit cards at an alarming rate and they dont' have Home Equity Lines to bail them out like they did a few years back. This is cause for concern.

So how do we trade all this ? For now I feel the best way to trade this market is to stay on the short side. There will be sharp rallies as always but as we have been seeing since September onwards, the market has been making lower highs and eventually things will break down to the point where those August 2007 lows will be taken out. I believe the Dow will eventually trade as low as the February 2007 lows and perhaps even lower if things get really bad.

IMPORTANT LEVELS ON INDICES

The 13200 number appears to be an important level for the Dow. Its around the early December lows. A close below 13200 could see a pullback to test the November lows.

The S&P 500 is currently below is support level of 1460 and is signalling a retest of 1400 is in order.

The Nasdaq appears to be ready to fill its gap around 2580 or so.

The markets are weak this morning despite the Fed credit auction that will occur later today and word of more liquidity injections. Despite current weakness I would not rule out a rally in the closing hours.

MARKET UPDATE

Will we get a strong close like yesterday or will we sell off ? The market opened weak and attempted a rally and currently it is retesting the lows. A successful test may mean a rally into the close. From a bullish perspective a strong close is good. But I am currently leaning more towards the bearish side and I wonder what happends if we don't get a strong close. The wheels could fall of the market fast.

I added more QID SRS SKF FXP a little earlier though I may sell them if I see strength going forward.

DON'T BET AGAINST THE BULL

Or perhaps don't bet on the bear. Either the bulls have remarkable resilience or the bears lack the ability to take control of the market. To be fair, the bulls have Bernanke on their side in the form of liquidity injections - don't think I didn't see that liquidity injection today Ben !

As I mentioned in my earlier post, I expected a late day rally if the bears were unable to force the issue. We got one as expected though how much of it can be attributed to Bernanke liquidity injections one cannot tell. Their appears to be a lot of indecision in the market though th efact we held above yesterdays lows is a positive for the bulls.

I added a little FXP SRS and SKF towards the end of the trading session. Sold some QID midday. SRS and SKF appear to be a better hedge than QID.

While the Dow and S&P both finished in the green, most of my major positions were in the red save HANS and NYX. 18 of 30 Dow components finished higher led by HON MSFT BA HPQ UTX . Its pretty easy to get the Dow green when you pump up some of the bigger components.

LOOKING AT NUMBERS

The market has opened weak today though the bears have not really taken full control with the bulls still hanging around. If this continues, I think the bulls could come back strong in the final two hours of trading.

A few numbers to look at. 14198 13962 13780 . These are three intermediate tops set on the Dow between early October and now with the latest figure occuring on Tuesday. The lows have been 13407 and 12724 . So we are in fact making lower highs and lower lows over the last 2 months. If 13780 does indeed stay as a high number in the short term, we are likely to see a lower low than 12724 in the coming weeks. I reckon from judging the point difference between the two lows 13407 and 12724, the next low could very well be around 12000. Perhaps even test the February/March lows of 11939.

The S&P 500 tells a similar story with highs being 1576 1552 and 1523 with the corresponding lows being 1489 and 1406.

The Nasdaq has been a different story with its late October high of 2861 breaking its earlier high of 2834. The recent high is 2734 with the low being 2539. The Nasdaq while being the strongest of the indices is also more volatile and could thus see more downside in a downturn.

FADE THE RALLY

The rally today has been extremely fadeable. I stared in shock as I witnessed the Dow up over 200 with the Nasdaq and S&P up over 50 and 30 respectively. All this because of the news that the The Federal Reserve, European Central Bank and three other central banks are moving in concert to alleviate a credit squeeze by pumping liquidity into the credit markets via auctions. This move is just another way of the Fed signalling that the credit markets are in deep shit. I think the crisis is still in the early stages and will get worse over time. The Fed is better of staying clear of the mess and allowing the market to settle things on their own way. Sure a few big banks may collapse in the process but this is the only way to prevent future such occurences. A bailout will only make things worse in the future as financial institutions fail to learn a lesson.

Today I added more QID SRS and took a position in the double inverse financial ETF SKF. Short financials and real estate will be the play for 2008. This is a trend that will continue for a while.

I sold out of my C position last week. The new CEO does not seem to be the right man for the job. More of a follower than a leader. I think C will see more downside perhaps even into the teens.

FED GIVES BULLS THE MIDDLE FINGER

Not quite the middle finger - an unchanged rate would have been the equivalent but close enough. A half point interest rate cut expectation by Wall Street was not on the cards as the Fed choose to cut rates by a quarter sending the stock market substantially lower though based on the volatility over the last few months , a 295 point drop in the Dow with 66 points on the Nasdaq and 38 on the S&P 500 is not such a big deal. The averages are still above strong levels of support and after such a strong rally the past few weeks a pullback is probably a decent buying opportunity.

Positions I had on today included QID FXP and SRS which all did well though my longs were pretty much beaten up across the board. I will continue to keep QID FXP SRS as hedges in these times of uncertainty .

The question on my mind right now is whether this pullback is a buying opportunity or the start of another leg down. If the preceeding rally was a result of hopefully investors expecting a half point interest rate cut, then is this a sell the news event considering we didn't even get the half point cut ? Are big funds going to play it safe here and close shop for the year ? - Play it safe due to uncertainty, keep their yearly gains and prepare for next year.

IS SUPRIME JUST THE TIP OF THE ICEBERG ?

The mortgage mess is just starting . Subprime was just the tip of the iceberg. This article by a mortgage insider courtesy of Herb Greenberg is worth reading. The real blow up is going to occur in the Neg Am Pay Option ARM arena where essentially people with incomes as low as $80,000 were qualifying for million dollar loans. Most of these people have good credit but unfortunately no conventional loan program is going to save them as their mortgages reset. A whole lot of foreclosure are going to occur in the million dollar plus range especially in California where home prices are ridiculously high to start with.

Having spoken to a fair number of mortgage industry insiders, I happen to believe the assessment in the Greenberg article is pretty accurate. While the whole nation and world for that matter focuses on Subprime, there is an even larger problem lurking ahead and it appears the mainstream media is not paying attention. The Fed can continue lowering rates, but this is not going to fix the issues at hand. Bush, Paulson, Bernanke and Co. can come up with all the short term fixes they want but the inevitable is looming around the corner. We are going to face a drastic real estate correction and a recession is all but guaranteed. Keep in mind most economists and market pundits don't call it a recession until we are more than half way through one. I don't recall anyone calling the 2001 -2002 slow down a recession until the later parts of 2002.

Goldmans Analyst High

The highlight of the trading day for me was reading the following

Abby Joseph Cohen, the Goldman Sachs Group Inc. strategist
whose call for a year-end rally in U.S. stocks hasn't come true, predicted the
Standard & Poor's 500 Index will rise 14 percent by the end of next
year. Cohen, 55, says the S&P 500 will climb to a record 1,675 .. Bloomberg

Keep in mind Cohen is the crazy old lady who was recommending internet stocks in 2000-2001. She disappeared from the circuit for the next few years before appearing to resurface last year.

Its hard to see the S&P 500 climbing as companies cut earnings and financials continue taking hits. In an environment where earnings estimates are being cut, the S&P 500 is likely to trend lower.

Analysing the indices, the S&P is facing resistance at its 200 day moving average at 1484. The Dow closed below its 200 day ma of 13255 and that level may act as resistance in the coming days. 13467 and 13579 are two other levels of resistance. The Nasdaq is facing resistance at 2696 and the 50 day ma 2718. I feel the market will test its lows and possibly head even lower.

WATCH THE YEN

Keep an eye on the Japanese Yen as it continues to get stronger this morning. US equities have a strong inverse correlation to the Yen and the carry trade continues to unwind with a stronger Yen.

The ISM Manufacturing Index is the major economic report out today. Keep an eye on this one as it has a strong ability to move the market.

A recession is already here for corporate profits not to mention housing. Is the US economy next ?

Moodys is cutting ratings on another $105 billion of SIVs. Further write downs are likely to follow.

Is the stage being set for a Dollar rally in 2008 ? Nobody wants anything to do with the Dollar and it appears the dumb money are moving out of the USD - think Gisele Bundchen and Jay Z. A Dollar rally will probably hasten a decline in US equities since US markets have risen in the since 2003 by the same percentage as the USD has declined. Given a scenario of a rising Dollar, US equities may fall as a result.

I added some more QID and FXP into the close on Friday. Lets see how things turn out today.

THANK YOU MR. BERNANKE

Thank you Mr. Bernanke for giving the bulls hope for another interest rate cut despite the first two interest rate cuts having no positive effect on the stock market. If the bulls are foolish enough to believe that a third interest rate cut will be good for stocks then let them. This gap up open is a great opportunity to add to QID and FXP positions and perhaps some SDS DXD TWM SRS. If the market is too strong going into the December 11th Fed meeting I doubt rates will be cut. So either way the market is bound to pullback. The market is currently lower than it was before the previous two rate cuts so how can we expect this cut to have any effect ? I cannot go long here and will cut back some of my long exposure further. Either we will see a retest of the recent lows or we will get a second leg down. Either way, I believe I am well positioned.

SUCKERS RALLY ?

Having taken time off the past week to contemplate the market the action of the past few sessions appears to be the making of a dead cat bounce. I didn't see anything on Monday or Tuesday which suggested a market bottom. A large stake in Citibank C by Abu Dhabi and a speech by Fed Governor Kohn suggesting further rate cuts appear to be the impetus for the current market surge. I don't know how long this bounce will last though I cannot rule out a return to an uptrend. Here are some the the things I have done and what I am looking at :

• Purchased FXP China double inverse ETF between $70-71 .
• Purchase QID ETF under $38 .
• Carefully watching Dow 13500 , Nasdaq 2700, S&P 1490 . Closes above these levels may suggest a return to the uptrend and I will close out short positions and the above mentioned ETFs.
• Keeping an eye on FXY ( Yen currency ETF). A break below $90 may signal return to bull market. Carry trade is a major factor in market breakdown.

DOW 12800 IS THE BULLS FINAL STAND

Dow 12800 is the bulls final stand. A break of 12800 and all hell breaks lose. Right now I am waiting for a break of 12800 to buy DDM SDS QID . I did add some QLD today in anticipation of a rally into the close. I will sell QLD is the market breaks its current lows.

So far the market appears to have made it lows for the day. But I could be wrong and I probably am wrong. With this type of volatility anything can happen. Anything. Traders are emotional and rumors could send this market flying in any direction. Just look what happened to CFC yesterday.

I continue to hold 40% cash and plan on putting it to use once a clearer trend is established. I know a lot of people are expecting a bounce from these oversold conditions. But the market could easily crater another 1000 points lower. Too many people expecting a bounce is a sure way for the market to do the opposite. On the other hand valuations are still attractive and foreign buyers flush with cash may prop up these markets .

TURKEY RALLY

Looks like we are having a turkey rally ahead of Thanksgiving. Do I think this rally will last ? I am not sure. There is still a lot of weakness in the markets particularly in the financials which are not participating in todays rally. Without the financials the bull market is doomed. I would not go long in this market if I don't see a recovery in financials. We may get a little rally in the retail sector and names like TGT COST BBY WMT M AEO APO ANF may all have a nice run going into the holidays.

FINANCIAL NEED TO RECOVER

Financials need to recover in order for the bull market to continue. Without the financials, this market is lost. Sure the markets have risen without the financials the last few months but, we've reached a stage where the underperformance by financials is taking its toll on the markets. Look at the way big names like C BSC CFC WM BAC WFC MS MER LEH have performed over the last 6 months. If they continue this downward spiral we are going to be in a serious bear market. Technology cannot carry as any longer.

If the markets do recover I think beaten down former momentum names will outperform . Names like CROX UA ZUMZ VDSI RVBD BCSI NILE LDK NCTY DRYS are on my list.

I am also making a China list of stocks. Names that I like are CTRP SINA NTES SOHU NINE CNTF COGO LFT CFSG CPSL AOB SDTH CSUN STP XFML FMCN STV .