Are we in Recovery Mode?

What happens next? That’s a multi-trillion dollar question which both bulls and bears will wrestle with for the next few weeks, and on into eternity.

In today’s Barron’s, Mike Santoli points out that "the recent seven-day, 8% jump from the intraday
low August 16 is only now at the point of proving whether it’s a mere
bounce or something more."

My own humble approach has been to note the quality of the rebound off of the lows, paying close attention to rally volume and breadth. That, so far, has spoke volumes about the nature of the snapback.

There are many other ways to assess the situation. Santoli notes the recent comments of Ned Davis Research (NDR is amongst the most highly respected technical analysts). Ne Davis has devised a number of measures for reading markets:

"Ned Davis of Ned Davis Research (NDR) is noteworthy among market handicappers for his adherence to the tape’s objective message and for a refreshing willingness to embrace nuance. He’s like a pilot who knows to trust his instruments most of the time yet is experienced enough to recognize when it’s necessary to fly by sight.

Davis for most of the year had been giving the nod to the market uptrend while discounting some upbeat signals due to the excess of debt in the system. How’s that for a well-written playbook?

Here’s what he wrote last week, on the subject of investor sentiment following the Dow’s bounce off the Aug. 16 low. "The market, aided by the Fed, did what it needed to do to prove the pessimistic majority wrong by rallying. Nevertheless, with mortgage rates and junk-bond yields still in zones which I feel are hostile, and with Big Mo’s Tape [his market-trend indicator] bearish, I have felt the NDR Crowd Sentiment Poll should drop below 40 to signal a low-risk buying opportunity."

His sentiment poll instead dipped to 48. That’s about on par with readings that accompanied the market lows in 2005 and March 2007, but not as pessimistic a showing as one that flashed at the 2006 bottom.

Davis concluded his Wednesday client note thus: "I admit there are some bullish signs around, but I just do not see a ‘fat pitch’ from the sentiment indicators currently."

Thanks for pointing us to the good stuff, Mike . . .


STREETWISE: Late Summer Reading   
Barron’s, August 27, 2007

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  1. SPECTRE of Deflation commented on Aug 25


    08/23/2007 $8,980,175,548,008.47

    We are in technical default, but hey let’s party like it’s 1999. What happened to, “we will need a debt ceiling increase by October 2007” by none other than our $700 million dollar man at Treasury by way of GS. For anyone that still cares about how much funny money should be out there right now, the figure is $8.965 TRILLION.

    Where is that old Prince Album?

  2. jack commented on Aug 25

    There are different ways of measuring sentiment. The Rydex Nova/Ursa ratio show an extremely oversold condition, on par with big sell outs in 00-01 (including 9/11). There is no question that the market will rally short term, as the excessive short bets need to be covered after all.
    It’s the long term that is more shaky IMHO. On the other hand, as we clear October, there will be a collective sigh of relief.

  3. SPECTRE of Deflation commented on Aug 25

    “Here’s what he wrote last week, on the subject of investor sentiment following the Dow’s bounce off the Aug. 16 low. “The market, aided by the Fed, did what it needed to do to prove the pessimistic majority wrong by rallying. Nevertheless, with mortgage rates and junk-bond yields still in zones which I feel are hostile, and with Big Mo’s Tape [his market-trend indicator] bearish, I have felt the NDR Crowd Sentiment Poll should drop below 40 to signal a low-risk buying opportunity.”

    What ole’ Ned failed to mention was that the only way we are where we are today is the ramp job by the FED pre open last Friday when the market was about to be taken to the shed to be beat like the dirty rug it is. How exactly do we factor this into sentiment?

    Also, but for the half a trillion dollars in funny money/digi-dollars put into the system by CB’s the last 2 weeks, we would have been outright crushed. Not to worry though because New Housing numbers are looking better even though they don’t count cancellations, but hey it can’t be a big number can it?

    Basically folks, we sell shit to one another without producing anything to speak of. I won’t talk history because anyone at this point that doesn’t know what’s coming is clueless and way too late to the musical chair competition. Prince, not the singer, from CITI said they had to dance while the music played. I’m thinking the music has stopped, there’s one chair still open, and Prince along with countless others are scrambling their asses to the chair, but we could get an ugly fight when they all converge on the one little ole’ chair. Party on Prince!

  4. Philippe commented on Aug 25

    The date of recovery and patterns are quiet familiar since two years, end of August last year was a recovery period may be a Merrill Lynch survey of funds mangers being pessimistic is missing on the agenda? Usually it is a good bait in order to attract short sellers.
    Profits do not matter much, if they dim companies have enough liquidities either in cash or in commercial paper, or borrowings from banks which are cash rich, to boost a stocks purchase programme (this is the purpose of the working capital)
    Individuals world wide whom have lost money in real estate bonds, money markets funds, in house depreciations, know well that if they want to double up in the financial markets, equities markets are the place starting in August till bonus days December.

    Among others few encouragements

    July 18 (Bloomberg) — Federal Reserve policy makers trimmed their forecasts for U.S. economic growth this year and next on weaker-than-anticipated home building, while keeping their inflation projections unchanged.
    The economy will grow by 2.25 percent to 2.5 percent in the fourth quarter of 2007

    Profit warnings issued by UK-listed firms are at their highest level since the low point of the technology-led stock market crash in 2001.

    Bank CEO warns of German crisis
    By Steve Goldstein, MarketWatch
    Last Update: 5:28 AM ET Aug 21, 2007
    LONDON (MarketWatch) — The chief executive of one of Germany’s largest state-backed banks warned that foreigners were increasingly loath to extend credit to financial institutions in Europe’s largest economy, which could spark a crisis.

  5. SPECTRE of Deflation commented on Aug 25

    More alchemy from the Boyz and Girlz at the FED. Don’t they do these things when there’s no other choice? I think that’s called desperation.

    Fed bends rules to help two big banks

    If the Federal Reserve is waiving a fundamental principle in banking regulation, the credit crunch must still be sapping the strength of America’s biggest banks. Fortune’s Peter Eavis documents an unusual Fed move.
    FORTUNE Magazine
    By Peter Eavis, Fortune writer
    August 24 2007: 5:09 PM EDT

    NEW YORK (Fortune) — In a clear sign that the credit crunch is still affecting the nation’s largest financial institutions, the Federal Reserve agreed this week to bend key banking regulations to help out Citigroup (Charts, Fortune 500) and Bank of America (Charts, Fortune 500), according to documents posted Friday on the Fed’s web site.

    The Aug. 20 letters from the Fed to Citigroup and Bank of America state that the Fed, which regulates large parts of the U.S. financial system, has agreed to exempt both banks from rules that effectively limit the amount of lending that their federally-insured banks can do with their brokerage affiliates. The exemption, which is temporary, means, for example, that Citigroup’s Citibank entity can substantially increase funding to Citigroup Global Markets, its brokerage subsidiary. Citigroup and Bank of America requested the exemptions, according to the letters, to provide liquidity to those holding mortgage loans, mortgage-backed securities, and other securities.

    This unusual move by the Fed shows that the largest Wall Street firms are continuing to have problems funding operations during the current market difficulties, according to banking industry skeptics. The Fed’s move appears to support the view that even the biggest brokerages have been caught off guard by the credit crunch and don’t have financing to deal with the resulting dislocation in the markets. The opposing, less negative view is that the Fed has taken this step merely to increase the speed with which the funds recently borrowed at the Fed’s discount window can flow through to the bond markets, where the mortgage mess has caused a drying up of liquidity.

    On Wednesday, Citibank and Bank of America said that they and two other banks accessed $500 million in 30-day financing at the discount window. A Citigroup spokesperson declined to comment. Bank of America dismissed the notion that Banc of America Securities is not well positioned to fund operations without help from the federally insured bank. “This is just a technicality to allow us to use our regular channels of business with funds from the Fed’s discount window,” says Bob Stickler, spokesperson for Bank of America. “We have no current plans to use the discount window beyond the $500 million announced earlier this week.”

    There is a good chance that other large banks, like J.P. Morgan (Charts, Fortune 500), have been granted similar exemptions. The Federal Reserve and J.P. Morgan didn’t immediately comment.

    The regulations in question effectively limit a bank’s funding exposure to an affiliate to 10% of the bank’s capital. But the Fed has allowed Citibank and Bank of America to blow through that level. Citigroup and Bank of America are able to lend up to $25 billion apiece under this exemption, according to the Fed. If Citibank used the full amount, “that represents about 30% of Citibank’s total regulatory capital, which is no small exemption,” says Charlie Peabody, banks analyst at Portales Partners.

    The Fed says that it made the exemption in the public interest, because it allows Citibank to get liquidity to the brokerage in “the most rapid and cost-effective manner possible.”

    So, how serious is this rule-bending? Very. One of the central tenets of banking regulation is that banks with federally insured deposits should never be over-exposed to brokerage subsidiaries; indeed, for decades financial institutions were legally required to keep the two units completely separate. This move by the Fed eats away at the principle.

    Sure, the temporary nature of the move makes it look slightly less serious, but the Fed didn’t give a date in the letter for when this exemption will end. In addition, the sheer size of the potential lending capacity at Citigroup and Bank of America – $25 billion each – is a cause for unease.

    Indeed, this move to exempt Citigroup casts a whole new light on the discount window borrowing that was revealed earlier this week. At the time, the gloss put on the discount window advances was that they were orderly and almost symbolic in nature. But if that were the case, why the need to use these exemptions to rush the funds to the brokerages?

    Expect the discount window borrowings to become a key part of the Fed’s recovery strategy for the financial system. The Fed’s exemption will almost certainly force its regulatory arm to sharpen its oversight of banks’ balance sheets, which means banks will almost certainly have to mark down asset values to appropriate levels a lot faster now. That’s because there is no way that the Fed is going to allow easier funding to lead to a further propping up of asset prices.

    Don’t forget: The Federal Reserve is in crisis management at the moment. However, it doesn’t want to show any signs of panic. That means no rushed cuts in interest rates. It also means that it wants banks to quickly take the big charges that will inevitably come from holding toxic debt securities. And it will do all it can behind the scenes to work with the banks to help them get through this upheaval. But waiving one of the most important banking regulations can only add nervousness to the market. And that’s what the Fed did Monday in these disturbing letters to the nation’s two largest banks. Top of page

  6. SPECTRE of Deflation commented on Aug 25

    “Profits do not matter much, if they dim companies have enough liquidities either in cash or in commercial paper, or borrowings from banks which are cash rich, to boost a stocks purchase programme (this is the purpose of the working capital)
    Individuals world wide whom have lost money in real estate bonds, money markets funds, in house depreciations, know well that if they want to double up in the financial markets, equities markets are the place starting in August till bonus days December.”

    SAY WHAT? I will take whatever you are ordering.

  7. SPECTRE of Deflation commented on Aug 25

    Let’s see, a negative savings rate…check, and income inequality not seen since the Depression…check. Things are looking up folks. LOL! Unbelievable! This should play oh so well with joe six pack. NOT!

    Half of America’s Gain in Income Goes to Richest 0.25 Percent
    New York Times reporter David Cay Johnston is kind of an awesome dude. Yesterday, he dropped one of his customary bombshell reports:

    [Earners of over $1 million/year,] who constitute less than a quarter of 1 percent of all taxpayers, reaped almost 47 percent of the total income gains in 2005, compared with 2000.
    People with incomes of more than a million dollars also received 62 percent of the savings from the reduced tax rates on long-term capital gains and dividends that President Bush signed into law in 2003…
    So less than one-quarter of one percent of all taxpayers took in almost 50 percent of the nation’s revenue gain. And what about the little guy? Screwed, as you would suspect.

    Americans earned a smaller average income in 2005 than in 2000, the fifth consecutive year that they had to make ends meet with less money…
    Total income listed on tax returns grew every year after World War II, with a single one-year exception, until 2001, making the five-year period of lower average incomes and four years of lower total incomes a new experience for the majority of Americans born since 1945.

  8. ari5000 commented on Aug 25

    I agree with the above comment — the Fed’s intervention was a critical part of the bounce. They really had perfect timing…

    Last few days though it kept climbing despite decreasing volume, and fewer leaders.

    New lows led new highs, even on Friday’s huge up move. Microcap indexes are down for the year.

    The brief 10% correction from the high in July was received by the Street as an utter breakdown in confidence and the beginning of a major recession even though such corrections are common and necessary in overbought markets.

    The way I see it — the markets are now ‘addicted’ to the Fed like crack. As the markets plummet, they’ll look to the Fed for more cuts, rule bends, manipulations.

    I’m not sure Bernanke wants to play this game. They’ll hate him if he doesn’t do something on the next plunge. Maybe he gets a thrill out of single-handedly ‘rescuing’ the economy. Anyone know if he has a hero complex?

    The #1 beneficiary is — once again– millionaire insiders who get to dump more stock at inflated prices. CROX, AMZN, GRMN, AAPL insiders… they just can’t be too wealthy.

  9. km4 commented on Aug 25

    Asset inflation ( esp real estate ) in the debt laden USA have become enormous so the correction is going to be harsh.

    I never thought I’d see the Fed being an accessory to massive Wall St. Ponzi scheme.

    Tells you how much this country has degenerated into a cesspool of endless corruption and wanton greed.

    Very rough economic times ahead for many many more in near future.

  10. Winston Munn commented on Aug 25

    There is a small problem known as divergence within the markets . From Lee Adler:

    “They [Federal Reserve] didn’t conduct any open market operations today, allowing $3.5 billion from the repo pool, and for the second week in a row they announced that at next week’s Treasury auctions they would not renew $5 billion of 4 week T bills which they hold. These actions result in the 5 day net dropping to an unbelievable $14 billion drain. The Fed acted to drain reserves with the Fed Funds rate at 4.88 overnight.”

    The Federal Reserve is not dumping money into the system – they are withdrawing in order to protect the target rate, although they may have internally lowered that target to 5% without yet announcing.

    Not only has the Fed been draining but for the past 4 weeks FCBs have been net sellers or treasuries, and in one auction last week the bid to cover was an omninously low 1.1.

    The divergence I point to is the rising equity prices while the underlying liquidity is being removed. If the trend lasts much longer, equity prices will not be able to sustain a rebound.

    With the need for USD distribution in foreign banks, the slowing of US consumer spending, and tightening of credits, it is difficult to imagine a sudden increase in liquidity from these sources. It looks like the divergence must revert downward in equity prices in the not to distant future.

  11. will rahal commented on Aug 25

    I agree that it is not time to buy yet.
    I have an excellent indicator that is almost 100% sensitive to short term tops.
    This indicator is suggesting a ST top.
    Now that the S&P approached the widely followed 50-day moving average, I believe the selloff will begin.

  12. Pool Shark commented on Aug 25


    Do you agree the major overhead resistance in the S&P is around 1480?

  13. Marcus Aurelius commented on Aug 25

    The Prince song everyone is dancing to is ‘Let’s Go Crazy’.

    The fundamentals of the entire economy are unsound (not just WS – all of the fundamentals). Accounting schemes, unthinkable in the recent past, have been allowed to flourish without regard to their near- or long-term ramifications. Personal and governmental debt has become the currency of the day. Bulls – and the irrationalally exuberant – will point to any twisted and tortured metric they can find to gloss over the underlying defects (Well, yeah, the foundation is cracked – just put some duct tape on it and don’t worry about it).

    Fundamentals are key. The full consequences of flawed fundamentals might not manifest themselves next week, but the dance can’t go on forever. Somebody has to pay the piper.

    From Prince:

    Are we gonna let de-elevator
    Bring us down?
    Oh, no Let’s Go!
    Let’s go crazy
    Let’s get nuts
    Let’s look for the purple banana
    ‘Til they put us in the truck, let’s go!

  14. blam commented on Aug 25

    I expect the “market” to rally, by prior agreement, because of the end of quarter massive push by wall street. However, there is no value left in any financial assets that I can see so I would not be surprised by a subsequent retreat that will take the “market” below the recent lows.

    There is a decent economy under the Enronesque layers of wall street shit but I figure we need a 40 percent haircut in most markets to get to it. How can any asset be evaluated ? Are the CDO’s the only valuation story that has been manipulated ? Why would companies buy-in their shares at the top of the cycle ? So they can reissue them at the bottom or because of systemic executive corruption ? What does that say for the quality of earnings being reported ?

    Party on all ye brave bulls. I thank you for continuing the pump just a while longer. The equity market is all yours.

  15. Stuart commented on Aug 25

    Put me down as a big no. No question that the Fed is serving as buyer of last resort, but their measures are by intent temporary in nature, whether it be temporary REPOS, reduced discount rates or expanded collateral for loans offered through their discount window, these are temporary measures. There is still no permanent solution on the table that I’ve seen. That’s the distinction that I can’t get passed. Their measures to date are merely mechanisms of deferral. In the final analysis we have upwards of several trillion dollars of bad debt moving around the credit markets as a result of mispriced risk. Merely easing credit requirements or creative financing abilities by the Fed does nothing to address this bad debt monster. I don’t see a permanent measure that does not generate massive inflation. Same goes for Europe. To address the hundreds of billions of commercial paper coming due, a permanent measure is required and I don’t see that unless they bite the bullet and simply buy them outright. If that happens, well, that’s about a close to pure monetary inflation IMO as you can get and the inflation genie is let loose with a vengeance.

  16. VJ commented on Aug 25


    I think, though, we’re going to see the market rally over the course of the next couple of weeks, going back toward the old highs, 1525, 1550 area on the S&P’s, towards the 14,000 level on the Dow Industrials, above 2,000 or thereabouts on the NASDAQ 100. But I think as we approach those old highs, the market will give it up and I don’t think the lows were put in place yet. So if we see any rally next week, which I think we will going into Labor Day, I would probably be selling into that.

    KANGAS: What about a Fed funds rate cut, wouldn’t that keep the rally going? Or is it already being read into the market?

    COCHRANE: I think right now it’s certainly being baked into the market. The discount window certainly helped a week or so ago. I think the market right now is seizing on that Fed doing that on the September 18th meeting. I don’t think the Fed’s going to accommodate. Bernanke is not one to accommodate Wall Street, per se. Wall Street wants that, I don’t think it’s going to happen. I think really that’s going to be the next leg down in the market when that does not occur. I would be real surprised if they did it.


  17. Rus commented on Aug 25

    What if a couple of nervous Central Bankers start demanding that Chief Risk Officers at commercial and investment banks start marking their CDO’s to market and not model at the end of this quarter? And the banks then pass these new values onto their hedge fund clients? Goodbye repo market and leverage to the funds.

  18. Mr. Bubbles commented on Aug 25

    Forget helicopters, Bennie is warming up the B52’s for the money drop.

    How does that Elton John song go?

    “B-B-B-Bennie and the Jets…..”

  19. donna commented on Aug 25

    After reading today’s NYT story on Countrywide, I think tossing Angelo in jail might be a good start on fixing what’s wrong with this country.

    And most of the others who have benefited from the housing market scam as well.

  20. angryinch commented on Aug 25

    Put Tan Angelo in jail? What crime did he commit? Seems to me like he simply took advantage of a thoroughly corrupt system. And he did it in rock star fashion. Not to mention, in plain sight.

    All year, the Tan Man has essentially been saying that the mortgage business sucks rocks. And he has been selling hundreds of millions worth of shares, week in, week out, for two years. This wasn’t done in secret. You can look on Yahoo! Finance and see his handiwork.

    What more did he need to do? Hold up a sign on CNBC that said, “Short CFC to zero”?

    I’m no fan of the Tan Man. He strikes me as one of the slitheriest snakes to slide through Cheat Street in quite some time.

    But the guy has stolen his loot fair and square, according to the rules of The Game. Like the wise man once said, “The best way to rob a bank is to own one.”

  21. Fat Lady Sings commented on Aug 25

    “I admit there are some bullish signs around, but I just do not see a ‘fat pitch’ from the sentiment indicators currently.”

    Ned might wait another 20 years (if ever) before his sentiment poll drops to 40.

    If you wait for the fat lady to sing before pulling the trigger, you will be too late and most likely you will miss the fantastic buying opportunities. Ned should know better that the hard trade is usually the right trade, you buy when the crowd finds it objectionable, not when you get a nice rounded sentiment number.

    The best time to buy is when there is blood on the streets. Warren Buffet: “…be fearful when others are greedy and be greedy only when others are fearful…”

    Ned has missed his buying opportunities last week, when VIX (a measurement of fear) was at 30. This week it has returned to neutral ground at 20. NYSE and NASDAQ short interest remain at record levels. The mother of all short squeezes is around the corner. You need to be positioned on the right side (the Fed side).

    As far as the Tan Man, I do not blame him for scaring the folks. His entire business survival depends on the Fed cutting the rates. It is more likely for the Fed to cut rates when there is panic. Another possibility, the Tan Man lures the shorts into the trap before some big company announcement.

  22. wunsacon commented on Aug 25

    I don’t follow Tangelo at all. But, if someone was making positive statements about the company publicly — which keeps the stock price up — while harboring a different view personally and selling, then ideally he should be found guilty of fraud.

  23. will rahal commented on Aug 25

    Pool Shark
    I believe that the rally from last week’s low has put the Stock Market in a vulnerable position, where sellers may come in. The Russell-2000 looks particularly weak.
    My Indicator just gives me more confidence for calling a ST top.

  24. wunsacon commented on Aug 25

    Same thing goes for anyone saying “We Knew We Were Buying Time Bombs”.

  25. ari5000 commented on Aug 25

    I think there is a class-action lawsuit coming against Mozilo and I think with the help of former sales agents — what they did is systematically defraud people and overcharge them. I’m fairly certain the lawsuit is coming and even though some may argue he ‘technically’ didn’t break the law — they’ll be two consequences for sure

    1) CFC will at the very least settle without admitting wrongdoing for a big hit

    2) Anyone who watches the news will never borrow a penny from CFC again and a lot of current borrowers will transfer.

    Either way — CFC is toast. BAC shareholders are going to take a small hit on that ridiculous bailout package.

    Mozilo is a criminal. Wealthy as all hell, but still a criminal. He should be ordered to pay out of his own pocket to the money he fleeced from poor Americans.

    The article link is:

  26. BigW commented on Aug 25


    Does anyone know if Ned Davis has issued anything since yesterday’s rally. Just a guess, but I would think his momentum indicator probably gave a buy signal?



  27. Frankie commented on Aug 25

    EVERYONE is expecting a re-test.

    Meanwhile, Barry left out a very important part of Santoli’s article, imho — massive mutual fund redemptions are matched (foiled) with massive (record) INSIDER buying. Santoli asks — “is it likely that retail investors “get it”, while corporate managers are clueless?”

    The market might not give the re-test, so many are hoping for – and positioned for (huge put call and short positions).

  28. Frankie commented on Aug 25

    Carlfutia has another interesting post on MSM “cover story” indicators. He highlights Fortune Mags laest:


    “There are four important things to note about this cover and the associated story.

    First, the cover’s colors are the colors of fear, red on black.

    Second, Fortune devoted about 40% of the entire issue to the panic story and related items. This is very unusual and reflects what a big impression the events of August in the markets have made upon the public and upon Wall Street.

    Third, Fortune’s take on these events is essentially : “They had it coming for assuming too much risk and now all of us are suffering”.

    Finally every subsection of the Fortune story is headed by an interesting graphic: a down arrow on a circular yellow background. Talk about subliminal predictions !!!!

    All in all, I think this magazine cover is very persuasive. It convinces me that stock prices will on average be much higher in three months time than they are today.”

  29. Frankie commented on Aug 25

    An speaking of recessions — here’s an interesting bit from ECRI:

    Jeff Miller
    Recession Forecasts
    8/24/2007 1:57 PM EDT

    Lakshman Achuthan of the Economic Cycle Research Institute was just interviewed on CNBC. His occasional updates are very important to those of us interested in economic analysis and forecasting. The ECRI has a great record that avoids “false positive” recession signals. They use proprietary leading indicators, but occasionally provide more insight into what they are seeing. Gary D. Smith also provides periodic updates on their indicators in his excellent Long/Short Trader column on RealMoney Silver.

    The ECRI is not speaking for a sell-side firm nor trading stocks, so their comments come without any apparent bias. They sell their research, and they must deliver a quality product. Today’s message? In answer to a question about the dramatic cover of Fortune, Achuthan made several interesting comments.

    “…the bottom line is that …dramatic predictions get attention….(A)lmost every year there is a recession call. In 2002, 2003, 2005, 2006 and now in 2007, we are seeing various scenarios. You know some speculation and you kind of link it together. There is a housing crash therefore there must be a recession. Or there is a credit market shock and there must be a recession. That’s not how recessions are made. …(S)hocks can help trigger a recession but the economy needs to be vulnerable in the first place.”

    Explaining that the ECRI was always looking for vulnerability, Achuthan continued, “The events we have seen over the last few weeks and months have taken the shine off of growth out a few quarters, and we’ll get some slowing.”

    He stated flatly that we would not get a recession this year. He also pointed out that economic indicators could only look forward a few quarters. The longest leading indicators show slowing growth, but he called it “way premature” to forecast a recession.

    Asked about a leading indicator he pointed to the spread between AAA corporates and BAA corporates. Since he thought that viewers might not believe it, he picked one that you can look up yourself. “It is a good leading indicator….The spread was about 100 bp’s before the credit drama started and now it is actually smaller…(I)t is a fifteen-month low in the spread.”

    I like the ECRI’s rigorous analysis. It includes long historical studies to discover the best indicators. It emphasizes quantification. It shows a clear concept of what leads to recession. Readers would benefit from looking up the video up on the CNBC site and taking a few minutes to watch for yourself.

  30. Owner Earnings commented on Aug 25

    How about some facts vs. opinions.

    Anyone look at

    Obviously numbers are not perfect, but last check HELOC rates are up 8% to 8%. So much for people pulling out their equity (as if they have any right now or as if an appraiser would say they did) to remodel the kitchen.

    Technicals. HA!

  31. Last Line of Defense commented on Aug 25

    A suggested draft for a Fed communique from their upcoming retreat at Jackson Hole:

    The Federal Reserve Governors and Presidents want to make public their full awareness of the following facts:

    * By August 15 hedge funds have received redemption notices from their clients, to be fulfilled by September 30, for an unprecedented total amount.

    * In order to fulfill those requests, hedge funds will have to collectively liquidate a significant part of their huge positions in the debt, foreign exchange, equity and commodity markets between now and September 30.

    * The liquidation of those positions will inevitably cause significant movements in all these markets.

    * These movements, being inherently transient in nature, have a very low probability to affect economic growth, which latest data – particularly the recent July Durable Goods Orders report – shows to be proceeding at a satisfactorily robust pace.

    In view of the aforementioned facts, the Federal Reserve Governors and Presidents state their unanimous resolve to not introduce any change whatsoever in monetary policy, in particular to the federal funds rate, in response to any movement, however large or steep, that might occur between now and September 30 in the mentioned markets. They view any such change as completely unnecesary for the purpose of ensuring a sustainable pace in economic growth. They are also aware that any such measure would not stand up to any examination on moral grounds, since it could justifiably be interpreted as having the purpose of bailing out hedge funds – which are definitely neither banks nor an essential or even important part of the financial system – and their customers – who are not exactly widows and orphans.

    If you like this, please pass around. (I forego the copyright ;-)

  32. Frankie commented on Aug 26

    From what I’ve heard the HF redemption requests are minimal.

  33. angryinch commented on Aug 26

    So I see we’re resorting to quoting from the collected works of wrong-way blogger Carl Futia now? That’s a laugh and a half.

    Ain’t he the gent who’s been posting his “three traps and a crap” pattern (or whatever it’s called) for three years running? Yep, thought so.

    As for this week’s Fortune cover, perhaps you’ve been out of town the past few weeks and missed some of what has been going on. The fact that Fortune had the audacity to cover it is what used to be commonly known as “news.” What’s contrary about covering the news?

    And what a shock that they used black and red colors. I would think fushcia and aquamarine would have been far more appropriate.

    Perhaps if you had actually read the Fortune package, instead of relying on Carl Futia’s wildly-biased “take” on it, you’d see that they in no way came to the conclusion that “They had it coming for assuming too much risk and now all of us are suffering”.

    Technically speaking, that is known as “making shit up.”

    Here’s the actual, bonafide, reality-based nut graf from the Fortune package:

    “Fortunately, this upheaval is taking place at a time when the basic economic outlook remains sound, bolstered by low inflation and strong growth around the globe. The best bet is that asset values will settle at a level higher than their long-term averages, reflecting the generally balmy climate.”

    Ooohhhh, I’m-a skeered. That kind of Armageddon talk makes me want to build a bunker in the Sierras and load up on the automatic weapons and government cheese.

    I’ll have to give Carl Futia one thing: he’s entertaining, not to mention the best fade in the business.

    And nothing is more chuckle-icious than his daily blather about “magazine cover indicators.”

    BTW, the magazine cover that spawned this whole “contrary indicator” nonsense was the Business Week “Death of Equities” issue in 1979 when the S&P was trading around 110.

    The good news: Equities weren’t dead, they were only sleeping.

    The bad news: The S&P didn’t clear 110 for good until August 1982, three years later.

    So if you “faded” the “contrary” Business Week cover in 1979, you had to wait three years for the market to take off in earnest.

    Sorry ’bout dat, Carl Futile.

  34. SPECTRE of Deflation commented on Aug 27

    From what I’ve heard the HF redemption requests are minimal.

    Posted by: Frankie | Aug 26, 2007 12:13:57 PM

    Who would volunteer the information? They are unregulated, and investors won’t know they are screwed until the Hedgies refuse redemptions. Expect lots of “dear John” letters to clients coming up shortly.

  35. SPECTRE of Deflation commented on Aug 27

    From Mish’s Blog:

    Bill Gross Wants PIMCO Bailout

    PIMCO’s Bill Gross was asking Where’s Waldo? in his investment outlook for September 2007.

    A certain dose of market discipline in the form of lower prices might be healthy, but market forecasters currently project over two million defaults before this current cycle is complete. The resultant impact on housing prices is likely to be close to -10%, an asset deflation in the U.S. never seen since the Great Depression.

    The ultimate solution, it seems to me, must not emanate from the bowels of Fed headquarters on Constitution Avenue, but from the West Wing of 1600 Pennsylvania Avenue.

    If we can bail out Chrysler, why can’t we support the American homeowner? The time has come to acknowledge that there are precedents aplenty in the long and even recent history of American policy making. This rescue, which admittedly might bail out speculators who deserve much worse, would support millions of hard working Americans whose recent hours have become ones of frantic desperation.

    Get with it Mr. President and Mr. Treasury Secretary. This is your moment to one-up Barney Frank and the Democrats. Reestablish not the RFC or the RTC, but create an RMC – Reconstruction Mortgage Corporation. If not, make some modifications in the existing FHA program, long discarded as ineffective. Write some checks, bail ‘em out, prevent a destructive housing deflation that Ben Bernanke is unable to do. After all “W”, you’re “the Decider,” aren’t you?
    Mr. Practical, whom I seldom disagree with simply because he is too practical, commented on the situation and came to a conclusion that I 100% agree with: More Bailouts Could Bring Disaster Down the Road.

    In my humble opinion Mr. Gross is right about only one thing: that Mr. Bernanke is unable to eventually stop a destructive housing deflation. At least now the pundits are admitting that a housing deflation is at the heart of the economic problems. That is a watershed event.

    But for the “government”, which I thought was using taxpayer money (except for the $9 trln in debt it has borrowed), to bail out malinvestment is only to increase the problem. If you don’t punish your child for playing with matches, he may one day burn the house down.


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