Archive for 2009

How to Repair a Broken Financial World

Here’s the second NY times piece, following the article "The End of the Financial World As We Know It".  Can a broken financial system be fixed — Michael Lewis and David Einhorn propose several changes that may help. 

How to Repair a Broken Financial World

Continued from "The End of the Financial World As We Know It"

Mr. Paulson must have had some reason for doing what he did. No doubt he still believes that without all this frantic activity we’d be far worse off than we are now. All we know for sure, however, is that the Treasury’s heroic deal-making has had little effect on what it claims is the problem at hand: the collapse of confidence in the companies atop our financial system.

Weeks after receiving its first $25 billion taxpayer investment, Citigroup returned to the Treasury to confess that — lo! — the markets still didn’t trust Citigroup to survive. In response, on Nov. 24, the Treasury handed Citigroup another $20 billion from the Troubled Assets Relief Program, and then simply guaranteed $306 billion of Citigroup’s assets. The Treasury didn’t ask for its fair share of the action, or management changes, or for that matter anything much at all beyond a teaspoon of warrants and a sliver of preferred stock. The $306 billion guarantee was an undisguised gift. The Treasury didn’t even bother to explain what the crisis was, just that the action was taken in response to Citigroup’s “declining stock price.”

Three hundred billion dollars is still a lot of money. It’s almost 2 percent of gross domestic product, and about what we spend annually on the departments of Agriculture, Education, Energy, Homeland Security, Housing and Urban Development and Transportation combined. Had Mr. Paulson executed his initial plan, and bought Citigroup’s pile of troubled assets at market prices, there would have been a limit to our exposure, as the money would have counted against the $700 billion Mr. Paulson had been given to dispense. Instead, he in effect granted himself the power to dispense unlimited sums of money without Congressional oversight. Now we don’t even know the nature of the assets that the Treasury is standing behind. Under TARP, these would have been disclosed.

THERE are other things the Treasury might do

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Tim’s Predictions for 2009

Courtesy of Tim Iacono at The Mess That Greenspan Made

Predictions for 2009

After a year like the one that has just concluded, it is more difficult than ever to see clearly into our dark and murky future, but that doesn’t seem to have stopped people from making predictions of one sort or another about what might lie ahead.

Such is the case here, despite the brightly glowing orb to the right.

After taking a close look at last year’s predictions the other day, it’s pretty clear that things would have been a lot easier to call if it was known in advance that Armageddon was finally going to arrive.

Discounting Armageddon has been a profitable investment strategy up until last year.

The question today is whether what happened in 2008 was Armageddon – Part I, or just plain Armageddon. As you’ll see below, from my vantage point, it looks more like the latter.

Off we go…

1. Another Bad Year for Housing

Once again, more pain in housing seems inevitable with liar loans and option ARM products reaching their critical years. If it already hasn’t, that second home/investment property that seemed like such a good idea back in 2004 will turn into a nightmare in 2009.

As was the case last year, only real estate sales types will be predicting a rebound for home prices in 2009 though home sales will probably make a lasting bottom. Late-2009 and 2010 will be the time to start looking to buy property again, but there will be no need to hurry – contrary to what real estate sales types tell you, prices are not headed back up anytime soon. They may not go too much lower in 2010, but, except for places like Washington D.C. where the bailout business is booming, prices will be mostly flat through 2011 or 2012.

Next year, housing prices will fall another 10 percent nationally, based on the year-over-year change to the 20-city S&P Case Shiller Home Price Index for October 2009 (this report gets released at the end of December and showed an 18 percent decline last week.) It seems that home price declines have to ease up. For example, based on their current trajectory, by the end of next year the median home price

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Swing trading virtual portfolio – Optrader

Let’s start the new year with a new post and a new virtual portfolio.

2008 was an amazing year for us with the virtual portfolio up 725.49%. We have to be thankful for all this volatility! Let’s hope 2009 is very good to us as well.

Thank you to everyone who participates in the comments in the optrader’s section, we have a smart group of people, with great ideas.

Live virtual portfolio and comments are only available to members of the swing trading virtual portfolio.

To learn more about the swing trading virtual portfolio (strategy, membership etc.), please click here

- Optrader

Swing trading virtual portfolio – Optrader

Let’s start the new year with a new post and a new virtual portfolio.

2008 was an amazing year for us with the virtual portfolio up 725.49%. We have to be thankful for all this volatility! Let’s hope 2009 is very good to us as well.

Thank you to everyone who participates in the comments in the optrader’s section, we have a smart group of people, with great ideas.

Live virtual portfolio and comments are only available to members of the swing trading virtual portfolio.

To learn more about the swing trading virtual portfolio (strategy, membership etc.), please click here

- Optrader

Daily and Weekly View of the S&P 500

Here’s an updated analysis of the S&P.  Next week will be important in determining whether the S&P can break the lower lows, lower highs pattern.

Daily and Weekly View of the S&P 500

Courtesy of Corey Rosenbloom at Afraid to Trade

With last week’s price action taking us slightly above resistance on the daily chart, let’s view both the daily and weekly price structures of the S&P 500 and note additional possible overhead resistance targets.

S&P 500 Daily:

The first thing that should jump out at you is that price rallied the last three days and officially closed above the 50 day EMA, breaking resistance for the moment.  That’s a significant development, but as many have noted, it was achieved on low volume, signaling a non-confirmation.  Next week will be critical once traders/funds return from the holidays and begin to settle back to work.  It’s possible the Bulls scored an uncontested victory provided Bears were away enjoying their profits.

Next, we should be aware that the 38.2% Fibonacci retracement of the August to November move comes up around 962, which is about 30 points away.  Bulls may be hard-pressed to pierce this zone, but if they do, it will signal a potentially significant change in price structure.  You need to watch this level very closely.

Third, note that price has succeeded in making consistently lower lows and lower highs – this structure has not changed.  The structure would officially change if price were to overtake the swing-high at 1,000, creating a higher high and confirming December’s activity as a ‘higher low.’

Fourth, notice that a large-scale positive momentum divergence has been forming since October, which could be working itself off currently.  Momentum divergences signal that the next retracement is expected to be stronger than normal, or that – in this case – the bears are losing momentum as price reaches new lows.

Finally, I’m showing different signals or clues in volume via different arrows.  Traditional analysis says that rising volume confirms price moves (such that lower prices on steadily increasing volume *confirms* the price move and suggests that lower prices are yet to come… which was the case both times in September and October).  The November 750 low was quite significant because it represented a positive momentum divergence AND a non-confirmation of new price lows

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The End of the Financial World as We Know

Christopher Fountain, writing at his blog For What It’s Worth, provides an introduction and excerpts from an excellent NY Times article The End of the Financial World as We Know Itby MICHAEL LEWIS and DAVID EINHORN.  But first, here’s my musical selection to go with the article, which I highly recommend reading in full, It’s The End of The World As We Know It:


Michael Lewis – The End of the Financial World as We Know It.

Courtesy of Christopher Fountain, at For What It’s Worth

Good article in yesterday’s Times by Michael Lewis on the state of Wall Street, its players and its regulators. It’s long but well worth reading in its entirety. Here are just a few of his observations:

The Madoff scandal echoes a deeper absence inside our financial system, which has been undermined not merely by bad behavior but by the lack of checks and balances to discourage it. “Greed” doesn’t cut it as a satisfying explanation for the current financial crisis. Greed was necessary but insufficient; in any case, we are as likely to eliminate greed from our national character as we are lust and envy. The fixable problem isn’t the greed of the few but the misaligned interests of the many. ….

OUR financial catastrophe, like Bernard Madoff’s pyramid scheme, required all sorts of important, plugged-in people to sacrifice our collective long-term interests for short-term gain. The pressure to do this in today’s financial markets is immense. Obviously the greater the market pressure to excel in the short term, the greater the need for pressure from outside the market to consider the longer term. But that’s the problem: there is no longer any serious pressure from outside the market. The tyranny of the short term has extended itself with frightening ease into the entities that were meant to, one way or another, discipline Wall Street, and force it to consider its enlightened self-interest.

The credit-rating agencies, for instance.

Everyone now knows that Moody’s and Standard & Poor’s botched their analyses of bonds backed by home mortgages. But their most costly mistake — one that deserves a lot more attention than it has received — lies in their area of putative expertise: measuring corporate risk.

Over the last 20 years American financial institutions have taken on more and more risk, with the

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The oil shock and recession of 2008: Part 2

Here’s the second in James D. Hamilton’s two part series on the oil shock and recession.  He shows that in economics, as in life, some harms - gas prices rising above $4 per gallon – become part of a cascade of events that cannot be undone simply by reversing the initial assault. – Ilene

The oil shock and recession of 2008: Part 2

Courtesy of James D. Hamilton at Econbrowser

In my previous post, I presented evidence that the oil price increase over 2007:H2-2008:H1 made a significant contribution to the slowdown in consumption spending in general and decline in spending on domestic automobiles in particular. Here I discuss why this should be regarded as a key development that turned the slowdown in growth into a recession.

Cumulative percent change in price of West Texas Intermediate between July, 1990 or July 2007 and indicated month. Data source: FRED

One way to put this in perspective is to compare what happened in 2007-2008 with what we saw in 1990-91. Prior to Iraq’s invasion of Kuwait in August 1990, the U.S. economy had been growing slowly due to a weak housing sector. The sudden loss in oil production from Iraq and Kuwait resulted in one of the biggest increases in oil prices on record, which unquestionably contributed to the downturn in consumption spending and the auto sector that were key factors in turning that slowdown into the recession of 1990-91. The graph above shows that although the oil price increase during 2007-08 was more gradual than what we saw in the fall of 1990, the cumulative magnitude was quite similar.

The next graph compares the path of employment in the auto sector during the two recessions. The red line shows the cumulative change in the number of workers employed in motor vehicles and parts manufacturing subsequent to July 1990. This sector had shed 94,000 jobs by the low point in March of 1991. For comparison, we’ve seen 150,000 jobs lost in this sector by October of this year. Although this is a small number relative to the total labor force, another hundred thousand jobs would have made the difference for calculations such as whether the year-over-year employment growth was positive or negative as of

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Wave 4 Theory Intact

Mish’s Elliott Wave Watch: following the course of a wave 4 bounce within the context of a larger move down, which will resume as wave 5, continuing down further. 

Wave 4 Theory Intact as Market Shrugs Off Bad News

Courtesy of Mish

The "wave 4 theory" is alive and fine. Here is the chart from December 8th Bullish Looking Charts: S&P 500, Nasdaq, BKX describing possible targets for Wave 4. 

$SPX – S&P 500 Daily Chart

click here for a sharper image

In Elliott Wave terms we are looking for a "wave [4]" bounce. The short term implications are bullish with possible retrace targets of 1008 for a 38.2% retrace or 1090 for a 50% retrace of "wave [3]". The long term implications are rather nasty. Our "Wave [5]" target back down is approximately 600.

Please see S&P 500 Crash Count for more details.Fibonacci numbers in nature

The S&P 500 closed today at 931, shrugging off a lot of bad news in its wake. There is no point to redraw the chart, just make a mental note we are one step closer to the Fibonacci target of 1008.

Market Shrugs Off Another Wave Of Bad News

Here are a few headlines.

US Manufacturing Orders at 60 Year Low, China Contracts 5th Straight Month

Manufacturing is contracting in the US, Eurozone, Russia and China. The Institute for Supply Management’s factory index [Manufacturing ISM] fell to 32.4, below economists’ forecasts and the lowest level since 1980, from 36.2 the prior month. Readings less than 50 signal contraction. The group’s new-orders measure reached the lowest level on record and prices slid the most since 1949.

Visteon plans pay cut, shorter work week

Visteon Corp. will cut pay by 20 percent for about 2,000 salaried employees as the employees transition into a four-day work week beginning Monday.

Two thousand employees at Visteon’s Van Buren Township offices and 50 workers at its testing center in Plymouth will be affected by the move, spokesman Jim Fisher said Friday. The action comes as Visteon is in the process of eliminating 800 salaried jobs globally.

"This is a way to reduce our operating costs while eliminating layoffs," Fisher said. "We realize this is a hardship for our workforce," Fisher said. "We have told our employees

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History of VaR

Stock Jockey reviews a NY Times article Risk Mismanagement, discussing Value at Risk (VaR).  

History Of VaR (JP Morgan Strikes Again)

Courtesy of StockJockey at 1440 Wall Street

The quants from JP Morgan have (inadvertently?) done more to ruin Wall Street than anyone, perhaps, more than Bernie Madoff. But JP Morgan was not a lone gunman.

The recent autopsy performed on AIG revealed that for all the sophisticated modeling, the jokers running the company’s Financial Products division did not take into account the ramifications of losing AIG’s AAA credit rating – a downgrade would require them to post more collateral on CDS contracts they had written, and the end was brutal, and swift.

I have often seen smart people do dumb things on the Street, and the over-reliance on Value at Risk models was certainly one of them. A little common sense on Wall Street can go a long way; too bad it is underappreciated.

I have been largely underwhelmed with Joe Nocera’s work but he earns a gold star for his historical account in the New York Times of VaR models – another debacle in many ways similar to the CDS nightmare.

VaR isn’t one model but rather a group of related models that share a mathematical framework. In its most common form, it measures the boundaries of risk in a portfolio over short durations, assuming a “normal” market. For instance, if you have $50 million of weekly VaR, that means that over the course of the next week, there is a 99 percent chance that your portfolio won’t lose more than $50 million. That portfolio could consist of equities, bonds, derivatives or all of the above; one reason VaR became so popular is that it is the only commonly used risk measure that can be applied to just about any asset class. And it takes into account a head-spinning variety of variables, including diversification, leverage and volatility, that make up the kind of market risk that traders and firms face every day. NYT

Yes, like credit default swaps it is all good, in theory, but the models ultimately failed many who relied on them. Goldman Sachs used common sense in working with VaR models, but was well aware of their limitations.…
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THE WEEK THAT WAS 12/29/2008-1/2/2008

-“Volatility is lower evidenced by the VIX in the mid 40s.  The chart indicates the same with narrowing of the bollinger bands and the formation of a symmetrical triangle.  Volume has been extremely low for the most part due to the [...]


Zero Hedge

Americans' Economic Hope Has Collapsed

Courtesy of ZeroHedge. View original post here.

Which came first, the confidence or the stock market rally?

One thing is for sure, the crash in stocks in December has crushed the hope of Americans that their economic future is going to be better under President Trump.

Overall confidence dipped to 58.1 - a 4-month low, but, U.S. consumers this month were the most downbeat on the economy since November 2016, a third straight drop after expectations reached a 16-year high just three months earlier, as the partial government shutdown wears on toward a fourth week.


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Kimble Charting Solutions

Triple Breakout Test In Play For S&P 500!

Courtesy of Chris Kimble.

Is the rally of late about to run out of steam or is a major breakout about to take place in the S&P 500? What happens at current prices should go a long way in determining this question.

This chart looks at the equal weight S&P 500 ETF (RSP) on a daily basis over the past 15-months.

The rally from the lows on Christmas Eve has RSP testing the top of a newly formed falling channel while testing the underneath side of the 2018 trading range and its falling 50-day moving average at (1).

At this time RPS is facing a triple resistance test. Wil...

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Phil's Favorites

Brexit deal flops, Theresa May survives -- so what happens now?


Brexit deal flops, Theresa May survives -- so what happens now?

Courtesy of Victoria Honeyman, University of Leeds

As the clock ticks down to March 29 2019, all of the political manoeuvring, negotiating, arguing and fighting is coming to a peak. In the two and a half years since the 2016 EU referendum, views on both sides have hardened and agreement still seems as far away as it was the day after the referendum.

With Theresa May’s withdrawal agreement disliked by all sides, and voted down by an unprecedented majority in the House of Commons, everyone is wondering what can and should be done next?


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Digital Currencies

Crypto-Bubble: Will Bitcoin Bottom In February Or Has It Already?

Courtesy of Michelle Jones via

The new year has been relatively good for the price of bitcoin after a spectacular collapse of the cryptocurrency bubble in 2018. It’s up notably since the middle of December and traded around the psychological level of $4,000... so is this a sign that the crypto market is about to recover?

Of course, it depends on who you ask, but one analyst discovered a pattern which might point to a bottom next month.

A year after the cryptocurrency bubble popped


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D.E. Shaw Investment Calls For Leadership Change At EQT

By ActivistInsight. Originally published at ValueWalk.

Elliott Management has offered to acquire QEP Resources for approximately $2.1 billion, contending the oil and gas explorer’s turnaround efforts have done little to lift the company’s share price. The company responded and said that a thorough review of the proposition is imperative in order to properly act in the best interests of shareholders, “taking into account the company’s other alternatives and current market conditions.” The news came only a month after Travelport Worldwide agreed to sell itself to Siris Capital Group and Elliott’s private equity arm Evergreen Coast Capital for $4.4 billion in cash and two months after Athenahealth was bought by Veritas and Evergreen for $5.7 bi...

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Insider Scoop

UBS Says Disney's Streaming Ambition Gives It A 'New Hope'

Courtesy of Benzinga.

Related DIS Despite Some Risks, Analysts Still Expecting Double Digit Growth From Communications Services In Q4 ... more from Insider

Chart School

Weekly Market Recap Jan 13, 2019

Courtesy of Blain.

In last week’s recap we asked:  “Has the Fed solved all the market’s problems in 1 speech?”

Thus far the market says yes!  As Guns n Roses preached – all we need is a little “patience”.  Four up days followed by a nominal down day Friday had the market following it’s normal pattern the past nearly 30 years – jumping whenever the Federal Reserve hints (or essentially says outright) it is here for the markets.   And in case you missed it the prior Friday, Chairman Powell came back out Thursday to reiterate the news – so…so… so… patient!

Fed Chairman Jerome Powell reinforced that message Thursday during a discussion at the Economic Club of Washington where he said that the central bank will be “fle...

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Members' Corner

Why Trump Can't Learn


Bill Eddy (lawyer, therapist, author) predicted Trump's chaotic presidency based on his high-conflict personality, which was evident years ago. This post, written in 2017, references a prescient article Bill wrote before Trump even became president, 5 Reasons Trump Can’t Learn. ~ Ilene 

Why Trump Can’t Learn

Donald Trump by Gage Skidmore (...

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Opening Pandora's Box: Gene editing and its consequences

Reminder: We are available to chat with Members, comments are found below each post.


Opening Pandora's Box: Gene editing and its consequences

Bacteriophage viruses infecting bacterial cells , Bacterial viruses. from

Courtesy of John Bergeron, McGill University

Today, the scientific community is aghast at the prospect of gene editing to create “designer” humans. Gene editing may be of greater consequence than climate change, or even the consequences of unleashing the energy of the atom.


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Mapping The Market

Trump: "I Won't Be Here" When It Blows Up

By Jean-Luc

Maybe we should simply try him for treason right now:

Trump on Coming Debt Crisis: ‘I Won’t Be Here’ When It Blows Up

The president thinks the balancing of the nation’s books is going to, ultimately, be a future president’s problem.

By Asawin Suebsaeng and Lachlan Markay, Daily Beast

The friction came to a head in early 2017 when senior officials offered Trump charts and graphics laying out the numbers and showing a “hockey stick” spike in the nationa...

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Swing trading portfolio - week of September 11th, 2017

Reminder: OpTrader is available to chat with Members, comments are found below each post.


This post is for all our live virtual trade ideas and daily comments. Please click on "comments" below to follow our live discussion. All of our current  trades are listed in the spreadsheet below, with entry price (1/2 in and All in), and exit prices (1/3 out, 2/3 out, and All out).

We also indicate our stop, which is most of the time the "5 day moving average". All trades, unless indicated, are front-month ATM options. 

Please feel free to participate in the discussion and ask any questions you might have about this virtual portfolio, by clicking on the "comments" link right below.

To learn more about the swing trading virtual portfolio (strategy, performance, FAQ, etc.), please click here ...

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Free eBook - "My Top Strategies for 2017"



Here's a free ebook for you to check out! 

Phil has a chapter in a newly-released eBook that we think you’ll enjoy.

In My Top Strategies for 2017, Phil's chapter is Secret Santa’s Inflation Hedges for 2017.

This chapter isn’t about risk or leverage. Phil present a few smart, practical ideas you can use as a hedge against inflation as well as hedging strategies designed to assist you in staying ahead of the markets.

Some other great content in this free eBook includes:


·       How 2017 Will Affect Oil, the US Dollar and the European Union


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About Phil:

Philip R. Davis is a founder Phil's Stock World, a stock and options trading site that teaches the art of options trading to newcomers and devises advanced strategies for expert traders...

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About Ilene:

Ilene is editor and affiliate program coordinator for PSW. She manages the site market shadows, archives, more. Contact Ilene to learn about our affiliate and content sharing programs.

Market Shadows >>