FSU Editorial: "Outlook For Week October 23" by Stephen Tetreault 10/23/2007

OUTLOOK FOR WEEK OCTOBER 23
by Stephen Tetreault
October 23, 2007

As I stated in my analysis for the week of 10/08 I was expecting an assault on the old highs and even a possibility of making relative NEW-Highs, which is exactly what we saw happen! I am still expecting that another exhaustion top is/has formed and I am till expecting an abrupt reversal according to my Turn-Time forecast...we as we have entered the enterer the inflection period....and it pointing toward a HUGE-MEGA inflection period ahead, and the window is tightening as we get nearer to the potential turn period @ (10-4 to 10-11 ) and according to my wave analysis we have multiple Tsunami waves converging and a major Inflection & Fibonacci collision possibility hitting the overall markets within this window and since we have been in a bullish-up-trend, this should be the start of a significant corrective wave/period....I am looking for what we call a BULL-TRAP to play out on Monday/Tuesday of this week we could easily giddiness in the markets as we tested and pushed through into NEW-HIGHS as new-monies flowed-into the new-quarter, than before the bulls know it they get trapped in the slaughter-yard, and the markets are pulled out below them! In my opinion the potential for significant profit taking this week is huge possibility. The propensity to take profits should be huge....Funds can always get back in when the clouds darkening the landscape dissipate.

We could see some additional bearishness (could be significant) as we ended the week on a very-sour-note, and Monday's action could be dependent on the over-night futures...often we see these directional players who creep in around 0330-0430 in the morning�I'll be watching the Asian and Euro markets and looking to see if they follow through and reverse their prior bearish tonality along with any signs of a continued bullish induced by timely-orchestrated large-cap upgrades crude futures will also provide some insight.

Please, remember when in doubt CASH is king. I am expecting some extreme volatility and many tradable bounces and drops in the near future ....in the hours/days ahead I am of the opinion that the bulls and bears will start to wage a significant bloody battle for control of the market, and if the bulls can somehow find the fuel (money/liquidity) they could push the bullish tonality higher and potentially retest the old relative highs as they will get a boost from a potential short-squeeze if triggered as well.

Are we destined to repeat History!!!

I have written many times in the past several weeks about the potential for a crash-like scenario (yes I know that I have been early) but I have seen many unsettling similarities between the 1987 stock market meltdown and today, including a weak greenback, surging commodity prices and a protracted bull market that appears to be wearing very thin. That market also fell sharply on the Friday preceding the infamous Black Monday�so please take heed my friends. Also disturbing was the fact that there were frantic scenes in the last hour of trading, as traders on the floor of the NYSE fell over one another to place sell orders in all of America's biggest liquid firms as the fear-emotion took hold.

Please remember it was 20 years ago to the day, that the stock market took a massive nose dive and the historic crash of 1987 began. Lets reflect back in time on the T-Waves Time machine�.according to my records on Friday, October 16th, 1987, the Dow dropped 108.36 points, or a 4.60% drop for the day. Back then many traders went home to their loved ones, a hot meal, and they pondered their next move and what tone/position they would take when the markets opened ton Monday.

When the markets reopened for trading on October 19,1987, the tone was clear most traders, fund-managers and institutional money managers, decided that they wanted to book profits and head for the exits and as such the herd dumped their positions as fast as they could. On that historic Monday, the Dow gapped down 82.57 points, on the open, then the proverbial rats thinking the ship was afire and sinking, started to panic and they were scrambling for any exit they could find, the selling pressure was very strong, and it only intensified as the trading day progressed, as many thought doomsday was upon them and this was judgment day. The Dow bleed red through out the day and when arteries began to burst the panic set in and the herd panicked for the doors, they were selling everything they could and this was evident as at one point in the secession the Dow had dropped 569.18 points intraday to 1,677.55, this was a whopping 25% below the previous Friday's close, and the losses were mounting�right before the close there was a slight mini-bounce as dip-buyers emerged which propped the Dow up a tad into the close�.and after the hours of carnage the Dow settled out the day at 1,738.74.

Unfortunately the herd was till in extreme panic mode the next morning as they bleed the indexes down to the intraday low of 1,616.21, a sell-off on Tuesday of an additional 122.53 points, or a whopping 7.04% before a rebound into the close (due to a rescue effort by big-banks) brought in buyers and an ebrupt end to the crash and they were successful in repelling the sellers as they managed to reverse the tonality and the Dow rose into the close to finish out the secession at 1,841.01 (100-points above the previous close).

Right before the great crash of 1987 we saw the formation of what we call an Hindenburg Omen Greenspam had only been on the job a short period of time crude was soaring, the dollar was under pressure and we had a President who was finishing out his second term, and we were embroiled in the �07� year of what is called a Decennial pattern.

Now are there any similarities present between then and now? This Friday the clock turned over to October 19th, 2007 the 20-year anniversary of the big-crash we saw the Dow drop strongly into the close Dow fell-off a cliff as traders started to panic and they sold very-hard into the close into another (options expiration Friday) the Dow plunged a huge 366.94 points, or 2.64%. We have seen several new Hindenburg Omen�s enter the scene our fed-head-chief is relatively new, crude is soaring the greenback is plunging off a cliff?

Will Monday be a repeat of Black-Monday�or will the Plunge Protection-Team arrive (like underdog to the rescue of miss molly pure-bread)�.remember that until this great-crash was undertaken we did not have a Plunge Protection Team as we do today as this manipulative group of SOB�s was born out of this crash. Its simple if the PPT arrives on Monday look for a small dip then a massive rocket-ride relief rally; as unless they (PPT) step in we could/should experience continued waves of selling, as my cycle-wave-analysis is pointing toward further downside there are several Elliott Wave counts pointing to further selling and several other indicators suggest more selling could/should hit markets over the coming secessions especially if panic sets in.

At a bear-minimum the markets may be in for further volatility this week ( we are light on economic data) except for the release of existing-home sales on Wednesday, 10:00am (expectations are for a reading of 5.3-million down form last months reading of 5.5-reading) then the following day we get the NEW-Home sales data (expectations are for a reading of 785,000 down form last months reading of 795,000-reading).

Friday's sell-off was also fueled in part by a growing perception that corporate earnings, which have expanded at double-digit rates for most of the five-year bull market, may be weakening significantly. And as such a wide spread assumption that profits would bounce back after a weak third quarter is yielding to fears that earnings could drop sharply. These economic fears prompted many investors to sell stocks and buy Treasury bonds for their perceived safety. We saw further pressure against the dollar, with the euro rising to a record $1.4318 against the greenback and the global dollar index hit fresh new-historic lows amid concerns that the worsening housing slump will lead to an exodus of foreign investors (see funds-flows of foreign investors section below)

From my volume analysis it appeared that no-one wanted to own stocks, as the buyers disappeared; and with thoughts of a Black-Monday almost everybody sold into the weekend�The overall concern for the financial and credit markets has taken over�and now many folks (my readers were made aware of these contagions many months ago) realized that these third-quarter earnings haven't been what was promised and hyped. After returning and doing my analysis on Friday it's got pretty ugly. Let's face it a company like Caterpillar should be a poster child for global growth and reap huge benefits from the weak dollar, hence their warning needed to be heeded and it surely spooked the markets. It should make a logical person question they incessant global growth scenario.

The helicopter man also sent shivers into the markets as Fed-head Bernanke warned on Thursday that "considerable strains remain" in the financial markets. He cited that risks in the housing market "housing weakness might spill over to other parts of the economy". He left no doubt that the FOMC is now seriously worried about the severity of the downturn. "Intuition suggests that stronger action by the central bank may be warranted to prevent particularly costly outcomes," he said.

On word of caution to my bear-friends�. when too many bears get short, especially new-bear-cubs; as evident by a high short interest ratio and high put/call ratio which has indicated that way too many people are getting ready for a market melt-down and this is just the type of situation that the plunge protection team like best as this type of excessive over-leaning toward one side of the market can set up for a very-strong short-covering rallies.

A HUGE underreported Contagion....liquidity flows for our markets

On Tuesday we saw that capital flows to the U.S. dropped off dramatically in August, falling by $163 billion, according to our Treasury Department. The monthly number includes the change in banks' dollar-denominated liabilities, which made up most of the loss. Those liabilities plummeted by $111.4 billion in August, basically a mega reversal after gaining $40.9 billion during the month of July. It is worth noting that this monthly loss is the largest since March 2001.

at the same time, investors bought $21 billion in Treasury bills in August.

Net foreign purchases of long-term U.S. securities fell by $34.9 billion in August, the lowest level since April 1994. After drilling into the numbers I see that the massive negative swing in net foreign purchases of U.S. securities was the direct consequence of mounting pressures in the U.S. credit markets, and I believe we will see more contagions heading forward as this is just the tip of the iceberg in my opinion the top 15-20% and we have a lot more pain to uncover. We saw that investors dumped U.S. equities and Treasury bonds in particular.

As Private investors unloaded $39 billion in equities, while official institutions like central banks sold $29.7 billion in Treasury bonds and notes, according to the data. By contrast, private investors found U.S. stocks much more to their liking during July, snapping up $18.4 billion worth of stocks. Holdings of Treasury securities by Japan and China, which have steadily risen month after month, dropped off in August, according to the data.

Japanese holdings fell to $585.6 billion in August, down from $610.4 billion a month earlier. Chinese holdings, meanwhile, dropped to $400.2 billion from $409 billion. Meanwhile U.S. residents bought a whopping $34.5 billion of long-term foreign securities in August, up from just $5.5 billion a month earlier.

Its simple folks as I believe this malaise and selling was affected by the massive decline in our precious greenback that has been surfaced in Bernanke's bail-out of Wall-Street brokerage firms and banks as we have seen that our dollar versus its rivals in September was hit very hard as this will surely mean a continued weak demand for all types of U.S. bonds.

On the 20th anniversary of Wall Street's worst one-day market crash, the indexes were bloodied as the overall confidence that produced record highs just 10 days ago gave way to revived economic worries/concerns tied to housing troubles and a stubborn credit crunch. With all the looming contagions facing the markets these days credit growing scarcer, oil near a record $90 a barrel, home prices in the dumps the stock indexes took it on the chin as this week's negative bias continued due to negative uncertainties growing within the credit/subprime-slime arena along with a few significant earnings disappointments from the likes of (C, WB, CAT, MMM, SNDK, HON, SLB) which significantly applied the selling pressure on Friday. Whether it was merely a coincidence or sort of a self-serving prophecy or what many might call a psychological factor for the markets, Friday marked the 20th anniversary of the October 1987 crash when the Dow dropped 508 points on that day (it only lost 366.94 points this Friday), The Nasdog lost 74.15 points and the SPX dropped a staggering 39.45 points on Friday. The decline on Friday was very broad based across the board with the Energy sector the weakest link, as many beloved stocks took huge haircuts the XLe dropped 4.74%, while the OIH dropped 6.2%; these are huge moves in the once favorite sector. Also posting substantial declines were Disk Drive sector as it was smacked down by 4.4%, the Semiconductor sector lost 4.3%, while the Brokerage sector lost 3.7%. the markets also rolled over on Friday as our once strong dollar has been allowed to be crucified, and taken out to the proverbial woodshed for a whipping. We also saw on Friday some skittish comments from several large U.S. companies as they provided downbeat assessments of their business prospects, prompting investors to discard the notion that, despite signs of economic weakness in this country, the large-blue-chip global firms could stay healthy by continuing to sell their goods to fast-growing emerging markets overseas.

Caterpillar a large exporter of earthmovers and other heavy equipment reported lower-than-expected earnings and they reduced their 2007 profit forecast. They also talked of a recession in the U.S., with the company's finance chief putting the odds of one in 2008 at "50-50." This certainly is not very bullish now is it? This earnings announcement surely calls into question the highly hyped global growth story now doesn't it and I believe it sent shock waves to investors who viewed Caterpillar as an oasis in the storm.

Schlumberger was also taken apart on Friday as they stated that its third quarter net income rose 35% to $1.35 billion, or $1.09 a share, from $999.8 million, or $0.81 a share, from a year ago. Analysts had been expecting the firm to post earnings per share of $1.07 a share, so this should have been great-news but when the rest of the story was told we saw that. Sales rose to $5.93 billion, from $5.64 billion a year ago. Schlumberger said that their growth in the third quarter was driven by international markets particularly Latin America, Russia, China and Indonesia. "Global demand for oil remains strong while non-OPEC production continues to disappoint, they stated

I was still amazed on Friday to see how many talking-buttheads that were being pranced about on bubblevision were so darn bullish ( heck it defies sensibility and logic) but nevertheless the bullish tonality ( even after the steep sell off on Friday) remains very strong as most of these so-called gurus have not wavered at all on their very-bullish projections that we are only in a minor retracement and that the share prices will rise significantly again after firms finish report their earning. It's very important to understand that there are still a lot more people who are in the bullish camp than bearish camp, and they are of the mentality that this pullbacks will create an great opportunity to buy (a buy the dips mentality).

While they are some worried about the economy heading toward what they believe will be a mild recession at best (they still believe in a fed-head soft goldilocks landing), they are still very energized by the potential for better than normal growth for U.S. firms especially those who play in the global markets. Most of these analysts and fund-managers still believe that many firms have had their most challenging quarter in over five years, but they have placed this behind themselves and they have large cash stockpiles ( war chests) and they are incessantly buying back stock; not to mention those with international exposure which will be able to take advantage of growth outside the United States. Most analysts do not expect the credit/debt turmoil to bleed over into the overall economy and send massive shockwaves throughout out the financial sectors. Recently we saw that the debt markets took a beating as (lenders, banks brokerage-firms) were hit with an ugly stick after defaults in subprime mortgages triggered a global loathing to risk aversion, hence they became very reluctant to lend monies with out asking for and receiving extra risk-premiums.

They also substantiate their bullishness by stating that these appears to be little reduction at best in consumer spending in the face of higher energy and food prices, and that when the highly anticipated 10/31 fed-head meeting delivers another 25/50 basis point rate cut consumers will be aided even further!

Dick & Jane Doe might not be very bullish (especially in light of Friday�s selling-event) as money-managers, hedge funds and many institution-money-managers are because there's almost a universal feeling that you can't allow the bull-train to leave the station with-out you. So I believe that many will look at the recent pull back as a decent buying opportunity (especially for those who missed the bull-train that departed in August) for stocks that they now believe as oversold and will again start their assent into the heavens.

Let's reflect on this week�s earnings parade of the 124 companies that reported throughout the week, we saw that 67 beat the street estimates and 51 failed to do so this is a bit off of last years bullish-press as 75 beat last year and 39 failed to live up to expectations. The largest drag on the SPX has been the banking industry along with brokerage firms tagging right behind, the banking industry accounts for about 19-20% of the overall index. But, for the most part, traders and investors had expected soft earnings from this sector; I still find it hard to believe that they saw the huge massive write-downs and impairment charges hitting the bottom line because of their excessive overleveraged exposure to the credit/subprime markets. This week I saw comments from S&P�s

Howard Silverblatt, their senior index analyst, stated that he still expects next year that we will see the return of the double-digit profit growth; and investors hung on every word; they are acutely watching/listening to the earnings announcements and guidance that CEO/CFOs regurgitate in order to determine how significantly that they may have been impacted by the credit/debt problems and are these contagions bleeding through to the overall economy. Currently expectations for the fourth quarter have been ratcheted down significantly now as new earnings guidance emerge, we see what will happen to crude prices and the spending habits of the consumer. We could also see some volatility around the Fed-head October meeting (10/31).

I thought this was very-interesting.....Wal-Mart Stores Inc. on Thursday said it cut prices on 15,000 items this week, a 20% increase from its cuts last year do they foresee some perilous time ahead for consumers? Some of the markdowns, which Wal-Mart refers to as "rollbacks" the price cuts come after they slashed prices earlier this month on a host of toys. Wal-Mart said additional discounts on electronics, home merchandise, food, and toys will be announced "in the days to come."

As many of my trading-friends in our Diamond-Group are aware (I went sHORt-Crude, when the front-month spot contract traded to $89.25, with the Feb-08 contract by utilizing PUTS�so I have shin in this game) This week we saw that black-gold�crude oil futures retreated after hitting $90.00 a barrel for the first time (in the overnight market) as continued weakness due to our government sacrificing our greenback also amid worries about supplies helped drive prices higher. We saw that the November light-crude contract peaked at $90.02 a barrel before slipping back to end down $0.87 at $88.60�.it still gained a whopping 6% plus on the week, a stellar rally ( last 5-weeks we have seen pull-backs on Fridays a trend worth watching).

Our greenback slipped close to the all-time low it set against the euro on Thursday; as the Euro closed at $1.437, and it finally broke through the $1.43 barrier. This was due primarily to continued fears over supply disruptions regarding crude ( Iraq/Turkey spat), also the news of a bomb attack against former Pakistani PM Benazir Bhutto, which reportedly left at least 130-140 people dead, added to upward pressure on crude.

Crude prices have been surging this week but the volumes have been very light, suggesting that buyers are pushing prices higher in an anemically volume less momentum trade with relative impunity as so many bears have been bloodied these past weeks/months attempting to short-crude ( I hope I'm not one of them) hence there are not too many willing shorts out there, and the bulls have been in control with a hugely crowded trade. I must confess I am a contrarian-trader but according to the talking butt-heads they see little impetus on the near-term black-gold horizon that will alter the strong-bullish bias towards buying all the dips in crude thusly driving these bloated prices even higher. We saw conflicting views on Friday (I of course side with MS)

On Friday Boone Pickens stated on CBNC that he believes strongly that we'll see $100 oil before we see $80
Morgan Stanley stated crude oil "likely to come down sharply" has "overshot fundamentals"

Among a series of possibilities/probabilities that could spark a reversal in crude prices would a be an unleveraging of the massive futures bullish ( speculative) bias position (profit taking) by Goldman especially as well as the other major brokerage firms as they have pressed their positions to the max ( especially from the August reversal/retracement); the other brokerage houses have also participated in this massive-leveraged play ( on what I believe was insider information about the dollar being allowed to free-fall). We could also see what I believe is some necessary jawboning about increasing quotas from OPEC. We could also see a major sell-off in U.S. equities which would of course drag down commodity price. We could see some relief in the geopolitical tensions in the middle-east which would strip away the so-call fear-premium as the current fundamentals do not warrant in my opinion such high valuations (I think that we have $13.00-$16.00 in speculative premium), the market seems to have a mind of its own at this stage, and only something seismic could force prices down significantly.

The American Petroleum Institute on Wednesday reported a increase of 4.4 million barrels in crude supplies this past week to 320.5 million barrels (not a very-bullish development). That compares with data from the Energy Department which reported an increase of 1.8 million barrels to 321.9 million barrels. The API data also indicated that gasoline inventories fell 3.0 million barrels to 198.3 million barrels, while the Energy Department data showed gasoline inventories rose by 2.8 million barrels to 195.8 million barrels.

Where is the next contagion�.proverbial shoe to drop?

On Monday we saw that deep concerns that the markets may not yet have priced in the continued credit crunch due too news that several of the world's biggest banks are setting up a multi-billion dollar fund in an attempt to prevent potentially toxic mortgage securities poisoning the wider financial markets (this is a manipulated smoke screen as they are still masking off sheet balance activities). According to reports, Citigroup, Bank of America and JP Morgan are prepared to offer credit guarantees worth 100-115-billion to the ponzi scheme, (my words) which would buy up assets (mostly held by large banks and brokerage houses in off of their balance sheets; reminds me of enron accounting) that are backed by mortgages. This process is called the Single-Master Liquidity Enhancement Conduit (SMLEC). The fund, is in my opinion a master-manipulated bail-out instrument for the financial sector, in a response to the US sub-prime crisis and its impact on the global economy (not of course due to stupid lending practices and greed).

This plan by the largest manipulative US banks to create a special fund to help guarantee liquidity in the commercial paper markets (is in my opinion a direct bail out, and our government is of course involved) we saw on Monday that the markets were disenchanted as its backers in our government said the proposal is a temporary step to help markets get back on their feet.

The move by Bank of America, J.P. Morgan Chase & Co. (JPM) and Citigroup is designed to restart demand in credit markets by buying troubled assets in exchange for new short-term debt. The fund could be up and running within 90 days, according to a statement issued by Bank of America (BAC). People familiar with the matter said the fund will be worth as much as $75-100 billion and that it won't buy subprime loans.

The manipulative Paulson Treasury Department welcomed the move on Monday morning, (I wonder how Goldman benefits from this move). "The joint efforts of domestic and international financial institutions, broker-dealers and investors have resulted in a potential structure to improve liquidity in the asset-backed commercial-paper markets," the Treasury department communicated in a statement. "This proposal will complement other solutions investors and asset managers may utilize in committing and deploying capital to support more efficient markets."

Its really hard to determine at this juncture what kind of impact this fund will have since details including who will participate besides the big three banks haven't been announced; nor have all the details of this bail-out been announced or all of undisclosed off-balance sheet SIV issues be disclosed (a potential Enron or not). From what I have read the fund will buy assets held by so-called structured investment vehicles. These SIVs are kept off banks' balance sheets, making it difficult for investors to gauge their related financial risks. There is a looming FEAR that a water-shed a fire sale of such assets could spark a broader credit crunch that could derail our so called stellar economy. Unloading the assets to the banks would enable sellers to meet pending redemptions and facilitate rollovers (and this is not a bailout?).

"The goal here is to help the markets start to work" Robert Steel, the Treasury's deputy undersecretary stated. "This is a temporary solution in order to transition the market on to more sound footing." This type of maneuver reminds me of the fund-instrument that is similar to the vehicle created to deal with the savings-and-loan meltdown of the 1980s. It is gauged to re-establish confidence in the commercial paper market, which continues to be unsettled; but I do not believe this will work!

This establishment of this fund is giving the markets something to talk about and speculate about; and from my vantage point its creates more uncertainty; as instead of reassuring investors, this plan in my opinion could and will ignite fresh worries/concerns about losses not yet reported {this fund brings to light that there are way too many off-balance-sheet-transactions and this type of disclosure just clouds the situation} when its difficult to measure and quantify the possible toll the credit crunch could take on the economy; the path of least resistance is to book profits. Adding to the uncertainty, former Fed-head Chairman Greenspam stated that the banks' effort might backfire by further undermining confidence. I truly believe that this is really a wake-up call that maybe this is are a lot more serious contagions to the banking sector than many people thought.

The Philly Fed index slipped to 6.8 in October from 10.9 in September. The new orders index fell sharply to 2.7 from 15.1. The current shipments index fell to negative 4.1, dropping below zero for the first time in year, indicating that shipments declined in early October. The details of the report were particularly worrisome, for me as to how they correlate to the economy as the data points to further weakness in manufacturing activity in the current quarter. On a bright-side; manufacturing firms were more optimistic about the near term, with the future activity index rose to its highest level in three years.

On the negative side Price pressures grew in early October. The prices-paid index rose to 40.3 from 23.1. The prices-received index rose to 12.4, the highest since March, indicating that manufacturers were more successful in receiving higher prices.

Growth in the New York manufacturing sector was widespread in October, a "substantial" improvement from September, according to the New York Federal Reserve Bank. The Empire state index rose to 28.8 vs. 14.7 in September. " Conditions for New York manufacturers improved substantially in October," the New York Fed report indicated. The diffusion index measures sentiment at manufacturing firms, with readings over zero indicating that more firms say conditions are better. The index is seen as a mundane predictor of national manufacturing activity. The new orders index rose to 25.0 from 13.6, while the shipments index rebounded to 28.6 from 5.1. The prices-paid index (inflationary gauge) was basically unchanged at 36.1, while the prices-received index rose to 15.1 from 11.7, the highest since January. While the employment index rose, and the average workweek index reached its highest level in more than a year (I find this hard to believe with the huge head-cuts at the brokerage firms and banks). Manufacturers expect business conditions to remain favorable; the future index increased to 50.6.

Is there really a Liquidity/Credit crisis or is it purely hype?

U.S. banks had borrowed a mere $10 million from the Federal Reserve's discount window as of Wednesday the Fed stated indicating that borrowing from the Fed remains a very rare development. On Wednesday, outstanding primary credit borrowing from the Fed (also known as the discount window) totaled $10 million, down from $40 million this past week and extremely far below the $7.2 billion borrowed 9/12. In mid-August, the Fed announced new procedures for their discount-window borrowing in an attempt to encourage banks to use the Fed to supply Liquidity to illiquid credit markets. Credit markets, outside of the mortgage market, have improved somewhat since August but have not normalized in terms of yield spreads. On Thursday the Fed also stated that the level of asset-backed commercial paper fell for a tenth straight week, indicating the mortgage market is still crummy.

The level of outstanding asset-backed commercial paper fell by $11 billion, or 1.2%, to $888.3 billion in the week ending 9/17, the Federal Reserve reported. Asset-backed paper has fallen for 10 straight weeks, dropping by $295 billion, or a whopping 25%. This decline in the market has squeezed mortgage lenders of their financing.

Global financial system out of intensive care, if we are to believe this pro forma report

The highly manipulative and secretive IMF (remember these are the money controllers of the world where the real power resides; jMHO) stated on Tuesday that the global financial system is out of intensive care, but they went on to state that it will months before it's back on its feet. A cloud of uncertainty hangs over the balance sheets of many of the most important financial institutions because of their off-balance sheet activity (They are covering up their buddy�s soiled foot-prints in my opinion). They stated that greater transparency would go a long way to restoring confidence, said Jaime Caruana, the director of the IMF's capital markets division. Caruana said the IMF needs more details about the special fund announced Monday by big U.S. banks to keep the debt crisis from worsening.

Another GREAT-HOUSING Report

I'm kidding of course�.we saw that home builders grew even more pessimistic in October, as many were embroiled in a crummy tightening credit environment, and extreme over abundant supply of homes for sale and crumbling prices�a near-perfect storm! The housing market index fell to a record low of 18 in Octob er from the reading of 20 in September, according to the National Association of Home Builders. It's the lowest reading in the index since its inception in 1985.

The troubles in the housing market have spread to the financial markets and now represent the greatest threat to the U.S. economy, Treasury Secretary Henry Paulson said Tuesday. (See story below). It's clear to me that has we head forward consumer spending will slow significantly further as a result of the higher cost of credit, food, gasoline, energy, and other commodities and other life sustaining stuffs!

Despite special sales incentives, it appears that many buyers are either holding out for even better deals or hesitating due to concerns about negative and confusing media reports on home values to delay purchases in order to possible get better, home values are down 3.9% in the past year in 20 cities covered by the Case-Shiller home price index.

All three components of the home builder�s index hit record lows in October. Sentiment fell in 3 out of 4 regions with builders in the West were the least optimistic. Builders in the Midwest, who had been the most pessimistic, grew slightly more cheerful in October. At 18, the gauge indicates that about 1 out of 6 builders said business conditions are good.

Individual builders have reported large decreases in new orders and a surge in cancellations, particularly in the past two months as standards for nonprime mortgage credit have tightened. For example, D.R. Horton (DHI) reported Tuesday that sales fell 39% from a year ago, and that 48% of new orders in the quarter were cancelled.

August, sales of new homes were down 21% in the past year and 43% from the peak. Those figures are likely overstated significantly, because they do not account for rising cancellation rates. Builders have unfortunately for them and their bottom lines, significantly reduced production of homes, but more new supply is coming onto the market each day (through foreclosures).

The index of current sales fell to a record low 18 from 20. The old record low was 19 in January 1991.
The index of traffic of prospective buyers fell to 15 from 17. The old record low was 16 in December 1990.
The home builders' index has been falling for more than two years from a peak of 72 in June 2005. After a short rebound in the first months of the year, the index has fallen by 20 points since February.

Paulson�s attempt to address the very-weak housing situation

Where the hell has he been during the past several years�.his old firm Goldman was one of the primary lecherous greedy SOB that was a primary subprime/slime promoter and CDO promoter: Nevertheless Treasury Secretary Henry Paulson said Tuesday that our housing crunch appears likely to continue to impact the economy and capital markets "for some time yet." He had the audacity to now refer to the crumbling housing-market "the most significant current risk to our economy," his firm and other brokerage houses and banks were the primary ponzi-scheme manipulators and creators of what I call ridiculous credit/debt instruments. He went on to outline several steps to prop up the market going forward, including loan modifications and an overhaul of the mortgage regulatory system (what a joke these ideas will not even mitigate the contagions at all in my opinion).

He stated that "The ongoing housing correction is not ending as quickly as it might have appeared late last year. He went on to say that �And it now looks like it will continue to adversely impact our economy, our capital markets and many homeowners for some time yet." These statements should have really spooked the markets!

"Let me be clear," Paulson said, "despite strong economic fundamentals, the housing decline is still unfolding. ... The longer home prices remain stagnant or fall, the greater the penalty to our future economic growth." He late to the party remarks (hell the horse is already out of the coral) reflect consistent concern and growing uncertainty in the markets, with consumers, over the state of the housing market, particularly the subprime markets, often where those borrows with less than stellar credit go to work into their first homes.

He stated that current trends suggest there will be just over one million foreclosure starts this year, with 620,000 of those in the subprime segment. He boss �Bush� has rejected a bailout of homeowners, however; but they are more than pleased to bail out the brokerage firms and banks.

He avoided the recession word altogether ( Hell these are the classic textbook leading-recessionary-indicators/signals leading up to a classic recession, break out your old economic text books) I emphatically contend that the crummy housing guidance and future outlook will be once of the main contributors leading to an U.S. recession that in my opinion will be far worse than most understand. I have written before that I sincerely believe that we're headed towards the inevitable recession, that will be significantly worse than most expect thanks to our dismal home environment and when we couple this with the slowdown in job creation (not to mention the lack of quality jobs) and the soaring crude, gasoline, food, healthcare prices to mention a few; this deflating mortgage and housing bubble meltdown will be far worse than many on bubblevision, Washington and the average American can fathom!

Crumbling Greenback a major contagion

For the past 5-6 years the global economy has sailed along, allowing meetings of the Group of Seven finance ministers (the real pompous controllers of the world economy) and central bank governors (the primary hyping, manipulative forces behind the large banks and brokerage houses) to take place in relative obscurity. But with the current financial market turmoil due primarily to excessive greed and idiotic lending practices and the crumbling U.S. greenback could place this group under the spot-light where they hate to be, the G7 will again be thrust into the spotlight this Friday as ministers have their closed-door meeting in Washington (no cameras, minutes or public allowed; sounds like Cheney�s meetings). After that, officials will remain in Washington for the weekend annual meetings of the International Monetary Fund and World Bank (boy they sure do have a lot of monetary influences now don't they).

The Financial markets are counting on the G7 ministers to support the rebuilding of confidence in international financial markets after August's financial turmoil. Additionally these markets are also counting on officials to coordinate efforts to keep the U.S. dollar's decline on a gradual path (no thought of supporting it, just to mitigate the drop�s intensity, as we debase our currency).

Our dollar has been declining since 2002; against a basket of 26 currencies, the dollar is down 23% since February 2002 (right after the Bush administration started their manipulated energy policy maneuvers) as since commodities especially crude is pegged to the dollar, energy company earnings were inflated, along with repatriated earnings, is this just a coincidence?). The recent financial market turmoil has stirred fears that the dollar's fall could turn into a significant-massive selling event.

Since the very aggressive surprise Fed-head rate cut (bail out action for wall-street) on 9/18, the dollar's decline has accelerated, dropping another 2.3% against the basket of currencies.

I expect that the bull-crap G7 statement released after the meeting will stress "excess volatility" is undesirable and that exchange rates should reflect fundamentals calling for increased flexibility for China and other Asian forex markets. But I seriously doubt that any reference to a stronger dollar will be inferred. I don't think we'll see any major new developments in terms of an agreement on currencies.

To usher in any changes in G7 communication language, the U.S. and the Japanese have to sign on and they are not likely to sign on a statement that points a finger at a weak dollar and a weak yen now are they as both currencies are extremely manipulated. The bottom line is that the lowest common denominator that everyone could agree upon is that the Chinese yuan needs to be higher.

This problem of our greenback and our ballooning trade imbalance has been around for a long time. Simply put, our currency has been sacrificed buy our political leaders so their buddies (HAL, XOM, CVX, COP FCX, AA etc.) can reap huge gains/profits due to commodities surging as they are pegged to the dollar; also our great country has (as many consumers have been duped into this path) been living beyond its means, consuming more that it is producing. Our pro forma current account deficit has ballooned to over $800 billion in 2006 or more than 6.2% of GDP. And the we are now the world's largest creditor nation by leaps and bounds�as a result, not only does the United States now need in excess of $2.7 billion a day in external financing, but we also needs the rest of the world to continuously add to its already outsized dollar asset holdings to support our consumption and their exports. This is an accident (train-wreck) waiting for a place to happen!

Our fed-heads also support a weak dollar, imagine that�.A gradual decline in the dollar is "least worst way for us to adjust to the imbalances we have in the global economy," said Robert McTeer, the former president of the Dallas Fed.

The real contagion is that a sharp downturn in the dollar could have drastic consequences for our already weakened economy; and no one seems to care! Any sign that foreign investors are reluctant to acquire and hold our crappy financial assets could lead to an accelerated weakening of the greenback. And a plunging dollar would make it all but impossible for the Fed-heads to manipulate interest rates lower to support and bail out their buddies on wall-street or to achieve their pro-forma smoke and mirrors dual mandate of promoting satisfactory economic growth and keeping inflation in check. A weaker dollar should have fueled inflationary pressures already (not yet visible) through rising import prices.

I believe we are already seeing the negative ramifications of a weak dollar as we have seen some backing up of long-term U.S. interest rates as foreigners exit from the market (we just better pray that the exit gradually). This could/would help to cripple the housing market and create a further meltdown in our economy�.

The dollar's decline has been met with avoidance (blanket-sound bites that we support a strong dollar) from the Bush administration and the Federal Reserve; and there has been no deviation by Paulson from the mantra that the he supports a strong dollar. Meanwhile many European leaders are clearly agitated by the drop in our greenback as many are now of the belief that they are bearing the brunt of the dollar's decline.

Jean-Claude Trichet, president of the European Central Bank, stated this past week that he was paying "great attention" to American statements in support of a "strong dollar." As many Asian countries, especially China, continue to essentially peg their currencies to the dollar, the exchange rate has fallen against floating-rate currencies, such as the euro, the Canadian dollar and a few others; not a positive for their economic health at all.

Many talking-buttheads have stated that the weakening greenback is an important part of their forecast for our economy to avoid a recession from the recent financial market turmoil (I just do not get it, convoluted logic) nevertheless they empathically expound that a weaker dollar supports U.S. exports and of course negatively impacts European exporters. European central-bankers and manufactures who continue to press us to take action to stem the dollar's mega-drop are oblivious to the fact that, even were they were inclined to do something there is little that the Fed-heads can direct do to support the dollar at the time that the housing market is crumbling at such a fast rate.

This is a major contagion, not to mention a disaster!

An estimated 1.8-2.1 million Americans will lose their homes over the next 12-14 months when adjustable rate mortgages (ARMs) reset; this is very-disturbing, as it will without a doubt negatively-impact our economy. The resetting of adjustable rate mortgages will clearly spread the carnage and deepen the contagions already experienced on the sub-prime market to the better off homebuyers, who purchased houses beyond their means by taking out mortgages with low initial rates that reset to higher rates at a later time�and so many will need to pay-the-proverbial-piper very-soon. The peak month for the resetting of mortgages this cycle will come this October November, when more than $129 billion in mortgages will readjust and switch to a new higher rates for the first time. In total, interest rates on $1.4 trillion worth of home mortgages or 14% of the nation's standing mortgages will reset for the first time in the coming 12+ months�and so many homeowners will not be able to meet the increased payments. Adjustable rate mortgages sold within past two years are set to affect housing market as rates shift and home prices increase; more than $50 billion in mortgages will shift to new rate for first time in October; and these levels will remain at $38-40 billion monthly through September 2008; homebuyers who took advantage of subprime loans may now be in danger of losing their homes With this coming tsunami wave of adjustable-rate mortgage resets, foreclosures, and actual MBS defaults, we continue to believe we are far from the bottom of this sub-prime/Alt-A debacle.

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Stephen Tetreault
T-Waves
Southern Maine, USA
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