SUBPRIME TIME BOMB

Subprime Time Bomb
With HSBC and New Century Financial suffering losses from subprime borrowers, which other mortgage lenders face an unpleasant reckoning?
by Maya Roney
As investors swallowed negative news from two of the biggest players in the subprime mortgage market on Feb. 8, the "housing bottom" question took a backseat to a new debate: Who will get crushed in the subprime shakeout, and who will emerge unscathed?
The market started showing more signs of subprime jitters when HSBC Finance, the Prospect Heights (Ill.)-based consumer lending unit of British banking giant HSBC Holdings (HBC) said it was setting aside 20% more than analysts had estimated for bad loans in 2006 because of weakening in the U.S. mortgage business. Shares of the bank were off 3% early afternoon on Feb. 8.
More bad news came from Irvine (Calif.)-based lender New Century Financial (NEW). New Century, the second-largest subprime mortgage originator in the U.S., announced it would restate results for the first three quarters of 2006 to correct accounting errors related to loan repurchase losses, sending the stock down 30% on Feb. 8. The company expects to see a loss for the fourth quarter of 2006 due to early payment defaults.
Defaults Aren't the Whole Story
Shares of other big mortgage players, Countrywide Financial (CFC) and Washington Mutual (WM), were down more than 2% on Feb. 8. Smaller subprime lenders were hit even harder: Kansas City (Mo.)-based Novastar Financial (NFI) shares fell 13%, and San Diego-based Accredited Home Lenders Holding (LEND) dropped 7%.
As investors become more aware of the problems with subprime loans, lenders that focus on customers with poor credit histories will have to face the music. But it may be for different reasons than people think.
"Just because some subprimers are bad doesn't mean all are," says Stuart Plesser, a mortgage lender and insurer analyst for Standard & Poor's Equity Research. "Countrywide will suffer because they are going to face a pricing issue." Plesser has a "sell" rating on Countrywide, the No. 1 mortgage originator and fourth largest subprime mortgage originator in the U.S., according to National Mortgage News.
Many mortgage lenders, including Countrywide and New Century, sell their loans to banks and investors that are attracted to the high interest rates they carry. HSBC got into subprime during the U.S. housing market boom, but when the market began to cool and foreclosure trends accelerated, the bank found itself in trouble. Washington Mutual, another big player in the subprime market, said in January that its mortgage business lost $122 million in the fourth quarter thanks entirely to losses in its subprime segment.
Price Competition
"This is the leitmotif of this whole thing: These people don't really know what they are doing in mortgage banking," says Plesser. "They are writing whatever loans just to write loans, thinking they will worry about it later. But now it's later."
Regular lenders also suffer when banks get into their territory. Companies like Countrywide have been forced to price loans lower since investment banks started buying up subprime loans and pricing them aggressively. Banks assumed they were covered from potential losses by the revenue streams from their myriad other businesses.
Despite the headwinds, lenders like Countrywide, which only has 10% of its business in subprime production, could weather the housing slump better than nearly pure subprime companies, like New Century and Novastar.
"Countrywide is diversified and will start picking it up when everyone goes out of business," says Piper Jaffray analyst Bob Napoli, who has a "buy" rating on the stock. Napoli also says Accredited, though a pure subprime company, could also "get to the other side."
Diversified Against Danger
As for New Century, Napoli says that although the earnings restatement came as a surprise, he has been looking for an ugly fourth quarter from a company that "grew way too fast for their infrastructure." Still, the analyst has a "market perform" rating on New Century shares, which he says are "not yet a certain sell."
Several other analysts downgraded New Century to "sell" on the news Feb. 8, including Kenneth Bruce of Merrill Lynch (MER). "In short, we think New Century will shift to survival mode, putting shareholders at further risk," the analyst wrote in a report.
Diversification will also be the key factor in keeping banks afloat in 2007. That may be why Bear Stearns (BSC) wasn't afraid to buy the subprime loan business last October of another Irvine-based lender, ECC Capital (ECR).
"Because they are so big and [Bear Sterns has] so many businesses, it doesn't go straight to their bottom line," says Plesser. By 2008, the analyst expects many of the big banks to unload their subprime portfolios and leave the business to the regular lenders.
Let That Be a Lesson
Even if banks decide to stick with their subprime segments, HSBC's profit warning and New Century's restatement may prevent other banks from getting into it in the future. Despite the profit warning, Standard & Poor's Ratings Services affirmed its "AA" long-term and "A1" short-term credit ratings on HSBC Holdings on Feb. 8 and said the outlook for the company remains positive. "The positive outlook reflects the potential for HSBC's diversification to generate very strong group performance even when some business lines are performing weakly," wrote credit analyst Michelle Brennan.
"They are going to look really stupid for making these acquisitions," says Napoli. "Things like this remind people that it's not an easy business."
Click here to see the U.S. cities with the highest foreclosure rates. (newsweek)

TIME TO LOOK AT TAIWAN?

*(click to enlarge chart)

MA'S rising nicely, but IMHO looks like EWT might be taking a little breather as it has on way up as my TA suggests good chance that has begun. If I decide to nibble, I will wait at least until indicators turn up as shown before.

D

20 YEAR DOW CHART

INTC READY TO BLOW?

THE NEXT MELTDOWN

TIME MAG LINK

ALARM SOUNDED BY MAJOR INVESTMENT BANK

GLOBAL LIQUIDITY CRUNCH?

NEW LOW FOR COPPER

We have new lows for copper (in BEAR MKT IMHO) we have had inverted yield curve for an extended period of time, near collapse of housing mkt, near exhaustion of cash out refi's, all of which point to some kind of economic slowdown or Recession, but none in sight? strange very strange.

Dow and Transports now in synch with new highs (9 months after Trannies first made new high w/o Dow) the NAZ 50% below previous 2000 bubble highs is LAGGING badly, even after CSCO earnings hype.

Several of my trusted subs say NO NEW HIGH IN SIGHT, uptrend should continue for "at least 4 more months".hmmmmmm

As prices rise, we need to see buying demand diminish, selling pressure must rise, new highs vs new lows must fall.

I see even now a VERY SELECTIVE rally, it hs been called a "stock pickers market".

VIX (volatility index) extremely LOW, no one buying put protection.

I am looking for interest rates to rise (10 yr) above 5%, will be initial sign of trouble IMHO.

Weren't a slew of mortgages supposed to rise this year in payments?

Early year money pump is right on schedule propping things up.

Bullish is year after mid term elections historical bullsihness.

I would abandon WEAK performers in favor of strong stocks in the strong sectors, if you feel you must be IN. IMHO

When was the LAST serious correction?

D

"ON THE WINGS OF A BUTTERFLY"

In honor of my father's passing on Monday Jan 29th at 82 years old, I love you dad and will miss you terribly, this poem is also for anyone who has lost someone.


ON THE WINGS OF A BUTTERFLY, I AM FREE
I AM FREE OF THE WORLD’S TROUBLES
I AM FREE TO FLY ABOVE ALL THE WORRIES
I AM FREE TO LEAVE THIS WORLD AND ENTER
A NEW ONE

A NEW WOLRD FREE OF STRIFE AND TURMOIL
FREE OF HATE AND INJUSTICE
FREE OF CRIME AND INPATIENCE
FREE OF THE HANDS OF TIME

ON THE WINGS OF A BUTTERFLY, I AM FREE
I AM FREE TO GO WHERE I WANT
I AM FREE OF ALL PAIN
I AM LIGHT AS A FEATHER AND HAVE NO WORRIES
ON THE WINGS OF A BUTTERFLY

I HAVE ONLY ONE REGRET IN LEAVING THIS WORLD
AND THAT IS THAT I CANNOT BE WITH YOU ANYMORE
YOU HAVE BROUGHT ME SO MUCH JOY IN MY LIFE
I HOPE YOU KNOW HOW MUCH I LOVED YOU

ON THE WINGS OF A BUTTERFLY I AM FREE,
BUT I CANNOT HAVE YOU
BUT WHAT I DO HAVE, AS DO YOU IS A LIFETIME OF MEMORIES
OF HAPPY TIMES AND OF LOVE AND JOY

I KNOW WHAT WE MEANT TO EACH OTHER
THE SADNESS AND EMPTYNESS WILL LIFT
ON THE WINGS OF A BUTTERFLY I AM LIFTED FROM MY SORROW
AND AM UPLIFTED WHEN I THINK OF YOU, OUR LIFE TOGETHER

YOU WILL BE THAT BUTTERFLY SOMEDAY,
AND I AM SURE WE WILL MEET AGAIN
HIGH ABOVE THE WORLD
WITHOUT A CARE, IN TOTAL PEACE
AND TOGETHER AGAIN.

NEW LOW

(Personal Savings Rate for 2006 Tumbles to Negative 1 Percent, the Lowest Level in 74 Years. ) I'm sure you saw this , but all is good? Hard to think of embarking on NEW ERA with this stat?
http://biz.yahoo.com/ap/070201/economy.html?.v=15

SWIMMING IN LIQUIDITY?

http://www.contraryinvestor.com/mo.htm

CREDIT BUBBLE BULLETIN

http://prudentbear.com/articles/show/298 This is an EYE OPENER, the liquidity splurge that began at he 2002/3 lows is alive and well. It MUST continue to expand or die.

At some point it will end, when it does, there will be a worldwide implosion of historic proportions as equal to its expansion.

D

Prudent Article

http://www.prudentbear.com/articles/show/299

Short term volatility does not mean uptrend is over, just getting more selective. When it does dry up I think we will have making of important top.

Year after mid-term elections tend to be jiggy, so we'll see. I like my MM return for now for safe stash, ride trends with a little.

Commercials upping shorts on gold, no weakness yet. Watch interest rates, bonds getting oversold IMHO due for rebound of sorts, see if 4.% holds any retreat, seem headed for 5%

D

CHINA RISING

http://www.msnbc.msn.com/id/7693580/site/newsweek/page/2/

HIJACKED DEMOCRACY by THE FAT CATS

http://www.pbs.org/wgbh/pages/frontline/darkside/ I KNOW the facts, the LIES, the DECEIT, this show laid it all out. and now our boys pay the price with blood.

Democracy has been hijacked, and we're getting jacked up! And now against Congress and the wishes of the American public, BVush sends 20,000 more troops to Iraq.

D

FORD POSTS WORST LOST IN HISTORY

http://news.yahoo.com/s/ap/20070125/ap_on_bi_ge/earns_ford HOLY &%!!@ over $12 B !!

Did you know the CHinese are now NET EXPORTERS of commodities? GOLD and copper were flying as they were net importers, is commodity bull over?

D

AFRAID OF AMERICANS

http://youtube.com/watch?v=wniGFm_jgRI

OIL USAGE DROPS IN 2006

SeekingAlpha
Reflecting On 2006: Oil Usage Dropped in Developed NationsWednesday January 24, 5:35 am ET
Neal Dikeman submits : Thank you to the millions that used less oil in 2006. For the first time in 20 years, the International Energy Agency shows that oil consumption in the 30 member countries of the Organization for Economic Cooperation and Development fell 0.6% in 2006. The drop was slight, but most encouraging to all who seek energy independence, averting a climate crisis and healing an economy “addicted to oil.”

Yes, global oil demand did grow in 2006, but only by 0.9% in 2006, compared to 3.9% growth in 2004 and 1.5% in 2005. Oil demand may be moderating for a number of reasons, including these:
1. When oil prices rose, demand shifted to more energy efficiency.2. Some vehicles have become more fuel efficient by reducing vehicle weight, air and road resistance, and by using hybrid technology.3. Less heating oil was needed due to global warming.4. The Kyoto Protocol is starting to work.5. Biofuels are increasingly used to substitute for fuels refined from oil.6. Clean distributed energy and more reliable grids reduced the usage of diesel generators, propane and butane.7. The ratio of people living in cities increased relative to suburbs. Oil demand per person is less in cities due to effective public transit and closer proximity of home and work. The U.N. forecasts that 80% of people will live in cities by 2050.8. More people are riding together by car pooling and using public transit.9. Trucks and buses are reducing the wasteful idling that keeps engines running up to 40% more than is necessary. Use of auxiliary power units are increasing.10. People spend more time working and shopping at home using broadband Internet services.
Neal Dikeman commented on the OECD drop, “That really is huge news. Supply and demand economics does work after all, despite what some people may think. Historically, new supply discoveries drove price declines (in the first half of the century). Since OPEC however, supply shocks and constraints have driven major price increases, and overestimated demand / negative demand shocks have driven declines.” Mr. Dikeman is a merchant banker, originally from Houston, Texas, and now a partner with Jane Capital.
Moderation of oil usage is timely. Next week, the first phase of the Intergovernmental Panel on Climate Change will be released. This will be a major update from the respected 2001 report that involved hundreds of leading scientists globally. "The smoking gun is definitely lying on the table as we speak," said top U.S. climate scientist Jerry Mahlman, who reviewed all 1,600 pages of the first segment of a giant four-part report. "The evidence ... is compelling." (See CNN Report.)
As the oil reduction numbers are analyzed, a picture may emerge about how to continue our path to a brighter future. To all of you who conserved – Thank You!
Author John Addison will be coming out with his book, "Save Gas, Save the Planet" shortly

NEW PIMPCO

http://www2.pimco.com/pdf/GCB%20Focus%20FEB%2007_WEB.pdf

mirror move of last dec/jan

http://research.stlouisfed.org/publications/usfd/page3.pdf

OIL INVENTORIES

EnergyOil Tumbles After Inventory BuildBy Simon ConstableTheStreet.com Staff Reporter1/18/2007 3:47 PM ESTURL: http://www.thestreet.com/markets/energy/10333313.htmlUpdated from 2:14 p.m. EST
Oil prices fell again Thursday and neared the psychologically important $50 level following news of higher inventories in the U.S.
Front-month crude contracts closed down $1.76 to $50.48 a barrel on the New York Mercantile Exchange, and other key products in the energy space were lower, as well. Heating oil was down 3 cents at $1.47 a gallon, while gasoline was lower by 2 cents to $1.36 a gallon.
Natural gas was the one riser, gaining 9 cents to $6.32 per million British thermal units.
The decline in oil came after the Energy Information Administration said that stocks of crude oil grew 2.2% last week to 322 million barrels. Inventories of gasoline and distillate fuel oils also were up, the EIA said.
"It seems the world is flush with oil, especially relative to recent years," says Peter Rodriguez, professor of economics at the Darden Graduate School of Business Administration and an energy market watcher. "This is the opposite of what one would expect this time of year," he says, noting that warm weather had reduced demand for heating fuels in the Northern Hemisphere.
With inventories so high, Rodriguez expects crude prices to remain closer to $50 a barrel than $60 for the next several weeks. In turn, that should help keep a lid on consumer price inflation, he says.
The energy exchange-traded funds -- the U.S. Oil (USO) fund and the iPath Goldman Sachs Crude Oil Index (OIL) -- were both losing 2.2% in recent action.
Turning to the energy complex, Fortis Bank upped its stock price target on Range Resources (RRC) to $36 a share from $32 and reiterated a buy rating. The stock was recently down 0.5% at $27.62.
Elsewhere, RBC Capital Markets hit Whiting Petroleum (WLL) with a downgrade, cutting its rating on the stock to underperform from sector perform. Shares recently were down 75 cents, or 1.8%, at $41.60.
Among the major energy companies, Exxon Mobil (XOM) was losing 1.1%, while Royal Dutch Shell (RDS.A) was down a fraction.

BERNANKE SPEAKS

"If early and meaningful action is not taken, the U.S. economy could be seriously weakened," Bernanke said in testimony to the Senate Budget Committee.
It marked the Fed chief's most extensive comments to date on the challenges facing the United States with the looming retirement of 78 million baby boomers, the oldest of whom will start retiring next year.
This huge wave of retirees will hit the U.S. budget as well as the economy, he said.
Absent policy changes by Congress and the White House, rising budget deficits are likely in the years ahead to increase the amount of federal debt outstanding to unprecedented levels, Bernanke said.
That could propel interest rates for consumers and businesses upward, which would be a worrisome development, he said.
"Thus a vicious cycle may develop in which large deficits lead to rapid growth in debt and interest payments, which in turn adds to subsequent deficits," he said.

THIS IS POLITICAL SUICIDE, NO ONE WANTS TO DEAL WITH THE $TRILLIONS OF UNFUNDED LIABILITIES NEAR $70 TRILLION, THIS CAN'T BE PUT OFF FOREVER.

2007 mild? 2008 BAMM!!!

STOMP INDY!!!

CASH IS TRASH>>>?????

Recent Bill Auction Results

Per $100 CUSIP YIELD
28-DAY 01-11-2007 02-08-2007 4.800 4.885 99.626667 912795YS4
91-DAY 01-11-2007 04-12-2007 4.940 5.072 98.751278 912795ZB0

WHY RISK MONEY IN MARKET WITH 5% 90 day yields??????

D

NEWS ALERT

Bank of England surprise rate hike

NEWS ALERT

Bank of England surprise rate hike

CLEAR SKIES AHEAD or BRIDGE OVER TROUBLED WATER?

FABER SAYS CAUTION WARRANTED

Global Markets Face `Severe Correction,' Faber Says (Update3)
By Ian C. Sayson and Pimm Fox

Jan. 8 (Bloomberg) -- Marc Faber, who predicted the U.S. stock market crash in 1987, said global assets are poised for a ``severe correction'' and says it's time to sell.
``In the next few months, we could get a severe correction in all asset markets,'' Faber said in an interview with Bloomberg Television in New York. ``In a selling panic you should buy, but in the buying mania that we have now the wisest course of action is to liquidate.''
Faber, founder and managing director of Hong Kong-based Marc Faber Ltd., advised investors to buy gold in 2001, which has since more than doubled. His company manages about $300 million in assets.
The bullish outlook of traders in everything from bonds, equities and commodities to real estate and art suggests valuations are peaking, Faber said. Last year, the Morgan Stanley Capital International World Index of developed stock markets jumped 18 percent, while a survey of Wall Street's biggest bond- trading firms predicted U.S. Treasuries will post the best gains in five years during 2007.
``I am not a great buyer of assets now,'' Faber said. ``We may be in a situation where consumer-price inflation comes back and will have a negative impact on the valuation of assets.''
Faber, publisher of the Gloom, Boom & Doom Report, does have some favorites. Singapore and Vietnam are his top picks in Asia because stocks in Singapore aren't ``terribly expensive compared with interest rates'' in the city-state, while Vietnam's equities have ``incredible potential in the long run.''
Vietnam, Singapore
Vietnam's Ho Chi Minh Stock Index more than doubled last year and was Asia's best-performing benchmark. Singapore's Straits Times Index climbed 27 percent, beating a 15 percent increase in the Morgan Stanley Capital International Asia-Pacific Index.
So far in 2007, Vietnam's index has surged 10 percent, again leading gains in the region, and Singapore's is up 0.6 percent. The MSCI has dropped 1 percent.
Faber recommends investors steer clear of shares in the world's biggest developing economies after the emerging markets in 2006 outperformed their developed counterparts for a fifth straight year.
``Emerging markets could get kicked in the next three months so I'd be careful of buying Russian shares,'' Faber said. ``I'd also be careful of buying China and India shares now.''
Russia's dollar-denominated RTS Index surged 75 percent last year, while the Hang Seng China Enterprise Index, which tracks Hong Kong-listed shares of Chinese companies, jumped 94 percent. India's Sensex Index, which more than quadrupled in the past five years, is valued at 25 times estimated earnings.
Thailand, Japan
Faber also advises investors stay away from shares in Thailand, where he and his family are based. The nation's SET Index has been the world's worst-performing benchmark in the past month, sliding 15 percent as currency controls introduced by the central bank and bombs in Bangkok spooked investors.
``Valuations in Thailand are very inexpensive but I wouldn't buy tomorrow,'' said Faber. `` We have some political problems in Thailand right now. I'd wait for a couple of months.''
The SET is valued at 10 times estimated earnings, the lowest among 14 Asia-Pacific markets tracked by Bloomberg. MSCI's regional index is valued at 18 times.
On a more positive note, Japanese stocks may prove good bets this year, Faber said. The Nikkei 225 Stock Average climbed 6.9 percent in 2006 and the broader Topix index added 1.9 percent, the smallest gains among benchmarks for the world's 10 biggest markets.
Gold, Oil
In addition, the fund manager said gold should rally further on expectations that supply of the precious metal will decline and demand for it will increase to hedge against inflation. Gold climbed 23 percent last year, its sixth year of gains.
``The price of gold will continue to go up and probably very substantially,'' Faber said. ``In the long run, it's very clear that central banks are basically increasing the supply of money and the supply of gold is obviously very limited.''
Oil prices are also tipped to rise as political instability in the Middle East and other petroleum-producing areas threatens supply and global demand increases. Crude oil in New York added less than 0.1 percent to $61.05 a barrel in 2006, after tripling in the previous four years.
``Everyday the world is burning more oil than new reserves are added,'' Faber said. ``You wont see $12 dollars again'' for every barrel of oil. ``The trend is likely more to be upside because demand in Asia is going to double over time.''
To contact the reporter on this story: Ian C. Sayson in Manila at isayson@bloomberg.net and Pimm Fox in New York at at Pfox11@bloomberg.net

ADJUSTED MONETARY BASE CLICK FOR LINK.

level is DEAD ON JAN high, so NO growth since then. DEAD ON the lows from that peak.. WILL JAN look like 2006 with a meteoric VAULT? ANY further decline destroys a multi yr if not decade pattern of yr/yr higher highs!!!!

MARGIN DEBT LEVELS APPROACHING 2000 levels!!! 1,3 and 6 month/month RECORDS for increase.

THIS market is HIGHLY LEVEREDGED for GAINS!!!!!! as was or more so than in 2000 !!!

I say some kind of top appears first 2 weeks of JAN, then MIGHT pay off to be short term......short........will be very interesting going forward.

2007 is a year after mid term elections, known to be bullish.

D

HAVE A GREAT NEW YEARS

Look for Sat morning post

D

MULTIPLE BUBBLES FORMING

(from NPR this AM)
M and A activity, mostly PRIVATE EQUITY FIRMS!

8 of the 10 LARGEST deals ever were done in last few years and were private equity firms.

More and more of these are running after the same deals pushing up prices paid, HUGE multiples and premiums being paid saddling new companies with mountains of debt.

“the things that used to turn the economy/markets no longer do…” chances for defaults because of huge premiums is growing.

Money continues to FLOW into these private equity firms.

In some ways me bucko’s this is MUCH LARGER THAN 2000 action, it just isn’t seen as same as before meaning huge runups in penny stocks etc, the BUBBLE is in the MA activity and the higher multiples being paid, too MUCH money running after too few deals pushing prices paid up way beyond reasonable value.

Investors are complacent and comfortable with only blue skies seen ahead.

D

XMAS CHEER?

http://seattlepi.nwsource.com/business/297204_holiday26.html Holiday retail sales fall short of estimates, deeper discounts coming equal weaker profits from retailers.

SIGNS OF AN IMPENDING TOP

Transports very weak, sensitive to economic conditions. Have not confirmed new highs in the Dow.

Several FED indiactors showing contraction of economy.

DOA residential housing.

Democratic control of both houses means stagnation and less possibility of keeping or adding tax incentives.

Bull market long in tooth in cycle.

Peter Eliades points out MANY cycles predicting top between Jan0March period.

NAZ underperforming. Strength becoming more selective. Energy weak.

This may be a period where one would weed out weaker performers in portfolio, I may not be short just yet, but I am on defensive and not long. JMHO

D

FUEL CELLS NOT READY FOR PRIME TIME?

http://www.fool.com/investing/high-growth/2006/12/20/fuel-cell-falls-in.aspx?source=eptyholnk303100&logvisit=y&npu=y

DR COPPER SICKLY!!!! NOT A GOOD OMEN FOR ECONOMY

SATURDAY MORNING POST

REQUIRED READING
http://www.hussmanfunds.com/wmc/wmc061211.htm DR JOHN HUSSMAN
http://www.stockmarketcycles.com/current_observations.htm PETER ELIADES
http://www.safehaven.com/article-6516.htm JOHN MAULDIN
http://www.safehaven.com/article-6515.htm DOUG NOLAND
http://www.safehaven.com/article-6514.htm DR RICHEBACHER

Corrections are short and painless, advance decline line continues to advance, life appears good for the ongoing bull market. As this bull from 2002 lows has exceeded its previous highs, we can consider it a Secular trend, most cyclical bull markets were long since dead.

What has also helped the market is the comeback of the hated weak sister US DOLLAR, mostly because sentiment got too negative, once this works off, new lows are possible.

Interest rates are still LOW historically speaking, and money is easy to obtain, it is possible that the housing sector has temporarally stabilized as some buyers may be inticed to come back into market. Sellers still reluctant to lower prices aggresively, but in ost areas they have stopped going up or have come down slightly, 2nd chance buyers may appear.

HEAVY foreign investment money is still POURING in, money supply has begun to grow again http://research.stlouisfed.org/publications/usfd/page3.pdf but this years growth has been stunted.

Merger and acqusition activity has reached new extremes beyond even 2000 top, there is a LOT of money sloshing about.

Fund managers want extreme bonuses too, so year end performance should remain in bullish control. Early next year we could see some weakness, but not sure it will amount to much, yet.

This may be the first time in market history where a NEW BULL MARKET began near historic extreme valuations, valuations have come down because of record margins and profits also at record levels, but now SPX PE of 18 is getting pricey especially if profit gains slow or regress.

Everything returns to its norm sooner or later, that trip for the stock market will not be a pretty sight, from a BELOW 10 VIX (volatility) there is a TON of FEAR to feed on, but I must say a new BEAR MARKET is nowhere in sight.

A well diversified portfolio must be doing rather well, the question is, when the winds of change DO finally come, are you prepared to make changes?

Question marks, last bull market charge led all to new highs, near the end, the Transports began to fall onths ahead of final top in DOW, then NAZ in March. The SPX is still below its 2000 top, the NAZ 50% below. The Transports have not CONFIRMED the NEW HIGHS in the DOW, according to Dow Theory, these non confirmations have led to MAJOR MARKET TOPS!

So, I am watching the TRansports to see if they can rally to new highs with DOW, the NAZ? not gonna happen. However, the NAZ is VERY close to an area of HUGE resistance, of which a month ago I charted and pointed out if it could "get inside" this area, a SURGE on 100's of points should occur.

I also charted the double tops on Q's near $43.30 once broken could be riden long, a buy near $43.50 on a close above was there and use of $43.25 (just below breakout) would define a well controlled stop loss. We're about a dollar above that now.

FED meeting and OPEX Fri wnet with a whimper, bulls in control UNTIL SERIOUS SELLING PRESSURE arrives.

I will attempt to post every Sat, so check back until then take care

D

SUMMATION

http://stockcharts.com/charts/indices/McSumNASD.html

There is underlying weakness on the nazdaq IMHO, market may go higher, I feel within next 4-6 weeks a severe correction will be upon us.

That said, I cannot rule out Bull mkt continues, as adv/decline line is rising as does mkt.

D

The DR is in

SUICIDAL TRADE DEFICIT (gold-eagle.com)
Dr. Kurt Richebächer

On the surface, it seems that there are diametrically different views at work in the markets. While the rising bond prices and the falling commodity prices apparently suggest underlying distinct economic bearishness, the sudden surge in stock prices and persistent record-low credit spreads appear to reflect very optimistic expectations about the economy.
The turn in the bond market started in June with yields of 10-year Treasury notes at 5.25%. A decline to 4.7% generated a 5% return for investors within just three months. Annualized, this comes to a return of 20%. Take further into account that there is generally heavy leverage involved, multiplying this return between 10-20 times.
Considering further that this rate of decline of long-term rates has occurred against the backdrop of a firmly inverted yield curve, implying that expenses of carry trade exceed current yields, the strength of this move seems a bit surprising. The quick capital gains, though, have richly offset these interest expenses - for the time being. But to maintain these highly leveraged positions, it will need at least one of two things: either a further sharp fall in long-term rates providing new capital gains or rate cuts by the Fed reducing the costs of carry trade.
More surprising is the new bull run of the stock market in the face of an economic slowdown. Approaching recessions have always tended to depress stock markets in expectation of falling profits. Well, there is a tremendous difference between past and present experience.
Past recessions were all triggered by true monetary tightening, hitting both the economy and the markets. The current economic downturn is unfolding against the backdrop of unmitigated monetary looseness. While the Fed has raised credit costs from unusually low levels, it has done nothing to tighten credit. Its expansion has kept accelerating.
Credit demand has been running wild for consumption, housing and financial speculation. There is just one striking and ominous exception: Corporate credit demand for fixed investment remains zero. Corporations, too, have been borrowing heavily, but for mergers, acquisitions and stock buybacks, not for productive investment.
In 2005, nonfinancial corporations spent $136.8 billion less than their cash flow from retained profits and depreciations on capital expenditures. Simultaneously, they spent $363.6 billion on mergers, acquisitions and stock buybacks. Given their moderate cash surplus, one has to assume that the stock purchases were generally financed with borrowed money.
It is certainly reasonable to regard the strong trend of corporate stock purchases as an early negative indicator of investment intentions. Principally, there are two different ways for corporations to expand and to raise profits. One is the old-fashioned way of organic growth through creating new plant and equipment. The other is to purchase economic growth and higher earnings through mergers and acquisitions by going more deeply into debt.
What, then, has been happening more lately to mergers and acquisitions? In short, they have gone crazy. During the first quarter of 2006, they hit an amount of $558 billion at annual rate, and in the second quarter another $554.8 billion.
This compares with continuously weak capital investment. In the first quarter, it was $2.7 billion below cash flow, and in the second quarter, $43.2 billion above cash flow. There is an interesting comparison with the year 2000. Then, capital expenditures of nonfinancial corporations exceeded their cash flow by $310.8 billion, compared with net stock purchases of $118.2 billion.
We would say that these figures indicate a continuous, rather dramatic change in corporate policies of expansion away from new capital investment and toward "purchasing" growth and earnings. It started in the 1980s. It strongly intensified during the 1990s, and during the last few years has gone to extremes.
Stating this, we primarily have the long-term development in mind. But in the same vein, we are pondering what is going to happen to business investment in the short run, when consumer spending slows, or even slumps, in the wake of the bursting housing bubble. The generally highly optimistic expectations and forecasts about investment spending taking over from consumption as the driver of the economy greatly puzzle us.
To stress one important point, which appears to be generally overlooked: Some rise in capital spending is not enough. Given its much smaller share of GDP than consumer spending, it needs a very strong rise to offset even a minor decline in consumer spending.
While the markets seem to reflect highly conflicting views about the U.S. economy's outlook, we nevertheless presume one underlying common view, and that is the perception of very little risk of a possible recession because the Fed would, in any case, swiftly act to head off any gathering weakness. What matters from this perspective both in the bond and stock markets are impending rate cuts.
In essence, this is in line with the conventional thinking that the U.S. Great Depression of the 1930s, as well as Japan's prolonged malaise since the early 1990s, could have been avoided by prompter monetary easing. Whoever believes in this is entitled to be bullish both on stocks and bonds.
U.S. stock prices received their lift since June/July mainly from lower oil prices and lower long-term interest rates. To keep heading higher, it will now need sufficient earnings growth. After an unusually steep rise in profits during 2005, analysts are predicting more of the same. Our focus is on aggregate profits, as calculated and reported by the Bureau of Economic Analysis within the National Income and Product Accounts (NIPA).
The customary way of making forecasts of economic developments is to extrapolate the recent past. Profit growth in the United States during the last two years has been at its best for the whole postwar period. Profits of the nonfinancial sector in 2005 have jumped to $900.1 billion, from $584 billion in 2004 and $411.8 billion in 2003. These figures compare with a profit peak of $508.4 billion for the sector in 1997 and a profit low of $322.0 billion in 2001.
If you look at the profit development of U.S. corporations over the last 10 years, you will see that it is an awkward picture. Profits fared very poorly during the "New Paradigm" years of the late 1990s, presumably a time of excellent economic performance. No less astounding is their sudden steep rise in the course of 2005, from $624.2 billion in the fourth quarter of 2004 to $1,027.7 billion in the first quarter of 2006, happening while the economy distinctly slowed.
The irony is that after a strong rise during the first half of the 1990s, profits abruptly turned down during the "New Paradigm" years of the late 1990s. For six years, from the recession year 1991-97, the nonfinancial sector's profits had soared from $227.3 billion to $508.4 billion. As a percentage of GDP, these profits had risen from 3.8% to 4.9%.
While "New Paradigm" ballyhoo and stock prices flourished after 1997, business profits, as officially measured, suddenly slumped. As a percentage of GDP, they were a little higher at the height of the dot-com bubble than in the recession year 1991.
Coming to the recent recovery years, we must point to some irritating observations. On the surface, it looks like a fabulous profit development. From recession year 2001 to 2005, profits of businesses in the nonfinancial sector have more than tripled, from $322 billion to almost $1,100 billion. It was the best profit performance of all time.
However, this good-looking total consisted of two extremely different parts. It was in the first quarter of 2004 that profits exceeded their peak of 1997 for the first time. From there, they shot up almost vertically. Typically, it has been inverse that the very first years of recovery were best for profits.
21 November 2006
Dr Kurt Richebächerfor The Daily Reckoningwww.dailyreckoning.com
Editor's Note: Dr. Richebächer has found the best investments to protect your portfolio, no matter what lies ahead for us in 2007. See his full report here:
Wealth Insurancewww.isecureonline.com/Reports/RCH/ERCHG805

FOR NOW MARKET CHOOSES TO IGNORE

Home builders slam on the brakes

Housing starts hit six-year low while permits, a key sign of builder confidence, slide to the lowest since 1997.
By Chris Isidore, CNNMoney.com senior writer

November 17 2006: 1:04 PM EST
NEW YORK (CNNMoney.com) -- New housing starts sank to the lowest level in more than six years in October and a key measure of builders' confidence in the market hit a nine-year low, a government report showed Friday.
Both housing starts and applications for new building permits tumbled well below Wall Street forecasts - a sign that the slumping housing market has not yet hit bottom.
"Today's figures clearly reveal that a quick turnaround in this sector is not just around the corner," said Anthony Chan, chief economist for JPMorgan Chase Private Client Services. "Any real turnaround may not be forthcoming until the central bank reverses course and begins to lower short-term rates again."
Housing starts plunged nearly 15 percent to a seasonally adjusted annual rate of 1.49 million in October from a revised 1.74 million in September, according to the Census Bureau report. That was the lowest reading since July 2000.
The pace of single family housing starts in October was down nearly 32 percent from the year-ago period when the home building boom was still roaring forward.
Building permits, seen as a measure of builder confidence in the real estate market, fell to the their lowest pace since December 1997, coming in at 1.54 million, down from 1.64 million in September. Permits for single family homes are also off 32 percent from the year-ago levels.
Economists surveyed by Briefing.com forecast that starts would fall to an annual rate of 1.68 million and permits to 1.625 million.
"Housing starts reported this morning was a shocker," said Phillip Neuhart, an economist with Wachovia. "The South -- the strongest home building region during the recent housing boom -- had by far the weakest month of any."
In some ways the slowdown in starts and permits is a positive for the housing market, since it will reduce the inventory of homes on the market, which as been depressing prices for both new and existing homes. But Neuhart said as inventory-induced slowdown is likely to depress the gross domestic product, the broad measure of the nation's economic activity, throughout all of 2007.
"We do not see healthy inventory levels being reached until at least the second quarter of next year," he said.
Another sign of weakness in the housing market came when a realty tracking firm reported Friday that home foreclosures rose once again in October, climbing 42 percent from year-earlier levels.
Still, before Friday's report, there had been hopes from other recent real estate reports that perhaps the slump in home sales and home building had bottomed out.
The National Association of Home Builders' survey of builder confidence for November posted a modest increase for the second month, even though far more builders still saw the market as poor rather than good. And housing starts rose in September, although permits fell.
In addition, mortgage rates fell sharply this week, with the average 30-year fixed rate mortgage dropping to 6.24 percent from 6.33 percent a week earlier, according to mortgage financier Freddie Mac. Mortgage applications climbed to their highest level since January in the most recent weekly reading from the Mortgage Bankers Association.
But other reports have showed weakness in prices for both new and existing homes, as inventories of both types of homes available for sale climbed to record levels. And home builders have reported having to offer attractive deals to move homes they have completed.
Major home builders have been reporting lower earnings and cutting forecasts for future results due to the downturn in new home sales.
Pulte Home (Charts), the nation's largest home builder, became the latest to report a stepper-than expected drop in earnings earlier this week, and cut its outlook.
"You can count us among the companies that would like to see this be the beginning of a more stable operating environment," said Pulte CEO Richard Dugas, after he cited some of the hopeful signs of improvement in the housing market during his call with investors following Pulte's earnings report. "But for now we will wait for the trends to continue and to broaden before we conclude that the bottom is being reached."
He said that it was important that Pulte and other builders cut back on housing starts, especially so called "spec homes" that are begun without a sales contract in hand.
"There is no need for us to aggravate existing market difficulties by throwing unnecessary supply into the market," he said.
Other home buildings reporting problems reduced earnings and or sales outlooks include Centex (Charts), D.R. Horton (Charts), Lennar (Charts), K.B. Home (Charts) and Toll Brothers (Charts).
Builders to buyers: Take this house, please!
October foreclosures jump 42 percent

"HOW MANY STOCKS DOES IT TAKE TO MAKE A NEW DOW HIGH?"

http://news.goldseek.com/bullnotbull/1163692800.php

THE BULL ROMPS

Until the BEars stop trying to call the TOP, and IMHO until the CPC (put call ratio) takes a hard dive this rally can feed off the newbie dopes who might keep getting in front of it as it has feasted on the ones already run over.

When ALL have given into its hypnotic cry of riches and any stock can rise, obviously this is not the Titanic yet, it seems topsy, it seems unreal, it seems like it needs a breather, it keeps going up. The animal is loose when the techs lead the way, we might be in that phase now.

PPI shows almost deflationary drop, maybe market loved that, FED will soon cut? Can they? The YIELD CURVE says they MUST! 10 yr near 4.5% but 90 day money is near 5% ??!!! woweeee the shits upside down and being ignored.

ENERGY TRUSTS have been GORED by tax fears, even if not taking effect until 2011 !!!!

I am licking my chops to nibble, but it is always toughest when something is getting blown up, right ow maybe too hot to handle, I am charting the secrot now, but if OIL does not hold this area and falls below recent low range, they could be whollapped again.

Consumer spending falls for second straight month.

Housing stocks rumbled today? what happened to the bubble?? saying low rates here we come!

Well if bonds are soaring money not coming out of there, money also in stocks, liquidity floats all boats.

I could say when this party is over, the market of 2001-2003 will look tame, but I wont.

I am NOT short any more, even though my charts tell me a comeupins is NEAR, I mean what I see has held true last 5 years on my indidcators......but only once did the market NOT bottom in OCT, in last 10 years!!! well make that 2 now in over 10 years...it tricked us and bottomed in JUly.

I see where the NAZ has declined most years in Jan quarter, but these days, I dont know if I want to bet on it.

One lesson all must learn for sure, you can find ALL the fundamental reasons, and charts that say this ish ow IT SHOULD BE, but shoulda coulda dont make you money, not fighting the trend does.

Specialist short position just SKYROCKETED, I thought I'd throw that in.
http://tal.marketgauge.com/dvMGPro/Charts/Charts.asp?chart=SPCSRT It doesnt have to lead to a huge retrace, but it normally is good NOT to bet against these guys while they are at an extreme.

Money managers MUST run after performance, evryone is running to and running from.
http://research.stlouisfed.org/publications/usfd/page3.pdf I am concerned with this chart.

So have fun while the fun lasts, I have a sip, but I sure as hell am not staying long enough to get drunk. For I am at least of memory of 2001-2003 and know that NO BEAR MARKET has ended with the SPX PE ratio and DIVIDEND yields where they were in 2003 bottom.

We are in the stratosphere of performance historically, and sooner or later you revert to the mean.

I get the feeling at some point next year this might be visable, but then no year after MIdterms has evern been a disaster, and most quite good, more history for you....not a guarantee.

If Dem's go after BUsh, all bets are off and tax cuts, but we dont know just yet what 2007 holds, for all of us I hope promise, and no worse than muddle thru.

Trillions in mortages are set to go much higher in 2007, and could greatly effect consumer spending. Savings rate still negative.

Doug Noland from Prudent Bear

The explosion of Credit derivatives and top-rated corporate securities issuance is a Monetary Development of historic proportions. I have written about the “Moneyness of Credit” issue over the past few years, but never did I imagine it would come to this. Marketplace perceptions of safety and liquidity are today being grossly distorted on a scale – multi-trillions of securities from one corner of the world to another - that so overshadow the technology Bubble – that overshadow anything previously experienced in the history of finance.

Following in the footsteps of the technology derivatives Bubble, the mania in Credit “insurance” ensures a collapse. It today feeds a self-reinforcing boom, but when this cycle inevitably reverses, the scope of Credit losses will quickly overwhelm the thinly capitalized speculators that have been more than happy to book premiums directly to profits. Undoubtedly, an unfolding bust will find this “insurance” market in complete disarray. Much of the marketplace today expects that they will - when things begin to turn sour - either obtain Credit “insurance” or hedge/”reinsure” protection already written. But when much of the marketplace moves to offload Credit risk there will simply be no one to take the other side of the trade. As losses mount, the market will then face the harsh reality that minimal “insurance” reserves are actually available to make good on all the protection written. This will have a profoundly negative impact on both Credit Availability and marketplace liquidity – ruining the plans of many expecting – and requiring – that “money” always flow so freely.

A major problem with the current monetary boom – the “Moneyness of Credit Bubble” – is the enormous and widening gulf between the market's perception of safety and liquidity and the acute vulnerability of the actual underlying Credits. Runaway booms invariably destroy the “money” – in whatever form it takes – whose inflationary expansion was responsible for fueling the Bubble. This lesson should have been learned from the late-twenties experience, or various other fiascos as far back as John Law. When current perceptions change – when $ trillions of Credit instruments are reclassified and revalued as risky instruments as opposed to today’s coveted “money” – Dr. Bernanke will learn why a central bank’s monetary focus must be in restraining “money” and Credit excesses during the boom. And the longer this destabilizing period of transforming risky Credits into perceived “money” is allowed to run unchecked, the more impotent his little “mop-up” operations will appear in the face of widespread financial and economic dislocation – on a global scale.
http://www.prudentbear.com/archive_comm_article.asp?category=Credit+Bubble+Bulletin&content_idx=60232

SAT MORNING POST

Briefly, a mild pullback seems in order, but high beta NAZ issues are holding strong, but I do see multiple bearish divergences, at some point should come into play.

High volume selloff was not followed though Friday. Options expiration is Fri and MAX PAIN has Q's at $42 Area just above current price has been resistance, if broken price could run.

Commodities after brief pullback could be good place to be. Same for OIL.

LArge caps still outperforming, some newsletters calling for rally into 2007, top making data near non existant. Opinions dont matter, market action does.

Sometimes you need to be watching when good stuff gets battered AKA EBAY at $22 or YHOO at $23. HOT stock HANS been gored. Dem's in charge has some selling in big pharma.

I think a top of mega years in duration appears early 2007, but year after mid term elections decisively bullish, if still so, maybe the market holds together even longer than now expected. One thing is will consumers with Bush spanking and Dem's in charge have a giddy rise in Consumer Sentiment?

D

"SOME HEADS ARE GONNA ROLL?"

A Time For Accounting
Joseph L. Galloway
November 10, 2006
Joseph L. Galloway is former senior military correspondent for Knight Ridder newspapers, columnist for McClatchy Newspapers, and co-author of the national best-seller We Were Soldiers Once ... and Young. Readers may write to him at: P.O. Box 399, Bayside, Texas 78340; e-mail: jlgalloway2@cs.com.
Better late than never.
Secretary of Defense Donald H. Rumsfeld is gone, but there's little time for celebration, even for those of us who long ago began calling for his removal. The damage that men do lives after them, and it's time at last for an accounting. The nation’s voters have spoken, and it's reasonable to expect that the Congress finally will begin to exercise some oversight of the wars in Iraq and Afghanistan after five years of serving as rubber stamp and doormats.
Can you spell "subpoena?"
For the Democrats who will soon take charge of the House of Representatives and perhaps the Senate, too, here's a preliminary laundry list of some of the things that need doing:
A comprehensive investigation of the pre-war intelligence on Iraq and how it was perverted, how the mine was salted, and by whom.
A thorough investigation of what pre-war advice was offered by senior American military commanders on troop strength, equipment requirements and strategy and tactics. Did even one general ignore the bullying from on high and ask for more troops, and how did Defense Secretary Donald H. Rumsfeld respond?
Why did the Pentagon send American troops into battle without enough armored vests, armored vehicles, rifles, ammunition, food and water? Who's responsible for that debacle which cost so much in blood and money?
Where did our money go? Billions of dollars of taxpayer money disappeared down various rat holes in Iraq, forked over to contractors without even so much as a handwritten receipt. Who got the money? What did they do for it? This is a fertile field that can be drilled for years, with a steady stream of indictments, trials and prison sentences.
What about those no-bid Defense Department contracts that were parceled out to the Halliburtons and KBRs and Blackwaters in Iraq and Afghanistan, and other more costly weapons and equipment contracts that went to big defense industry conglomerates accustomed to writing very generous checks to the Republicans?
Why did an administration that was hell-bent on going to war, with the inevitable and terrible human casualties among our troops, consistently underfund the Veterans Administration, which is charged with caring for our wounded and disabled?
What's been the effect of the grotesque politicization of the selection and promotion system for senior military commanders by the office of the Secretary of Defense? What failures have resulted from that ill-conceived action? What responsibility do those generals and admirals chosen by Donald H. Rumsfeld bear for the failure to prepare for and conduct effective action against an inevitable Iraqi insurgency?
Who at the top bears responsibility for the torture and mistreatment of prisoners and detainees at Abu Ghraib prison and the Guantanamo detention camp? A score of Pentagon investigations got to the bottom of the chain of command but declared that the top, in Rumsfeld’s office and the White House, was innocent.
Who's responsible for breaking our understrength Army and Marine Corps with endless combat duty tours in Iraq and Afghanistan? Who refused all suggestions that the force was too small for the mission, and that 50,000 or 100,000 more men and women were needed in uniform? Who stubbornly refused even to consider the inevitable consequences of an Army so tied down trying to man these wars that it no longer could react to an emergency anywhere else in a dangerous world?
Simply put, the jig is up. President George W. Bush, Vice President Dick Cheney and Rumsfeld have come to the end of their free ride. No longer can they act without thought or ignore the boundaries of the Constitution, the law and common sense.
Did they really think they could get away with all of this without ever being called to answer to history and the American people?
They all deserve what's about to descend on their heads. They deserve every subpoena. They deserve every indictment. Most of all, they deserve a reserved place atop the ash heap of history.

VOLUME ALERT

NYSE traded close to 3 billion shares today on DECLINE, when a move is made on increasing volume it is to be taken seriously. Selling pressure picked up today that is for sure, why it did is for speculation.

I have reasoned that IF the Repub's and their inside cronies goosed the market by buying futures togive the party a lift, now seeing it was for naught, might sustain new buying as the reason to do so is no longer there.

The Q's were held right at their previous 52 wk high leaving a double top in place, it is very interesting how stocks and indexes act at important levels be they previous support now resistance or other way around. Its full meaning is for now unclear, but what is sure, is a pause was necessary.

Will this lead to a meaningful correction? SHOW ME I say, but if high volume continues on declines, be very cautious.

D

BUSH IS A SELLOUT

http://www.youtube.com/watch?v=IonpUlJluH8&NR SEND HIM A MESSAGE LOUD AND CLEAR, WE WILL ACCEPT NO MORE BULLSHIT AND GIVE UP NO MORE FREEDOMS, AND HEAR NO MORE LIES

D

SATURDAY MORNING POST "ELECTION DAY"

Bush is stumping on his Economic record and sending fears of tax hikes if Dem's gain control as only reason to vote R.

ENGLEWOOD, Colo. -
President Bush said Saturday his tax-cutting policies have created jobs and promoted growth, economic progress he contended is jeopardized by the prospect of Democratic victories on Election Day.

"Americans are finding jobs and they're taking home more pay. The main reason for our growing economy is that we cut taxes and left more money in the hands of families and workers and small business owners," the president said in his weekly radio address, delivered live from Mile High Coffee in suburban Denver.
Campaigning on the final weekend before Tuesday's vote, Bush told reporters just before the broadcast that he "feels good. It's quite a campaign coming down the stretch."
On the radio, he said Democrats consistently have opposed his tax cuts and they predicted the tax would not create jobs or increase wages and "would cause the federal deficit to explode."
"American workers and entrepreneurs have proved all those predictions wrong. But Democrats are still determined to raise taxes. And if they gain control of the Congress, they can do so without lifting a finger," said Bush, seated at table in the shop as patrons sipped coffee and snacked.

Bush's main tax cut was a cut in dividend tax rates in which the avg American gained very little, however the insiders and already rich in the higher tax brackets with much larger stock portfolio's have gained mightily.

Bush's policies have widened the gulf between the have's and the have not's. The avg American is falling deeper and deeper into debt.

ALL we have gotten from Bush policies is asset inflation and dollars fleeing this country to Asia. China now holds a record $1 trillion dollar of US debt, even more than Japan.

It takes 250,000 jobs a month just to keep up with those coming into work force. Yet last 2 months we have averaged less than 100,000 and unemployment rate drops dramatically?

Only once has the market rallied in OCT, now make it twice in 10 years. just a coincidence?

I think the short term health of the stock market will be determined by the outcome of the Tues election, if the Repulican's lose their grip I think the market will react badly, but you never know the Republican's might pull it off again, and then we see a SWIFT rise.

The markets recent mild pullback is telling us it doesn't know for sure how it will all come out, I do not expect much until we get Wednesdays reaction.

If you like the way things are going, if you support the war in Iraq, and don't mind losing some of your constitutional rights, vote R. If you think a STRONG message needs to be sent to the Republican majority and BUSH we don't agree with his policies and ignoring criminally the constitution......you know what to do


Duratek

The Brilliant Hans Sennholz "An Unstable Dollar Standard"

An Unstable Dollar Standard
We live in a period of world-wide economic expansion and prosperity. The world economy is said to grow this year at some five percent, which will be the third year above the historic average. Even if, in the coming year, the growth rate should decline a little, the global economy looks bright and prosperous. Led by some Asiatic countries, especially China and Japan, more countries than ever before are reporting rapid economic expansion.
But no matter how bright the economic outlook may be, the international prosperity is exposed to a looming risk, which has even grown in recent months. The war in Iraq and the skirmishes in Afghanistan are an ever-present danger that may destabilize the Middle East and spread the conflict to more countries. The Islamic republic of Iran, which does not hesitate to confront American interests and concerns, may upend the peace at any time. But the greatest concern of many economists is the global economic imbalance which is clearly visible in the huge balance-of-payments deficits of the United States and in the corresponding surpluses of the creditor countries. Americans are said to consume some 70 percent of the world’s savings while Japan, China, and other developing countries are financing the deficits and accumulating American IOUs. Many economists are convinced that such disproportions and imbalances are unsustainable in the long run.
Surely, American foreign debt has increased significantly, but so has individual income and wealth. Total domestic debt has risen visibly over the last decade, but so have productivity and income. This economic harmony nevertheless is burdened by considerable risk of global imbalances that may cause disruption and upheaval in the future. The debt-and-credit differences of the large national economies continue to grow, the balance-of-payment deficits of the United States surpass all national surpluses. In 2005 the deficits amounted to some $790 billion, which, in relation to gross national product, exceeded six percent. So far this year, it may exceed $800 billion, or 6.5 percent of GDP. Moreover, the federal government continues to suffer huge budget deficits which enlarge the national debt and add weight to the international concern.
The American mountain of debt is matched by large balance-of-payment surpluses in developing Asian countries, as well as by most oil-exporting countries. Many creditors welcome the surpluses. They keep the exchange rates of their currencies low which, in turn, boosts their exports and gives employment to millions of workers who, with American assistance and technology, are learning to produce for the world market. Chinese banks now hold nearly $1 trillion, which is the highest reserve position in the world, having passed Japan this year with some $865 billion. Without such dollar purchases, their currencies would rise immediately, which would boost all export prices, curb exports, and depress economic production and employment.
A few critics believe that the U.S. trade deficits may be the greatest threat to the economic order. Yet the deficits have neither impaired the U.S. dollar nor undermined the position of the United States as the primary economic engine and power. Many observers, therefore, question and disclaim the dangers of American balance-of-payments deficits. They not only cast doubt on official statistics that may exaggerate the case, but also point to the stable rates of exchange which all participants maintain voluntarily. Stability, after all, benefits everyone.
This economist, nevertheless, is convinced that a correction is unavoidable. All markets function to adjust and readjust any maladjustment. They are burdened and strained by the growing mountain of debt which raises the question of American ability to meet its obligations. If there ever should be any doubt about the stability of the American economy, the world-wide demand for U.S. dollars would decline, which would cause the dollar exchange rate to plummet. American imports would decline, dampening the surge of consumption and slowing the very growth engines of export countries such as Japan, China, and many others. The whole world would feel the American instability. A weaker dollar and rising import prices also would accelerate the inflation rate which would pressure the Federal Reserve to raise interest rates. Higher rates would slow the American economy and boost the rate of unemployment.
Despite such international imbalances, the U.S. dollar has not weakened significantly in recent months, and the world economy has not fallen into a global recession. At first, Asian central banks, and then also the oil-exporting countries, financed the huge deficits. It is in the economic interest of the Asian developing countries to keep their exchange rates low in order to keep export prices low and thus keep the export motor running. Massive purchases of federal obligations support the exchange rate of the dollar and increase Asian currency reserves.
It is in the interest of the United States, as well as the Asian countries, that the U.S. dollar maintain its high exchange value. Some American economists like to speak of a “Bretton Woods II” arrangement, which would resemble the international system in effect between the Second World War and 1973. Participating countries supported each other’s currencies and thus sustained stable exchange rates.In Bretton Woods I, the member countries supported each other’s currencies – in Bretton Woods II, they eagerly support the dollar. The European Central Bank, which actively pursues employment policies, manages to avoid the influx of U.S. dollars by keeping interest rates very low and liquidity plentiful. According to some estimates, the quantity of money in euro countries, since 2000, has increased some 25 percent faster than the gross product. In the United States, it has grown some 10 percent, and in Japan by 15 percent. The European Central Bank even surpassed the Bank of Japan, which is inflating its currency in order to counter powerful deflationary forces. In short, euro liquidity is plentiful and interest rates, seen historically, are exceptionally low.
As the U.S.-Asian imbalances continue to mount, the forces of readjustment are gaining strength. There are indications that the imbalances are correcting slowly and in an orderly fashion. Most governments agree that greater flexibility of the exchange rates, especially of the Asian currencies, is an orderly step toward the correction of the global imbalances. But most governments cling to their old policies. The interest rate differences are closing slowly, which causes more and more investors to shun the dollar risk. Moreover, the American real estate market has cooled off significantly without dramatic crashes. The boom, according to Fed Chairman Ben Bernanke, has given way in an orderly and moderate fashion. But there cannot be any doubt that the decline in the housing market will be felt throughout the economy in months to come.
Some Americans will have to curtail their spending which is bound to slow down the economy. Will it drag the world economy with it? The rate of expansion in many Asian countries undoubtedly will decline, but by less than pessimists predict. Most economic expansion in China, India, and other developing countries in recent years has been driven by domestic demand and supply. Yet we must not underestimate the weighty and consequential role played by the United States in world financial markets. A huge debt casts a shadow on any market; the rapidly growing international debt of the United States is clouding the world economy. It cannot grow perpetually; it will be settled sooner or later either in an orderly and upright fashion or in financial crisis and economic recession.
The finale of the scenario may be played by the Federal Reserve System. It may seek to reassure and pacify numerous Asian creditors by maintaining high market rates of interest or at least approximate them, or cater to the notions and wishes of most legislators and their constituents who usually favor monetary stimulation. Sooner or later Federal Reserve governors will have to choose between economic consideration or political preference. Their choice will determine the future of the U. S. dollar.
Hans F. Sennholzwww.sennholz.com

CREDIT BUBBLE BULLETIN

http://prudentbear.com/creditbubblebulletin.asp Doug Noland

Fair playing field?

October 27 – Bloomberg (Shannon D. Harrington): “Derivatives traders may be profiting from inside information on leveraged buyouts and other takeovers, a study by Credit Derivatives Research LLC suggests. Credit-default swaps based on the bonds of 30 takeover targets, including four of the five biggest LBOs of 2006, rose before deals were announced or news reports said transactions were likely, according to the New York-based independent research firm.”

It’s not only the resurgent corporate debt Bubble that has me recalling 1999/2000. It was no coincidence that NASDAQ went parabolic about the time deterioration in underlying fundamentals was gathering pace. A spectacular short squeeze, flight into perceived safer corporate bonds, and liquidity creating securities/derivatives leveraging were prominent aspects of that period’s Monetary Disorder. Today, an extraordinary confluence of factors including the housing downturn, economic vulnerability, destabilizing Credit excesses being “recycled” back to U.S. securities markets, and a major shift of speculation into riskier Credits is fueling a corporate debt Bubble with a present scope and future consequences that greatly exceed anything from 1999. The tech Bubble was only a warm-up…

Dr. Issing is absolutely correct: “… Excessive liquidity world-wide is fueling asset prices and is something which has to be taken seriously by central banks.” Tonight I’ve focused on U.S. Credit system dynamics. But our massive Current Account Deficits have as well spurred lending, liquidity and speculative excess around the world. Our degraded currency has certainly unleashed systemic global Credit inflation, with profligate domestic Credit systems no longer disciplined by the (dollar-anchored) global marketplace. It’s more aptly described as “Global Wildcat Finance,” with Credit and asset inflation readily condoned by a speculating community that has come to wield incredible power and influence.

Please read entire post by Noland. ALL you have to understand is how the markets asset inflation is coming about, and like the tech bubble this will burst and be 10X worse, for now? enjoy all boats floating

Duratek (I am currently short the NAZ with stop loss previous high, which was NOT taken out Fri, and when I think any correction due is done? I am long

SATURDAY MORNING POST

So here we are, my haven't we come a long way? Who among you thought you would see Dow above 12,000? How about that bursted housing bubble? Iraq war, deficits, stock option scandal, etc etc.

Selling pressure has melted away, giving way to a renewed bullish zeal maybe never seen, by some measures one wonders if 1982 Bull market ever ended?

Years after mid term elections are usually VERY BULLISH seldom blue. I wont take too much trying to explain it, wondering where did that 4 yr cycle low go, or how the market can gain almost every day or ignore monumental divergences and inbalances and record debt.

What we have is record earnings expansion, fueled by easy money, financials from trading and IPO'S M and A activity, a virtual frenzy.

The FED stands pat, idley by, as the market spirals up out of control and no anchor to reality. They are and have been fostering every kind of bubble and form of asset inflation, and are mainly responsable for every crisis.

I do not know where this rally goes or where it ends. AS long as traders/investors fear not (VIX 10) and money flows in not out, maybe longer than anyone predicts....or it could suddenly end without notice.

As a new high is in DOW, CRASH potential is now back on the table, the 2 CRASHES have only occurred very shortly after new highs, not well into any bear market, no near the top....this is a rare phenom.

So, maybe no news matters, it isnt all jiggy news we see, 1.6 GDP (could be lowered when revised) we have a reliable indicator, the yield curve telling us Recession is coming or here, but it is excused away.

WHat matters is enough want this market, have to be IN this market and the flow of cash is blowing away any sellers.

Is FRIDAY the top of this rally VERY short term? I think it is possible, we have VERY overbought condition daily and weekly, and I see momo divergences all over the place, but Fri was not VERY aggresive selloff, and may be over or last just a few days.

Lots of retraces back track 30% of rise, so we need to be watchful here to see what develops.

The rise VERY sharp parabolic like, when or if parabolic rise is done, it usually gets 100% retraced.

Goldilocks landing/economy? ALL I see is one asset inflation being traded for another, so this musical chairs Ponzi scheme marches on, but at some point the music will stop, no greater fool will arrive, and no one to tell those to get out that may have gotten back most or all of their bear losses, 2nd time no charm and will be horribly painful. IMHO

Duratek

18 DAYS

VOTE DEMOCRATIC ACROSS THE BOARD FOR ANY CONGRESSIONAL OR SENATE SEAT AND SEND GEORGE BUSH A CLEAR MESSAGE: YOU CANT SCREW THE AMERICAN PUBLIC, LIE AND ABUSE THE CONSTITUTION AND GET AWAY WITH IT.

IF YOU SIT N YOUR HANDS THIS ELECTION, THEN YOU DESERVE WHAT YOU GET.

D

Sat Morning POst "DAY OF RECKONING PUT ON HOLD"

I just scanned weekend L< need to read whole piece, but it seems, and with mkt action, there will be NO mkt pullback and IF the R’s hold onto majority this NOV BAMMM an EXPLPOSIVE RALLY into yr end will ensue……while many
….waiting for the OCT or other decline that never comes.

Even with record string as EWT points out of 90% plus bulls, 4 yr low no low down, 4 yrs without 10% correction…in a climate we all know is false but it creating record SPX earnings qtr after qtr after qtr……and here is L all but shouting ALL IN M’fer’s all in

*(one good thing, I found a BEAUTIFUL Japanese made Fender Jazz like new, played my friends last night on AMPEG equip all night…jamming, so nice!!!! Excited one day I will jam in front of people got long way to go) picking it up today !!!

It is now clear that 200-2003 was just correction to the MUTHA of all SECULAR BULL MARKETS!!!!! Can it be anything else? There is NOTHING that can derail it…..ANY long term MA’S you run shows it INTACT and strong, so why are we looking for its end, why NOT ALL IN??

EVEN 2 ½ year MACD divergence cant end it. Longest running Trannie/Dow non confirm cant end it, now other way around Dow new highs and trannie non confirm cant end it. Housing bubble burst cant end it. Destruction of manufacturing cant end it, record debt cant end it. BOND inversion cant end it.
Record % of income for mortgage cant end it. Negative savings rate cant end it.BLOW OUT record of total credit market debt as % of GDP cant end it.
Coming qtr probably near 1% GDP my guess cant end it? Flagging LEI’S cant end it. Record gas prices didn’t end it. $2 B a week in IRAQ Fiasco didn’t end it. STOCK OPTION SCAM didn’t end it. Loss of ENERGY earnings as leadership to record SPX earnings isn’t going to end it?
LOWER GAS and HIGHER MKT before NOV election NO ACCIDENT…………CONTRACTING ADJ MONETARY BSE cant end it.

GOLDILOCKS IT IS and I cant fight them anymore I think, I don’t have to understand how ASSET inflation one to another then another is all we need? Now a BULL that began no later than 1982 (some accts say 1974) is still gaining momentum in 2006?? Minimum length 24 years as many as 30 years.

And it is said the BEAR THAT FOLLOWS BULL is of equal length and severity/extreme……and so this is not the case to date.

Was all it was about checking just one facit of it? The techs, taken down 90% (and we wanted more?) has been accomplished. FED is invincible holding rates down to 1% a record move AND NO ONE should doubt they can fix anything?

Record trade and gov deficits cant end it?

WE all cant win in the end I KNOW that, like ANY Ponzi scheme, how is it possible we ALL make money in the stock market? WE ALL just keep putting money in for retirement, and never stop.

Historic LOW levels of Mutual fund cash can’t stop it. 8,000 wild and untethered hedge funds cant stop it.

Why not just give in to it, what sense in the worrying, what good is that. Had one only had small % in Tech going into 2000 who stayed LTBH are way ahead of the game and NEVER Lost any sleep nor had to put ONE OUNCE of time, worry or effort in to managing their accounts.
Yes to this point in time, “It is time IN the mkt, not TIMING the market” that pays off.

Now how can one argue with that?

Duratek (tired of being a bear and constantly on watch, in a world where nothing adds up and the rich get richer as lemmings buy their wares.....there is world of hurt out their for the barely haves and the nots....as the DAY OF RECKONING has been put on hold)

DATA ALERT

> http://research.stlouisfed.org/publications/usfd/page3.pdf


I dont care what
> definition you apply to this figure.....it IS contracting as of this
report,
> BELOW JAN position, we have int rate INVERSION, we have CNBC laughing off
> falling retail sales numbers....we have NOV election. WE have making of monumental top,IMHO

D

SEPT RICHEBACHER

A TIGHTENING FARCE

Dr. Kurt Richebächer

There is total detachment from the bad news that is pouring out of the economy. For several years, the booming housing market has made the difference between recession and recovery for the U.S. economy. Zooming house valuations provided private households with the collateral that allowed them to replace the missing income growth with a borrowing binge.

But as the housing market is sagging, this major source of higher consumer spending is plainly drying up, and most obviously and importantly, income growth is by no means catching up.

In 2005, real disposable incomes of private households in the United States increased $93.8 billion, or 1.2%, while their debts grew $1,208.6 billion, or 11.7%. Total consumer spending on goods, services and new housing accounted for 92% of real GDP growth.

The U.S. economy's recovery from the recession in 2001 has been its slowest in the whole postwar period, and in addition, it has been of a most unusual pattern. Real GDP rose by 11.7% over the four years to 2005. Within this aggregate, residential building soared by 35.6%. Consumption gained 13.4% and government spending 10%. The big laggard in domestic spending was business nonresidential investment, up only 3.6%. Net exports year for year were increasingly negative.

Most economic data have softened, with the downtrend accelerating. In the face of this fact, it could not be doubted that Mr. Ben Bernanke and most others in the Federal Reserve were anxious to stop their rate hikes. In question was only whether they would dare to do so in view of the high and rising inflation rates. They dared. They even disappointed those who had predicted the combination of a declared "pause" with hawkish remarks about fighting inflation.

In its statement, the Fed conceded:

"Readings on core inflation have been elevated in recent months, and the high levels of resource allocation and of the prices of energy and other commodities have the potential to sustain inflation pressures. However, inflation pressures seem likely to moderate over time, reflecting contained inflation expectations and the cumulative of monetary actions and other factors restraining aggregate demand."

When the Bureau of Labor Statistics (BLS) reported on Aug. 16 that the CPI in July had seasonally adjusted, advancing 0.4%, following a 2% rise in June, both the bond and stock markets responded with strong rallies. What, apparently, had made it so exciting in the eyes of the consensus was the fact that these bad figures had remained in line with distinctly unoptimistic predictions. Never mind that during the first seven months of 2006 the CPI has risen at a 4.8% seasonally adjusted annual rate, compared with an increase of 3.4% for all of 2005.

It is, of course, perfectly true that monetary tightening impacts the economy and its inflation rates with a pretty long delay. The trouble in the U.S. case is that there never was any monetary tightening. There were many small rate hikes, and the Greenspan Fed had probably hoped that the higher costs of borrowing would exert some restraint on credit demand. But it has not happened. It was a vain hope.

The fact is that the credit expansion has sharply accelerated during these two years of rate hikes instead of decelerating. During 2004, when the Fed started its rate hike cycle, total credit, financial and nonfinancial, expanded by $2,800.8 billion. In the first quarter of 2006, it expanded at an annual rate of $4,392.8 billion.

Over the two years of so-called monetary tightening, the flow of new credit has effectively accelerated by 56%. In 2005, credit growth was $3,335.9 billion. Over the whole period of rate hikes, it had steadily accelerated from quarter to quarter. Borrowers and lenders, apparently, simply adjusted to the higher rates, trusting that there would never be serious tightening.

True monetary tightening would have to show first of all in declining "excess reserves" of banks relative to their reserve requirements. These have remained at an elevated level during the rate-hike years of 2004-05.

In 1991, when the Fed tightened, credit expansion slowed sharply from $866.9 billion in the prior year to $620.1 billion. A sharp slowdown in credit expansion in 2000 to $1,605 billion also happened, from $2,044.7 billion the year before. Yet this still represented very strong credit growth in comparison with the years until 1997.

Like all central banks, the Federal Reserve has two levers at its disposal to stimulate or to retard credit and money creation. The big lever is its open market operations, buying or selling government bonds, thereby increasing the banking system's liquid reserves. The little lever consists of altering its short-term interest rate, the federal funds rate, thereby influencing the costs of credit.

It is most important to distinguish between the two instruments. True monetary tightening has to show inexorably in a slower credit expansion throughout the financial system. There is one sure way for a central bank to enforce this, and that is by curtailing bank reserves through selling government bonds.

The other lever at its disposal, as pointed out, is to influence credit costs. But the influence of the central bank on credit costs begins and ends with altering its short-term federal funds rate. During the past two years, the Fed has raised its federal funds rate from 1% to 5.25%. But long-term rates hardly budged. To the extent that borrowers shifted from the low short-term rate to the long-term rate, they encountered higher borrowing costs. But at the long end, interest rates rose less than the inflation rate.

Here are still a few other credit figures illustrating the Fed's monetary tightening since mid-2004. Total bank credit expanded, annualized, by $957.0 billion in the first quarter of 2006, against $563.5 billion in 2004. For security brokers and dealers, the two numbers were $611.3 billion, against $231.9 billion; and for issuers of asset-backed securities (ABSs), they were $663.3 billion and $322.6 billion. This is monetary tightening à la Greenspan.

Monetary tightening has one purpose: to curb credit expansion fueling the excess spending in the economy and the markets. By this measure, Greenspan's monetary tightening since 2004 has been a sheer farce. During these two years, he presided over a sharply accelerating credit boom, for which the reason is also obvious.

To equate rising short-term rates automatically with monetary tightening can, therefore, be a gross mistake. Later on, we shall explain that this is the great error of the monetarists in assessing the development in 1929 and following years. Borrowing exploded during 1927-29, despite the Fed's rate hikes, and then literally collapsed after the stock market crash.

It can be argued that rate hikes in the past have generally worked. Yes, but the central bankers of the past never forgot to tighten bank reserves. Tighter money to them meant tighter credit, and it always showed in sharply shrinking credit figures. So it also has, in the past, in the United States. But this time, the diametric opposite has happened.

There was reserve easing. Money and credit, moreover, only became significantly more expensive at the short end. All the time, there was nothing in this to slow the housing bubble and the associated borrowing binge. Rising house prices easily offset the effect of rising short-term rates.

Does this mean that the economy can continue to grow as before? No, not at all. All excesses, if not stopped, are sure to exhaust themselves over time. That is no less true for economies than for the human body. In our view, the housing bubble is finished not because credit has become tight, but because the borrowing excesses are running against natural barriers.

One such natural barrier is the affordability of housing and the limited number of greater fools who are able and willing to pay these inflated prices. At some point, excess supply will exceed demand. We read from reliable sources that in June, sale offers of existing single-family homes were up 35%, while actual sales were down 6.5% versus a year ago. So the year-over-year "excess" supply was 42.2%.

Affordability is way down, units offered for sale are way up and price appreciation has all but stopped. It is a radical change in the market situation, which, however, has so far impacted economic activity only moderately.

Past experience with housing bubbles suggests that the first effects are in the steep fall of actual sales and in the lengthening of time until sales materialize. The markets become illiquid. Until sellers capitulate and accept lower prices, it can take a long time. In this way, apparent price stability becomes increasingly treacherous over time.

Present American folklore has it that a protracted slump in house prices is impossible. Let us say for many people it is unthinkable. And that is precisely one reason why this housing bubble could go to such unprecedented excess. The little historical knowledge we have about bursting housing bubbles is from a study published by the International Monetary Fund in its World Economic Outlook of April 2003. It presents past experience in a very different light. Here are some excerpts on decisive points:

"To qualify as a bust, a housing price contraction had to exceed 14%, compared with 37% for equities. Housing price busts were slightly less frequent than equity price crashes... Most housing price busts clustered around 1980-82 and 1989-92, while equity price busts were more evenly distributed across time.

Housing price crashes differ from equity price busts also in other three important dimensions. First, the price corrections during house price busts averaged 30%, reflecting the lower volatility of housing prices and the lower liquidity in housing markets. Second, housing price crashes lasted about four years, about 11/2 years longer than equity price busts. Third, the association between booms and busts was stronger for housing than for equity prices."

An important theme running through the foregoing analysis is that housing price busts were associated with more severe macroeconomic developments than equity price busts. Coupled with the fact that housing price booms were more likely (than equity price booms) to be followed by busts, the implication is that housing price booms present significant risks. For this, the authors give the following reasons:

"Housing price busts have larger wealth effects on consumption than the equity price busts...

"Housing price busts were associated with stronger and faster adverse effects on the banking system than equity price busts... All major banking crises in industrial countries during the postwar period coincided with housing price busts.

"Price spillovers across asset classes matter, as evidenced by the fact that housing price busts were more likely associated with generalized asset price bear markets or even busts than equity price busts.

The authors then give a fourth reason, which was true in the past, but in which the situation in America today radically differs:

"Housing price busts were associated with tighter monetary policy than equity price busts, reflecting the fact that most housing price busts occurred during either the late 1970s or the late 1980s, when reducing inflation was an important policy objective. The disinflation increased the real burden of debt, which exposed inflation-related overinvestment and associated financial frailty."



Dr Kurt Richebächer
for The Daily Reckoning
www.dailyreckoning.com