Grab Your Shorts, the Tide Has Turned

You only learn who has been swimming naked when the tide goes out. - Warren Buffett

So much for that.

Last week we commented that the latest rally stunk even more than the post-Bear Stearns one. It doesn’t matter how cleverly CNBC and the talking heads spin these things, you cannot stage a bull market via interventions.

In the history of market regulators it has always been the market, not the regulators, that resolves financial issues. And credit contraction, worsening fundamentals, growing inflation, and shrinking corporate profits aren’t what bull markets are made of.

However, despite all of this, I was expecting the market to stage some kind of rally this week. Stocks have rallied during the last five days of summer for four years straight now. It’s a bad sign if traders aren’t trying to push this during one of the market’s thinnest trading weeks in terms of volume.

Instead, we got a whopper of a Monday with stocks plunging nearly 2%. A whole slew of bad news was announced, including:

• The national median existing-home price fell 7% in July from the year before.
• Goldman Sachs announced that half of the world's economy is in recession.
• Commodities may have hit a bottom: see News Bulletin below.
• Another bank going under, this time in Kansas.

At this point, even the most delusional perma-bulls are beginning to realize that the market is in serious trouble. The list of problems and issues is virtually endless.

Willem Buiter, policy maker at the Bank of England, tore Ben Bernanke and the Federal Reserve a new one at the bankers’ meeting in Jackson Hole, Wyoming. Rumors are circulating that at least one central bank has banned the ownership of US agency debt. And no one, not even Sovereign Wealth Funds, has stepped in to help out Lehman Brothers (LEH). Meanwhile, Fannie Mae (FNM) and Freddie Mac (FRE) are inching closer and closer to an inevitable bailout: one that will kick the dollar in the face.

Stocks were in a critical spot last week, forming a rising wedge pattern between their 28-day moving average (DMA) and 55-DMA. At that time I commented that these patterns tend to break to the downside.

Yesterday it did.

As you can see, stocks gave up Friday’s rally and then some. And the S&P 500 breached a critical support line. I know this. And so do traders around the world. If we don’t see a substantial turnaround today, the next leg down is here and it’s time to establish some shorts.

Fortunately, going short is easier today than ever before. There are a whole slew of short or inverse ETFs that allow you to short sectors, or the market as a whole. You can see them here.

Comments

[buyitcheap]

Is this the part of the investment cycle, where a la Dr. Strangelove, the bomb bay doors open and we ride the bomb down to the ground? yeehaa!! (channelling howard dean...)

[moonbat1775]

One day the unnecessary business cycle (cause by fractional reserve banking) might dip too low. Banksters should quit while they still have their heads.

[gabe borenstein]

For quite some time the experts have stated that the U.S is in the state of recession.Even Mr.Warren Buffet had expressed that opinion.The stock prices have clearly adjusted for that state of economy.Neeedless to say the recession is defined as two quarterly declines in the GDP.Clearly we are not there .Some experts are whining that the GDP will keep growing at only 3% for the next five years.What happened to recession ?
Here again we are dealing with the conclusions that the FNM and FRE are doomed and will face the bailout.
The data reflects that the both agencies are responsible for about 80% of the mortgage activity in the U.S market.
Both agencies have been handling mortgage funding betterr than the banking institutions.
Both agencies have been created by the Congress(implicit U.S government guarantee), with the aim to assist the housing market.
There is no bailout involved .If either of the agencies had to face financial issues ,the governmemt would have to live up to the implicit guarantee-nothing is wrong with this potential action if ever there was a need for it. In fact potential for such an action should enhance perception of the market stabiliy.
In fact the housing sector's risks had existed for years but were conveniently ignored allowing the share of both agencies to trade in the stratosphere. By the way I have discussed the relevant risks as early as June of 2005 (Mark Gilbert -Bloomberg interview).I have reinforced my view as late as September 18 ,2007 (Brian Sullivan TV interview-Bloomberg).F... few weeks later investors had seen the light.
Now that U.S economic/financial issues have been identified and addressed ,I am bullish on the market as economy will respond to the implemented measures but with a lag.
Would not surprise me if the stock market rally in the period ahead was lead by the shares of the FNA and FRE.
In the meantinme ,as the market consolidates ,the volatility will continue.
The financial risk perceptions which should have been discussed last year ,will be a focus of the media.Why ?,because the investment community has a record short positions in this market segment.One thing that should be noted ,it is Europe that is heading for a recession.This will benefit U.S economy and the American markets-period.

[Ishortyou]

Freddie and Fannie bonds will probably will be refinance with the help of bond insurers like AMBAC or MBIA to long term or medium term debt, so looks like they are just going to be fine, not sure about all the fuss out there coming from, maybe from short sellers rumor givers?

[otbricki]

Buy on bad news. Sell on good news.

Yes it really is that easy.

[H-Bomb]

I'm not sure which is funnier, the long winded comment by the guy that longs to be published here or the broken English boasts of the foreigner that doesn't realize he's a douche.

Yes, I revel in the irony.

[iThinkBig]

1) Mr Bornstein, your comment trail shows you almost consistently wrong this entire last year. I ask what this means:

"Both agencies have been created by the Congress(implicit U.S government guarantee), with the aim to assist the housing market.
There is no bailout involved .If either of the agencies had to face financial issues ,the governmemt would have to live up to the implicit guarantee-nothing is wrong with this potential action if ever there was a need for it. In fact potential for such an action should enhance perception of the market stabilty'

Whom is the government, do you mean the taxpayers? Do you mean the debt-laden, house deflating, job losing middle class being ripped at now all sides by predatory utilities, local and state governments? Please extrapolate if this means the taxpayer Mr Bornstein. Because right now to me that is what it means to me and historically, the middle class takes it way up the keister in such affairs and that does NOT promote market stability. 70% of our economy is consumer driven.

You comments of 'bullish with a lag'. What does that mean, exactly? 2020? I have stated for several months the next Bull is 2013, since June of 2007 chance of recession this year 100%. I don't want credit or to sound important, I give a damn about my countrymen, so stop sounding so obtuse about 'government implied' guarantees.

My comment trail explains my positions of why I feel this way about prior forecasts. Now, since we are all a shade tired of just regurgitating the obvious, here are my solutions and which sectors will provide some shade next year (as this year is shot, minus some obvious shorts):

Washington Policy:

1) Energy- the national focus and investment should consumer 35% of our entire GDP if we wish to avoid the Great Depression part II. As it stands now, very nasty long-lasting recession if good policy emerges from Washington in this and other areas.
2) Healthcare - Enact discount drug program with big pharma. Approaching them with 'discount or else' in 2006 by House Democrats was STUPID. Go the Dennis Hastert route of 2000. This will promote loyalty programs with big pharma patients and cross-sales opportunities. This also keep clinical trial business in the US. Investigate Medicaid and Medicair fraud and prosecute much.
3) Education - I like Bush's proposed $300 B Higher Ed bill. Too bad this Congress made him a lame duck, this one of his better ideas. I assume this will pass next year and the funds must be better managed to improving college standards. Like Healthcare, work with private colleges to offer multiple 'grants' (in other words discounts) . Time to stop pissing good money away and NOT supervising the entire affair. Laziness abounds in Washington. Not new but reaching alarming levels.
4) Lube multiple regional banks that have displayed fiscal disipline these last few years. Stop feeding ugly, dishonest iBanks and begin investigations for fraud. No investigations, the global investor keeps shorting into oblivion. Force taxpayers to pay again, get pitchforks. There are many now joining the good guys network to educate the population. Not to forment revolt, but to let people have the facts and decide what should be done about this continuing disgusting problem. Perhaps by 2012 we'll see the voter revolution needed to get half of Washington back on a beach someplace warm instead of office creating new schemes to rape the middle class, tax the wealthy, most of which spent an entire lifetime earning and stop malinvestment into the least productive of our society to bribe votes.
5) Enforce immigration laws to seal our southern border and DO fine businesses hiring them. No more $30k per year entitlements tax free so Latino queens can drive around in an SUV on my and yours dime, then go back to a couch to call friends to complain why we all don't learn spanish. Meanwhile, the guy making $30k a year working 40 hours a week can't to get to work or feed a family.

Short & Mid Term Shade Sectors:
Agriculture, Consumer Healthcare, Energy, Higher Education, Efficiency Technology, Railroads

[mouse]

Dear iThinkBig, I enjoy your commentary, I just wish I could be as hopeful as you seem to be that good things can be accomplished by the Washington government if just the right people are elected. I have come to believe after many years of watching our national government that it is too late----big money rules this country now, and whoever is elected will do what they want, no matter how destructive to our national economic health the actions may be. I have been watching that process for years, with no end in sight.

[iThinkBig]

I appreciate that Dr. Waterbury. I have some ideas on that front: ragingdebate.com/whati... . My team (I am a founder) just went live literally a few minutes ago... Advertising heavily. I am a connector of peopple and owner of some interesting advertising assets. I have worked for several politicians on fund raising (survey/analysis/marke... plan) and advised this President a bit through contacts on economics/energy. The Time magazine cover with Gov Dean making record fund raising? Yeah... I did the survey/analytics of potential voters and made key recommendations of how to use social network (when that wasn't quite a term yet) to generate campaign donations and segment the activist into certain groups, further profile and self-perpetuate. But I certainly am under no illusions, I can't do it alone but have started speaking with some heavy hitters and a heck of a lot of contributors.

Voter revolts do occur, the last one was in 1933 when 206 of 531 incumbants were ousted. Similar events occurred in 1861 and 1877. History rythmes as human nature never changes. It willl occur again in 2012. It is about retention ratios of House Congress and Senate and getting true public servants in. It has been 75 years since the aggregate retention ratio was under 85%. The free market including Washington, does work but it certainly doesn't fix itself on its own. People fix it.

And in these next few years, pain points will multiply for the American people similar to the events of 1929-1933. It does take time to gather a movement and connect the stars with a simple ambition to serve the public. The retention rates plunge when American citizens feel the economic woes and get off the couch. Right now, half the country wants a bailout and thinks that will solve it. Socialism being used to attempt to fix Socialism, just like 1930's. So in one fashion I agree, the time is not right and this government itself may collapse in-between, anything seems possible right now. But pending that, expect voter registration in 2012.

[fxtrader07]

G

[fxtrader07]

Graham, didi it ever occur to you that CNBC/Cramer have NO interest in really getting the markets talked up beyond a certain point? Don't you know how close these folks (Cramer and his current and former TSC employees who now sit in many financial media outlets) are very closely associated with the hedge funds and (naked) short sellers who make vast profits from every market decline? So they actually only need to talk the markets up a bit to build new short positions and then let go down again. CNBC is not a pump channel anymore. it's a pump'n dump channel and you can bet that for all the silly and plain stupid stuff cramer aires out, he has plenty of reason and interest to pump and bash certain stocks.
The U.S. stock markets are heavily manipulated, as are the commodities futures markets. SEC and CFTC are coomplete failures and rather protect the manipulators than anyone else. You only need to look at which firms most guys from SEC and CFTC end up after they leave these regulatory institutions to know whose interests SEC and CFTC are actually serving.

[this Bud's for you]

I thought 1994 was a rout when the Democrats lost control of the House. Too bad the Gingrich disciples lost their original 10 point plan "vision" and joined in with the gotta-get-re-elected survivors and sucked up to the big money contributors. When will Bubba learn that the starched-shirt, French-cuffed, spray-do, feel-your-pain guy doesn't give a rat's ass about Bubba?

[User 232593]

nobody getting elected can do anything.its too late.its go along or get out.did the romans know their empire is collapsing?

[Emerald]

"Bubba" doesn't read and gets his news in short sound bites. There is no real understanding of issues regarding infrastructure investment and early childhood education. It's all about the government screwing Bubba and wanting to raise his taxes. Most Bubbas pay very little in taxes but can easily be swayed by race baiting and name calling. The Romans and British understood "divide and conquer". Both empires crashed. Low taxes and wars, expensive. Voting against your economic interest, priceless!

[msgtb]

Jim Rogers has it right we need to dissolve the Federal Reserve to save our country. The interference and manipulation in the stock and commodities markets are out of control. This is only putting off the pain. Email your congressman and senator and tell them that if they don't reel in the Mr. Bernake and Paulson. The pain that they will feel is at the polls. Remember that this is an election year. Please remember to vote!

[moonbat1775]

I'll be voting with a vengeance against EVERY incumbent (except Ron Paul who I can't vote for anyway). Bums off the street would do a better job.

[Philman]

Good article!

[Umm, yeah]

H-Bomb, you're brutal, but you made me laugh. Lol!

[cristian]

The roman elites drank leaded wine and were crazed as a consequence. I wonder what excuse the historians will find for the US elites ?

[WEBISKING]

Wha we need is to throw out EVERY policitan republican and democrat and replace them with retire"billionair... who actually under how money works. Clayburn Pelosi Stevens Craig Byrd Kucnich replaced by Pickens Buffett Redstone Gates Perot and Soros and Trump and Zell. These peopel could spend an hor a day doing this and DO NOT have to go washington.Congress isnt in session much anyhow. Think of how much money would be "saved" and DOES ANYONE doubt thee billionaires are smarter than the crooked incompetent buch we have now.Obama and McCain have NEVER had REAL JOBS

[moonbat1775]

"I wonder what excuse the historians will find for the US elites ? "

Probably the guilt from knowing they achieved their wealth from a dishonest banking system and/or crony capitalism.

[moonbat1775]

"replaced by Pickens Buffett Redstone Gates Perot and Soros and Trump and Zell. "

Strike Pickens Buffett Gates Perot Soros Trump.
Add Ron Paul
Don't know about Redstone or Zell

[jayminho]

hopefully, i dont buy every thing i read,
hopefully, i didnt read this by the time it got posted (26th.. right?)

i do regret dumping abk with 50% profit "only" when i could have made more than 100%+ as of todays price.

i do regret going to RDN right after that, as i could have bought FRE/FNM ..

but anyway,
at least im green, green, happy, and over 70% this year, NO I HAVENT SHORTED ANYTHING.

so i say...
for the long term, fre/fnm mbi and abk are the right thing to do..

how patient are you?

if you can afford to put 10k in any of this stocks today.. you will get a 500%+ in about 5 to 10 years.
thats amazing, considering a fixed income (the best ones) are paying dividends of 10%/year ...

anyway, in the end
im glad i dont follow the amazing minds that puke those articles around here.