Next Wave Down will be bigger !!!

8/11/09

Bob Prechter "Quite Sure" Next Wave Down Will Be Bigger and March Lows Will Break

In late February, Robert Prechter of Elliott Wave International said "cover your shorts," and predicted a sharp rally that would take the S&P into the 1000 to 1100 range.

With that prediction having come to pass, Prechter is now saying investors should "step aside" from long positions, and speculators should "start looking at the short side."

"The big question is whether the rally is over," Prechter says, suggesting "countertrend moves can be tricky" to predict. But the veteran market watcher is "quite sure the next wave down is going to be larger than what we've already experienced," and take major averages well below their March 2009 lows.

Yes, the late 2007-early 2009 market debacle was just a warm-up to what Prechter believes will be the bear market's main attraction. In this regard, he says the current cycle will echo past post-bubble periods such as America in the 1930s and England in the 1720s, after the bursting of the South Sea bubble.

The 2000 market peak market a "major trend change" for the market from a very long-term cycle perspective, and the downside is going to continue to be painful well into the next decade, Prechter says. "The extreme overvaluation, the manic buying and bubbles in the late 1990s [and] mid-2000s are for the history books - they're very large," he says. "The bear market is going to have balance that out with some sort of significant retrenchment."

My comments: Who is Bob Prechter?! Check out yourself. Hmm, I am well-prepared. How about you?!

Stock markets are technically very overbought !!!

8/11/09

Please, Please, and please read the following carefully, it is written by one of my favorite technical analysts(not hired by any financial firms)......

And by overbought, I mean WAY overbought.

The relative strength index (RSI) is a metric used to measure the velocity and momentum of a given investment by comparing its upward and downward moves from close-to-close. If an investment is moving up strongly, its RSI is higher. Similarly, if an RSI is low, it means the investment is performing weakly.

Historically, RSI’s of 70 or higher mean an investment is overbought while an RSI of 30 means an investment is oversold. In these situations the market is primed for a “revert to the mean” trade, meaning you could see a quick correction or turnaround rally as the market snaps back to a more reasonably RSI.

Well, have a look at Friday's NASDAQ.

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As you can see, the NASDAQ recently hit an RSI of 75. This is the highest reading we’ve seen in nearly two years. In fact, the last time the NASDAQ had an RSI of 75 was October 10, 2007, right before stocks entered their first major leg down in the Financial Crisis, losing 55% in six months.

As soon as I noticed this, I called up Ron Coby, a brilliant portfolio manager based in Medford, Oregon. Ron’s one of the smartest guys I know and when it comes to trading short-term moves, he’s one of the best in the business. What he had to say completely blew me away.

Ron said,“Graham, you won’t believe this, but I went back on the NASDAQ and made a note of every time it hit an RSI of 75. EVERY TIME, the market collapsed soon after. And I don’t mean a “plain vanilla” correction, I mean a full blown CRASH.”

Ron then forwarded me the following chart. Suffice to say, I was floored:

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As you can see, the NASDAQ has hit an RSI of 75 or higher five times in the last 12 years. Every time, the market collapsed soon after with an average drop of -22%. In several cases, stocks suffered a full-blown CRASH.

This is a very serious warning for the Bulls. A high RSI doesn’t mean that stocks have to CRASH immediately. But it does indicate that the NASDAQ is more than ready for a serious correction. Again, an RSI of 75 or higher has only been hit FIVE times in the last 12 years. Two of those times were at massive historic bubble peaks. The others were all periods in which stocks were simply far too overbought. And ALL FIVE OF THEM PRECEDED SERIOUS CORRECTIONS.

Be forewarned, if stocks are this overbought, we’re in dangerous territory. If smart money like Ron Coby is worried and shifting to a defensive stance, I’m paying attention.

I suggest you do the same.

My comments:At two weeks before, I have already noticed this overbought condition. Watch out ahead!! Yeah...it is coming!!!

New Toxic Products from our old Banks !!!

8/10/09

In case everyone miss this frisky news from Business week. I repost it here:

Lenders haven't sworn off risky financial products. They've come up with a slew of new ones

That didn't take long. The economy hasn't yet recovered from the implosion of risky investments that led to the worst recession in decades -- and already some of the world's biggest banks are peddling a new generation of dicey products to corporations, consumers, and investors.

More from BusinessWeek.com: • The Big Banks Enabled Subprime Lenders • The Top 25 Subprime Lenders • Banks: Good News -- and Bad Assets

In recent months such big banks as Bank of America (BAC), Citigroup (C), and JPMorgan Chase (JPM) have rolled out newfangled corporate credit lines tied to complicated and volatile derivatives. Others, including Wells Fargo (WFC) and Fifth Third (FITB), are offering payday-loan programs aimed at cash-strapped consumers. Still others are marketing new, potentially risky "structured notes" to small investors.

There's no indication that the loans and instruments are doomed to fail. If the economy keeps moving toward recovery, as many measures suggest, then the new products might well work out for buyers and sellers alike.

But it's another scenario that worries regulators, lawmakers, and consumer advocates: that banks once again are making dangerous loans to borrowers who can't repay them and selling toxic investments to investors who don't understand the risks -- all of which could cause blowups in the banking sector and weigh on the economy.

More from Yahoo! Finance: • Lucrative Fees May Deter Efforts to Alter Troubled Loans • Subprime Brokers Resurface as Dubious Loan Fixers • Big Car Bargains: Deal or No Deal Visit the Loans Center

CDS-Linked Corporate Credit Lines

Some of Wall Street's latest innovations give reason for pause. Consider a trend in business loans. Lenders typically tie corporate credit lines to short-term interest rates. But now Citi, JPMorgan Chase, and BofA, among others, are linking credit lines both to short-term rates and credit default swaps (CDSs), the volatile and complicated derivatives that are supposed to act as "insurance" by paying off the owners if a company defaults on its debt. JPMorgan, BofA, and Citi declined to comment.

In these new arrangements, when the price of the CDS rises -- generally a sign the market thinks the company's health is deteriorating -- the cost of the loan increases, too. The result: The weaker the company, the higher the interest rates it must pay, which hurts the company further.

The lenders stress that the new products give them extra protection against default. But for companies, the opposite may be true. Managers now must deal with two layers of volatility -- both short-term interest rates and credit default swaps, whose prices can spike for reasons outside their control.

Making matters more difficult for corporate borrowers: high fees. Banks are raising their rates for credit lines across the board -- but the new CDS-based credit lines cost far more than the old lines. FedEx (FDX) could end up paying $1.9 million to $3.6 million a month if it decides to tap a new line from JPMorgan and Bank of America. On its previous line with JPMorgan, FedEx would have paid about $540,000.

Yet many companies have little alternative. With corporate credit remaining tight, banks increasingly are steering borrowers to the CDS-linked loans. All told, lenders have handed out nearly $40 billion worth this year -- roughly 70% of the total in credit lines extended to borrowers in fairly good standing. That's up from around 14% in 2008. FedEx, United Parcel Service (UPS), Hewlett-Packard (HPQ), and Toyota Motor Credit have all taken the plunge. "It wasn't our idea," says a UPS spokesman. "The banks pulled back from offering set rates."

Big Banks Offering Payday Loans

At the other end of the borrower spectrum, big banks are entering another controversial arena: payday loans, whose interest rates can run as high as 400%. Historically the market has been dominated by small nonbank lenders, which mainly operate in poor urban centers and offer customers an advance on their paychecks. But big lenders Fifth Third and U.S. Bancorp (USB) started offering the loans, while Wells Fargo continues to boost its payday-loan program, which it began in 1994.

More big banks are getting into the market just as a recent flurry of usury laws has crippled smaller players. In the past two years lawmakers in 15 states have capped interest rates on short-term loans or kicked out payday lenders altogether. The state of Ohio, for example, has imposed a 28% interest rate limit. But thanks to interstate commerce rules, nationally chartered banks don't have to follow local rules. After Ohio limited rates, Cincinnati-based Fifth Third, which has 400 branches in the state but also operates in 11 others, introduced its Early Access Loan, with an annual interest rate of 120%. "These banks are skirting state laws," says Kathleen Day of advocacy group Center for Responsible Lending. Says a spokeswoman for Fifth Third: "Our Early Access product fully complies with federal regulations and applicable state regulations."

Lenders argue they offer a valuable service for those who need emergency cash. Wells Fargo says it warns customers using its Direct Deposit Advance that the loan is expensive and tries to offer alternatives. "We have policies in place to prevent long-term usage of the services," says a spokeswoman. U.S. Bancorp didn't return calls.

National regulators are taking notice, however. The Office of Thrift Supervision says it is "looking into" two institutions that are offering the high-interest loans. "We need to make sure there's no predatory lending and also ensure that there are no risks to the institutions," says an OTS spokesman.

Derivatives for Small Investors

On the investing front, too, Wall Street firms are embracing more risk. Big brokerage houses, including Morgan Stanley Smith Barney (MS) and UBS (UBS), are selling new forms of "structured notes," a type of debt instrument. Wall Street sold $15 billion of the products in the second quarter, up from $13 billion in the first, according to StructuredRetailProducts.com. Some of the new notes have a minimum investment of only $1,000.

Structured notes are essentially derivatives for small investors -- and they make sense for some. Basic structured notes let buyers benefit from the growth in stock, bond, or currency prices while offering some degree of loss protection. But many of the latest iterations are highly complex and may not compensate for all the risk. Buyers "have to have the [financial] experience to be able to evaluate the risk," says Gary L. Goldsholle, general counsel at the Financial Industry Regulatory Authority, the securities industry's self-governing organization.

The new debt investments offer attractive rates, sometimes guaranteeing double-digit returns for the first couple of years. But when those teaser rates disappear, investors face huge potential losses over the life of the instrument, up to 15 years. A Morgan Stanley spokeswoman says the firm "services a broad range of products for retail and ultrahigh-net-worth clients," including structured products, and "offers training to financial advisers to assist them in making suitability determinations." UBS declined to comment.

The risks to investors can be tough to tease out of the prospectus. A July offering from Morgan Stanley promises 10% interest for the first two years. After that, it pays 10% when short-term interest rates and the Standard & Poor's 500-stock index both stay within certain ranges. If they don't, the investment pays nothing.

The prospectus says the latter scenario would have been a rare event over the past 15 years. But as the recent market turmoil has shown, historical patterns aren't always reliable. Investors in similar notes got burned last year when Lehman Brothers failed. Says Bob Williams, a broker at Delta Trust Investments in Little Rock who's often pitched on such investments: "I'm not convinced half the brokers in this country, much less their clients, understand these products."

My comments:WTF!! How come our bank regulator let them sell these frisky products to us ??? Are they keep saying need to tighten the standard??? Damn!! You all know why I am still very bearish. Good luck to America. I am totally 100% sure we are going into doom world.

Should you believe what expert analysts predict ??!

8/8/09

I find out very reliable data about how our so proud Wall Street Analysts have done for their job:

The incomparable James Montier--once of SocGen, soon of GMO--blasts the Efficient Market Hypothesis (EMH) in a recent speech (via John Mauldin). Let's leave the EMH aside for a moment and just focus on one simple point.

Most investment economic analysis is devoted to forecasting the future. Unfortunately, the evidence is in...and it's clear that people can't forecast the future.

In my opinion [trying to forecast the future] is one of the biggest wastes of time, yet one that is nearly universal in our industry. Pretty much 80-90% of the investment processes that I come across revolve around forecasting. Yet there isn't a scrap of evidence to suggest that we can actually see the future at all.

For example, the last chart shows how good economists are at forecasting GDP.

Note that, year in, year out, the forecasts stay very close to the average GDP growth rate. Of course, everyone knows that the economy is cyclical, so forecasting this way is absurd. But economists simply have no ability to forecast the turns:

And how about stock analysts? How are analysts at predicting how stocks will do over the next year?

Terrible. See the middle chart above!!

Analysts just pick targets that are close to the average annual return for the average stock in recent years--then cross their fingers and pray. Of course, stocks are cyclical, too. And once again, analysts have no ability to call the turns.

My comments: Now, you see those called analysts are working for their own company best interest. They are not doing the prudent job to advise or give good idea to us. Period. Also, look at the very first chart I post above. Now, we are at reflective wave. What do you think?

No recovery for consumer spending !!!

8/6/09

One of every 10 American workers will be without a job by early 2010, economists project, shaking the confidence of those still on payrolls and discouraging spending. It may take as long as 15 years for consumers to fully repair finances battered by the decline in home values, stocks and employment, said Edmund Phelps, winner of the Nobel prize in economics in 2006.

Decreasing pay is not the only hurdle for consumers. Plunging home prices and stocks reduced household net worth by a record $13.9 trillion from the third quarter of 2007 through this year’s first quarter, according to figures from the Fed.

“Households are going to have to do an awful lot of rebuilding of their wealth,” Phelps, a professor at Columbia University in New York, said this week in an interview on Bloomberg Television. “Even if that rebuilding goes on at a pretty good clip, it will take 12 or 15 years for households to get to the wealth level that they had several years ago. Consumer demand is going to take a long time to rebuild to normal levels.”

My comments: It is just opinion by Nobel Prize economist. However, it does make very sense. Just ask yourself, do you spend less compare the time you were one or two years ago?! And, are you going to increase your spending on coming months?! I guess you all know the answer.

Surprise move by Bank of England !!!

8/6/09

Recent polls by Bloomberg and a Shadow MPC report calling for an end to QE from the Bank of England are way off the mark with the Bank of England announcing this morning that not only will they extend the QE programme, but also double the expected GBP25B addition to GBP50B. This takes the total programme to GBP175B. The MPC has said that the world economy remains in recession, despite increasing signs that the output in the UK’s export market is stabilizing, and that financial markets are still fragile even with noticeable improvements. This has weighed tremendously on Sterling across the board, and could very well set the tone for the day. Rates were left unchanged at 0.50% as expected.

My comments: Wow. Bank of England is increasing the failed move again to put addition money into qualitative easing. That act is telling everyone that they are still in very very bad shape. Also, their view of the world economy is still remains in recession. Will next week our US Fed would catch on the same conclusion? Should we reduce the QE or follow England?? I would say Fed has to keep what they are doing(Even though I think it is not working well), there no interest rate adjust until next year(Actually, I would say they never have a chance to consider to raise interest rate again). They will keep purchase government bonds period!!