FedUpUSA

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… confidence is lost.

After being down 634 points today the DOW futures are down 264 more overnight at this point, or approximately 900 points in less than 24 hours.

After being down a stunning 80 points today, the S&P futures are down another 28 overnight, or more than 100 in 24 hours.

Global confidence has been effectively shattered.  The outright lies of governments worldwide – that there was no need to de-lever, there was no need to take insolvent banks into receivership, we could spend more and more on “stimulus” programs along with social spending and that demand represented by deficit spending was all sustainable GDP – all is being exposed as an utter load of crap and the “valuations” these lies have supported are being systematically shredded.

There is no floor as things sit right now.  From a volumetric perspective we have broken key levels with the next serious support in the 900s on the S&P 500.

Price is now back to levels last seen in the early part of 2009 and if the market does not hold up there we are headed for the 666 lows and below.

This evening we are losing about ten points per hour in the overnight session, implying that we will lock-limit down at -50 on the S&P 500 before midnight!

The arrogance of our government – at all levels – has finally reached the point where the markets give the finger to it all.  What’s worse is that it’s not just us – it’s also Europe, where the willful and intentional refusal to deal with the peripheral nations’ problems have turned into a monstrous mess.

To put this in the proper perspective over the last ten trading days we have gone from 1328 on the S&P to 1081, a loss of nearly 19%!

The DOW has gone from 12458 to 10450 – a loss of nearly 20%.

The Russell is down more than 20%; that barrier, incidentally, defines a “Bear Market.”

The panic is not confined to the US and Europe, however.  We are now generating the same sort of panic worldwide!

All of this compels one to ask: Is this “the one”?   The detonation of the markets that results in the recognized entry to the Second Great Depression?

In my opinion, no.

Could it be?  Yes.  But that’s not the odds-on play here.

What I expected to see as indications in front of this decline didn’t happen, and the breakdown appears to be more driven by Obama and our Congress than anything else, along with the ham-handed ECB crap of the last few days than anything else.

The bad news?  The number of stops that have been cleared out – the people who have wildly thrown stocks over the transom during this plunge has cleared out what would have been bids on the way down.  We’re disgustingly oversold at this point to a degree that some of my daily indicators have a reading of “0″ – something that I have seen only replicated briefly last summer and during the depths of the collapse in 2008.  Not even during the terminal decline of early 2009 were these indicators pinned on the floor.  They are now.

The more-likely path is that these oversold conditions will produce a monstrous reflex move higher.  But in doing so those who shorted the market late or who sold out in disgust will both be caught on the wrong side of the move, and once again serious amounts of market liquidity will be destroyed.

No, what I believe is coming is that bounce, and then, some time not far in the future, the next move down is the one that doesn’t retrace.

Don’t get complacent.  It will be easy to do, if I’m right.  You’ll see 50, even 100 handles go on the S&P and perhaps as much as 500 or more points on the DOW.  You’ll think “it’s over” as there’s a relentless climb back from what looks like a date with The Devil.

If you are unprepared for what comes after that you will be wiped out.

Four charts cast a skeptical light on the Status Quo “stories” of endlessly rising equities and the doomed dollar.

Here are the Status Quo’s most important investment “stories:”
1) China will continue booming for decades
2) U.S. equities will continue soaring as profits continue rising
3) The U.S. dollar will continue heading down because Bernanke wills it to do so

I would love to believe these magical tales, but the charts cast a skeptical pall on the happy stories. Beauty and uptrends alike are in the eye of the beholder, so maybe you see uptrends in equities here; I don’t.

The chart of the SSEC Shanghai Index is downright ugly. The uptrend line has been decisively broken, and a giant pennant/flag pattern looks busted, too.

The SPX (S&P 500) has also busted its uptrend, and the fan pattern indicates a weakening trend off the March 2009 lows. Notice how the trendline that was support is now resistance–a classic technical sign of reversal.

The dollar’s slight uptrend was broken in Bernanke’s last-ditch effort to goose the equities market to a new high in April. Since then, the DXY has clawed its way higher while the indicators are showing positive divergence to the buck’s weak ascent.

There is great resistance just overhead above 76, as the trendline now offers resistance, as does the 50-week moving average. Those two are roughly aligning with the  upper Bollinger band.  On a slightly positive note, the lower Bollinger has turned up and the DXY has managed to hover at or above its 20-week moving average.

If the dollar closes decisively above 76.30, then Bernanke has lost control and equities are headed down: a dollar breakout will be in play.

Here is an analog chart of the Dow Jones Industrial Average from 1907 and the present, courtesy of Ron Griess and The Chart Store. Note the uncanny correlation of the two. Correlation isn’t causation,of course, so maybe the Dow will sprint to 15,000 from here. But this chart introduces the notion that if history and pattern-matching have any predictive value, the next move will be down.

The truism in technical analysis is that you can always find a chart or indicator to support your belief system. But if we look at these simple charts and simple lines without predisposed beliefs, then what story are they telling?

Of Two Minds

As I write this the DOW is down 178, the S&P is down 19, and the Nasdaq 100 is down 32, all well more than 1%.  In addition volume is more than 10:1 down on the NYSE and about 8:1 on the Nasdaq.

It’s a bloody day in the markets.

But one problem is apparent – the TNX, or 10 year Treasury bond interest rate, is actually up about 0.2% on the day, and the 30 year is up 1% in yield.

They shouldn’t be.

When investors get nervous about stocks, they usually flow to bonds.  Today, they’re not.  They’re buying Gold instead which is up just under 1%, or silver, which is up 3.2%, both on the day.

These correlations have been solid for a long time.  Now they’re failing.  This failure is telling you something – that our Congress and President had better get their heads out in the daylight instead of up their respective asses, and they better do it soon.

Oh sure, we’re not seeing the sort of out-of-control ramp in government bond rates that Italy has seen the last few weeks.

Yet.

But remember the 1930s.  A bank called Creditanstalt turned what was a nasty stock market crash and credit contraction into a global Depression.

Regulators then, as now, ignored the crash’s warnings and refused to force those who were not properly capitalized to close.  They allowed people to double into bad bets.  Those bad bets compounded, and when the economy started to slip for real, instead of just on paper, the leverage they were carrying, both that which everyone knew about and that which people did not, ultimately blew them up.

Now we have a “little bank” in Italy that is teetering on the same edge – Unicredit.  It is too big to bail out – it holds hundreds of billions in liabilities.  There’s no money available to bail them out and the time to resolve them, as with our banks, was two and three years ago.

The risks are extremely high here folks.  I know many have laughed at my warnings for the last three years and have hooted and hollered as the stock market “recovered”, buoyed by yet more cheap money.  But during this the coverage of government debt with employment has not recovered at all – in fact, it’s worse now by far than it was in 2008.

So now what’s available in terms of policy tools?  There’s no funds available to bail people out, and a bank of that size isn’t able to be bailed out anyway in reality – all you can do is lie and hope people believe it.  But the market is calling all the bluffs now, one after another.

Remember 2008?  Buffet was going to buy the world.  Then it was Korea’s Development Bank.  Both, and many more yarns that were spun, were lies.  Those who believed got skinned alive in the collapse that followed.

If you think it can’t happen again, you’re wrong.  It both can and will, and nobody will be held to account for the lies they tell, just as they weren’t the last time.

Our government isn’t helping.  We should have taken all the big banks into receivership and went through every one of their alleged “assets” in 2008, forcing them to prove by independent valuation that they were holding them at reasonable valuations and that their “credit insurance” was backed by someone with 100% of the actual cash required to pay.  We didn’t, because Paulson and Geithner both knew that under such a standard not one of the big banks would survive.

So instead of forcing bondholders to eat it, which is what should have happened, they rolled the dice.  They bet that there would not be another Creditanstalt.

This is now looking like a bet they are going to lose.

Well, it’s official.  U.S. stock prices have fallen for six weeks in a row.  So will next week make it seven?  The last time stocks declined for seven weeks in a row was back in May 2001 when the “dot-com” bubble was bursting.  At this point, the Dow has declined by approximately 5 percent since the beginning of June.  Things don’t look good.  So exactly what is going on here?  Well, it is undeniable that the recent mini-bubble in stocks has been too good to be true.  The S&P 500 had surged nearly 30 percent since last September.  Much of this has been fueled by the Federal Reserve’s latest round of quantitative easing, but now that is coming to an end in a few weeks and investors are a bit spooked.  Meanwhile, wars and revolutions are sweeping the Middle East, Japan is dealing with the damage caused by the tsunami and by Fukushima, Europe is trying to figure out how to bail out Greece again and the U.S. debt crisis is continually getting worse.  In addition, wave after wave of bad economic news is certainly not helping the mood on Wall Street.  In many ways, a “perfect storm” is developing and many are now extremely concerned about what the rest of 2011 is going to bring for Wall Street.

QE2 is slated to conclude at the end of June, and many investors are deeply disappointed that it does not appear that we are not going to see QE3 right away.  Many fear that the end of quantitative easing will pop the current mini-bubble in stocks and commodities.  At the moment, financial markets are more jittery than they have been in a long time.

Frank Davis, director of sales and trading with LEK Securities, says that there is a lot of pessimism on Wall Street right now….

“There’s a lot of emotion in this market at the moment, and the conversations among traders are nearly all leaning toward the bear side”

So what are some of the signs that this downturn on Wall Street may turn into a full-blown crash?

Well, according to the Wall Street Journal, junk bonds are being sold off at an alarming rate right now.  Does the following quote from the Journal remind anyone of 2008 at least a little bit?….

A steep decline in prices of bonds backed by subprime mortgages has spread through the riskiest segments of the credit markets, ending rallies in high-yield corporate bonds and commercial real-estate debt.

Also, many of the big Wall Street banks are already laying off workers.  In a previous article I wrote about the potential for Wall Street to go into “panic mode“, I noted that Goldman Sachs, Bank of America, JPMorgan Chase and Morgan Stanley are all laying people off or are considering staff cuts.

The truth is that the big banks on Wall Street are not nearly as stable as most people think that they are.  Moody’s recently warned that it may downgrade the debt ratings of Bank of America, Citigroup and Wells Fargo.

Another major story on Wall Street right now is oil.  OPEC recently announced that oil production levels will not be raised, even though the price of oil has been hovering around $100 a barrel.

World oil supplies are very tight right now.  In fact, the globe actually consumed 5 million barrels per day more oil than it produced during 2010.  This was possible because the difference was apparently made up by drawing down reserves.

But if oil supplies are this tight already, what is going to happen if a major war (as opposed to all of the minor wars that are already happening) erupts in the Middle East?

The world is sitting on the edge of a financial disaster.

It is important to keep in mind that Europe is also in far worse financial condition than it was just prior to the financial collapse of 2008.

It is being reported that German finance minister Wolfgang Schaeuble is convinced that a “full-blown” financial meltdown by Greece is a very real possibility. The cost of insuring Greek debt has soared to a brand new record high, and officials all over Europe are in panic mode.

But financial problems are not just happening in Greece.  The largest bank in France has just cut in half the amount of cash that customers can withdraw from ATMs each week.

Most Americans don’t spend much time thinking about the financial condition of Europe, but the truth is that what happens in Europe is going to play a major role in the months and years ahead.

Of course most Americans already know that the U.S. government is a financial mess.

As the “debt ceiling deadline” of August 2nd draws closer, the U.S. government has been raiding retirement funds in order to stay under the debt limit.

Many investors are quite nervous about what may happen if the U.S. government actually does start defaulting on debt on August 2nd.

Others claim that the U.S. government is already in default.

The only Chinese agency that gives credit ratings on sovereign debt says that the U.S. government “has already been defaulting” and the Chinese government has been repeatedly warning that the U.S. needs to get its finances in order.

In any event, this debt ceiling drama will get resolved one way or another.

The bigger question is this….

How is the U.S. government going to respond when the next financial crash happens?

Back in 2008, the Federal Reserve and the U.S. government took unprecedented steps to prop up Wall Street.

But can they really do that again if we see another major crash in 2011 or 2012?

Many believe that things will be totally different this time around.  Just check out what Jim Rogers recently told CNBC….

“The debts that are in this country are skyrocketing,” he said. “In the last three years the government has spent staggering amounts of money and the Federal Reserve is taking on staggering amounts of debt.

“When the problems arise  next time…what are they going to do? They can’t quadruple the debt again. They cannot print that much more money. It’s gonna be worse the next time around.”

Jim Rogers is right about that.

The next time we see a collapse on the scale of 2008 it is going to be a much bigger mess.

Global financial markets are extremely vulnerable right now and there are a whole host of potential “tipping points” which could push them over the edge.

The Federal Reserve and the U.S. government more or less used up all of their ammunition on the 2008 crisis.

If we see another collapse in 2011 or 2012 there is not going to be much of a safety net available.

The entire world financial system is simply swamped with way too much debt.  The world has never seen anything even remotely close to the gigantic mountains of debt that have been accumulated around the world today.

The current global financial system is not sustainable.  More crashes are inevitable.  A lot of people are going to get steamrolled.

Hopefully you will not be one of them.

The Economic Collapse

Stock Market Casino Royale – S&P 500 is Overvalued by 100 Percent – Earnings do not Justify Current S&P 500 Levels. Financial Markets Setting up for Another Correction.

Posted by mybudget360

When I look at the S&P 500 like most people do, you would expect that this wide cross-section of companies in the U.S. would reflect an accurate measure of the true health of industries in our economy.  Yet the S&P 500 is fully disconnected from any historical measures of valuations.  It is startling to see people talk about the wild swings in the stock market as if this were somehow standard in a regular market.  The S&P 500 fell by a stunning 58 percent from the peak in summer of 2007 to the low in March of 2009.  But from March of 2009 to February of 2010 the market has rocketed back up by 63 percent.  This kind of massive market volatility is not indicative of a healthy stock market.  This is a symptom of a system that is having a really hard time valuing assets since much of the toxic financial assets are still lurking in the murky black box of many financial institutions.

Let us first look at the S&P 500 price to earnings ratio (adjusted for inflation):

Source:  Robert Shiller, www.multpl.com

130 years of data and each major financial crisis has sent the PE ratio falling between the 5 and 10 range.  This crisis has kept PE ratios elevated to the point that the S&P 500 is still valued at twice of what it should be if we use moderate historical valuations.  And if we measure the bubble via earnings, valuations during this bubble got even more out of line compared to those prior to the Great Depression.  Yet in this crisis, valuations never made it down to a more realistic level.  This is endemic of our current financial system where market alchemy is suddenly supplanting any rational analysis of earnings and actual potential growth.

Take a look at inflation adjusted earnings:

Earnings have collapsed during this market turmoil yet the market is up some 63 percent.  What is the rally based on?  A lot of the rally is based on easy money flowing into financial institutions that are using their black box to make trades and maneuver around accounting rules to make out with billions in profits while the real economy is mired in real fundamental problems.  And this is easy to see since all you need to do is look at how consumer credit has contracted over the crisis:

Now ask yourself the following question; if we are a consumption based society and a large part of our consumption is fueled by debt, doesn’t a massively contracting credit market mean people are spending less?  Of course.  The above chart merely reflects what average Americans are dealing with.  They are adjusting their household budgets to reflect stagnant wages or lost jobs.  They are battling with the reality that their homes are not worth what they once were during the halcyon days of the bubble.  Yet the stock market has rallied as if we are back to the heyday of 2007.

This rally is really something to behold:

The only other time we saw such a sharp drop and rally was during the Great Depression.  Yet the depression dragged on for over a decade and here we are less than one year from the bottom of this market correction and all of a sudden we expect the market to be valued at these levels with no justification from actual earnings?  It just doesn’t make any financial sense.  We are back to seeing bubble like behavior.

Middle class Americans are largely not participating in this rally.  Clearly banks aren’t lending anymore even though they clamored for additional funds to provide credit to Americans.  The home loans banks are making are all backed by the U.S. government which only adds further fuel to the flame.  If you really want to see what sector by and large has benefitted the most from this rally, just look at the financial sector:

While the S&P 500 is up 63 percent and that in itself is stunning, the financial sector index is up a stunning 173 percent in this same period.  Have the banks really gotten that much better?  Is credit really flowing from their doors?  Not really but banks have managed to take taxpayer money and funnel it back into the stock market that is largely becoming more and more like a casino.  The structure is setup for quick profits even if it means long-term destruction for our economy.  Why try giving a boring 30 year fixed mortgage and earn a modest fee, even though the client will be better off in the long run when you can dish out a toxic mortgage with a high commission but will eventually lead the borrower to ruin?  That is the structure of our current financial system and nothing has really changed even though we have seen the most volatility since the Great Depression.

The current stock market valuation tells us that the stock market will hit another correction.  Short of incomes going sky high or earnings doubling each subsequent quarter, at a certain point valuations need to come back down to Earth.  Ironically the low reached in March of 2009 actually reflected a more sensible valuation of the economy.  Right now the S&P 500 is betting that things are back to the good old days but clearly this is not the case.  We should now be absolutely cautious when people try to value stocks or assets on potential values and not what reality is currently reflecting.