This crisis, however, has turned out to be much broader than anything I could have imagined”

“Those of us who have looked to the self-interest of lending institutions to protect shareholders equity – are in a state of shocked disbelief”

Alan Greenspan, Federal Reserve chairman 1987-2006 – October 24, 2008

Shocked – well, we are shocked that Mr Greenspan is shocked. The former Fed chairman who was revered as a god by Wall Street now has the chutzpah to say he is shocked by what has taken place. He went on to admit that he was “partially” wrong to resist regulation of some securities. Some securities? Which ones? Most securities except for the stock market are not regulated. Except for the Sarbanes-Oxley Act of 2002, most securities regulation in the USA dates back to the 1930s.

Mr Greenspan, we are shocked that you could have been so naive for so long. In a world of
unbridled deregulation and laissez faire capitalism, allowing interest rates to remain low for so
long while pouring oodles of money into the financial system was like throwing gasoline on a
fire. It would end in an unmitigated disaster.

S&P 500 STRATEGY: STAND ASIDE (for definitions of terms see end of report)

- May have completed a huge ABC down from May highs.
- May have completed an ABC wave of a larger degree from October 2007 highs. Fell in a
5-3-3 corrective fashion. But we can’t rule out that the current wave is actually a five
wave collapse with waves 4 and 5 to come.
- VIX indicator at all time highs
- VIX Indicator made new highs even as the S&P 500 fell short of its previous lows
- Numerous positive divergences being seen on indicators
- A break out over 1000 would be very positive and may confirm a low in place otherwise
the area will act as resistance
- Short term buy signal would be seen above 910
- Pessimism remains extremely high
- Monday is the anniversary of the Monday/Tuesday 1929 stock market crash
- We don’t expect that but instead the market will probably end with a whimper
- We can’t rule out more new lows though on Monday because of the weak market on
Friday although Friday’s market was not the collapse it seemed to indicate at least
initially
- Awaiting finishing of hedge fund liquidation and can’t rule out that they may just
continue again this coming week
- If we get a break over 1000 we could just go straight up
- Look for a low by Tuesday at the latest

TSX INDICES
It was another ugly week in the markets with the TSX Composite making new lows and losing about 3 per cent. If there was any good news is that after the scary plunge on Friday we closed almost unchanged and we did close the week nearly 600 points off of the new lows. Some faster moving indicators are turning up on the weekly charts for the first time in a while. But we note we note we do not have any major divergences on the weekly charts.

New lows were seen not only on the TSX Composite, the TSX 60 and the CDNX Venture Exchange (now back at 1999/2000 levels which we note was a major buying opportunity) others making new lows were Information Technology, Consumer Discretionary, Materials, Gold and Metals & Mining. The latter three have been particularly beat up and they were not even at the heart of the financial crisis but have been the most sideswiped victim. Think of it as a reckless, careless driver causing a serious accident but innocent victims get killed.[ read more... ]

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• Alan Greenspan says he is shocked. So are we.
• Three train wrecks and the third one took everything
• Alberta pushed to its knees
• The gold sector lies prostrate
• Even Kerkorian gives up on Ford
• But don’t worry. We will never be as bad off as Zimbabwe
• The Greenspan debt legacy.
• Could the US go bankrupt?
• G20? Fogetaboutit. The US is still the Godfather
• The next crisis. The collapse of the US$.
• Gold has not fallen in all currencies.
• DJI headed for 5000? Well the charts seem to tell us so.

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This past week was one of the wildest in our memory. The VIX indicator, a measure of fear and greed and volatility in the market, went above 80 before reversing and closing over 10 points lower. The VIX trades inversely to the stock market (S&P 500). This was a record level for the current version of the VIX indicator, although it only goes back to 1990. As we have noted before, the VIX this time around took out the highs seen at the 1997 Asian financial panic, the 1998 Asian/Russian and Long Term Capital Management (LTCM) panic, the 2001 September 11 attacks and the 2002 tech wreck/dot-com bust.

Some have noted that based on the old formula for the VIX, the past weeks high was around 100. That is the highest since the 1987 stock market crash where the VIX hit a record one-day high of 122. This crash occurred over a two-week period but nonetheless the impact was the same. As well this crash got underway after the market was already down roughly 20 per cent. In the period following the highs seen on September 19, 2008 the S&P 500 fell another 30 per cent to the lows on October 10, 2008.

TSX INDICES
After collapsing some 16 per cent the previous week the TSX Composite after making new lows for the move down reversed and closed up on the week by 5.5 per cent. No it wasn’t a huge outside week signaling a possible key reversal week but nonetheless it does qualify as a reversal week.

Leading the way was the Financials index with a 10.8 per cent gain. But right on their tale also with an up week above 10 per cent was Utilities up 10.7 per cent and Energy up 10.1 per cent. But not all sectors joined the reversal party. The Gold Index was hammered down 14.5 per cent while Materials also saw an 11.1 per cent drop. They also saw new lows for the move down as did the TSX Composite of course, the TSX 60 Composite. The CDNX Venture exchange also recorded new lows for the move as that group cannot seem to get anything going.

TSX COMPOSITE STOCKS BUYS AND SELLS
In the devastation of the stock market buys are few while sells are many. TF.UN below is the subject of a takeover at $11 so Friday’s close price $10.50 leaves little. Sectors seem to be primarily consumer staples. Almost any and every sector is showing avoid as are many stocks. RGL fell off the list for gold buys but it is still a hold. FFH benefited from positions in Credit Default Swaps (CDS’s) where it is was positively [ read more... ]

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• Market trying to make a bottom
• VIX at record highs
• Sentiment indicators say bears are overwhelming bulls. Is there a bull anywhere?
• The financial industry will undergo a major shakeout in employment over the next year
• Many hedge funds are out of business and many more will fail
• Fed printing money at an unprecedented pace. Monetary base explodes.
• Bonds topping. Get out of bonds.
• Gold (and silver) on their knees
• A new Bretton Woods is now going mainstream

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“It’s a recession when your neighbour loses his job. It’s a depression when you lose your own.”
– Harry S. Truman

The stock market has crashed. Pretending it is anything else is futile. What has for years been predicted by the perma bears has come to pass. But now that it has happened we can begin to focus on the recovery. The end is nigh. While it will be a severe recession or even a mild depression, either of which will grip us for more than a few years and maybe a decade or more as it is with Japan, we can with the mind boggling collapse of the past two weeks begin to focus on how to get out of this mess.

First, some perspective on the depth of this stock market crash. Over the past two weeks the S&P 500 fell 25.9 per cent, the Dow Jones Industrials 24.2 per cent, the NASDAQ 24.5 per cent, the TSX Composite 25.1 per cent, TSX Financials 21.2 per cent, TSX Energy 39.2 per cent and the TSX Gold 15.5 per cent. The damage was worldwide – Tokyo Nikkei Dow 30.4 per cent, Hong Kong Hang Seng 20.8 per cent, FTSE (London) 22.7 per cent, CAC 40 (France) 23.7 per cent and the DAX (Germany) 25.1 per cent. While this crash happened over a two-week period, we note that the two-day crash of October 28-29, 1929 fell 23.6 per cent and the one-day crash of October 19, 1987 fell 22.6 per cent (Dow Jones Industrials in both cases).

By most measures of previous stock market crashes we should be at or very near a low for this phase of the bear market. October 19 was the low in 1987, while in 1929 the low was seen nearly a month later, on November 13, but it was another 13.6 per cent lower. A two-day rally was quickly wiped before leading to the final low. As we note, the end is nigh.
In 1987 fears of a severe recession or even a depression never materialized. Yes, there was a recession, and a painful one, especially to the real estate sector and the fallout from the savings…..

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• The end is nigh
• A crash of historic proportions
• Maximum fear now in the market should probably signal a short term low
• We face a deep recession or even a mild depression. On the other hand we could be surprised.
• While there are similarities between now and the 1930’s the differences outweigh the similarities and a repeat of the 1930’s will not happen.

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An extremely ugly week as the TSX Composite fell 11 per cent. We are now down 27 per cent from the May top and 22 per cent in the past month. There is no where to hide. Every sector except Financials, Gold and Consumer Staples made new lows. On the positive side is that many of them are flashing extremes normally seen at bottoms. The fact that Financials, Golds and Consumer Staples are not making new lows we view as a divergence and a potential positive in this debacle.

While we are at extremes here we could see a rebound rally develop at any time. The sectors not making new lows are the ones to look at for possible buys. The TSX could rebound back to the major breakdown level near 12,000 and in a best case scenario get back to 13,000. But that is about as good as it gets. Fact is we have now broken down under the 4 year MA and once we do that we are entering a more serious bear market. We expect the TSX Composite to correct at least 50 per cent over time which targets down to between 7,000 to 8,000.

The sector that has the best indication of a possible bottom in the making is the Gold sector. In some of the faster indicators (stochastics) we are getting positive divergences. This is of course not a guarantee that we
are making a bottom but it is at least a reasonable indication that we could be in the process of bottoming.
Financials are also showing positive divergences. So amongst the carnage there is some hope here.
While the CDNX Venture Exchange continues to make new lows overall we are seeing a number of stocks that definitely now appear to be in the accumulation stage. There have been a number of them have very high  volume days with no significant price movement a clear sign of some accumulation occurring through placement usually at the expense of very distressed sellers. Nonetheless it is a positive indication there. The
CDNX Venture Exchange is also in the zone of old basing indicating there is very little if any downside from here.

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• The financial panic of 2008 is on
• We may be in the vicinity of temporary low
• The bear market may still have many years to run
• The financial system is stressed out
• The authorities appear to be at a loss as to what to do
• Calls are coming for a new Bretton Woods
• Gold remains the one true currency

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Investors can be forgiven if they have only now realized that what they have been going through in the markets of late is of historic proportions. Financial panics are rare events but when they occur they generally wipe out at least half and sometimes more of investors’ stock market wealth. Capitalism, it seems, has a knack for creative destruction. Does that mean that investors should never invest in the stock market? Of course not. Eventually it recovers, but it usually takes years.

Does that mean that given the events of the past couple of weeks that everyone should now join the panic? That is definitely a more difficult question to answer because in a panic sell off even  the good is thrown out with the bad and it is a more a case of bids just disappearing then it is that there is something fundamentally wrong with many stocks including preferred shares of blue chip companies. At the end of the day quality will recover faster than the fundamentally unsound. The rapidity and broadness of the decline has even caught us off guard.

Financial panics have been around at least as long as organized economies. The first recorded panic in modern economies was in 1819. At its heart was a failure of the banking system following the War of 1812. It was preceded by a change in monetary policy caused by heavy borrowings to finance the war, and the monetary expansion in turn spurred an expansion of banks and bank notes. The resulting speculative investment led inevitably to collapse, with bank failures, bank runs and bankruptcies.

We can suppose that at least this time the mania wasn’t tulips, so there is at least a chance that this one might reasonably recover in our lifetimes and some will recover… [ read more ]