Trader’s Narrative

For economic and market news and to see what interesting reading you may have missed last week, check out the list below. To see more, go to news.tradersnarrative.com:

• AIG CEO Gives Uncle Sam (and Us) the Finger
• Prechter Turns Bearish
• Optimism is Back
• Stiglitz Calls for New Global Reserve System
• Get a FREE Subscription to Futures Magazine
• Random Reinforcement: Why Most Traders Fail
• Former Market Maker Turned At-Home Trader (video)
• Asia: An astonishing rebound
• Is Nouriel Roubini a False Prophet?
• Hoenig Stirs Debate on Bank Failures
• No Bull! Rally Hits the Wall
• Get the “Best of Trader’s Classroom” eBook for FREE (limited time)
• Andy Xie: New Bubble Threatens a V-Shaped Rebound

For the complete list, follow the graphic link below:

And remember to check back regularly since there are interesting links added throughout the week.

Geithner’s Non-Sequitur

For economic and market news and to see what you may have missed last week, check out the list below. It is a small sample, to see it all go to news.tradersnarrative.com:

• Doug Kass: The Roubini Top?
• What went wrong with economics
• The real price of Goldman’s giganto-profits
• Get a FREE Subscription to Financial Magazines
• SEC’s Wish List
• Top Rated Technical Analyst: Market Range Bound
• Matching the Time Frames of Your Analyses and Your Trading
• The ABC’s of CDOs
• Get in on EWI’s FreeWeek for Commodities (only until July 22nd)
• Shadow Banking: What It Is, How it Broke, and How to Fix It
• A Tale of Two Bailouts
• Dissecting a Pro’s Portfolio
• Toxic Equity Trading Order Flow on Wall Street

For the complete list, follow the graphic below:

And remember to check back regularly since there are interesting links added throughout the week.

Earnings Season:

A short trading week due to the Easter holidays but a key moment nonetheless as the market teeters on a +27% rally powered by very low volume. To catch up on what you missed and to prepare for next week, here are just a few picks from the past week’s reading list at news.tradersnarrative.com.

• Why D-Day Could Come as Soon as Monday
• The Real Unemployment Rate (try 15.6%)
• Robert Shiller’s new book on “animal spirits”
• How Banks Will Game the PPIP (Geithner’s plan)
• Do Your Genes Determine Your Investing Destiny?
• Free Subscription to Futures Magazine
• Trading Fibonacci Levels
• Roubini Eviscerates Cramer (almost makes you feel bad for the Booya… almost)
• Abnormal Markets: High Yields Outperforming Investment Grade Bonds

Follow the link below to get much, much more:

And remember to check regularly since there are new links added everyday.

WSJ Economy Survey: Things Not Getting Worse

So basically a small group of bankers (Summers, Paulson, Rubin) that saunter back and forth between private and government jobs, along with regulators (Greenspan, Bernanke, Geithner, SEC, etc) - who don’t really regulate - created a situation where the US taxpayer would foot the bill when the bank’s had finished their shenanigans. Check out the interview with William K. Black, the article about Brooksley Born’s attempt to regulate the CDS market, and other similar articles. Oh and by the way, Fannie and Freddie are about to pay $210 million in bonuses.

Those are just a few picks from the past week’s reading list at news.tradersnarrative.com. Follow the link below to get much, much more:

• FASB’s Mark-to-Market Ruling
• A Few Drops Don’t Make the Glass Half Full
• Geithner’s Plan is worse than nationalization
• Fine-Tuning Candlestick Trading: Combine Moving Average Techniques
• The Regulatory Charade
• One Secret to Life Success
• MIT Blackjack Team perspective on the financial crisis
• 6 reasons I’m calling a bottom and a new bull
• I helped build the bomb that blew up Wall Street

And remember to check regularly since there are new links added everyday.

Lawrence Summers Comments on Jobs, Economy:

Not a moment too soon, the financial markets reacted to leadership from European governments and central banks over the weekend. Sadly, the US team of Bush (excuse me while I roll on the floor convulsing with laughter) Paulson and Bernanke didn’t exhibit one iota of leadership or common sense. Did anyone expect the same team that continuously reassured the world that everything was fine over the past 2 years to be the ones to actually solve this?

The consensus among smart economists (Roubini), investors and traders (Soros) has been the need for “capital injection” - a euphemism for “buy a truckload of financial common stocks”.

The Old World Shows The Way
The US’s muddled TARP proposal instead was aimed at buying into the nebulous and toxic derivatives at the heart of this crisis. Shares are easily priced each second on the open market so it can’t be easier to value a bank’s “worth”. Whereas the derivatives are next to impossible to untangle and value. Also, a share, because of its perpetual existence, has a multiplier effect. So by injecting $100 billion of capital, you in turn leverage the effect by the P/E ratio which even now is around 10 for the average financial institution.

Of course, by now TARP has morphed into the European model. Which can arguably be also called the Swedish model, since this very solution was used by them in the early 1990’s to get a banking crisis under control. And unless I’m mistaken, the Swedish taxpayer actually got significant capital gains out of the whole thing. Seriously, how ridiculous does Paulson sound when he proposes with a straight face to simply use government money to buy assets of dubious quality and worth… without receiving absolutely anything in return?

You don’t need a PhD in finance to know that way lies madness.

Then again, the news of a concerted European effort may simply have coincided with a snap back rally. If you recall, many had high hopes for the TARP announcement to reverse the market’s decline. It did no such thing. So in effect, while the news seems to have caused the market to rally, we can’t truly prove that it was the force behind it. There are strong reasons to believe that the market was simply exhausted from relentless forced liquidation and just hit the wall.

Timing
Last week I facetiously suggested that if this wasn’t the stock market bottom, we should flee to the hills and buy guns. The future was starting to look like some kind of Mad Max distopia, at least if you believed the breathless analysts on TV and the headlines across newspapers. Then just hours later I learned that Tony Oz had taken a large long position, based on similar conclusions.

Of course, no one knows what will happen in the market. The best one can do is to put aside emotion and to look at the facts. Or one better, and use emotion to your advantage by looking at sentiment, rather than having it control you. Last week’s sentiment overview was clearly the most pessimistic in a very very long time.

90-90 Day? - You Betcha! (wink)
As much as last week’s market’s were smashing all records on the way down, Monday’s rally smashed them on the way up. This was as broad based and furious a come back as the bulls could have mounted.

In terms of volume, 95% was accounted by advancing stocks on the NYSE. We went from seeing more than 2,500 stocks on the Big Board hitting new 52 week lows on Friday… to seeing less than 60 today doing the same today. So yes, today definitely met the requirements for a Lowry’s 90-90 up day - and more!. This is something that we had been waiting for because according to the research, a significant floor is created when the market has fallen significantly (90-90 down days) and then reverses with the same ferocity.

Here is a short excerpt from the research done by Paul Desmond of Lowry’s Research:

The historical record shows that 90% Downside Days do not usually occur as a single incident on the bottom day of an important market decline, but typically occur on a number of occasions throughout a major decline, often spread apart by as much as thirty trading days. For example, there were seven such days during the 1962 decline, six during 1970, fourteen during the 1973-74 bear market, two before the bottom in 1987, seven throughout the 1990 decline, and three before the lows of 1998. These 90% Downside Days are a key part of an eventual market bottom, since they show that prices are being deeply discounted, perhaps far beyond rational valuations, and that the desire to sell is being exhausted.

But, there is a second key ingredient to every major market bottom. It is essential to recognize that days of panic selling cannot, by themselves, produce a market reversal, any more than simply lowering the sale price on a house will suddenly produce an enthusiastic buyer. As the Law of Supply and Demand would emphasize, it takes strong Demand, not just a reduction in Supply, to cause prices to rise substantially. It does not matter how much prices are discounted; if investors are not attracted to buy, even at deeply depressed levels, sellers will eventually be forced to discount prices further still, until Demand is eventually rejuvenated. Thus, our 69-year record shows that declines containing two or more 90% Downside Days usually persist, on a trend basis, until investors eventually come rushing back in to snap up what they perceive to be the bargains of the decade and, in the process, produce a 90% Upside Day (in which Points Gained equal 90.0% or more of the sum of Points Gained plus Points Lost, and on which Upside Volume equals 90.0% or more of the sum of Upside plus Downside Volume). These two events – panic selling (one or more 90% Downside Days) and panic buying (a 90% Upside Day, or on rare occasions, two back-to-back 80% Upside Days) – produce very powerful probabilities that a major trend reversal has begun, and that the market’s Sweet Spot is ready to be savored.

Source: Identifying Bear Market Bottoms and New Bull Markets (Dow Awards folder)

Believe it or not, this is the second Lowry’s 90-90 up day we’ve had within 9 trading days. According to Lowry’s 90-90 up days can be spaced out as far as 30 days from each other and still be effective. And although most people keep strictly to the 90-90 definition, Lowry’s actually mentions above that 80-80 up days also qualify. So if you want to be more flexible like them, on September 18th 2008 we had a 89.5% up day which would make it three strong up days.

LIBOR & TED Spread
As I mentioned a few days back, LIBOR and the TED spread stopped going up and today they actually fell hinting that we may have seen the worst of the credit crisis. As banks start to trust one another and lend again, liquidity will flow back into the financial markets and the forced liquidation will cease. It is still too early to be complacent about this but the first signs of a return to normalcy are there.