Financial history doesn't repeat itself, but it often rhymes. You can't be stupid enough to trade off anything I say.... I'm lucky they let me out of the straight-jacket long enough to trade.

J. P. Morgan

"Sell down to your sleeping point"

Saturday, March 29, 2008

It's 2am and I'm still up!!! Damn. This is a Super post from my Crystal Ball

Grodge and I were commenting about Peter Schiff, and the DOW in 2006 when it was at 11300.. and Peter was talking about the Recession. I figured I'd share this with the Class.

He said:
The amazing thing to me has not been the decline since Oct, but rather the prolonged market rise from Aug06 to Oct07. Amazing. What was it based on?

Not to be Patronizing(I'm just providing background, incase somone needs it)... but the market is based on PEG (P/E and Growth) The Growth in earnings in a stock, give us our upward momentum in the market. If a stock is Showing steady 2% growth in earnings every quarter. The P/E ratio gets larger and the Price of the stock steadily... Linearly Grows every quarter. And a miss will take it back to it's last quarter level...

So, if the stock is growing at 2% one quarter and 3% the next quarter and 4% the next... this is where the stock gets Parabolic.. because as the earnings are parabolic so will the stock price..... The danger with these stocks is that if they miss Expectations in any way... That parabola Suddenly gets flat, and a 20-30% haircut is in order... Immediately, This is what happened to the Nasdaq in 2000.

So..... As a stock trades, so as the market..

Kudlow did a great thing about earnings tonight. He pointed out that "Domestic Earnings Growth" has been flat since late 2006. But international earnings were supporting the market, till August 2007.... this is accounted for in the Dip we took in late 2006. And the continuation in a slower up move through august.

Now the banks were hiding their losses, up till then. This was what shook the market in august.... But UnTalked about by CNBC, primarily was that earnings were Flat in August... and Roughly this means we have to come back to the March levels.... Primarily, and trade flat.

The Bull thesis between August and October was that; the Weak Dollar, and the fed was going to save us.(BTW I actually looked it up, and it's very normal for the market to have a denial rally when the fed starts cutting, happens almost every time. The Thesis almost every time is weak dollar and the fed will save us, it was Creapy, I looked it up) And almost every time After the fed cuts We trade to "NEW ALL TIME HIGHS" then within 1-6 months we trade back to where we were when the fed started cutting.... Catch another Bounce... and that is where the "Recession Trade" starts.

Interesting, this cycle was that We traded this crisis like we had a problem Like the Mexican debt, LTC, or Asian Debt. Some External threat to our market like a Hang Nail or thorn in our side.
This was very strange, and from my research it should not have happened... BUT this can be accounted for buy the fact we have had such a strong bull market, and so many "Generals Fight the last War", and the only substancial financial Crisis we have seen in 30 years was the Nasdaq Bubble. If you notice... Every thing is a bubble now... you hear it everywhere.... and it's nonsense... most "over heated markets don't trade like bubbles".... a bubble is that parabolic move in things... and when it pops we get that 30-40% haircut... That is a bubble. And housing was a bubble, and that doubling in price in 2 years was parabolic (quick tangent, When Gold goes from 2k-3K in a parabolic move in the next 5-7 years... that will be the "Bubble"... this $1030 level was no bubble. That will tell us that the Secular Commodities bull is over.)

More on how this should trade.....

Assuming I'm correct and this is a SECULAR BEAR..... and that what comes with your secular bear BTW is a Crash... a Charming 40% Dump in the market from the highs. BUT... since I've only looked at a few of them... and this is the way this should trade... We will trade down to 20-25% from the Highs..... We will Trade Range bound +/- 15% for some period of time.... 6 months-2years.... then we pull back to that 40% mark... After that WTF knows.. We usually recover, but could trade +/- 20% after that for 5-20 years. This has been Baby bear who in a few months has grown to adolescent bear.... Mama Bear is coming.... And then Daddy.

There has been some remark about this last rally and how "Bullish" it was... Which Makes me feel better about my Thesis on this being a Range Bound Secular Bear... It should be Different than a standard Recession trade. A standard Recession is just a large 10-17% dip in the market For 3-5 months. But But But... here is the thing... I talk about the "Inflation Trade".... This is what should keep the market up, and Range bound..... We will Keep waiting for commodities price to come down... and it's just never going to happen, it will keep the materials and industrials ripping... But Like in the 70's "higher input costs" will keep things from growing. And will keep the market from Daddy bear Market for the time Being. Also... there are Too many Bear Generals Trading the Last War. The 2000 Nazdaq bubble... Which is where they are getting confused(or I'm wrong and full of shit) But... I believe we will never see 12700 ever again.. till 2015 . or Hyperinflation... which ever comes first.

Interesting thing I was trying to point out last week as all the "Crisis Trade" Bottom pickers were out in force was that, they thought this was a Crisis Trade... Problem is this is a Recession trade on a Lack of Growth in Earnings... this is the Second in a series of "Credit Crunches"... and like the Fed cuts only help after 9 months... Credit Crunches hit us in 6.... So expect us to feel the effects of this one in September...

What is SUPER SCARY!!! Is that in a normal Recession trade the fed still cuts for 3-5 months after the market has recovered.... Problem is... the Fed is out of Bullets.

THE BIG QUESTION IS... when will traders figure all of this out.... and we are a discounting mechanism.. but only 6 months out. They do tend to be smarter than I think... and we could see some..... unexpected moves.

My expectation is a Temporary bottom to be put in between now and April 15. in the 11000-11300 level... We will pop back to 12500. Then be Range bound.. maybe back to 11300-11500 Bounce to the 1200 Flatline +/-200 pts for 1 month or 2.

There is many a slip between cup and a lip... The real Bomb to the Shorts, will be if they do as Steve Forbs says, and toss the "Mark to Market" and go back to "Mark to Enron".. that could give us a 2K pt pop in the market... till Unemployment starts Creaming us. I suspect, that the bad jobs numbers won't come till fall.

I heard someone joke about the Non-jobloss Recession, just like the Jobless recovery. I have called it the Jobless Economy, as huge numbers of people have moved to "contracting" which is more like being a second class employee form companies these days. Most the job losses will be felt by Contractors, and by undocumented workers... that is this leg of the slowdown... But I think it will hit normal workers later in the year.... I also think that the Fed will have to take the tough road and Hike Rates... but the market is going to have to Scream at them to do it.... In fact I bet Cramer will have to do it....

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