Question for bulls?

First a quick review about what I see happening, and then a simple question for bulls;

* Funnymentals;

So, this credit bubble finally popped. The Fed injected record amounts of cash in 2005 and 2006 to offset the weakness that was growing in the credit markets and the large caps continued to rally. The smart money started to sell into these rallies since Dec 2006. Now, only 5% off from the index highs, there is record amount of new lows, the prices are finally snapping back. It took quite a bit time for the market to come to their senses that the easy credit era was finally over, it was because they had a lot of cash in their hands to burn, not because that cash was growing...

Sometimes an earthquake is an earthquake, not a simple crack on the asphalt. It takes time to rebuild. The way I see it, the monetary environment or the liquidity will not improve before the rates start to come down a bit. The earnings are set to slow down, but I think the situation will probably happen quicker now since the consumer and many corporations will be stressed with the credit conditions even more. There is a possible compounding effect here, even if the current conditions are nearly priced in...

From what I was able to read about the past history, just like every bubble has been driven by the easy credit sponsored by the gov'ts, another one just happened since 1998 during the former Fed Chairman Greenspan's era. This is the aftershocks of the 2000 bubble, they inflated another one immediately with the easy credit and it also popped over the past 12 months, but the last and largest injection of liquidity since 2005 managed to push the markets and convince the majority. It takes time for the crowd to change their perspective...

The best case for this market is a trading range for the next 2 quarters until the investor confidence rebuilds and some sort of liquidity returns to the markets, either by the Fed easing or growing earnings projections into 2008 at some point. The trading range should last until some more visibility emerges about Q4'07 or Q1' 08 earnings. But the Fed is really stuck with the USDX just above 80, so no easing at the moment. The earnings will slow down for a while longer, they will probably do better into 2008 and 2009, especially if the Fed can do something about it.

* Technically;

The long term cycle lows are not point events, we should remember the summer of 2006, especially given the market internals this time. I would think that if another major cycle is bottoming, what we have seen this week was probably the fastest part of the decline, but it should not mark the bottom of it right away given the downside momentum, I would think a slower decline will mark the lows around the middle of August and then only a retest of the lows around Sep or Oct, perhaps a higher low...

There is no catalyst for the upside other than the excess cash that the people might still have in their hands at the moment, so a strong bounce sometime this week is quite likely given the record put buying in the option markets. However, I think the market bounces a bit early next week and declines until the end of the week and bounces stronger instead during the expirations!

So I see that bearing a 1 or 2 day good bounce next week, the downside should still not be over next week, there should be a 10 week long trading range from the lows. If the USDX can improve, I can see the market climbing another wall of worry in winter since the Fed will choose to help for 2008 elections at least, imho. This is really the best case scenario assuming that the damage due to the credit bubble will not be compounded in the months ahead...

* Finally:

So, my question for the bulls is; if you see the market making new highs by the end of 2007, where will the liquidity come from?!?

Good luck,
- kisa

Where does the liquidity come from? The Fed. They just print more of it.

When? Certainly not now, certainly not right away...

When? Certainly not now, certainly not right away...

You saw that gang of PPT huddled around CNBC friday? That was like saying "we'll push a few zeros out this weekend, come talk to us about it".

The US is such a bargain due to the dollar that Asia (China), Europe and US Treasuries will provide the liquidity. But! first a little countertrend of 38-50% up, then the third wave down in the fall which will have you dispondent apparently. Buying time will be later in Octorber '07 (providing there is no War in the Mid-East). Chin up, it is not over yet. Best, Islander

It's gotta trap the dip buyers and bust the puts, so I would think it goes under the 200 dma on Monday and gets under the 3rd standard deviation of the 20 dma. Then bounces really hard for 2 days and declines a bit into the weekend and another rally into the expirations. It should retest the lows by the end of August...

You saw that gang of PPT huddled around CNBC friday? That was like saying "we'll push a few zeros out this weekend, come talk to us about it".

I am not sure this chart is saying like they were gathering their resources on Friday...

http://ichart.financ...X,USDJPY=X&.png


The PPT would not reassure anyone, they would just do it. This reads a lot like a desperate gov't to me. What they are talking vs what they are doing are two different issues. But I am pretty sure, once the reversal triggers it will be also a buyback panic...

Look at the submitted vs expected repos here...

Edited by kisacik, 28 July 2007 - 04:29 PM.

the third wave down in the fall which will have you dispondent apparently

Not really, you can not predict that far out without seeing where and how this decline will stop. This decline can turn into a crash next week and everything you are hoping for will be priced in August... Markets love to kill projections...

... especially the EWP ones... I love those waves that never work, ask to da_cheif about them...

BTW, this is now almost inverted again, but if the Fed manages to lower the rates in the months ahead once this correction is over a bit to 4.5% from 5.25%, this chart can get quite steep again. So, as much downside potential there is immediately ahead, it is really hard to say what is going to unfold near Sep-Oct timeframe...

http://quote.bloomberg.com/apps/chart?type=c13&cfg=yldCurve_US.xml&x=3m|6m|2y|3y|5y|10y|30y&y1=4.84|4.93|4.50|4.48|4.56|4.76|4.93&y2=4.91|4.96|4.56|4.54|4.60|4.79|4.95&y3=-.00|.00|.00|-.00|-.00|.00|.00&.gif

Different bubbles burst at different rates. The 2000 Internet STOCK bubble was burst fairly rapidly because stock prices have greater velocity than asset prices. The housing bubble is more like a puncture in a large baloon. It will deflate at slower velocity albeit will last longer. Therefore instead of a crash/fall of the cliff I am looking for a slow drowning into a mud hole. The real key item to watch ahead is retail sales. If retail sales continue to be sluggish, that is 75% of the US economy and that is very likely to affect corporate earnings. OTOH if retail sales hold their own, the market will most likely grind further up. Another mis-information I keep seeing on posts is that Fed can print any amount of money as Benny wants. That is not true. Fed can only issue credit. Which means there has to be borrowers willing and able to borrow. These loans are not interest free loans such as the one I got for my last two automobiles. If there is dearth of willing borrowers, there is NO Fed induced hyper-liquidity. If retail sales are slow, there will be fewer borrowers. With the US $ at near all time low against major currencies, it won't be easy for Fed to exercise the 2nd weapon they have which is to lower interest rates. Who is going to buy the T-bonds with low interest rates and depreciating US$?

The housing bubble is more like a puncture in a large baloon.

We'll see how much faster the housing will correct once people start hitting the bidders' prices instead of asking the current prices. They tend to sit and wait, but the prices will come down, it just didn't occur to the majority as much and they have no interest in selling asap since they still live in them.

I keep seeing on posts is that Fed can print any amount of money as Benny wants.

Yes, but almost, since there is always demand for the cheap liquidity, it is only a matter of Fed's decision to collaterize the failing debt obligations into the future. The banks are not necessarily the best borrowers as we just saw two BSC's failing hedge funds...

I mean, once the perception of the abundant liquidity is gone, you will see people acting a bit faster than how they did so far, imho...

- kisa