SP500 Bear Market Update

Continuing the comparison of the 2000-2003 bear market with
the recent decline from the October 2007 market top.

We are at key support.


















The next step could be a big one.


















We just noticed this evening that the current measuring objective of the active chart formation,
the big Head and Shoulders top, is 1182 which is roughly a 25% decline from the October 2007 top.
So we have an intermediate target if this chart comparison is to continue successfully.

The bear market decline of 2000-2003 ended up down roughly 47% from the top.
















That would be about 836 on today's charts, for those
at home who are keeping score.

What Happened in the Last Recession and Bear Market?

Yippee ki-yay....

A Capital Idea, Without Free Reserves, but Still Plenty of Room for Concern

To put this patient to bed so to speak, for banks the issue is not one of reserves, but one of capital. Reserves are what the regulator says you must hold based on formulas involving the size and nature of deposits you are holding. Capital is what you have to work with, the base from which you make loans and do business.

Liquidity relief from the Fed can help avoid a credit crunch, which is a short term liquidity problem that can come from a variety of sources, including operational problems like major snowstorms impeding check clearing, major events such as 911, and bank panics. The key phrase is short term imbalance between supply and demand.

``There is no relationship between non-borrowed reserves and anything the Fed cares about, be it inflation, employment or real GDP,'' said Paul Kasriel, chief economist at the Northern Trust Corp. in Chicago.

Insolvency is the real financial problem here. Insolvency stems from insufficient working capital to meet the continuing business needs of the bank, not incidentally, but because of some major business loss depleting capital or a failure to make the appropriate growth provisions. Its working capital that banks are seeking to increase when they sell preferred shares to the SWFs, for example.

Capital is something the Fed cannot directly provide. It does not buy bank shares. It can help to arrange mergers and rescues. It can make capital sufficiently inexpensive to make deals between parties feasible. But it cannot (at this time) directly intervene in the corporate bond and equity markets. The Fed and Treasury did surprise us after the tech bubble bust, so let's continue working on our differential diagnosis , because the financial system still seems to be suffering from a sickness unto death.

Here are a few charts worth watching and perhaps becoming concerned about at some point although by the time it shows up here...

Buffett Blames the Banks

Expect to see more broadsides from academics for hire and think tank economists attacking the monetary moralizers and moral hazardists, as the financial situation becomes more dire, and it is put to us that we really have no choice.

A monetary moralizer is anyone who thinks that bailing out the banks with public monies, supplied by the middle and lower classes in inordinate amounts, is not the appropriate thing to do, creating future moral hazard, rewarding incompetency and thievery, et cetera. The neo-Keynesians like to portray those who are concerned with moral hazards as fussy old biddies who let principle get in the way of a really good time with the punchbowl.

Contrast that, however, with the illumination cast by the independently thinking (and independently wealthy), such as the famed Mr. Buffett, who on occasion prefers to like to tell it like it is, as he does at a conference in Toronto, as cited by the UK Telegraph:

Billionaire Warren Buffet has accused major banks of creating their own downfalls. Mr Buffett, known as the "Sage of Omaha" for his investment record, suggested that the banking fraternity has only itself to blame for its recent problems which have seen banks write off more than $130bn (£66.3bn) so far.

"It's sort of a little poetic justice, in that the people that brewed this toxic Kool-Aid found themselves drinking a lot of it in the end," Mr Buffett said, making reference to the American soft drink.

The septuagenarian investor, speaking in Toronto, said that in spite of the meltdown in the sub-prime mortgage market and the impact on the banking system, funds remain available.

"I wouldn't quite call it a credit crunch," he said. "Money is available, and it's really quite cheap because of the lowering of rates that has taken place."

However, he said what had taken place was "a re-pricing of risk," leading to an "unavailability of what I might call 'dumb money', of which there was plenty around a year ago." (his point is that the problem is not liquidity, but a scarce supply of fresh suckers willing to buy into the familiar Ponzi schemes - J)

Mr. Buffett also reiterated his negative views on the subject of the US dollar, saying that over the next five-10 years, the dollar could seriously devalue if the US trade deficit persists.

Now, we don't necessarily believe that the bankers should be punished for what they have done; after all, there is the Ken Lay defence, that destroying the US economy and impoverishing millions was an unintended consequence of simple incompetency, fiduciary abuse, bad management and greed, without malice aforethought.

But we do think it is a bit much even by Wall Street's face-ripping standards to defraud the public, and then to expect the public to foot the bill when the scheme goes awry and money is left on the table, so to speak, or at least a hefty tab remains for someone to pick up.

Lowering interest rates and increasing the money supply is not going to fix this. The problem is not a shortage of funds. The problem is a shortage of suckers willing to buy into these Ponzi schemes, and to buy just about anything from the jokers that sold them damaged good last week. The music is stopping and the bankers don't quite have a seat, and are searching for a fresh supply of dumb money. Hence the grab for public funds from Congress and sovereign wealth funds (SWFs); it doesn't get any dumber than that.

What we recommend is to let the free markets work. Even if we don't allow the banks to fail, thereby impoverishing depositors and the public via the FDIC, the shareholders and owners and top management of these banks need to lose money, and lots of it. What the markets do not accomplish, heavy fines and judgements will have to do. Jail sentences are optional, but recommended for our consideration.

We would also like to see the reinstatement of Glass-Steagall, which the banks spent years and considerable political donations to overturn. A return to a sensible regime of banking regulation and policing, which obviously became a joke during the Greenspan chairmanship and the Clinton and Bush administrations, might be a step in the right direction. The public may wish to do its part by NOT continuing to re-elect these jokers even if they do shed a few crocodile tears.

That will do, for openers.