HOLY SMOKES : Dow below 5,000 and S&P 500. Is this possible by Dec 31, 2009?

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Awgee, here are some excerpts from: <a href="http://www.federalreserve.gov/newsevents/press/monetary/20081006a.htm">http://www.federalreserve.gov/newsevents/press/monetary/20081006a.htm</a>



<blockquote>Interest on Reserves

The Financial Services Regulatory Relief Act of 2006 originally authorized the Federal Reserve to begin paying interest on balances held by or on behalf of depository institutions beginning October 1, 2011. The recently enacted Emergency Economic Stabilization Act of 2008 accelerated the effective date to October 1, 2008. </blockquote>


<blockquote>Paying interest on excess balances should help to establish a lower bound on the federal funds rate.</blockquote>


My perspective is the Federal Reserve has created the appearance of an "honest" way of printing money. That they can do this is pretty ridiculous. At the same time it is a convenient incentive for encouraging banks to keep reserves in times of risky behavior or to encourage more loaning in conservative times (by lowering the incentive).



So to answer your question, I believe the Fed will indeed lower the interest earned on excess reserves at some point to encourage lending, but at the time this was enacted, I believe the primary purpose was to funnel money to banks in as many ways as possible (and this was one of them). It may be the interest has been raised to offset the losses that would come from making less loans to prop up earnings until banks are adequately re-capitalized.



Yes, the Fed said they wanted banks to be lending (and not hoarding) but that was before they had the clearer picture about the top banks. Now I'm sure they will simply be happy to see banks recapitalized.
 
Panda,



I think we are already past the peak of the last rally. I think we will see market behavior like that of 2008 where there were ups and downs, but overall the Dow kept losing until there were a couple big drops and people suddenly realized they had lost 20% and could lose more, then sold in a panic.



So while I'm not confident we will reach Dow 5,000 by 12/31, I'm betting Dow performance falls.



I believe the market has focused on the housing bust, the liquidity crisis, and the solvency crisis. Meanwhile, these news items have overshadowed the "expansion" bust and overleveraged households.



<a href="http://www.thestockmasters.com/starbucks-sbux-dying-05212009">This article</a> reminded me of a book I read some years ago where the author as a side-topic conveyed a story about finding himself in a Starbucks and looked out the window only to see another Starbucks across the street. His minor point was that the success of companies was becoming dependent upon expansion. Like any ponzi scheme the apparent profits of growth through expansion can not be sustained forever. Starbucks appeared to have solved this problem a year ago by expanding into China, but look at them now (or not -- since they have closed so many stores).



We have too many consumables and not enough consumers. Couple that with the recent closing of the home ATM and you have to wonder (as I learned Calculated Risk does) how do we get out of this funk? (my paraphrase). Once this becomes the news, I'm sure the market will realize this is not your average recession and things will get worse.



It seems the recent rally was about snapping up stocks when they were cheap. They are no longer cheap, and they are not likely to perform. So what would make the Dow magically rise? Of course, I have to admit I was certainly surprised by the recent rally, and if it were to continue on up I would feel really embarrassed for suggesting all this, but you asked and this is my take.
 
[quote author="WaitingToBuyByAndBy" date=1242665734]We have too many consumables and not enough consumers. Couple that with the recent closing of the home ATM and you have to wonder (<strong>as I learned Calculated Risk does</strong>) how do we get out of this funk? (my paraphrase). Once this becomes the news, I'm sure the market will realize this is not your average recession and things will get worse.



It seems the recent rally was about snapping up stocks when they were cheap. They are no longer cheap, and they are not likely to perform. So what would make the Dow magically rise? Of course, <strong>I have to admit I was certainly surprised by the recent rally</strong>, and if it were to continue on up I would feel really embarrassed for suggesting all this, but you asked and this is my take.</blockquote>


Wait a second... you read CR, and you are surprised by the rally? Or, do you mean you are surprised by the velocity of the rally? Because CR has been posting this chart over and over again, a bear market rally was obviously in the works. Yes, it was a greater rally that readers expected, myself included, but you can't tell me you didn't see a bear market rally coming when you see this chart...



http://dshort.com/charts/bears/four-bears-large.gif



If I could draw a trend line, it would be above the depression, but below the other recessions. If you trade with the trends, it would be obvious. Although, I could be wrong, and I have been, I thought it would have been bad the last few weeks, but it wasn't bad enough for me to make money. However, it is coming, the trend is there.
 
[quote author="graphrix" date=1242666584][quote author="WaitingToBuyByAndBy" date=1242665734]We have too many consumables and not enough consumers. Couple that with the recent closing of the home ATM and you have to wonder (<strong>as I learned Calculated Risk does</strong>) how do we get out of this funk? (my paraphrase). Once this becomes the news, I'm sure the market will realize this is not your average recession and things will get worse.



It seems the recent rally was about snapping up stocks when they were cheap. They are no longer cheap, and they are not likely to perform. So what would make the Dow magically rise? Of course, <strong>I have to admit I was certainly surprised by the recent rally</strong>, and if it were to continue on up I would feel really embarrassed for suggesting all this, but you asked and this is my take.</blockquote>


Wait a second... you read CR, and you are surprised by the rally? Or, do you mean you are surprised by the velocity of the rally? Because CR has been posting this chart over and over again, a bear market rally was obviously in the works. Yes, it was a greater rally that readers expected, myself included, but you can't tell me you didn't see a bear market rally coming when you see this chart...



http://dshort.com/charts/bears/four-bears-large.gif



If I could draw a trend line, it would be above the depression, but below the other recessions. If you trade with the trends, it would be obvious. Although, I could be wrong, and I have been, I thought it would have been bad the last few weeks, but it wasn't bad enough for me to make money. However, it is coming, the trend is there.</blockquote>


Thanks Graphix for the chart. I have seen this chart before and I also hope (with you) that we will be between the other recessions, but above the depression. Keep in mind that the Nasdaq dropped more that 70% from its peak in 2000 to the bottom. (One chart that is not shown here.)



So which short ETF would you recommend to play this? DOG (Short DOW30) and DXD (UltraShort DOW30) or SH (Short S&P500;) and SDS (UltraShort S&P500;) or PSQ (Short QQQ) or QID (UtlraShort) QQQ?
 
[quote author="morekaos" date=1242685997]Don't fight the tape.</blockquote>


Or, "It is easier to ride a horse in the direction it is going."
 
Yes, Graphrix, I'm familiar with Doug Short's Four Bad Bears chart.



It was not the reversal that surprised me, but the pop at the top. You can see in the chart that the upward rally velocity began to decelerate, as though the rally had gone as high as it could go. That was exactly where I smiled thinking we'd start heading down again, then WHAM! the recent boost at the top that seemed to me to last about three weeks. So when I see the latest version of the chart, it still looks to me like it will head down this week, but again, that's what I thought three or four weeks ago.



It sounds as though we are both expecting a downward turn based on the fundamentals of the economy (or lack thereof) rather than continued upward progress based (apparently) on hope. I was trying to make the point there didn't seem to be any magical force to raise the DOW or keep it at its current levels. Maybe there are yet more people with money who have hope and decide now is the best time to buy bank stocks? I dunno.



Sounds like I should do a little more reading before I do any more writing.
 
[quote author="WaitingToBuyByAndBy" date=1242838922]Awgee,



You said you were going to comment on the Fed paying interest on excess reserves. I would like to hear what you have to say.</blockquote>


Sorry.



Could it be that the Fed is capitalizing the big banks in order to allow the big banks to buy the smaller banks and consolidate power? My view is that the real purpose of the Fed being to increase the wealth and power of it's member banks.
 
So are we headed to DOW 4,000 now? or are we going to see 10,500 DOW before heading to 4,000 DOW? I am waiting to pull the trigger on DOG (Short DOW30) and DXD (UltraShort DOW30). UpperLowerClass, I got out of DXO yesterday. You and I bought around the same time at 2.01 in mid-February? Are you already out or are you still in?
 
[quote author="PANDA" date=1242943564]So are we headed to DOW 4,000 now? or are we going to see 10,500 DOW before heading to 4,000 DOW? I am waiting to pull the trigger on DOG (Short DOW30) and DXD (UltraShort DOW30). UpperLowerClass, I got out of DXO yesterday and you and I bought around the same time at 2.01? Are you already out?</blockquote>


As I mentioned before, we will correct 10-15% in May-June, as soon as SPX breaks 870, the selling will intensify, the PPT is desperately trying to hold that key technical level. Then we will have another sucker rally which might carry the Dow near 10,000 and SPX 975 in July, I started shorting about 2 weeks ago through ETFs like DXD, SKF, and puts on XLF, and holding on to my DGP.
 
[quote author="BondTrader" date=1242944130][quote author="PANDA" date=1242943564]So are we headed to DOW 4,000 now? or are we going to see 10,500 DOW before heading to 4,000 DOW? I am waiting to pull the trigger on DOG (Short DOW30) and DXD (UltraShort DOW30). UpperLowerClass, I got out of DXO yesterday and you and I bought around the same time at 2.01? Are you already out?</blockquote>


As I mentioned before, we will correct 10-15% in May-June, as soon as SPX breaks 870, the selling will intensify, the PPT is desperately trying to hold that key technical level. Then we will have another sucker rally which might carry the Dow near 10,000 and SPX 975 in July, I started shorting about 2 weeks ago through ETFs like DXD, SKF, and puts on XLF, and holding on to my DGP.</blockquote>


Bondtrader... You know what.... I think you are right. I am going to hold off shorting the DOW until i see it break 10,000 level and pull the trigger on DXDs. Do you follow Marc Faber?... He has been saying the exact same thing.
 
[quote author="PANDA" date=1242944573][quote author="BondTrader" date=1242944130][quote author="PANDA" date=1242943564]So are we headed to DOW 4,000 now? or are we going to see 10,500 DOW before heading to 4,000 DOW? I am waiting to pull the trigger on DOG (Short DOW30) and DXD (UltraShort DOW30). UpperLowerClass, I got out of DXO yesterday and you and I bought around the same time at 2.01? Are you already out?</blockquote>


As I mentioned before, we will correct 10-15% in May-June, as soon as SPX breaks 870, the selling will intensify, the PPT is desperately trying to hold that key technical level. Then we will have another sucker rally which might carry the Dow near 10,000 and SPX 975 in July, I started shorting about 2 weeks ago through ETFs like DXD, SKF, and puts on XLF, and holding on to my DGP.</blockquote>


Bondtrader... You know what.... I think you are right. I am going to hold off shorting the DOW until i see it break 10,000 level and pull the trigger on DXDs. Do you follow Marc Faber?... He has been saying the exact same thing.</blockquote>


That's the guy on CNBC morning show, right? We stop watching CNBC in our trading room here (coulpe of my buddies in PIMCO telling me they are doing the same), absolutely sick of hearing all the BS.
 
One good thing about CNBC is that you get to hear Santelli rants once in a while. Here's one he did today: <a href="http://markettalk.newswires-americas.com/?p=2077#more-2077">greenshoots? what greenshoots?</a>
 
Uh oh, 10-year bonds are shooting up like fireworks and I was so ready to pull the trigger on some TBT calls. If long rates start going through the roof, watch out for equities dropping like rocks.
 
[quote author="irvine_grad" date=1242948002]One good thing about CNBC is that you get to hear Santelli rants once in a while. Here's one he did today: <a href="http://markettalk.newswires-americas.com/?p=2077#more-2077">greenshoots? what greenshoots?</a></blockquote>


Oh, wow, we missed some fireworks this morning, Santelli is one of the few honest ones, Rosenberg is my man.
 
It is my wish that Santelli would never try to behave moderate and normal, but rather he would be himself and "go off" every time he is asked about an issue. He needs his own show.
 
Rick Santelli and Art Cashin are the 2 guys I enjoy the most on CNBC.

I make a point to really listen to what they say and digest it.



Always listen to Bill Gross as well.

<a href="http://www.cnbc.com/id/30870842">http://www.cnbc.com/id/30870842</a>



Look out if the US loses its AAA Rating. Bonds will sell off HUGE.

Interest rates will take off like a rocketship.

We are nothing but a third world debtor nation in the world today.
 
US won't lose its AAA rating, at least not in the near term, Debt/GDP ratio is still below 100% (around 70%, Thank God!), but we all knew China has been slowly diversifying away from dollar and that by itself is enough to bring down the value of dollar, on top of that, big Ben and little Timmy are frustrated about not being able to bring down the rates on the long bond and they will print more money and buy back more T-bonds in the months to come.

It's almost painful to see DXY falls below 80, we lost more than 12% of our purchasing power in the last 3 months!! I made a suggestion to our CFO yesterday that we should base our annual merit salary increase on DXY instead of the phony government inflation index!!!
 
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