DOW Closes Below 10,000 as Worries Mount

I guess it's time to throw away the DOW party hats! Hmmm...Now when do you think we will be rolling out the DOW 10,000 3.0 versions?

Will it be a day from now or will it be another decade before they make another appearance? That's the question every investor is asking themselves right now.

The market has clearly lost confidence as fears on several fronts continue to worry investors. Stocks pulled back sharply at the close as the DOW closed below 10,000 for the first time since early February.

The trigger today was a drop in the Euro late in the day as rumors started to float around the trading floors that China might be backing away from European debt. A strong correlation right now is a weak Euro means weakness in stocks. As soon as the Euro started moving stocks started to roll over.

180 Degree Turn from 2009

I find it fascinating to see how psychological the market is. Last year the market rose no matter how bearish the news was. The bulls got their mojo back and the momo traders/speculators sent the DOW soaring 70% higher from the lows.

Today, the exact opposite is true. Good news is now ignored as fear has crept back into the market. This was seen today. The durable goods and housing numbers both came in way above expectations yet stocks still sold off on the news.

I think what's going on right now is the market is looking 6 months ahead like it always does and it doesn't like what it sees.

Any smart economist knows that we have pulled a lot of our GDP growth forward in the forms of various stimulus. Cash for clunkers or home buyer tax credits were excellent examples of this.

It definitely worked as we saw strong GDP growth over the past several quarters. The problem we have looking out forward into the second half of the year is these programs are all now gone. So the question now becomes where is the growth going to come from in the second half of 2010?

Uhhhh...Good question!

Adding to concerns around future growth are the announcements over the last couple of days around severe austerity measures in Western Europe. Italy, England, Portugal, and Spain all came out with austerity programs in that will slash jobs and cut spending.

This is a huge concern since about 30% of our multinational corporate earnings come from the major economies in Europe. Spending is going to come to a halt in these countries as they start paying off their enormous debt loads. This combined with a strong dollar is going to slam exports and thus badly hurt corporate earnings.

As if these worries aren't bad enough we also have oil spewing into the gulf, serious military tensions in the Koreas, and continued concerns around potential failed bond auctions in Europe.

Other than that everything is great! In fact....Why aren't stocks going up?(sarcasm off)

The Bottom Line

Technically the market acted terribly today. Usually you see strong follow through the day after you see stocks rebound from a 250 point loss to close near even.

The fact that we saw no follow through today was not a good sign for the bulls. I actually grabbed some SDS on the bounce and held it into the close.

From a macro perspective, I was expecting one more thrust higher before stocks rolled over. However, I am starting to wonder if that's ever going to materialize which is why I grabbed a position today. BTW, the ES has now turned red(-1.75).

If the bulls can't organize a move higher here over the next few days I think the market is in deep deep trouble.

I wouldn't be surprised to see the market dump on Friday. I expect that we are about to revisit the price action that we saw back in 2008 where no one wanted to hold stocks over a long weekend when there were so many potential triggers for a huge sell off.

Stay nimble out there folks. Like 2008, there are several holes in the dam that threaten to bring down the whole financial house of cards, and we are rapidly running out of fingers.

Disclosure: Bought ETF SDS on today's early bounce.

Another Global Meltdown Right Around the Corner?

Interesting day today. The markets started off the day looking like they were heading off a cliff as the market tumbled over 250 points which took the DOW under 10,000.

Later in the day the banks rallied which then lifted the markets after Barney Frank's comments around derivatives:

"But Mr. Frank's opposition to the derivatives spin-off proposal, which has been championed by Senate Agriculture Committee Chairman Blanche Lincoln (D., Ark.), raises the chances that this provision will likely be altered or stripped out completely because Mr. Frank's comments on it were pointed.


Banks ought to be able to hedge their own risks," Mr. Frank said. He said banks would be prohibited from overly risky derivatives activities by the Volcker Rule and that the separate provision wouldn't be necessary.


"I don't see the need for a separate rule regarding derivatives because the restriction on banks engaging in proprietary activities would apply to derivatives as well as everything else," Mr. Frank said."

My Take:

It looks like the bankers are going to win again when it comes to financial reform.

It appears that this legislation appears will lack the teeth that it needs to really clamp down on derivatives trancactions. I will hold my judgement until I see the bill, but I am guessing that the bankers got their way based on how the market turned around this afternoon.

In fact, I am sure Wall St is already working on ways in which they can work around this financial reform. They are historically famous for finding ways to work around rules.

I still hold out hope that some of this legislation will at least reign them in a bit. Time will tell!

A weak financial reform bill is not good for the taxpayers or the stock market. Confidence will not return to the markets as long as the banksters are allowed to run wild on Wall St. The SEC is still nowhere to be found and it looks like they will continue to be.

Where in the heck are the regulators? They still have been able to figure out the cause for the flash crash. Is Wall St so out of control to the point where our government doesn't even understand how the market works anymore?

The fact that this 1000 point selloff and the ensuing rally a few minutes later remains a mystery scares the you know what out of me. Why would anyone want anything to do with stocks when no one can understand them?

The fact that Wall St tried to intitially blame it on a fat finger trade is embarrasing! Do they think we are that stupid? Apparently so.

Another Global Meltdown?

The market in my opinion is beginning to look a lot like 2008. We saw huge swings in both directions back then like we are now.

The market also ramped and sold off depending on various rumors and news just like it is today.

The questions that we are asking about today's Greek debt crisis are remarkably similiar to the ones seen in 2008 that were asked by the subprime crisis. The only difference is the trigger:

- Instead of asking is subprime contained we now ask is Greece contained?

- Instead of asking will subprime's issues spread into other forms of mortgage debt we now ask will Greece's debt issues spread into other PIIGS debt?

- Instead of aking which American bank will go under we now ask which European bank will go under?

- Instead of asking how much "AAA" MBS do the banks own we now ask how much PIIGS debt do the banks own?

Eventually confidence was lost in 2008 when realized that subprime was not "contained" and had been spread into almost all "AAA" debt. This then triggered a meltdown of our banking system ,and it almost brought down the whole financial system by the time we recognized the magnitude of the problem.

The Fed was able to stem the panic by passing the losses onto the taxpayers balance sheet from the banking system's balance sheet. The problem isn't solved and the losses are still there. However, they don't have to be recognized. Eventually they will be forced to but that's another story for another day.

Can today's debt panic be stick saved like the last one?

This is the key question that needs to be asked and the problem is I don't think that it can.

The 2008 crisis was was triggered and then cleaned up by one country and one currency which of course was the USA.

The problem with today's Greek crisis is there are 16 different countries involved and one currency(Euro) that cannot be manipulated. They cannot "print" out of their problems like we can.

This is why you continue to hear the word austerity over and over again in Europe. The only way out of this mess is by forcing the countries involved to slash spending and pay off the debt.

The problem is this isn't going to work because it's going it's going to be extremely hard on the people that live in the PIIGS. The nations taxpayers are the ones who are going to have to payoff the losses, and I don't think the political will is there to enforce the austerity.

We already know what the Greeks can do when it comes to riots and the austerity measures haven't even started yet!

There will be a lot of pressure on the PIIGS governments to leave the Euro and "print" their way out of this versus living under extreme austerity measures for generations.

This puts the Euro at risk and the reprocussions of such actions would be felt economically worldwide.

I expect to see a lot of violence once we realize how bad this European debt crisis actually is. Could this ultimately lead to wars? Absolutely but that remains to be seen.

Just like subprime this crisis isn't "contained", and it will likely trigger another another global financial meltdown.

Disclosure: No new positions taken at the time of publication.

Could Deflation be a Blessing in Disguise?

There is a piece out tonight from David Rosenberg on Zero Hedge that was a real eye opener for me. For the first time since this crisis began, I heard the word Depression used by a very well respected economist.

I had planned on doing a deflation piece over the weekend and Rosenberg's article fits in perfectly with what I wanted to talk about.

The numbers are now basically telling us that deflation has arrived. Incomes are dropping at a record pace as you can see below:

My Take:

Folks, the numbers here are staggering. Personal incomes have dropped by a whopping $500 billion dollars which is the largest reversal in history. The second chart indicates that government handouts now account for over 18% of personal income.

The problem with the handouts as we all know is they mostly expire after 99 weeks because a good chunk of that 18% are unemployment benefits. The problem here is the government cannot sustain this type of spending without blowing themselves up via default.

Collapsing incomes in a country that has a 70% consumption based economy is the perfect recipe for a depression. I am glad Rosenberg said the "D" word. I think it's time for all of us take our heads out of the sand and say it. As my dad likes to say: "Son, it is what it is".

The depression going away anytime soon so we might as well get used to it.

Is Deflation really a bad thing?

If you are a banker with a few trillion of mortgage debt on your balance sheet it is. However, in many ways deflation is good(more on this larter).

It is pretty clear that Ben Bernanke's obsession around preventing deflation is doing more harm than good at this point.

Someone needs to tell Ben that obsession's usually don't turn out very well. It's not a very constructive emotion. In fact, it's a huge character flaw!

I mean how many relationships work when one person get obsessed with the other? Yeah, I can't think of anytime where it's worked out either. Fatal Attraction anyone?

I just watched the movie "The Fan" with Robert Deniro today where he plays a fan that becomes obsessed with a baseball player that ultimately dies in the end as a result of his obsession. That one didn't work out to well either!

My point here is that when someone becomes obsessed they open themselves up to making bad decisions because they are too emotionally involved with the topic or person they are obsessed about.

This then leads to irrational critical mistakes and then ultimately failure.

I mean any girl or guy that dates an obsessed "stalker" always runs for the hills as fast as they can right?

IMO, Ben is making several crucial mistakes at this juncture as he desperately tries to prevent deflation. Its obvious from the charts above that he has already lost the battle.

The problem is he is not allowing the markets to "revert to the mean" down to affordable levels where people can afford to live in this new deflationary world.

Housing is a perfect example of this. No one will ever buy all of these bubble priced homes because no one can afford them. There are 5 million empty homes in this country!

Yet, Mr. Bernanke continues to keep rates at zero in an attempt to stimulate borrowing and allow the banks to heal themselves. The problem is people can't borrow like they used to because they are losing their jobs and taking huge pay cuts as a result of our collapsing economy!

The only healing the banks did was to their wallets in form of massive bonuses.

Deflation is not always a bad thing. Ben is obsessed with it because he knows deflation will destroy all of his banking buddies because they hold too many overpriced assets on their balance sheets. I say so what? Let them fail. We can create new banks that are actually well capitalized.

Deflation is good for the average person in many ways because it makes living life affordable once again. We can go back to being consumers like we always have been in the past because items will be priced more in line with our smaller incomes!

The government can then reduce their spending because the private sector will be able to replace them as the economy begins to recover. They can then focus on being down our trillion dollar debts.

Living the American dream has flat out gotten too darn expeensive. The examples of our bloated costs of living are endless:

he cost of college is another example of this: How many people moving forward are going to have the $150,000-$200,000 to send their kid to a decent private college for 4 years as their incomes continue and shrink? It's not gonna happen!

As the job market continues to deteriorate you have to wonder if parents will want to send their kids to school at all. What's the point in spending six figures on an education if there are no jobs out there?

How can afford to buy a $35,000 new car when you have to spend 500k for a decent house in cities like Baltimore or Washington DC? How can you then save for your son or daughters education when you are forced to become a debt slave in order to simply live.

Another area where we have severe issues as deflation sets in are the pension retirements for public sector employees:

How can we continue to pay out 70-100k pension funds to retired public service retirees? These people wail like babies if they don't get their 4% raises. NJ teachers had a huge protest regarding this exact subject.

Wait until they are asked to take 20% haircuts as this bubble bursts. There will be blood in the streets! People better wisen the heck up and get used to austerity because its going to take a lot of sacrifice if we plan on saving this country.

These unions need a to drink a seriously large glass of reality juice before they all find themselves fired for failing to be realistic about their expectations moving forward. They need to realize that they should be thankful to have a job even if it is at a lower wage.

I mean the public pensions are absolutely raping the taxpayers in this country"

Police officers are allowed to retire in many states at close to their full pay after 20 years. When they retire a new one is then hired to replace him which then means we are now paying two full salaries for one job. 20 years after that we will be paying for 3 salaries for that one police officer when he retirees. How on earth is this sustainable? Where is the money going to come from?

In a time where salaries were rising along with inflation like we have seen over the past 30 years the Ponzi scam worked just fine. The problem is that it's unsustainable when incomes do a 180 and the economy falls off a cliff.

Bernanke's obsession around preventing deflation is going to lead us to economic ruin if he doesn't alter the course.

The economy will not recover as long as we continue to fight deflation and prop up assets at unsustainable prices. The government needs to just stop all of this bailout nonsense and allow the market forces to set in and cleanse the economic system.

If it leads to a depression so be it. At least then we can then prepare to come out it on the other side and begin a REAL sustainable recovery.

When it comes to the markets the best way to play deflation is to short stocks and raise dollars. Gold will still work and I plan on holding mine but it could go through a severe correction before rebounding. Inflation will be coming when we come out of this, but I am strongly starting to believe that we are going to see a deflationary collapse first.

Disclosure: No new positions taken at the time of publication.