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Further Trouble in the Cards?

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Risk dispersed has become risk run rampant.

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Baby, there's fever in the funk house now
This low down bitchin' got my poor feet a itchin'
You know, you know the deuce is still wild.
-
Tumbling Dice (The Rolling Stones)

"I'm shocked, shocked to find that gambling is going on here!"
-Casablanca

"Credit is like a looking-glass which when once sullied by a breath, may be wiped clear again; but if once cracked can never be repaired."
-Sir Walter Scott

"Economic history is a never-ending series of episodes based on falsehoods and lies, not truths. It represents th path to big money. The object is to recognize the trend whose premise is false, ride that trend and step off before it is discredited."
-George Soros


Yah, Boo! That's what the FOMC, the Federal Operations of Musical Chairs (alternately referred to as the Federal Organized Mob of Casinos) said to the bears on Friday morning.

It gave Boo quite a scare. It stuck the shorts pretty good. As my four year old daughter put it when she saw my reaction Friday morning, "Daddy, someone got a booboo?"

Be that as it may despite some of the cheerleaders saying Friday would be the largest up day in history, it did not play out that way.

But it's official now – it's a rigged game. It's just that there's a new stick man handing over the baton from Uncle Sam to Uncle Al, to Uncle Bernie. The Greenspan Put it Where the Moon Don't Shine lives on masquerading as the Bernanke Bid.

Of course, the sanctity of the casino, er... system must be preserved at all costs. Whether that cost is the full faith and credit of the U.S. Dollar or not.

What better time to switch the dice and load a new pair but an hour before options expirations on Friday. Of course, the die was cast on Thursday when the high rollers who lubricate the play and the casino bosses who run the Show got the call.

That, of course, is one of the reasons we, as traders, follow the technicals and the tracks and the scent of the big money. They are always in the loop. And there's almost never a loop left unlooped. You want to play? You pay the Vigmeisters. If you press your bet into crowded trade when the table's tilting too far against the house, you stand to get your knuckles broken. Just be careful the comped drinks aren't spiked: up spikes in a defined downtrend typically spell the end of countertrend rallies.

And knuckles on the Street are conspicuously white lately. That demand for T-Bills have ratcheted down to under 3% at one point last week is emblematic of the panic in the air. Yes, Virginia, the Panic of '07 did begin in mid-July.

Boom Boom may have lowered the boom on the shorts and eased the pain somewhat for the big institutions, who sold naked puts over the last few months for the August expiration, but the wider Discount Window will be little comfort to those that really need cash and merely more wallpaper for those lenders unwilling to part with it. Cash is not always cash. Not all cash is created equal. After all, who wants to step up to the plate and risk their job until the dust has settled? Especially, when demand for U.S. Dollar denominated debt may be DOA. As Randall Forsyth quotes a senior Wall Street marketing director in Barron's this weekend, "These pools (of excess liquidity around the globe) are basically derived from two sources:

  • Massive trade surpluses with U.S. in U.S. Dollars
  • Petro dollar recyclers

These two pools of excess capital are U.S. Dollar – dominated and have a virtually insatiable demand for U.S. Dollar dominated debt…until now".

In a nutshell, foreign buyers were burned by the "full faith and credit of the U.S. real estate shell game". Real estate was a classic case of instruments of hot air (no money down, easy terms and no verifications), helium of hubris, and the A.D.D. of the appraisers, and the wunderkind Midas in reverse on Wall Street trying to play Merlin with other people's money. These "youtes," as Joe Pesci, would say have succeeded in turning gold into lead. No one knows how far the Albatross of Alchemy around the financial system's neck will carry. No one knows exactly how heavy the clunk from the anvil of leaden obligations will be.

But a few things have become apparent: risk dispersed has become risk run rampant. Risk run rampant has infected the speculative spirit.

Is Dr. Bernanke's antibiotic enough to do the trick? If not, it's a better than average likelihood that Thursday's low of 1371 S&P was the mid-point of the decline. If so, the 185 point range from 1556 to last week's low would potentially project anther 185 points down from 1371 or 1186 S&P. As you will recall, I have written in this space often about a cluster of geometry that indicates a decline back to where the last up thrust started in October 2005 at 1160 – 1170 S&P.

Conclusion: In the depths of the dark nights of the financial jungle, Bernanke pulled out an old machete from his quiver and started discounting the dense brush of debt.

However, it will be interesting to see how China reacts on Monday morning since the Asian market shrugged off Thursday's large range volume reversal in the U.S. markets in a big way. If China does not rally over the next week, the global growth paradigm may be in jeopardy resulting in a deflationary spiral.

Strategy: I would expect alternating tumbling prices and deuces to be wild over the next few days. It should be worth playing the don't pass line if 1450 S&P is tested and fails a few more times. Why? The snapback rally that started at 1427 on August 6 and ran to 1504 S&P on August 8 was an interesting 77 points. A measured move of 77 points from Thursday's 1371 S&P low gives 1448. Friday's high, 1450.35. Friday's close, 1445.95. Seven come eleven anyone?

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