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The Financial Panic of '07 May Have Started Today


A panic can occur when you have to sell something that you don't want to, because what you want to sell you can't.

The wicked king of parody is kissing all his enemies
On the seventh day of the seventh week
The tyrant's voice is softer now but just for one forgiving hour
Before the rise of his iron fist again
-Natalie Merchant (Thick As Thieves)

"Behind every great fortune there is a crime."
-Honore de Balzac

"The borrowing has to stop. The market slide was a shot right between the eyes that had better wake us all up to the simple fact that we can't keep romping forever on borrowed money."
-Lee Iacocca, Chrysler Corp Chairman, October 20, 1987

"Technically, the crash of 1987 bears an uncanny resemblance to the crash of 1929. The shape and extent of the decline, and even the day to day movement of stock prices track very closely."
-George Soros

"I will tell you that, prior to the opening of the market, John J.Phelan, Chairman of the NYSE and I had a conversation where he advised me that there was an inordinate number – unbelievable I think was his word – of sell orders coming into their market. That was like an hour before the opening on Monday. So we saw it coming, but who knows who pushed the button to make it happen. I think that button was pushed a million times by a million people."
-Leo Melamed, Chairman of the Chicago Merc, October 28, 1927

The financial panic of '07 may have started today. I don't make that statement promiscuously. However, the dollar fell out of bed again, making a twenty-six year low against the pound. And, what must have been truly terrifying for the dyed-in-the-bovine-dip permabulls: a rocketing bond rally failed to support stock. The rally in bonds and the break in equities had the feeling of a flight to safety as a whiff of panic permeated Tape Town.

The news breaks with the cycles. If stocks opened weak on Tuesday as investors cringed on poor reports from D.R. Horton (DHI), Home Depot (HD), and Sears Holdings (SHLD), underscoring a dreary housing market, stocks plunged on news that Standard and Poors Credit Service slashed the ratings on billions and billions of dollars of subprime loans. Circling the wagons on 399 such loans to be specific, Standard and Poors stepped up the plate in addressing its mandate as a rating agency par excellence and put some wood on the ball, saying "The level of losses continues to exceed historical precedents."

We are left to connect the dots as to which precedent they are referring to. But, I have connected a few of those dots recently as to the cyclical precedent as to the panics in 1857, 1907, 1937, 1957, 1987, and let's not forget the 1997 'Asian Contagion' that affected world markets. What are they going to call this one? The Western Infection?

The $64 bln question will be what happens in the Asian market Tuesday night (this is being written on Tuesday afternoon). Will the Chinese market follow suit? A look at the FXI shows a measured move that suggests at least an interim peak. From a break out above 117 on June 14th the FXI ran immediately to 130. From there the FXI left a Cooper 1-2-3 Runaway Pullback at 126. Symmetrical 13 points added to 126 gives 139. FXI tagged 139 on Monday. The move up in the FXI from 90 in March to 133 represents a 360-degree move on the Square of Nine Chart. The move to 139 represents a potential 45-degree overthrow. Interestingly, 137 squares out on July 9th.

Manias usually precede panics. I think it is safe to say that this particular period has had its share of manias – be it condo flipping; Private Equity; the expanding debt bubble; hedge fund chic, without the check in the mail, a.k.a. the Adoration of the Under-performance Gods; or the CDO mess – the Creepy Debt Overhang; or be it the trotting of the Horsemen of Momentum, seen in the likes of (BIDU), Apple (AAPL), Research in Motion (RIMM), or Crocs (CROX).

Every bull market has its particular folly, scheme or fantasy which provides a chasm for unrealized gains and a new generation of susceptible believers. This has always been the case thoroughout history. All of these follies and schemes spin on the spokes of the wheel of love of gain, the desire for excitement, the compulsion for easy money and the fix for a free lunch.

Panics are a product of crowd behavior. But herd mentality, when it shifts, can do so like a school of fish, all at once– usually when it suspects a predator.

A panic occurs when someone says sell and the response is "Sell to whom?"

A panic is what occurs when there is nothing left to worry about. Usually because the worries become indelible and concrete. A panic occurs when delusion topples off the wall of worries like some kind of mark to the market Humpty Dumpty scrambled with an instrument of tyranny– tyranny of the mean – reversion to the mean, that is.

Has the market's apparent resilience to all the slings and arrows of late been a sign of strength? Or conversely, is the message that when the dynamics of the law of physics are tampered with the result is often Repulsion of the Mean. A panic can occur when the kimono is lifted and it is apparent that price is rife with artifice– that prices have been cobbled with delusion in the penthouses of a Wall Street thick with thieves.

A panic can occur when you have to sell something that you don't want to, because what you want to sell you can't. It is called forced liquidation. Leverage is the mother of extreme forced liquidation.

This bull market has seen many meteors, but the leading sector as a whole in the market has been the energy arena. I believe that a breakdown in this group would be a stake in the heart of the vampire of recent speculation– a sign of the bear, and indicate such liquidation.

I have never seen a bull market without the financials leading. And they are leading down. A corresponding break in the oil patch could be the gusher in reverse that drains point count from the S&P leading to a break of the Big W below 1490.

As the best pure tape reader I have ever met, my father Jack, used to say, "Believe what you see."
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