What will they create or announce tomorrow?

Let's see:

Friday: House passes Bailout (Market drops)
Monday: $900 billion in the TAFF (big increase) & pay interest on institutions' required reserve deposits (Market drops)
Tuesday: Creation of commercial paper funding facility CPFF & coordinated central bank action to increase in US dollar (Market drops)
Wednesday: Coordinated global interest rate cut (Market drops)

Maybe if they don't announce anything tomorrow, the market will rally?

Could it be Thursday?

Some thoughts:

There seems to be a lot of coordination between England and the US for the short ban last month. Notice that Canada wasn’t even involved in that initially.

Fed announces that they are going to buy commercial paper. PIMCO’s Bill Gross asked (told?) the Fed to do so yesterday in his monthly must-read newsletter. What else did he ask (tell?): set up a clearinghouse for transactions and do a 100 pt cut, preferably coordinated with other central banks. Remember he asked for a Fannie bailout (he got it) and he asked for a “new balance sheet” (ie the Treasury) to buy us out of this mess (he got that too).

Bank of Australia cut 100 today. There was no coordination but it is unlikely that Fed would want to team up with a lightweight like Australia (or Canada) here. They are going with the A team of BoE and/or ECB.

BoE is not going to go before Thursday since it is unlikely to move up its meeting barring a crash
BoE will need to cut more than the 50 expected; therefore 75 is likely (100 can’t be ruled out but it may look a little desperate).

BoC, Fed and Bank of New Zealand have meeting at the end of October (an eternity in this market). I think they join for 75 each.

ECB is the toughest call since they are inflation hawks but their meeting is in November. I think they go along for 25

Australia, which cut 100 today, could even go along for symbolism for 25 but that may be asking too much.

Summary: BoE, BoC, Fed, BoNz cut 75 on Thursday. Maybe ECB and Australia cut 25..

Addendum: Wednesday 8am (Oct 8th): Looks like it happened today! 50 pts across the board. Looks like after Black Tuesday, they couldn't wait any longer ...

Addendum #2 Wednesday night: I guess they felt that they didn't have the luxury to wait another day, although it was a horrible close (yet again)...

I have tried a few very small long positions and got stopped out. The volatility is killer. I have to remind myself to stay in cash.

Now What?

After one of the craziest days in recent times (TSX down 1000+ twice, Dow down 800; both cut losses in half), it is time to revisit previous posts with the interest not of gloating but looking forward: 1) I said this on Sept 6th after making a similar warning on Aug 8th:

Cash is king here for all but experienced investors (who can short carefully). Stay out of debt. I saw (and still see) a move to about S&P 1078-1090 (Dow 9Kish?) for this downleg which should last into November, around the time that Barack Obama (or John McCain) becomes the new President.

I added to this on Sept 25th:

I think that there is now a risk that if the market is not saved here, that we go lower than I initially thought (S&P 1080) to S&P 990. This would translate in to roughly 9000 on the Dow.

What do I think now, after we hit 1007 S&P (not quite yet 9K on the Dow): CLOSE ENOUGH FOR NOW.

Barring the low probability (but definitely a possibility here) of a full 1929 or 1987 crash, we may get a bounce. This is not a bottom call. We could still crash or we could rally huge for a few weeks or even months. Very tough to call here.

I am now almost totally in cash (sold off remaining shorts this morning; have a few puts left).

If we had a sharp rally here and certain things that I look for don't "confirm" that rally, then I would even consider shorting again. If things did "confirm", then I would get more invested.

I may even take a small (10-15%) dip in the ocean if I feel like it with tight stops.

At S&P 1007, we were about 36% off the highs. I think we ultimately go lower, but at least at 36% you have finally passed a garden variety bear market.

A severe bear market (1907, 1937, 1973, 2003, etc...) often gets you to 49%. My gut tells me that is where we are ultimately heading to 49% but that could be next week, next month, next year. Not quite sure. My gut also tells me that today was not a bottom and we go lower either in October or November but I'm not quite sure here.

Even in vicious bear markets, you often get multi-month huge bear market rallies (example September 2001 to January 2002) before making new lows. I suspect that we are getting near to a multi-month rally but first we likely have to retest 1007 (could be tomorrow, this week, this month or in Nov/Dec) and not break it.

If we retest and break, then we go to 777ish S&P (which could be via a crash).

Stay tuned...

2) Fed surprise cut

I speculated last week that it would be either on Monday or Thursday. Clearly, it was not Monday. I speculated that they want an up day first (I wrote the post when the market was up huge pre House vote on Friday). Today might have qualified since the market rallied in the last hour....Therefore, Tuesday is fair game IMHO. I would expect 75 points at least since the market already expects 50. In theory, the market should rally but some of that rally likely happened between 2:48pm and 4pm today....

Thanks for nothing

"Canada heading for recession, say economists"- CBC, October 6, 2008

Yeah, thanks for that now that the TSX is down about 30%. Until a few weeks ago, these bozos were pretty much dismissing a recession in Canada. Now it is a certainty. Thanks for the heads-up.

When I wrote this back in February, very few were even discussing this as a possibility in Canada. Decoupling and commodity super boom forever were all the rage. The credit crunch was supposedly winding down...

Pretty sad that all these economists either missed this or didn't want to say so in public. The same thing happened in the last slowdown (2001 didn't qualify as such in Canada) and probably the 1990 recession too.

When will the Fed do its "surprise" rate cut?

An open thread: When will the Fed do its "surprise" rate cut?

In Fedthink, the credit markets are frozen now and waiting until the end of the month will only hurt the economy more. In all these Bush, Paulson & Bernanke meetings, there must be intense pressure on Bernanke to cut. There is no way in my thinking that the Fed will wait until its scheduled meeting on October 28/29 to cut rates. Note that the Bank of England announces its rate cut (75 points as the market expects at least 50) next Thursday.

There is a lot of global coordination going on behind the scenes. The ECB's Trichet has been on conference calls with the US government related to this bailout (see the great NY Times article "As Credit Crisis Spiraled, Alarm Led to Action")

I think that the Fed is reluctant to use monetary policy in this way (unlike Greenspan) as they are using more direct tools to free up liquidity. However, they know that they have to break the negative psychology. To some degree, they needed the markets to go down but not crash this week to get the House to pass the bailout. Note that the bailout passage will allow the temporary shorting ban to elapse after 3 business days. Therefore, if the House passes the bill today, the ban would end Thursday morning. Hmm, timed with the Bank of England?

I think the Fed want to avoid cutting after a big down day (like this past Monday or yesterday) so they don't look panicy as they did on the SocGen bottom back in January.

If we close up on Friday on the back of a successful vote in the House, I expect the Fed to cut 50 points either Monday, probably before the open, or Thursday with the Bank of England and when the short ban expires. I would expect the discount rate to be cut 50 or even 75 points.

I also expect Bernanke to have a few other countries to join him in their cut, including Canada , England and even maybe the ECB (which laid the groundwork for a cut yesterday).

Ultimately, I don't think this really matters or works since all the Fed Funds rate does is control the very short end of the government T-Bill market, which is already at near zero rates. The rest of the bond market is where the trouble is, and this will do nothing to help that except a psychologic 1 or 2 day boost. If rates at 2% are not working, I doubt 1 or 1.5% rates will make a big difference.

What say ye? Please give your thoughts....

Warning on Potash, Encana and RIM

TSX down 800 to below 11K today as Potash got annihilated. Last week it was RIM getting annihilated.

While I feel horror and sympathy for anyone heavily invested in the TSX or other markets, I wrote these words back on May 13 (as the TSX hit a new high) to try to help people:

It bears repeating again: Just recognize that the TSX is not a very diversified index. 75% of the TSX in 3 groups (mining, oils and financials). There are 3 mega cap stocks in Toronto (Encana, Potash and Research in Motion). We all remember what happened to the TSX (TSE back then) in the Nortel crash. This could be similar...

Say we get a 30% hit to energy/materials and 20% hit to the financials everything else, that would be an 11,000 TSX (25% off)

These are not outlandish scenarios in my book. If we get a typical 30% bear in the US and the commodity bubble bursts, I would expect the TSX to at least test the 11,000 level.

Keep these things in mind as we hit a new record...

I think we still go lower but please remember this the next time we have a boom and the TSX chart looks like the Eiffel Tower.

The TSX is not diversified and will probably never be diversified (in that it is unlikely to have high weightings in pharma, retail and consumer goods and not be dominated by more than a few megacaps). It was Nortel and a bear market in 2000, it is RIM, POT and ECA and a bear market in 2007.

Please remember this the next time that experts (Jeff Rubin) are touting that Canada has decoupled (and TSX 16,000 and $200 oil) in the midst of an obvious US recession.

I know what it is like to be on the imploding side of a bubble. I invested heavily (not big dollars since I was starting my career) from 1996 to 1999 in technology. I made fantastic returns but gave all those gains back in 2000-2001. I even saw overvaluation (calling it a bubble but not fully understanding what that meant) in early 2000 and raised cash, but I got back in too early in late 2000 and stupidly on margin.

Since then, I have tried to learn about bubbles. When bubbles burst, they often do a round-trip (ie return to the levels that the bubble started) or more. Potash at $100 has arguably not done a round-trip (it depends where you decide that the bubble started). RIM and Encana probably also not a round trip. I am not using any of my cash to buy these imploding bubble stocks here as they could still go a lot lower here. These 3 stocks are back to 2007 levels. I think that they could easily go back a few more years...

Full disclosure: I was short Potash last week for a profit but I covered about $50 ago

Is there subprime in....?

I talk to many intelligent people in the Canadian financial services industry. Despite their intelligence, and this is admittedly anecdotal, I keep hearing opinions that housing in Canada (and in particular Montreal) will slow down and maybe go down a little, but nothing too serious. Why do you assume that I ask? It usually comes down to some variation of "our banks and regulations were sound and we have no subprime"

Was there subprime in the UK? Down 13% YoY

Was there subprime in Spain? Down to -0.3% YoY (supposedly understated and dropping rapidly)

Was there subprime in Ireland? Down double digits YoY (I've seen reports of -14%)

Was there subprime in New Zealand? Down single digits YoY

Was there subprime in Portugal? Down single digits YoY

There are reports of falling prices in many other countries in Asia and Europe.. Was there subprime there?

Every country had its own problems that can be summarized as follows: Time and price.

When prices go up forever (time), it encourages people to pay too much thinking prices will continue to go up, borrow too much and the financial sector lends too much and levers up too much. Pretty much everywhere in the world. The boom was global and the bust will be global.