Saturday, October 1, 2011

The cataclysm begins...

I will be posting a few charts this weekend…I am seeing quite a lot of mistaken analysis the recent days. I of course, have been aggressively long the dollar and short assets and am accordingly up substantially (meaning over 50% net) in September for medium to aggressive allocations and over 10% net for conservative ones.

My interview with Douglass Lodmell on “The Mind of Money” from last weekend was a final attempt to get some color out there about the coming gargantuan margin call. That margin call has begun and it will not likely finish with a nice clean bounce off convenient levels…this margin call represents the exact references that I made in the video. Its a margin call on all the crazy illiquid leveraged trades that the banks have been doing to generate income and cash-flow without real accommodation for risk. We will likely see several banks, and larges ones too, blow up or go under due to these types of positions and next week will likely represent a pivotal gutting of their assets and remaining cash. There will be a mad rush to obtain non-credit money…that means unencumbered dollars…this will further undermine the asset quality on most bank balance sheets. We will likely begin to see Jamie Dimon’s ponzi scheme at JP Morgan and Blankfine’s a Goldman Tax to begin to be revealed in all their glory in the near future and the credit-lines of major financial institutions like Morgan Stanley, Bank Of America, Well Fargo and Citibank called in. European banks will likely fare even worse. Overall, this will not likely be pretty and it will make the unwind so forceful, in my opinion, that it will likely make our initial margin call in August look like a baby…as nearly every arb/correlation strategy, diversification and leverage strategy becomes strained and overwhelmed…Flash in the pan managers like John “Can I PLEASE close my fund now” Paulson, Eric “what what I thinking" Sprott and David “my equity curve looks like an EKG chart” Tepper who have confused luck with genius and their AUM curve with their equity performance curves - will likely usher in the next phase of their legacies - "life support".

Accordingly, as I see it from a larger-term wave count, we are in an impulse wave of an impulse wave of a C wave zigzag down. This means in Elliottwave terms, we are in a very strong wave 3. I generally, prefer not to put impulse labels on market structures and almost always label things purely as single, double or triple zigzags. Market activity falls very well in to zigzags and the urge that people generally have to find an impulse wave where there is not one is very strong - so there is a lot of bias that comes in unnecessarily. However, in this case, I do believe that we have a zigzag three wave bounce in June, followed by a clear zigzag three wave bounce off the lows in August. I have almost never seen a wave 4 take this form. What it looks like is a double zigzag down or that the bounce off the lows is another wave 2 which sets us up in another wave 3. The fact that the macro picture is likely to become more intense than 2008’s will likely be recognized by a few brilliant minds after its too late and this will most likely be represented in next weeks action. Accordingly, I expect that the market will test 940 to 1,000 in the SP500 next week and ultimately (maybe a lot sooner than logically expected) will not hold there, with clean options to trade to much much lower levels as I have indicated in previous posts regarding out pattern. Lest I leave it out, Gold and Silver among a host of other commodities will also likely suffer broadly as well in the they are beginning their trip to much much lower levels.

What is very disturbing about what is occurring is that the markets have so little real liquidity in them, meaning non leveraged cash that there is not enough money for shorts to hold short positions and certainly not enough money for people to hold long positions. This can be seen by the ridiculous volatility - meaning people’s books are so strained that even a small pop causes their shorts to be forcibly covered and drops trigger the predominant long positions to be involuntarily unwound and sold. Many more people are long than are short and most people are over invested in both directions - this results in stress in both directions and creates irrational and wacky behavior such as we have been seeing over the last few weeks and days.

Again, I will post some charts detailing the market this weekend as a follow-up on this post.
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