A Whipsaw Wednesday

by: Philip Davis

And down we go again!

Gosh, who’d have thought I’ve gotten too bullish? It seems that might be the case. As Fredrang pointed out, the August lows may have been 12,845 officially but the Dow touched 12,517 that day. On the one hand ouch and, on the other hand, don’t forget to take those mattress plays off the table if we get that crazy

I’m not saying we’re going to go there today but it doesn’t look pretty over in Asia, where the Hang Seng dropped 1,153 (4%) and was only saved by the closing bell while the Nikkei plunged right into the 2.5% rule and finished down 373, breaking below the critical 15,000 mark in a very steep drop at the end. At least, UNLIKE THE US MARKETS, the Asian markets tend to pick a direction for a day and stick with it! Shanghai A shares lost another point, down to 5,473 from 6,250 on 10/31. That’s a 12.4% drop in 21 days, far worse than our own 7% (so far) drop in the same period but you won’t hear this from the Mainstream Media because it does not serve the China growth myth they keep trying to shove down your throats.

Remember the A shares are the ones that are NOT manipulated by foreign institutions and reflect, for the most part, the sentiment of the actual Chinese investors. Japan’s MTU reported a 49% drop in net profit, roughly $2.4Bn lower than last year and the bank is worrying investors by claiming just $182M of anticipated losses on the $2.4Bn of sub-prime loans that are still on their books. Meanwhile, no matter how bad things are in Japan - at least they’re not America and the Yen hit a new high against the dollar, falling below the hyper-critical 110 yen to the dollar mark - all the way to 108.89.

That’s it folks - if we fall below the Yen we have officially gone to bottom of the global currency chain and Japan is a country that has effectively been in a recession for 20 years!

Our pre-markets are tanking as global investors are simply losing confidence in our markets as well as our economy. "What the heck were the wild ups and downs in New York?" said Masayoshi Okamoto, a general manager at Jujiya Securities in Tokyo. Mr. Okamoto said the trading pattern reflected the unsettled prospects for the market. The rising yen killed Asian exporters as HMC dropped 4.5%, TM dropped 2.8% and MC dropped 4.8%. Korea, who is very big on exports, had their 5th consecutive down day, falling back to 8/27 lows on the Kospi.

Europe (home of the World’s strongest currency) is not having a good time either and is down close to 2% in early trading. France is shut down for day 8 of a transit strike but mainly it’s a reaction to yesterday’s FRE story which is a very big deal, even if the US markets didn’t believe me yesterday. GS was on the attack again with downgrades of already beaten-down rivals CS and Societe General.

In case that wasn’t enough to spook the markets entirely, Goldman called out their big gun, Treasury Secretary Hank Paulson, who capped off a full week (coming into a holiday, which smacks of manipulation) of GS market bashing by switching his stance suddenly and now says "The number of potential home-loan defaults will be significantly bigger in 2008 than in 2007." Wow! He could not have timed that better if he was just a mouthpiece for Goldman Sachs, looking to make their bearish bets work rather than one of our top ranking government officials!

"We’re never going to be able to process the number of workouts and modifications that are going to be necessary doing it just sort of one-off," Mr. Paulson said. "I’ve talked to enough people now to know there’s no way that’s going to work." And a happy Thanksgiving to you too Mr. Secretary!

Hopefully everyone is well hedged as we head into the Holiday. I’d say today we should make some aggressive short plays (I still like the QID calls from yesterday!) but use stops in case we get a pointless reversal. The oil patch should be the last to fall but they will fall if our markets drop below 12,800, which will put us into a heavy technical sell-off that will not be pretty. If we spike down and back up, that will be a good thing but if we have another week like the last 5 days (down 400 points) then there may be several more like it to come.

At least we can be thankful that an election is coming up and we have a chance to throw out every single representative (and I’m being non-partisan but you know who I mean) as well as 1/3 of the Senate in two weeks and I think it’s about time we stop talking and actually throw the bums out who’ve let this country go from first to worst in the past decade!

I’ll be away for the weekend so posts may be a bit sporadic, certainly not tonight but maybe tomorrow and certainly Friday but don’t get too bullish or too bearish as this market could snap back once the Fed comes up with some wacky bail-out scheme (and word is already out the Blackstone has a plan that’s moving forward). The higher oil goes against the market the more I will want to short them so let’s watchDUG (oil and gas ultra-short) as it retests it’s all-time low and I’m willing to test the waters with July $42 calls as they get closer to $8 as we’ll either wipe out a series of pricey callers or get a natural double off this one.

Have a safe and happy Thanksgiving!