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Why Merrill Lynch Is Bullish on 2010: Foreseeing a Burst of the Pessimism Bubble

I believe economists tend to be wrong at the top or the bottom parts. But basically, many will also be correct most of the way. Just not the top or the bottom where many traders care the most since they prefer to time the markets in real-time and not with delayed data.

I attend a trading website dominated by rabid bears and perma-bear traders on a daily basis.

It is not easy trying to tell them that this rally is being supported by the most current positive economic fundamentals since late February and that the gargantuan problems create in the last 2 decades leading to the start of the collapse of the tech sector in year 2000 and that of the housing sector of year 2006 are getting better if not being prevented from getting worse.

It takes two whipsaws to learn a lesson most of the time. The meltdown of 2000 to 2002 did not teach us the lesson, more likely because of the 9/11 incident shifting policy makers' attention from economics to wars that agravated the situation. This massive meltdown of 2007 to 2009 should be more than enought to teach us a lesson. 9/11 Part II or not. Just look how the Dubai and Greece debacles were set aside in a hurry. Investors now are trying hard not to panic in any bad news coming their way. Traders do react instantaneously; but that is their nature.

Technical patterns are much earlier to form before most economists can get a handle of the situation. Traders do learn fast. Except for the few rabid bears and the perma's.

Since April to July, the technical patterns were very weak leading to the conclusion by most traders that the rally off March 2009 was a bear bounce rather than a true recovery. But the vertical rally of July to August caught them by surprice.

Since August, the technical pattern was of confusion but the dominating factor was that the rally was not getting weaker as weeks passed by but rather gathering strenght as indicated by the positve type of ongoing corrective patterns. It was a different type of correction and does not happen often; a trending correction of higher highs and higher lows instead of a counter-trend type of correction that usually happens which is the lower high lower low type. Hence, most traders cannot understand the low daily volume printout from August to November.

That corrective pattern has basically completed in November 2; and the 12 days rally happened as expected. Not a searingly hot rally since a rally off a 3 months correction is supposed to be composed of series of small rallies and corresponding minor corrections or consolidation ranges. It is better understood using Elliott Waves analysis than any other types of Technical Analysis.

In all probabilities; we may have already completed the first consolidation needed to support further rallies from the first rally off November 2.

Conservative target for the next rally is 1152 to 1170 range with the upper range as indicated by the most recent price structure on the daily chart.

It may or may not change depending on whether the current structure will morph into a prolonged consolidation range or goes straight into a sustainable rally. It is sustainable in that the last rally took 12 days and the ensuing correction or consolidation range took 14 days before the last 4 days of rally happened. 14 days is good enought to sustain another rally but will not be confirmed until the next rally off the last 4 green days actually happens. For now, the bulls are trying to consolidate the last 4 days rally in preparation for the next rally intraday.

Intraday using the 30min chart; a rally toward 1150 to 1164 is sustainable. But that will depend mostly on what will happen today after the FOMC meeting.

For now, the bears are struggling to form a complex Head and Shoulders on the 240min chart that is also visible on the daily chart with the first right shoulder resistance of 1114.53 that they immediate took advantage yesterday with the Spx.

But Spx or SnP500 is the lone ranger for the bears being affected mostly by the weak financials sector. Dow and Nasdaq are not forming such patterns together with their cousin DAX.

We are good to go for 1150 year-end target as was initially projected by the big guns such as GS a few months ago.

Most current price structures of the daily and intraday charts are capable of supporting such target and the fundamentals are not bad either.

Is Dubai's Default a Black Swan Event?

The Emerging Markets had been on the tear with vertical rallies almost across the board for the last several months with global investors pumping as much capital into that area. They definitely need a rest sooner or later that can last several months if not a year or so.

While the US and European had been languishing in an undecided higher high higher lows corrections since early August. Higher highs and higher lows but a correction none-the-less with no vertical rally similar to the Emerging Markets'. Bouyed by the tide but not the bigger waves that propelled the EMs into a vertical rally.

This is a welcome catalysts for most global investors to rake in some profits and start looking elsewhere for better bigger profit potential as the EMs start a long overdue pullback or correction.

US and Europe come into the spotlight since they had been in a consolidation higher highs higher lows running correction pattern for more than 3 months already.

1150 to 1182 is still the conservative target for SnP500 with 1270 to 1330 higher range for the SPX in case this Emerging Markets' crisis turned into flight to quality vertical rally for SnP500 and the DAX.

Global stock markets rotation in the works?

Similar to the US and European stock sectors' rotation played in the US and Europe long before the Emerging Markets start making their marks.

This could be a better way to sustain global rallies for the next decades than a synchronized method.

China and most EMs were able to print their last bottom in November 2008 while the US and European markets were the laggards being able to reverse their downside momentum in early March 2009. There is a 3-4 month differential that has to be addressed with.

Bearish on Banks - Why Now Is the Time to Sell

If you are trendtrading the banks medium term; definitely, the trend for $BKX is still bearish based on the monthly chart with an ADX reading of 44.97.

But if you are trend trading short term; the trend is definitely more upsides just by using the fast MACD on monthly chart which has just reached new momentum high. Meaning, $BKX will still make higher highs on daily and/or weekly charts before a divergence sell signal on the monthly chart can lead to a major pullback or sell-off.

As for being over-bought; it is simply not true. $BKX was only able to recover 30% of it's total losses from January 2007 to March 2009. Basically $BKX went down by 85.33% from it's Jan 2007 high of $121 to Mar 2009 low of $17.75.

Today it is still selling at 62% discount from it's highs. That is not an over-bought condition. So for longer-term hold; buying $BKX or XLF at these levels is still buying at a discount of 62%. You cannot be paying at an over-bought price with that kind of massive discount.

Some banks made several hundred percent rallies off their lows and may need some correction or consolidation ranges in order for them to sustain their rallies; but many of them are still way below their Jan 2007 highs.

What is $45B anyway to the total size of the banking sector? I don't know; but comparing the $700B TARP in which the government is expected to get a sizable profit; then what is $45B?

How about way back late 2008 and early 2009 when banks were willing to pay 15%, 20%, and even 25% premium on their bonds? That would translate to more than $45B premium if they were able to raise even half as much as what TARP provided on an annual basis.

FDIC which is a government agency will get itself (and the US government) definitely hooked into the banking sector if they charge that $45B upfront fees.

Could this $45B be a "cheap" insurance for the banks to get the government's unbridled support hook, line, and sinker?

Is that not a good news?

Sobering Stat: ARMS Index Indicates Market Is at Peak, Not Bottom

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TRIN reading aside; the technical picture on both daily and weekly charts have significantly improved with the rally of the last 2 weeks.

Momentum indicators on both daily and weekly charts are indicating they can support further rallies. Short-term Elliott waves analysis also supports further upsides. Longer-term,; EW analysis points to lower lows. But that is the nature of TAs; short term can be bullish but long term can be bearish until proven wrong -- and vice versa.

The monthly chart is still significantly bearish and is still trending down using the basic ADX indicator.

The SnP500 is now projecting a target of 1063 to 1075 within the next 2 weeks if the bulls can sustain the rally using Elliott waves analysis.

Minor resistance is at 1043 which is the 2x fibonacci price projection on the daily chart of the June to July correction and a major resistance at 1055 which is the monthly 20ema that is trending to the downside. We don't know if those resistances will work or not until the bull/bear battles had been completed at those levels.

For the bears; it is very hard to make a reasonable technical analysis since there are lots of strong supports below such as the daily 20ema support which is now trending; the 1018 support which was tested last Aug 27; 956 which is the last high of June. We can also add the daily 50ema, the daily 100ma, the daily 200ma supports, etc. There are also a plethora of fibonacci retracement levels down there that can provide supports on both daily and weekly charts not to mention their own moving average supports. And the monthly chart has the 10ma which is being used by some TAs as initial support for long-term position holding in situations such as we had these last 2 years.

At the current stage; the highest probability is that any selloff or correction will be bought by the bulls or by those who failed to buy at the bottom and/or failed to fully or partially participate with the recent rallies since March 2009. Whether or not their combined efforts will prevent a potential meltdown and sustain the existing 6 months of rallies nobody knows for sure. But we can be sure, lots of those who had been left behind will take advantage of any pullback or correction.

For the armagedon'ers; here is the scenario just in case we drop like a rock from here: a normal target range of from SnP 721 to 635 with a maximum target of 524 under extreme conditions. These targets will have to be adjusted depending on when and where the expected "big" correction actually start to happen and sustain, if at all.

So the possibility of SnP going to 500 or lower as the major doomers have been "preaching" goes into the low probability scenario.

There is a very small window of opportunity for the bulls as of Friday or Aug 28 to execute the next rally, so they will have to do it early next week. Until then, we don't know what the next move will be for the bears. The bulls are holding the ball right now.

Citigroup Looks Overpriced

As far as technical analysis is concerned; citi is still bullish and can run up to 4.61 to 5.92 short-term before requiring several weeks of correction that can last 4 to 6 months.

On the bigger picture; citi can make a total run toward 10.21 before it will require a major correction that will span several months and can last a year to a year and a half.

For me, I am long citi. My conservative target is 8.40 once citi breaks above the last high of 4.48.

Overall, I intend to sell portions of my holdings at targets and buy them back after the necessary corrections.

Citi is much maligned in the US among common folks. Look elsewhere outside the US and most of their affluent citizens respect citibank. Follow the money, 20% of populations controls 80% of global wealth. Citi need only to cater for that 20% of population and they can control a significant portion of the wealth on earth.

Regulatory Tightening: Remember Chuck Prince!

Tighten regulations on the banks at this stage and we may have the perfect scenario for a total system breakdown.

The government is now tapped out. Their tax receipts are plunging at unprecedented speed while expenditures are still climbing. No solution on big ticket healtcare either in the near term. Local governments will be crying foul if Congress don't give them financial assistance.

And the US can't borrow a lot more from the likes of China when they are scared stiff of potential global hyper-inflation as a result of trillions of dollars of stimulus packages sloshing all over the world diluting their $ cash reserves and loans to the US.

Non-financial companies will be approaching their cash burn-out limits and many of them will be declaring bankcrupcy as the consumer crunchdown continues.

Regulating the banks further will only result in another credit crunch thereby ascerbating the potential next wave of company bankcrupcies and jobs layoffs.

Credit crunch can go from housing to consumer credit cards to the corporate level by implementing regulatory tightening at this stage.

Regulatory forebearance might be the better solution if the current economic crises goes from worse to worst. The exact opposite from what those who want to punish the guilty would want to happen.

They will have to wait a lot longer before the cleanup process can proceed. Doing it now can only result in finally sinking the ship.

For now, every available hand is needed, guilty or not, in order to salvage the economy from a potential total meltdown.

An analogy can be made of the Iraq War. After the war, GWB and Karzak decided to purge the Iran government of all former "guilty" officials and personnel and tried to train new "clean" hands to manage the new government. An admirable solution during a critical condition of building a new nation from the ashes of war. Remove the cancer and start a new beginning.

Regulatory tightening across the board. Punish the guilty was the norm.

It only resulted in total breakdown of the local governments since the new central government and the "macho" Americans simply did not have any knowledge and experience on how to run and manage the "new" Iran government and the "same old" problematic diverse population resulting in tribal wars across the country and hundreds of thousands of civilian deaths including a few thousand more of American casualties.

They got caught flat-footed. While those who had the expertise on how to right the ship were found guilty of past misdeeds and had been purged out of the system and thus prevented to provide the necessary helping hand.

A Summary of Q1 Bank Earnings: World, You Just Got Hustled

There will always be half-full and half-empty fundamental analysis. There will always be buyers and sellers with contrasting analysis of the markets.

But the banking sector was able to have an 85.33% haircut going from $121 down to $17.75. What do you call it? It cannot be called half-full nor half-empty. It is more like a dry towel already. And this author is trying to short the financials again?

I bought the financials as it goes from 80% to 85.33% discount as it approaches my maximum target of $16.85. It is not so often that the glass becomes almost empty rather than just half-empty. Well, $BKX was not able to reach it's maximum lowest target but rather made a turnaround at $17.75. Now, it is still have a lot more room to run to the upside even at $42 or so price levels.

Do you know that $BKX was able to form a 1-2-3-4-5 pattern on the weekly and daily charts to the downside during the last sell-off iteration? It is a high probability bottoming process used by bottom fishers for precision entry.

Do you know that the $BKX has successfully broken out of a potential inverted Head and Shoulders pattern on the daily chart. Another high probability bottoming process used by those who try to chase the rally.

InvHnS has a probability rate of 65%. 65% probability rate is very high - you don't want to go against such an odd with your shorts more likely to be squeezed hard you might not be able to know what hits you.

Why not short AIG again at the current price of almost $2.00? It might go back down to 33 cents again and you will gain more than 80% profit on your trade. The trend is your friend, right?

Meanwhile, those contrarian traders who bought AIG at 33 cents are now up almost 500% on their trades.

Who is the greater fool getting hustled down here at these extremely depressed prices? The trend traders or the contrarian traders?

Bank Stress Test: The Cheat Sheet

Banks don't want to borrow from the TARP anymore. Some of them would want to pay back their loans in order to avoid government control.

Problem is, the government don't want them to pay back the loans.

Why? Because the government will be left holding the bag. The government must have borrowed the $700B TARP from the likes of China and will be paying annual interest rates on those loans.

Stress testing the banks might force them to borrow more from the TARP and thus the government can have their 5% annual interest from most if not all of the $700B TARP allotment. But the government will have to give assurances they will not use command and control over the banks.

The more the government gets it teeth sunk into the banking industry, the more chances the banks will not fail in the furture since the government can always legislate new "projects" or initiative to help out the banks in particular and the economy in general. Meaning, the government has the power to make the banks profitable in the future and will not hesitate to use that power in order to protect it's own $700B investment. Since the taxpayers money is on the hook, the public will be more hesitant to oppose of new legislations that will benefit the banks in particular and the economy in general even if such legislation can potentially adversely affect the US consumers.

Since most of the $700B TARP has been deployed into the mega-banks who has more exposure all over the world, it would be beneficial for the banks if the government will pass legislation toward further easing of trades specially to that of the developing countries.

The developing countries will still need lots of capital for their basic infrastructure projects such as electrification, water supply systems, roads, etc. - specially the smaller ones in order for them to sustain their industrialization efforts of the last 2 decades.

They are going to need the assistance of the mega-banks such as Citigroup, BAC, JPM, and WFC who are among the most liquid banks in the world and are therefore in the best possible position to provide financing to the developing countries once this global economic downturn has turned around.

China is the first one to make a credible turn-around since Oct 2008. Most other developing countries has been making substantial gains since Oct 2008 while the US and Europe had been going downstream until March 2009.

There is a big world out there. The United States local market may have shrunked but the consumer markets in China, India, Brazil, Russia, Indonesia, Thailand, etc. are still a vast untapped markets the US can cultivate in the decades ahead.

The US and it's mega-banks have vast $trillions of liquidity, albeit borrowed from the likes of China, at very low interest rates.

Those trillions of dollars cannot be deployed in the United States since the US is already a well developed country and it's own consumers have already learned the lessons of how bad things can go if they spend beyond their means - meaning, no need for multi-billion infra-structure projects and less consumerism in the US and thus much less new companies (who will need financing from the banks) setting up in the US.

Thus, the mega-banks $trillions of cash reserves cannot be deployed in the US but rather most of them should be used as assistance loans to the developing countries.

This will be a good alternative on how the US can generated "export" income while the US is not in a viable position to gain substantial market shares in the developing countries through the "traditional" export earning industries such as agriculture, mining, manufacturing, and technology.

The US is in the most viable position in garnering a substantial portion of the profit from the global marketplace by Financing the industrialization projects of the developing countries rather than try to fight teeth to toe in the highly competitive consumer markets of China, India, Brazil, Russia, Indonesia, etc. where the profit margins on consumer products are absurbly tiny as compared to that being enjoyed by US companies from the US consumers.

For example, a retailer in the US can easily make 30% gross profit margin while in Asia a 10% gross profit margin is already acceptable if not desirable. They achieve more profit through fast turn-overs and economies of scale rather than through percentages. Add the cheap labor to the equation and the United States' manufacturing companies have very little chance to compete effectively in the consumer products markets to those produced by the developing countries.

Thus, the US has to deploy those $trillions of "borrowed" money into financing industrialization projects in the developing countries.

Borrow at low interest rates from cash rich countries such as China and lend the money to cash-strapped but viable developing countries at much higher interest rates - that way the US can use it's global leadership and credibility for maximum profit in the field where it commands the most - the banking and finance/insurance sectors.

There are only 2 sectors by which the US has commanding lead in the global marketplace:

- Military hardware/software, and

- Banking and Finance/Insurance

Thus the government cannot afford to lose the banking/finance sector to the "western world's" CDO/CDS crisis.

Develop new means and ways later on in order to become competitive again in manufacturing and/or technology as we try to solve this unemployment problem primarily caused by the stock markets meltdown and the crunchdown in consumer spending.

5 Reasons Bank Shareholders Will Take a Hit

This is a very confusing stage.

What will the government gain by doing these things?

Did the government borrowed so much money from China and/or Japan they have so much cash to lend to the banks and other companies such as GM? How will they force those companies to borrow - by doing the stress test?

How can the TARP make more money? By converting them to common shares?

What if the the banks fail and many of them goes bankcrupt or dibilitated by so much borrowings from the government while the economy stays in a funk for several years, then they will have to dismantle many of their operations in order to save cost. That will be very bad for the government who loaned so much money to the banks.

Will the government do something about that to make sure the banks will make money in the future? The government can always create any type of opportunity for any industry through legislation.

I think using that above logic, it will be almost a suicide to bet against the banks.

We Need to Make Banking Boring Again

Why is it that most analysis of big banks focus on the US consumers rather than international trade?

Are the Mega-banks not supposed to provide support to the realization of multi-billion projects in the different parts of the world not necessarily benefiting American consumers directly?

The world has changed dramatically since World War II. Russia and China came to power and the third world is now considered developing world. Japan came and went but still a major force to recon with. Germany went the way of Spain and England = obscurity.

International trade has now expanded dramatically while the United States started looking inward since the Tech Meltdown of year 2000-2002. The Bush Administration decided to prop up the housing and retail sectors instead of rescuing the manufacturing and tech sectors.
That was the start of the death sentence for the US manufacturing sector and may as well be the start of the US's technological lead.

Dismantle the big banks and that will become the death knell for US suppremacy in global banking and finance.

What will happen in the next 10, 20, 30 years and beyond?

How about when the time comes that China starts becoming the primary global force in international trade while the United States kept on deleveraging. China, India, Brazil, Russia, and the rest of the developing countries will still keep on planning and implementing mega-infrastructure projects costing multi-billions of dollars (assuming hyper-inflation does not happen otherwise it will become giga-zillions of dollars) in the decades ahead. While the rest of the US goes into the deleveraging process. I don't know about Europe but I have'nt read any effort on their part to deleverage their industries. Japan will buy part of Citigroup. Which country is deleveraging and which country is trying to grow bigger conglomerated companies?

Just imagine how the US will start scampering trying to integrate many smaller banks and the other financial institutions into a mega-bank after distmantling Citigroup, BAC, JPM, WFC, AIG, etc. into small portions. Why not dismantle GM and GE too? How about Microsoft, Intel, and Cisco? They may become too big to fail in th future too.

Dismantle the whole Dow Jones 30 large cap companies. Any one of them are or can become too big to fail company.

Soon the US will join the ranks of Spain and England. Contented with their accumulated wealth but no longer in the position to compete effectively in the international arena.

Perhaps a good thing after more than 30 years of unbridled profligate living and then choking on it's own gargantuan dept.

How can the US pay for it's trillions of dept if it can't compete in the international trade arena and thus won't be able to generate excess income to pay for the dept?

Hyper-inflation? Pay the trillions of dept with worthless dollars that will enable the likes of China to buy a few cans of beer with their trillions of dollar holdings?

This can easily lead to World War III.

Forgive my ignorance, but that is how I see the way things are potentially starting to unravel with this economic crisis of the western world, specifically the United States.

Hope such myopic analysis by many as a result of this confusing times don't become a reality. Stop looking and over-analysing each individual tree. Look at the jungle first.

I think Geithner's proposal of keeping them big while requiring them to provide substantial capital-based liquidity will prevent them from going the way they did in 2007 to 2008.

Something's Afoot in CDS: The Merrill - Bank of America Decompression Trade

How to read the chart?

The run up from zero to 190 is a 5 wave rally. We call this a 1-2-3-4-5 rally when going to the upside.

Notice that after the 1-2-3-4-5 upside run there is a 1-2-3-4-5 rundown of smaller scale from 190 to 112 (estimate only). Then the most recent spike up from 112 to current price of 153 (estimate only). This sudden spike up is what we call a "bear rally" on the smaller degree after an initial small degree 1-2-3-4-5 run down has occured.

To make this discussion short since very few analysts know how to read charts using Elliott Waves analysis: The chart is indicating a potential zigzag run up to perhaps 160 to 170, the zig already exists, the zag to follow after a minor run down. After the small zigzag up should follow another bigger run down to 80-60 levels.

I don't have an eSignal chart on this, so I am using eyeballs instead of fibonacci levels on TD's chart.

In summary, there will be more run down in the near future for this CDS. The corrective process to the downside is not yet finished after the major 1-2-3-4-5 rally from zero to 190.

That means that after a sustained fear by CDS buyers, fear will subside slowly - before perhaps more incidents will start stoking the fear back to higher levels that will force them to buy more CDS protection against BAC failure.

Comparing this CDS chart to BAC daily chart. They are not well correlated. Too many conflicting runs over the same time period. Meaning, more likely than not, you will be at the wrong side of timing when trading BAC using the CDS chart.

Banking Reform: Value for Value

Yea right, tell that to the banks when they were panicking way back Jan to Oct 2008. And the government who was trying to stem the blood flow with one hand tied to their backs also practically in panic mode as the crisis unfolds in real time with no proven viable alternative solutions. Maybe there was, but nobody in-charge really knew what the future holds. Nobody has the practical experience on how to solve this "economic crisis of the 21st century while it was unfolding". Do you?

Who would have thought of a viable solution at those times when George Bush was on the way out and an ignoramus Obama campaigning his hearts out, not because he would want to solve the unfolding economic crisis, but in order to change the 7 years of Bush policies? Neither Obama nor McCain knew what was happening to the economy when they staged their face-the-nation debates - while ordinary people were so evidently hurting badly at that time. The government was dysfunctional while the credit crisis was unfolding at unprecedented speed.

Is this not the first time in capitalism's history that the government acted pro-actively against an impending economic collapse? They have no prior experience on how to do the job!

Value for Value - when you have been given enought time to think about it. Enought time to hear everybody's side of the story. Hindsight is a blessing, is'nt it? Does it solve anything at the time when a solution was needed?

Would you ask your son first that he would not go swimming again far away from the seashore and that he will have to mow the lawn every Sunday for 2 months as penalty -- WHILE HE WAS DROWNING?

Value for Value from now on and into the future. No exception?

Are we out of the woods yet?

Paulson Throws Bernanke Under the Bus, Backs Ken Lewis

This may be good after all.

The government did their job of containing the excessive panic in the private sector last year.

This year we saw how the gov't tried to impose the straight-jacket by which the private sector can operate. Not good for an economic recovery to start. Private sector initiative has proven much better in the long run rather than state-induced economic recovery.

Three Banking ETFs That Won't Fail (Thanks to Your Tax Dollars)

If you can't beat them join them!

Simple.

How Much Risk is the Treasury Really Assuming from Financial Institutions?

Big business for the 4 mentioned banks.

The United States practically has a cartel in derivatives. They control the whole world.

China will control the consumer products for the next decades if not for the whole 21st century.

Japan and Korea have taken up the automobile business.

Is there any ocean frighter ever built in the US for decades now?

Taiwan and India are now trying to gang up on computers, computer components, and software production. Who knows, Intel and Microsoft might lose their global dominance in a few decades time. The United States will become a net importer of technology if not already doing so.

Without the banking and finance sectors; the United States will be left with high-end military hardware and software exports as a sole source of income - the global merchant of death?

This newfound potential source of tremendous profits (and losses) has shown it's promise and peril within less than 2 decades.

The complexity of these instruments will prevent many nations from wrestling the market away from the US with ease.

And since most of those securities are based on trust; the United States will have to show the whole world they stand by it's products come thick or thin.

Extremely risky at best. Highly profitable at most.

Like the airplane, nobody would want to fly in an airplane. Now, air travel is almost as indespensable as car travel.

Magellan was never expected to come back trying to prove the world was round instead of being flat. He would certainly had fallen off the edge after several years of absence.

I think there is no other country in the world capable of handling such a risky venture such as the derivatives.

No wonder the government is doing everything within it's powers and means. They must have seen the future of the USA and it does not look good being just a merchant of death the whole world can depend upon.