Warren Gets It

Warren Buffet says that our recession will be "deep and last longer than many think." And Buffett is using his hoard of 35 billion of cash to buy companies now, saying "if the world fell apart I'd still invest in companies." And he says, "I think we've got fabulous capital markets in this country, and they get screwed up enough to make them even more fabulous. You do NOT want capital markets that function perfectly if you're in my business. People continue to do foolish things, and they always will."


Buffet is the world's richest man. He gets it.

Friday we saw a market that watched oil spike to 147.00 a barrel, and rumor that Fannie and Freddie were insolvent and the Bushy boys would have to bail out.

There is NO doubt in my mind that both of these mortgage giants are insolvent, and the books are bad, and will continue to be exposed for being bad. There is no doubt that if more negative exposure occurs we will have to borrow money from Communist China again to go to our massive debt to bail this out. The stimulus packages just sent out will seem,as they are, like nothing.

Whoever is elected will inherit a destroyed economy, gas at all time highs, USD at all time lows, Debt at all time highs, and corporations reeling with exposed debt.

Friday's fall off is frightening. For the first time in two years the market moved below Dow 11,000. It did not hold, and did close above 11,000, yet again averting a true bear market, but who knows for how long.

Many traders have had difficulty making money in the past month. This is right. It is almost impossible to make money trading stocks or options in markets that move 350 bi-directionally in a day, several times a week, and more difficult to even project longer term tops and bottoms. There are times simply...not to trade...unless you have stamina, the ability to stay with the market all through the day, and the fortitude to accept losses.

As a friend on the stock floor told me Friday " more money is being lost each day than I have ever seen in my brokering career"



Mike Gibbons with Breakoutwatch.com:

The optimism that followed the Bear Sterns rescue has evaporated and a new pessimism pervades the market as it contemplates the possible bankruptcy of Fannie Mae and Freddie Mac (F&F). Together they hold $5.3 trillion of debt with $3.7 trillion in mortgage backed securities. St. Louis Fed Chairman Poole estimates that F&F are already insolvent if fair value accounting rules are applied.

Adding to this gloomy picture, investment manager Bridgewater Associates now estimates that global financial losses will rise to $1.6 trillion. That is four times the value of writedowns that have been recognized so far. It is clear things are going to get worse! Just how much worse is described by Nouriel Roubini in his blog yesterday. The Professor was among the first to warn of the impending crisis back in 2006 and was scoffed at during 2007 but lately has been accorded the respect due. In August of 2006 he correctly predicted the eventual severe losses at F&F. Readers of this newsletter know we have frequently quoted him and do so again now:

"Expect a much sharper fall in equity prices in the US, advanced economies and emerging markets from current levels in the rest of 2008 as a severe US recession and global slowdown and a severe financial crisis and credit/liquidity crunch takes a more severe toll on earning of non-financial firms. In a typical US recession the S&P 500 falls – from peak to trough – by 28%; and this is not your typical run of the mill mild recession."

Roubini recommends being in cash or inflation-indexed bonds. He is also stridently opposed to the "mother of all bailouts" that a rescue of F&F would entail"

Long term 9800 is very possible. The presidential election could pull the economy up, Floyd thinks, and that oil sell off could actually stimulate the market. If oil is another bubble, how will the market itself react as it influences the closure of the global economy. That's what Floyd thinks. Who will bail out who?

Market conditions show a 5 count to the put, meaning more downside could easily occur. Yet, the market is vastly over extended, and ripe for upturn, as last Thursday's 156 point rise showed, but without follow through.

Two way trades are very possible. There is higher risk to this market, which is not following 21 day cycles at all, a clear sign that these tests of market bottoms are far more serious than those in our recent past. Two way trades,however, may also stop on the following news, and the market may react very positively. Follow futures carefully.