Bear Market

by Larry Levin

If there were any doubts that equities are in a bear market, which of course was a rampant debate on Wall Street, last week's 465-point Dow decline should end the debate. However, since The Street is engorged with value buyers (read: panicked long-only money managers), the debate will surely continue regardless of the swift decline. I'm guessing the Dow will need to close below 11,000 for the perma-bulls to even consider a bear market. In my opinion, a savvy investor follows the trend.

Friday's boot-stomping was a delayed reaction to both the Citigroup mea-culpa and the further downgrades of MBIA and Ambac.

Moody's Investors Service cut MBIA to A2 from Aaa late Thursday, which was a two-notch downgrade and bigger than some investors expected. The ratings agency also lowered Ambac Financial to Aa3 from Aaa. But they didn't stop there; Moody's also cut the bond insurance subsidiaries of FGIC Corp. and Security Capital Assurance to junk status after markets closed on Friday. It has been estimated that these insurance companies indemnify more than $1-trillion of securities.

As you can imagine, when they're downgraded all the securities they back get downgraded as well, potentially meaning a deleterious domino-effect for investment banks and other financial institutions that bought guarantees from bond insurers to hedge mortgage-backed securities and CDOs.

The major ratings agencies have apparently just seen the light. There are others, however, who have nor been fooled by anything. Egan-Jones Ratings is one of these other firms. On Friday it said, With the rating cuts by most firms, new business is highly problematic and MBIA's future is doubtful. This rival agency, which is paid by investors rather than issuing firm like Citigroup or Merrill Lynch, has a C rating on MBIA, which is well into non-investment grade, or junk, status.

It seems to me that several markets need to reverse course to get equities back on their feet; oil and inflation (commodities in general) need to fall and the US dollar needs to make a sustained rally. The only way this could happen is if the Fed started a new policy by raising interest rates at next weeks FOMC meeting. Does anyone really think that is likely to happen? I don't.

Real Time Trading Signals*for

Trade Date: 6/20/08

E-Mini S&P Trades*
(before fees and commissions):

1) Engf sell @ 9:30am at 1326.50 = b/e (1 lot)

2) OTF sell @ 10:00am at 1328.00 = -2.00 (1 lot)

3) TP buy @ 12:50pm at 1322.00 = -1.50 (1 lot)

4) Algorithm trades (5) -2.75


E-Mini Russell Trades*
(before fees and commissions):

1) Buy @ 10:18am at 725.8 = +2.9 (1 lot)

2) Sell @ 11:34am at 726.3 = -.4 (1 lot)

3) Sell @ 12:45pm at 721.1 = -.8 (1 lot)

4) Sell @ 1:55pm at 721.3 = +1.3 (1 lot) +$300


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