Easy Come, Easy Go

by Larry Levin

Last week's rally was pretty strong - up all four days. In fact, the market enjoyed the strongest 5-day advance since the '30's. As the saying goes, however, easy come easy go. Today's massive decline erased four of the previous five days advance. The S&P500 was down -8.93%, the Nasdaq -8.95%, and the Dow was off 679.95 points, or 7.70%.

Last week's rally was done primarily on the hallucinations that the egregiously bad economic data didn't matter. It had been priced in, said the so-called experts. With new incredibly bad economic data coming out this morning, the hallucination went away. Today's drop was the 7th worst in history.

In a still bearish mindset, investors are not only digesting their Thanksgiving meals, but also recent gains in the market, S&P's Sam Stovall said. The economic data is not looking good. But since it's already out there in print, who doesn't know it already? Still, this market remains more successful at stringing negative days than it has positive days.

One of the data pieces Mr. Stovall was referring to was today's ISM report. The Institute for Supply Management said its manufacturing index fell to 36.2% in November from 38.9% in October. It was the lowest reading since early 1982. Economists were expecting the index to fall to 37%. Readings under 50% indicate most firms reported worsening conditions. The new orders index fell to 27.9% in November, the lowest level since June 1980.

The other economic data, however, came out of China. In a recent report, China's manufacturing contracted by the most on record and export orders slumped as a slowdown in the world's fourth-biggest economy deepened. Nigel Gault, chief U.S. economist with IHS Global Insight, wrote that miserable readings from manufacturing indexes in China and throughout Europe are showing the severity of the global downturn.

That key prop is now being knocked away as a global recession takes hold, Gault wrote. The ISM report is consistent with other economic indicators that show the economy contracting at an exceptionally rapid pace.

In his speech today, Ben Bernanke admitted to monetizing government debt which, by the way, has led to hyperinflation every time and everywhere it has been attempted.

The second arrow in the Federal Reserve's quiver - the provision of liquidity - remains effective, he said. The Fed could purchase longer-term Treasury or agency securities on the open market in substantial quantities. This approach might influence the yields on these securities, thus helping to spur aggregate demand.

Debt monetization is the conversion of government debt into money. The government sells bonds to its nation's central bank, (the Federal Reserve in the United States), which pays for the bonds by printing additional currency or just increasing a bank balance. If a government needs or wants to spend more money than it takes in, debt monetization is one way to do it. It prevents the government from competing with businesses for private capital. There are a limited amount of funds available for borrowing and if the government takes a substantial portion of them, there will be fewer funds for businesses and interest rates will increase. When performed in isolation, debt monetization causes inflation (as do all forms of money creation).

So again I ask - Where will all of the money come from? Well, when it is just printed out of thin air, it will come from lost purchasing power of your existing dollars!


Previous Day's Trading Room Results:

Trade Date: 12/1/08

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

1) OTF sell @ 10:40am at 850.00 = b/e (1 lot)

2) Engf sell @ 11:50am at 842.00 = -2.00 (1 lot)

3) OTF buy @ 1:05pm at 839.75 = b/e (1 lot)

4) Algorithm positions (9)...combined daily total...-.50

ZB (30 Year Bond) Trades*
(before fees and commissions):


1) No trades today.



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