I should be buying now. I should be really buying. But I just cannot make myself do it.

You won’t believe how much money I’ve lost thru this downturn if I have told you.

I’m going to conserve my cash, because I see a real possibility of $575 on gold, and 250 on the HUI. That may happen after a strong and quick bounce. If that comes along, I’m going to close my eyes and put in my buy order. Yeah, I just refinance and got all the cash that I need for my emotional boost (but doesn’t mean that I will put everything to work. Sound money management is not playing in the stock market casino.)

I was right after all. The big fall will precede the big rise in precious metal markets. Should have listened to myself instead of BillCara.com.

Good luck.

Short message.

If you haven’t sold, hold on. I think the markets will make a temporary bottom. How high it’s going to go back up, I don’t know. But again, it won’t be a bad idea to lighten up at 50 days moving average if it reaches it. Some people are saying that this is a correction, but I believe the fall from the peak will exceed 20%. I don’t exclude the possibility that the next intermediate high will exceed previous high, but I believe the possibility is low. I think the downtrend/sideway will last longer than any bulls expects.

In case the markets unfold like Frank Barbera describes as if a free fall in 1929, make sure you get out quickly. Unfortunately, it will require you to watch the markets almost every minute. I don’t really do stop losses because those tend to be triggered falsely with big volatility.

Yes, the fall is very painful. But nothing goes up forever.

Good luck.

P.S. I forgot to add that this “bear” market or whatever you want to call it will last shorter than many bears expect too. I think it should be shorter than the last bear market in 2000.

It’s interesting to see how media has played the news. And how gold bulls have taken the news in stride. Here is what has taken from Forbes:

The ECB injected a further 61 billion euros ($83.8 billion) Friday morning, while the U.S. Federal Reserve later announced a three-day repurchase agreement to inject liquidity into the market.

The Fed said it would accept $19 billion in mortgage-backed securities after its Fed Funds rate, the rate that banks charge each other for overnight loans, ticked above 6 percent – well above the Fed’s target of 5.25 percent.

You can get the temporary repo market operations from the New York Fed site directly. However, these repo operations are temporary only for 1 to 7 days. The cash needs to be paid back, while the supposedly sold mortgage assets are only serving as collateral during this temporary period.

Regardless, major media plays this as Fed & ECB coming in without stating any of the facts related to the temporary nature of these operations.

So does that mean Fed is not printing money after all? The answer is obviously NO. At the minimum, Fed has printed 0.78 trillion of dollars via its treasury securities holdings. You can get the data at this link. Fed holding these securities is a method of printing money directly for the use of US federal government. It’s one branch issuing IOUs, and then “another branch” taking up the IOUs and giving back and authenticating the new cash as an electronic ledger. These new cash obviously dilute the buying power of the existing $US and create inflation. If US budget deficit continues and foreigners refuse to take more new US debt, the new IOUs will either force the interest rate on treasury bills to go up (which will also make the mortgage rates to go up further) or Federal Reserve can come in and absorb the excessive supplies of treasury bonds via printing of more US dollars which eventually will drag down the currency exchange rate of $US due to more supply versus demands.

So don’t let the orderly liquidation of securities liquidating into your hands via your buy order. Someone needs to take the losses. Don’t partake a portion of it.

Central banks around the world injected some US$339 billion worth of liquidity over Thursday and Friday of last week. Remarkable was that the Fed took in $19 billion worth of MBS as collateral for its first open market operation on Friday (I have seen no mention of how they were valued and whose bids were taken). It will go a long way towards calming the nerves in the credit market. As I have said many times, we need to separate the liquidity crisis from the underlying economy. There is a good chance that the equity market will bounce back as confidence is restored and the sea of liquidity finds a resting place.

However, I couldn’t help but wondering that a new appreciation for risk will linger no matter how successful the central banks’ market supporting endeavors. At a minimum, mortgage lending standards will tighten when trillion dollars of ARMs are still facing resetting in the next year. Near term, worries of the US economy and the remnants of the latest liquidity injection will have to battle it out. I’m keeping an eye on IWM (proxy for the Russell 2000) which is stuck between its long term trend line and the 200 DMA (about $75-80), a break either way should be telling.

Bradley Siderograph
We live in interesting times. For those of you wondering about the future and looking for a good laugh here’s something completely off the beaten path, from the field of astrology to be exact.

The Bradley siderograph was developed in the 40ies by Donald Bradley to forecast the stock markets. Bradley assigned numerical values to certain planetary constellations for every day, and the sum is the siderograph. It was originally intended to predict the stock markets. It is crucial to understand what the siderograph is about since almost all traders (and even and even financial astrologers!) misunderstand it. Over the decades it has been observed that the siderograph can NOT (!!!) reliably predict the direction but only turning points in the financial markets (stocks, bonds, bonds, commodities) within a time window of +/- 4 calendar days (in a few cases up to +/- 7 days). Inversions (i.e. a high instead of a low and vice versa) are quite common. Also, it is not a timing tool for short-term trends but rather for intermediate-term to longer-term trends because the turning window is rather wide.

Two important dates, 8/26 and 10/17, are fast approaching, with 10/17 being the most important date of the year.

Needless to say, I do not recommend trading base on this information.

My answer is Yes.

Whatever rallies, you should sell into it, I believe. Did you miss the opportunity at 50-day moving average?

But I believe this bear market won’t be as extended or deep as the previous bear market in 2002/2003. I believe that the bear market is only intermediate in nature, instead of a resumption of a long term bear market. I don’t know how long the bearish trend will last, but it should be at least 5 months more.

However, if you adjust the market by true inflation rates, I believe that markets will not have any real gain for probably several years out.

Should you hold cash then? Maybe for the short term, it’s okay. The washout will definitely not be pretty.

This current bear market I believe is going to be “saved” by higher inflation rates in general. Cash will be trashed by the printing press of central banks. A resumption of a bull market in precious metals and possibly commodity is in the cards.

Because I believe cash will be trashed, and markets may have a bigger coming washout, I have refinanced my home equity out through a 15 year fixed loan at 6.375% (no point no any fees) after years of indecision. Cash will be trash, marked my words, and look back in 8 years. You may be surprised on how much more things will cost in the future. The central banks only hope that you don’t realize it through the thousand small cuts of gradual inflation.

And of course, I won’t be sitting on my cash pile. I will be buying when the opportunity presents itself. And you should know what I will be buying, if you have been reading my blog.

Last night, we found that the supposedly “contained” subprime problem had spread to BNP Paribas, a large French bank. Early this month, Macquarie bank of Australia admitted losses in two funds due to fallouts from the subprime sector. Enquiring minds want to know here: all this “toxic waste” originated in the US, notwithstanding Bear Stearns and several hedge funds that imploded, how come we haven’t yet heard of any US banks taking big losses? Are US banks that much better at risk management, or are they simply less forthcoming?

The other bogeyman today was quant funds that are liquidating positions after an awful July, such as the Global Alpha fund from Goldman Sachs. Apparently the blackbox models were not stress-tested with the volatility we’re seeing now. Details are not that important, suffice it to say that we are in the middle of a pretty serious dislocation in the credit market. I have been approaching this by separating the credit event from what’s happening in the real economy. I believe the market will solve the liquidity issue, although rates on risky loans will certainly rise. For now I’m more concerned with the underlying economy. Buried in today’s headlines were some lackluster retail sales figures for July, which cements the view that a recession in the US is likely by Q1 08.

All said the S&P finished the day sitting perilously above its 200 day moving average which for many people defines the long term trend in the market. It has dipped below the 200 DMA in Apr-May 05, Oct 05 and May-Jul 06, and recovered all three times. I’m currently using it as a secondary indicator. When the S&P dips below the 200 DMA (which occured last Friday), I hedge or close 25% of my domestic equity exposure. Likewise, when and if the S&P moves above the 200 DMA, I’ll remove the hedge/re-establish longs. I don’t do it on the day of the crossover, rather I tend to ease into/out of positions in the week after. The other 75% is controlled by a primary indicator which has not issued a “sell” signal yet.

I’m by no means recommending this approach, but I think it’s important to have a plan so you protect your assets and not scared out of your positions at the worst time.

Two officials at leading Communist Party bodies have given interviews in recent days warning – for the first time – that Beijing may use its $1.33 trillion (£658bn) of foreign reserves as a political weapon to counter pressure from the US Congress. Shifts in Chinese policy are often announced through key think tanks and academies.

click here for full text from telegraph.co.uk.

For the best interests of global economy, I think a gradual devaluation of $US is the best. However, US keeps wanting to revalue Reminbi at a much faster rate. I don’t know how much these Congress man think, but revaluation of Reminbi is equivalent to increase inflation in the US. Increasing inflation means US needs to keep higher interest rate. And higher interest rates mean less economic growth and lower stock prices.

I personally think that what China is doing with Reminbi is smart. Although most likely the policy is more beneficial to Chinese, the fate of Chinese and American are really tied together in this global economy. Making your creditors mad most likely won’t do you any good.

Again the spectre of heightened inflation is there again from the threat of China, adding onto a long list of reasons of why inflation in the US will go higher for the forseeable future. So whatever you invest in, make sure it can be inflation-proof somewhat. Otherwise, whether it’s an energy-driven inflation (due to peak oil or emerging world demands), or monetizing the heavy US debt and all the social programs, or an inflation driven by US dollar devaluation, or the need for higher inflation to reduce the absolute magnitude of collapsing housing price from Shiller’s housing price curve, or inflation caused by decreasing agricultural labor or any other minimum wage jobs due to increased immigration enforcement, etc. I think you get the picture.

Inflation does nothing to the people without savings, since they don’t have any savings to be depreciated. Inflation usually makes the rich even richer because they are always positioned at the front of inflation curve, whether it’s their assets or their salary. But for the people in the middle class as a whole, they tend to get poorer because the wealth is transfered to the rich people or foreign countries. Make sure you are not one of them.

Today it’s the Fed meeting for August. My own wild guess is that the market will levitate a little, and then gradually sell off towards closing after fed not giving out “candies”.

Nowadays reading Fed’s meeting notes is like reading a joke, except it’s not so funny. Inflation is NOT subdued, and subprime problems are NOT contained. The Fed’s credibility is totally lost on me. Like always, Fed bluffs on inflation, while cheerleads the markets.

My partner ML blogged about Cramer’s rant yesterday. I saw the video twice. It’s almost hilarious I would say. But I also agree with him somewhat. A serious loss of confidence in the bond market is staring at us, and once the wheel of deflation starts to turn and snowball, it gets much harder to stop it and put it back in order. Of course, with the printing press at Fed, deflation will be eventually stopped. Except that the cost (in terms of the next wave of inflation) is simply going to be higher if deflation is stopped later.

Besides Fed, a more significant event is the possibility of lifting cap on Fanni Mae and Freddie Mac’s portfolio. The shares of both companies went up by 7.7 to 10% yesterday. If approved, it will be as effective as a Fed’s rate cut, if not more. More buying from GSE will help the mortgage markets directly. Although subprime will not be helped immediately, availability of money will eventually lift everything up. And Dow had one of the best days yesterday.

I don’t know whether market could stage a rally from here. But I am tentatively bullish for the short term, but bearish for the intermediate term.

Jim Cramer had another of his trademarked spasmodic episodes on CNBC on Friday, literally begging Bernanke to open up the money spigots. It was quite a sight and quite entertaining in my opinion.

Amid a crescendo of negative, “subprime” related sentiment, it’s imperative that we discern two separate effects of the housing debacle

1. Reduced construction activity, reduced mortgage equity withdrawal, high home inventory, high loan delinquency and foreclosure rates, tight lending standards, reduced consumer spending and rising unemployment
2. Losses in MBS, CDO and CDS portfolios, hedge fund busts and redemptions, and increasing loan loss reserves

Effect #1 is a blow to Main St. where countless real people are in danger of losing their homes; however, the shockwave takes time to reverberate through the real economy. In contrast with effect #2, which primarily impacts Wall St., some pension funds and insurance companies, has the potential to bring down the entire financial system. This is one of those occasions that I actually agree with Cramer that the Fed will step in as the “lender of last resort”.

All eyes will be on the FOMC meeting this week. If they give an indication that they’re ready to intervene in credit markets or if they change the so-called “bias”, expect a big rally. For now the Fed still has credibility. At the same time, housing’s drag on the real economy won’t be so easy to address. This housing bubble collapse is already in motion: lower rates (which the Fed does not directly control) are unlikely to spark buying interest. Congress does have the power, for example, to act through Freddie and Fannie to keep home owners on life support for much longer, but I fail to see how that won’t result in a Japanese style “lost decade”.

200 Day moving average

S&P dropped below its 200 day moving average (both simple and exponential) on Friday to end at 1433. Many people follow this very important indicator and I’m no exception. I use it as one of my secondary timing indicators and the crossing means I’ll be looking to hedge 25% or my domestic equity exposure next week. My primary indicator is even slower moving and hasn’t flashed a “sell” signal yet. In view of the FOMC meeting and Cisco’s earning release on Tuesday I plan to set up the hedge slowly.

Best.

As the credit risk increases at all spectrum, and more lenders going out of business, guess what? You and I will be paying much higher interest rates.

I just checked out the mortgage rates offered by the two cheapest mortgage sources that I relied on (only for quoting purpose):
Mtgcapital.com: 15 years fixed at 6.000%, 30 years fixed at 6.375%. Lender’s fee is $1250.
Absolute Mortgage: 15 years fixed at 6.125%, 30 years fixed at 6.375%. Lender’s fee is $399, and both are zero points.
The above rate is based on ^TNX or 10 year treasury at 4.77%, and ^TYX or 30 year treasury at 4.92%.

You won’t find out the effects of increased risk premium + decreased competitions if you don’t have a history. Fortunately, I had a previous post with the exact information that I need:

at Mortgage Capital.com:
1. 30 years fixed: 5.75% APR.
2. 15 years fixed: 5.5% APR.

Both are zero points, $1250 lender’s fee.

at Absolute Mortgage:
1. 30 years fixed: 5.75% APR.
2. 15 years fixed: 5.5% APR.

Both are 0.125 points, $399 lender’s fee (lower interest and/or lower fees). When you make a loan as big as 680K (exceeding conventional conforming loan of $417K already), the 0.125 point will cost you more fees compared to MtgCapital. Therefore, Absolute Mortgage should be cheaper in all cases.

The above rates are quoted when 10 year treasury yield was at 4.509% and 30 year treasury was at 4.65%

So let’s see how much more expensive you need to pay now. From mtgcapital.com, it appears that every 0.50 point will give you 1/8 lower in interest rate. I’m going to use that to adjust the interest rates wherever applicable. The 10 year treasury was 0.261% lower and 30 year treasury was 0.27% lower.

So at mtgcapital.com, the 15 years fixed is now (6.00% – 5.5% – 0.261%) = 0.239% more expensive. The 30 years fixed is now (6.375% – 5.75% – 0.27%) = 0.355% more expensive.

At absolute mortgage, the 15 years fixed is now (6.125% – 5.5% – 0.261% – 1/8% * 0.125/0.5) = 0.333% more expensive. The 30 years fixed is now (6.375% – 5.75% – 0.27% – 1/8% * 0.125/0.5) = 0.352% more expensive.

Conclusion: you and I will be paying about 0.25% to 0.35% more in interest rate for the same loan as before. On the 30 years, the risk premium is higher now also because there is a yield curve steepening effect. If Fed starts to cut interest rates, it may pin down the lower end of the curve, but the longer end (15 and 30 years fixed) may or may not come down in relative terms. Until the inflation appears subdued, the longer end will not come down as much.

Good luck to anyone who wants to get a loan, or refinance their ARM time bomb.