Quaalude Cloud Gas

[wndysrf]

Mark?s Market Commentary ? December 5, 2002

 

As we have mentioned here in recent weeks, a sign of a market top is usually marked by excess speculative velocity, where multiple instruments are traded, and hedges layered upon hedges are used in order to ?maximize profits? and ?minimize downside risk?.

 

Nowhere else is it more clear that a market top is in place in the credit markets, where wild trading action is occurring in the credit derivative market.

 

Imagine this.

 

Imagine being able to buy mood swing insurance which pays you cash if your girlfriend goes psycho.

 

That insurance is sold by a group of bookies who think they can ?market time? everyone?s girlfriend?s mood swings by using astrological cycles, premenstrual cycles, and other analytic exotica.

 

Imagine a scenario where the market grows so fast, and the profits are so huge, that the bookies start trading the insurance policies amongst themselves.

 

Better yet, new hedges are created:

 

PMS insurance.

Prozac insurance.

Bad Hair insurance.

Forgotten anniversary and birthday insurance.

Psychic reading insurance.

 

These hedges are created in order to minimize or offset losses on the basic mood swing insurance policies.

 

But then something happens.

 

Leveraged speculators find out about the extraordinary profits to be had by trading these products, because Al Green has been able to magically appear with Quaalude Cloud Gas which miraculously calms the girls down every time there is a crisis.

 

Since history has shown that girlfriends will ALWAYS have bad days, the hedge funds realize that trading in these instruments is a no brainer, because Al Green?s Cloud magically appears with regularity.

 

So the speculators double up. And triple up.

 

The market goes crazy, and the juicy profits are made by actually trading the hedges themselves, let alone the basic insurance policies. Bets start flying around everywhere, the most complex scenarios are created.

 

Some how, some way, there is always a sucker or speculator willing to take the other side of EVERY trade, no matter how bizarre or complex.

 

Within a short time, ALL the men have purchased mood swing insurance, and they begin to start dating the worst of the worst psychos with the lowest self esteem.

 

After all, what is there to lose? Everybody is insured. So where is the downside?

 

I can have a relationship with a Vegas call girl hooked on crack with 15 jealous ex-boyfriends, and if she decides to go off on me, then hundreds of insurers will start writing me checks.

 

How good is that? Having sex with a porn star quality girl and get paid at the same time!!

 

The insurers are able to write checks because they themselves are making obscene profits by daytrading futures and options on PMS cycles, forgotten birthdays, and all the rest. Because every blown trade is ?saved? by the Quaalude Cloud dispensed by Al Green.

 

But what happens when a 10-sigma event hits? What happens when all the girls mysteriously hit menopause early? And at the same time become infected with a brain virus that turns them into serial killers? And at the same time you find that they were having an affair with a computer hacker who was able to clean out your bank account and steal your identity and sell it to a Middle Eastern terrorist named Dan Niles?

 

And Al Green has suddenly discovered that there is no more Quaalude Gas remaining in his cylinders because he already used most of it up?

 

Now what happens?

 

Will there still be a sucker and speculator to make good on the other side of that PMS Cycle option contract? A contract which is traded over the counter in an unregulated market? A market which is subject to manipulation and theivery?

 

Will the HedgeHog players wake up one day and find out that the mood swing insurance market has seized up? Because the market for the related options and hedges suddenly vanished? And that mountain of cash moving around in the trading frenzy was really borrowed money?

 

And now the lenders find out that they are now bagholders?

 

Page C1 in today?s The Wall Street Journal has an excellent article discussing the credit insurance market.

 

?A market originally designed to provide stability by letting investors hedge their credit risk has instead in some instances become a source of the very instability it was meant to produce.?

 

?This potential for disruption is particularly vexing, because credit default swaps have become so widely used.?

 

?Instead of buying and writing credit insurance for protection, hedge funds have begun trading in the insurance products themselves. Yet another speculative instrument, with tremendous volatility. In an unregulated market.?

 

As Bill Gross mentioned, hedge funds have turned away from shorting stocks and started shorting credit insurance and junk bond funds instead. ?There are fresh negatives to haunt traditional corporate bondholders that emanate from the growing power of hedge funds and their willingness to play fast and loose with the insolvency of struggling companies. It?s a whole new game, except this feels like war?

 

War is the proper term.

 

Because what it really boils down to, is that the Speculative Sphere is obsessed with winning the game. Out-trading the next guy. Making obscene profits in such a short period of time. Daytrading paper on a computer for profit, whether its long or short.

 

And since the Casino is now filled with an unlimited number of machines to play with, and spectacular volatility assures giant wins provided that you are sitting at the correct slot machine, everybody on the planet is gaming the system to get some type of edge.

 

Because the volatility is what keeps the game alive. Spectacular losses suffered by those who shorted credit insurance in October may be made up by putting your entire account into ARBA call options.

 

Now that the Iraq situation is lining up, the Riverboaters are preparing for battle:

 

The Color Commentator views the action:

 

?The Pigmen and BoarSoldiers have assembled just inside the woods South of the Village. The real call now comes off the next move made by the Idiot Prince from Crawford, Texas. The gaming rooms of Wall Struck are flooded with rumors this way and that as to when the clarion call for blood and gore will crack thru the mist and snow and low muffle of Pig fart and horse dropping. The question is not If but rather When.?

 

?The Matrix war machine is already in second gear. The event is now inevitable. The land grab for oil and power positioning in the deserts of the ancient Arabias is underway. The days of the House of Saud are numbered. A flimsy monarchy on the verge of collapse. This too will need to be addressed. Ghoulish speculators are lining up at the tables now to game the War call. The market should lurch this way and that as we head into the times up Sadaam call this weekend.?

 

?Each PigMen trying to frontrun the next in a game of hour by hour Porcine Prophecy. Innocent Iraqi civilians are the real pawns of this chess game. No one in Americkanna or across the media waves of the Matrix pumpsters of Bloomberg and Fox cares even a Sow's hair for those who are set to be slaughtered. Very sad and serious game indeed. The little bushman's bloodlust is now approaching boiling point. God bless the innocent, the downtrodden, those caught constantly in the crosshairs.?

 

And the players lining up for battle now resemble huge Mechanical Robots on Star Wars:

 

Another derivative HedgeHog adds: ?It is undeniable that hedge funds are now bigger than many institutions. They are so big that they can attack any market, and create momentum. You just need to know who the players are and what their biases are?

 

What happened in October was a massive short squeeze on the HedgeHogs who were trying to drive the corporate bond market into the tank and force the rating agencies to issue massive downgrades to accelerate the death spiral. ?They were scaring everyone into selling, whipsawing the market to their advantage?, says Ray Kennedy at PIMCO.

 

And of course, when the market failed to collapse, a massive squeeze ensued, and the credit shorts were blown out. Most reloaded later, only to be blown out again when the HI buyout was announced.

 

Now I suspect that the credit insurance market is probably much weaker than at the August 22 highs. Junk bond and credit insurance prices have recovered, but at what cost? Are there any shorts left to stop the next slide?

 

More evidence on how leveraged speculation, maniacal trading of options, hedges, and other financial exotica tends to weaken the markets and set things up for a spectacular fall.

 

So what initially appeared to be a ?new cyclical bull? was really a credit derivative short squeeze, followed by a tech speculation mania by the players attempting to ?catch up? on their blown trades.We?ll have to watch and see how the credit spreads react when the next ?accident? occurs.

 

I suspect that the HedgeHogs are now heavily recruiting more math geniuses at MIT to develop ?Chaos Theory Derivatives? in an attempt to ?hedge? against volatility.

 

So for now, The Matrix has managed to execute some Silva Mind Control on the speculators to reverse the mood from fear to euphoria.

 

According to WSJ Credit Markets article: ?Investors Show Fresh Taste For Risk? by ?snapping up new bond deals from lower-rated companies like Goodrich. And Tyco is about to hit the street with $4 billion in convertibles and a $1.5 billion bank term loan.

 

Can you believe the madness?

 

Its really no different than having a massive blowout argument with your girlfriend, where things are being thrown around the room, and the worst of the worst profanity being shouted. Just when the guy thinks that the relationship is history and he?s making mental notes of what he needs to start packing up, the girlfriend emerges with a bottle of champagne and fine lingerie.

 

All is forgotten. Psycho girlfriends and a psycho bond and stock market.

 

What will historians think of this complicated, fragile, tower of tinker toys built to the sky?

 

Will the financial historians marvel at how long it held up?

 

How much Quaalude Gas does Al Green have left in his tanks?

 

The real Bear Market test is now upon us.

 

And that is the test of who the strongest party is: Stranded longs desperate to sell on strength, or ?sidelined? spectators anxious to get in on weakness.

 

We have all heard about the massive pension deficits. And how giant chunks of these deficits have been recovered during this rally.

 

If you were a pension fund manager, would you be a buyer or seller of equities? Are you willing to place a bet that a future recovery will shrink the deficit further, or that future weakness will make the problem worse?

 

Who is going to be the hero to sell out and raise cash while in Prechter?s ?Last Chance Saloon??

 

Who is going to be the goat being grilled by Congress in 2003 for failing to ?preserve and protect capital? in the largest pension plan in the country.

 

How many anxious players are out there ready to buy equities and overpower the huge pool of stranded longs?

 

Now that we are right under the giant head and shoulders pattern, we are currently witnessing the Ultimate Test of the bear market.

 

Pass or Fail?

 

Due to the importance of this area, it is likely that we may wobble around in some type of range for awhile, frustrating both the longs and the shorts.

 

Joe DiNapoli said last night on Tom O?Brien?s show that 9138 on the Dow was a critical Fiber Nacho area, and if we are able to stay above it and rally from there, the odds are in that a cyclical bull is in play.

 

However, if that line fails, then the next stop will be somewhere around 6845. And if 6845 fails in 2003 or 2004, then the market is in for some extreme trouble.

 

By the way DiNapoli was the one who correctly called the ?double repenetration top? on the Dow in January which would lead to a ?catastrophic selloff? to the 7500 area. He also called the 8100 bottom at the September 2001 lows. Apparently these are simple Fiber Nacho retracements on a yearly chart. Wished I had been paying attention to him earlier.

 

His trading method is simple. Just pay attention to key Fiber time and price ratios on the yearly chart. Everything else is noise.

 

See his charts here:

 

Charts

 

Position Summary:

 

Two more half shorts added:

 

We are 50% short, 12% long, 38% cash.

 

Didn?t like the low volume on the broad market today. Four down days in a row. Heavy volume came into the QQQ?s, but they really couldn?t push it down much. A bounce is due. Will add more shorts on the INTC jam job??

 

Half Short:

 

LOW at $42

KSS at $66

INTU at $53

C at $38

IBM at $85

 

Quarter Short:

 

FRE at $68

CFC at $49

MBI at $54

KBH at $49

LEN at $56

TOL at $27

NCEN at $30

BBBY at $35

COCO at $40

 

Half Long:

 

BGO at $1.31

HL at $4.10

PAAS at $5

DROOY at $3.35

GG at $10

GLG at $9

[Fartpolio Manager]

"Joe DiNapoli said last night on Tom O?Brien?s show that 9138 on the Dow was a critical Fiber Nacho area, and if we are able to stay above it and rally from there, the odds are in that a cyclical bull is in play."

 

I thought he said 9039.... O'Brien just repeated it this afternoon.

[h2orush]

Love the commentary today....Anyone else looking at defense stocks for longs?

 

Seems the entire sector has been left for dead, is it the as good as it gets mentality or are we missing an extraordinary opportunity...?

 

GD, LMT, RTN, etc have all been beaten and bloddied, look good to me.......

 

I still am short MMM at 130.....

 

 

h2orush

[ShamPoo]

Thanks Mark

 

The happy lover in your story may have difficulty opening all those checks with one arm in a sling from a jealous shooter and both eyes kind of messed up from multiple fingernail scratches. And one of the checks may turn out to be the lab report showing positive for aids. Be happy.

[Guest]

Mark...

Why isn't PG on your shorts list? That issue looks like it is about to take another dive a la its summer move to 75. Given that it weaker, technically, than it was then, it would seem to be an easy ...mark. Then...KA-CHING!

Homie

[sweefraapp]

Should put an announcement on LOB that you're back Mark. I just noticed.

[rog]

How do you spell bulls###: Greater than expected capacity utilization charge.

 

Why would INTC need to be taking a larger than expected charge if revenue and volumes are going up? More importantly if INTC one month after warning has suddenly found a spring of flowing demand, why can't they figure out what this charge is now and give us earnings guidance also?

 

Andy Bryant: "revenue will be up, but I can't say whether it will be higher volume or higher ASPs"

 

Why not?

[sweefraapp]

AH INTC

[ShamPoo]

INTC Pop turning to Poop

[sweefraapp]

QQQ's AH

[HardStoolGuy]

Statistical physics predicts stock market gloom

11:59 02 December 02 NewScientist.com news service

 

http://www.newscientist.com/news/news.jsp?...p?id=ns99993124

 

 

The US 2000-2002 market descent: how much longer and deeper?

 

Abstract. A remarkable similarity in the behaviour of the US S&P500 index from 1996 to August 2002 and of the Japanese Nikkei index from 1985 to 1992 (11 year shift) is presented, with particular emphasis on the structure of the bearish phases. Extending a previous analysis of Johansen and Sornette on the Nikkei index `antibubble' based on a theory of cooperative herding and imitation working both in bullish as well as in bearish regimes, we demonstrate the existence of a clear signature of herding in the decay of the S&P500 index since August 2000 with high statistical significance, in the form of strong log-periodic components. In the next two years, we predict an overall continuation of the bearish phase, punctuated by local rallies; we predict an overall increasing market until the end of the year 2002 or until the first quarter of 2003; we predict a severe following descent (with maybe one or two severe ups and downs in the middle) which stops during the first semester of 2004. Beyond this, we cannot be very certain due to the possible effect of additional nonlinear collective effects and of a real departure from the antibubble regime. The similarities between the two stock market indices may reflect deeper similarities between the fundamentals of the two economies which both went through over-valuation with strong speculative phases preceding the transition to bearish phases characterized by a surprising number of bad surprises (bad loans for Japan and accounting frauds for the US) sapping investors' confidence.

 

http://www.iop.org/EJ/S/UNREG/DXemMqcMiGqT...c/1469-7688/2/6

[rog]

I expect some INTC downgrades in the morning. Bryant is dancing around refusing to answer basic questions. He has no idea how 2003 is shaping up. That's only three weeks away Andy! One of the dead-fish actually said," With all due respect my question has been asked several times and you refuse to answer it." I've had my finger on the pound sign for ten minutes they won't let me ask a question.

[weak hand]

Gap down tomorrow morning.

[sweefraapp]

Weak: I think you be right. Naz futures just turned red. Glad no one bought my MXIM puts I had up for sale AH.

[sweefraapp]

MXIM AH