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Speculators running for cover



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Some fundamental views are following further down. First I want 
to make some comment on
> http://www.geocities.com/WallStreet/6243/crack/crash.html

These charts suggest that the market crashed 29 and 87 always 36 days 
after an all time high. At first sight these statistics look 
convincing.

BUT there have been plenty of all time highs in this century with a 
supsequent downturn. If I was to be convinced then I would like to 
see statistics showing relationships between "all time high" AND 
"subsequent downturn percentage" AND the crash.

In any case: Two events do not make a meaningful statistic.

I just want to add my own psychological and fundamental thoughts 
regarding the current situation - I hope that the technical traders 
will excuse these rather lengthy comments - but perhaps someone 
wants to give me some feedback to verify or falsify my thoughts:

I have been bearish on this market for quite some time and have had 
numerous conversations on this list with bulls like Bruce and others 
I do not want to boast that I was right I just want to say that I was 
not really surprised about the downturn itself - I have been 
surprised about something else:

The move downwards has started very innocently and suddenly turned 
violently without giving individual investors a chance to bailout. 
This is really worrying because it fuels unease with individual 
investors. I have had my fair amount of talking with small investors 
last week who suddenly turned bearish. This however strikes me as odd 
since these investors only get bearish with the market being at 7500 
and not earlier. I would had thought that the down-turn target was 
7200 - 7400. Now we are nearly there.

So basically these small investors have missed te opportunity to take 
their profits. And they are not really selling at these levels 
because it looks as if the market is stabilizing here.

My big worry is that the professionals will test the new lows made 
and drive the market through 7200. I suspect that such a move would 
take all confidence out of the punters and could easily knock 1500 
points off the dow.

And now the fundamentals:

One of the main problems is that the American administration  who 
have been the leaders of the global economic cycle are loosing 
control of the situation. Recent comments from the IMF and the 
American administration regarding the Russian situation show that 
they do not see big problems ahead and do not want to step in to 
stabilize the situation. One of the reasons seems to be that they are 
quite happy that the American economy is slowing down. However as the 
American economy slows down other economies (Europe or Asia) should 
take over the lead. Asia still seems to be weak and the Europaens are 
just trying to get their economies going again. It remains doubtfull 
whether they can really take the global lead from here.

The global flight to quality leads to immense loss of confidence in 
other smaller economies. This loss of confidence drives up interest 
rates in these countries and hurts their economies. The devaluations 
of Peru, Columbia and other Latin American countries illustrate the 
situation. All of Latin America has now already eperienced the market 
down-turn which is now starting to hurt the States.

Some of the people on the list have questioned why the Russian 
problems should have any effect on the world economy. The reason is 
that the Russian example illustrates what can happen to a market. It 
can just disappear. And this example frightens the shit out of all 
investment banks.

Over the last two years we have seen huge amounts of speculative 
money parked in hedge funds which tried to cash-in on emerging 
markets. Viktor Niederhoffer busted his fund in Thailand. Now several 
hedge funds are busting because of Russia. Nearly all of the major 
investment banks have lost money in Russia. This leads to 
reallocation of capital because all these banks run risk-models which 
now have to be retuned since the prevailing risk parameters were 
obviously wrong. Who can even imagine now that Russia launched last 
year a 30 year (THIRTY YEAR) eurobond. Now people don't even want to 
look one week ahead.

It seems that neither the Americans not the Europaens want to 
stabilize this situation with an easy money policy. The IMF has been 
extremely tight recently. The Ukraine received their loan approval 
only late on Friday after they ran out of reserves and had to devalue 
their currency. Funny enough the IMF loan was just meant to prevent 
this - it came to late.

The Russians have cut partially their gas supplies to the Ukraine 
until they pay their debts - luckily it's not winter now. It seems 
that the Russians are raising the stakes in this game. The Ukraine is 
a "friend" of the United States and used by the Americans as a 
counter-force in Europe against the Russians - which is propably why 
they are supported by the IMF although they have a less liberal 
market than the Russians. By cutting the gas supplies to the Ukraine 
the Russians are effectivly telling the Americans: "you are in the 
same boat with us".

The Americans however are trying to play hardball with the Russians 
and are telling them that they must sort out their problems first 
before they get any further money. One of the reasons why the 
Americans take this stance is because their investment banks have 
been basically cheated by the Russians.

In Asia the investment banks lost mainly due to the devaluation of 
their currencies and because the debtors are unable to repay up their 
US DOLLAR loans. Now these banks take the chance to pay assets there 
cheaply. 

However the Russians have chosen to play the game with their own 
rules:

The Russian government had kept their currency stable and borrowed 
mainly heavily in RUSSIAN ROUBLES (and not in Dollars). The 
investment banks and hedge funds bought these treasury bills (GKOs) 
then hedged this Rouble exposure with Rouble/Dollar forward 
contracts - which they settled with Russian banks. The Russian 
Rouble debts ballooned over the last year and interest rates went up. 
However the hedge funds and the investment banks felt that the high 
interest rates and the currency hedge would give them a limited 
downside if things should turn ugly.

What the investors did not think about was that the Russians could 
invent a new approach to solve their problems: 

1. They just refused to pay their treasury bills and replaced them 
with fresh discounted debt. 
2. they devalued their currrency
3. they forbid their banks to honor the forward contracts.

With these three measures they blocked all possible escape routes 
that the investors could have had and basically cheated the 
international investors out of several billions of dollars.

This experience is news to many bankers and they haven't digested it 
fully. In any case it has made them extremely risk aware. 


Malaysia has just followed the Russian example and forbid offshore 
trading in their currency. Singapore which used to be a major trading 
center in Malaysian Ruppees is frantically working out a plan how 
their banks can get out of forward Rupee contracts .....

Who knows what the Chinese will come up with - they haven't devalued 
yet.

For speculators like Soros these are a new experiences as well 
because they cannot cash in on their correct predictions - they are 
simply expropriated. Words like "hedge fund" are suddenly 
getting the taste of "leveraged buyout" or "junk bond" - remember 
those ?


The parameters are in place for a major correction (30%) in 
the US market because many stocks are still extremely overvalued and 
investors are suddenly realising the fact that we are living now in a 
world where SPECULATIVE  money is getting scarce. 

The only way how this situation can possibly be defused is when the 
IMF and G7 are actively helping the weak economies to get out off the 
mess and share the burden of the down-turn. 

This however will not quite work in the liberal market ways of 
yesterday because some of these economies do not want their assets 
snatched up cheaply by Americans. Remember the feelings when the 
Japanese were buying America in the 80s ?

Hope to have some feedback on these issues in order to verify/ 
falsify my thoughts.

Gerrit

Gerrit Jacobsen
http://www.tickscape.com