Monthly Archives: September 2008

Financial “Bird-Flu”

Although the public has yet to be let in on the dirtiest little secret of this unfolding debacle, they will soon understand that what they do understand is but a small fraction of the ugly truths that fester just beneath the surface of the markets.


Sub Prime  


The problem up until now has been viewed as a residential SUB-PRIME real estate problem and although the tax payers seem pretty bitter about a bailout, the government—both sides—are trying to sell us on the idea that this was simply a good idea gone bad. 


According to them, they were trying—out of the kindness of their hearts—to help every single person in the United States realize the dream of home ownership but unfortunately for US—and in compassion for THEM—they simply went a bit too far in their zeal to assist the less fortunate.


Do we have a sub prime mortgage problem? YES!  Is that problem causing pain in the mortgage backed securities market?  YES!  Should that problem bring down the entire world’s financial systems?  NO…uh, unless of course those sub prime mortgage backed securities are just the tip of a larger iceberg involving Alt-A loans as well as other types of consumer debt. (think credit cards) all of which were insured against default by what Warren Buffett referred to as “financial weapons of mass destruction.” 


I hate to constantly bring up all of the negatives I see out there but I want to deal with a bit of market psychology here.  Soon enough, people will most likely start digging around and as they do, the newspapers should finally help then understand this debacle in greater detail.  It’s bad enough that they think they have an idea of the core problem (real estate) but once they discover the much more dangerous and unpredictable boogieman, I’d guess it will really hit the fan. 

The “Dirtiest” Little Secret is DERIVATIVES! 

It’s very easy to get caught up in all the chatter about “franchise value” “earning power” “asset value” etc. so let’s take a major step back and try to put all of this financial system chaos in perspective.  I haven’t talked much about this one in a while but way back in March when JPM took over Bear Sterns I told you all that the model was telling me JPM was in trouble.  I also guessed that JP Morgan had a very strategic purpose in taking over Bear Sterns—their very survival. 

It’s becoming increasingly obvious to me that companies are being strategically “rolled-up” like a snowball into larger and larger institutions in order to hide derivatives exposure and to backstop derivatives defaults.  If I’m correct, the largest institution—the FED, US GOV, Central banks—will eventually own both sides of all the worthless insurance policies created over the past 15 years as they play a game of financial Russian roulette in hopes that the gun never fires a bullet into the temple of the fragile confidence that props up fiat currencies around the world. 

The Bear Sterns “Bargain” 

Back when JPM announced their agreement with Bear Sterns many in the press—and many analysts as well—called the deal “a bargain.”  The BAM model, on the other hand, called it “a boat anchor” and I said it looked to me as if the deal were forced by the GOV out of necessity in order to hide/control the truth behind the derivatives time-bomb.  One other publication was also willing to at least entertain that unpopular view and they even revealed Bear’s $10 Trillion notional value worth of derivatives. 

(JGS NOTE: If swings in BUSINESS CYCLE EUPHORIA are not pre-ordained and predictable, how was the BAM model able to forecast all of these events—from housing to banks to brokers—way back in the summer of 2005?) 

Commercial Banks or Casinos? 

Commercial banks must report quarterly derivatives exposure to the government and those numbers can be found at

In the OCC’s Q2 2008 report, they showed— 

–“The notional value of derivatives held by US commercial banks increased 1.8 trillion in the second quarter, or 1%, to 182.1 trillion.” 

–“The notional value of credit derivatives was listed at 15.5 trillion of which 99% were “credit default swaps.” 

Now Let’s Look at the REAL BIG Numbers…I Wonder if AIG is Involved? 

Of the 596 TRILLION in derivatives (that’s an old number from 2007) 66% are interest rate contracts.  Incredible that we allowed ourselves to get into this mess but it’s pretty easy to understand the model’s forecast for 15-21% rates in a few years— 

(This from Wikipedia) 

Broadly speaking there are two distinct groups of derivative contracts, which are distinguished by the way they are traded in market:

Over-the-counter (OTC) derivatives are contracts that are traded (and privately negotiated) directly between two parties, without going through an exchange or other intermediary. Products such as swaps, forward rate agreements, and exotic options are almost always traded in this way.

 The OTC derivative market is the largest market for derivatives, and is unregulated. According to the Bank for International Settlements, the total outstanding notional amount is $596 trillion (as of December 2007)[1]. Of this total notional amount, 66% are interest rate contracts, 10% are credit default swaps (CDS), 9% are foreign exchange contracts, 2% are commodity contracts, 1% are equity contracts, and 12% are other. OTC derivatives are largely subject to counterparty risk, as the validity of a contract depends on the counterparty’s solvency and ability to honor its obligations.

Bottom-Line, and it’s NOT GOOD 

Way back in my August 27 report of 2007 with the headline “They Don’t Know What They Don’t Know” I was attempting to make a point about the unknowable world of derivates risk and the “daisy-chain” that links them but as I see the looks on the faces of Bernanke and Paulson I’m now afraid that they know enough to be absolutely terrified.  Just think back to the relentless nature of the interventions over the past year and you’ll begin to worry, just as I do, that the government’s models look more like the BAM model than they want anyone to know.  The fact that the government has stepped in during each and every crash zone I’ve published over the past 15 months is NOT a coincidence.  They must be seeing some of what I’m seeing behind the scenes.  It’s interesting that the current wrangling over the huge bailout package is taking place just prior to another forecasted crash zone.  This 45-50% “air-pocket” under the market dictates that the authorities act decisively and although the BAM model tells us that this action will merely postpone the inevitable depression era crash decline into 2012-2016, we should be thankful for small favors.

Full report coming soon



Well…they did it again.  “Investors” managed to register GREED level sell signals in the face of the MOST dangerous fundamental backdrop of our generation.   I’ll repeat this again.  Simply talking about being fearful is not the same as BEING fearful and unless and until this FED and this Treasury Dept. allow investors to experience some sharp, deep,  pain, we’re NOT going to create the impact that is needed to create a decent low. 

I told you all many weeks ago, after a whole new crew of bottom-pickers were rolled out on TV and in the press, that—even ignoring my proprietary model and looking at common-sense battle-tested Fear/Greed indicators—it was easy to determine that the July low was nothing more than a VERY temporary low that would be taken out…maybe violently. 

Over the past several years, whenever the TRIN has registered a reading as low as the reading registered on 9-15 (the 7:30 hourly bar) the market had traded down or sideways for 8 to 16 sessions.  (Because that reading registered as a “BUYING PANIC” and what we need is a BIG upside spike in the TRIN in order to register a “SELLING PANIC.” 

Bottom-line, fear is good, fear cleanses, and we NEED FEAR to form a tradable low.  The constant interventions are creating a very unhealthy amount of complacency out there and at some point we’re going to have to pay the piper. 

Best case for the bulls, our economy and financial markets around the globe is a 1200 point consolidation range between 1133 and 1300 but their not even going to get that if they don’t capitulate a bit and with the worst-case scenario a 45% crash during October I sure hope they capitulate quickly. 

Remember, we have that air-pocket between 1131 and 944 so maybe they can plunge to 944 and make them capitulate.  That would be a gift compared to a 45% crash.

Full report coming soon


AIG…76 Cents or ZERO?

It takes me the same amount of time to build a model on an individual stock as it does to build a model on a commodity or stock index and, for that reason; I really don’t follow a lot of stocks.  But in this case, AIG is such an important story stock—as are all of the brokers and a few large banks—that I found it worth while to build the model.  Anyway, I had literally just finished building the model today when I noticed a crash set up into 10-2 in the hourly model as well as an intraday sell signal in the 5 minute model.  It was at that point that I rushed that email out to you all at 9:43 titled “AIG CRASH COMING!!—GET OUT IMMEDIATELY. 

Well, AIG obviously tracked the model today in fact just two minutes after I sent that mail, the stock registered THE HIGH of the day at 9:45am PST as it touched the 4.36 level.  Then, as the sell signals triggered with the stock up 30%, the stock turned violently and plummeted 38% before bouncing slightly to close at 3.02. 

Below you’ll find the 5 minute model intraday chart along with an hourly model chart showing you all exactly what I’m seeing between today and October 2 (minus the proprietary stuff).  As you can see, I’m expecting weakness in AIG into about 11:00am PST tomorrow, followed by a sucker rally, followed by lower lows into about 10:00-11:00am PST on October 2. 

I have two targets…76 cents, and ZERO.  No clue if it is possible for AIG to go under but something destabilizing should hit the NEWS and hit this stock. 

Also remember that MS and GS should get caught up in this mess (probably inter-related if I had to guess)

Full report coming soon


The $700,000,000,000.00 “BAND-AID”…Crash Alert, AIG, MS, AND GS

I’ve included the original August 14 report below so that new subscribers can be assured that I’m not simply jumping on the bandwagon here. 

In that report (prior to the Sept 15 LEH and MER news followed by the 9-17 AIG news) I wrote about the XBD broker/dealer index saying “SOMETHING BIG IS COMING in this space according to the model and I would not hesitate to put on NEW shorts if I had not already been short this index the entire year.” 

This crash/decline in the XBD index is something that the BAM model called when it registered a capitulation sell signal into the top and told us to get “aggressively short” well over 1 year ago.  In fact you can visit and read about the model’s negative view on Bear Sterns prior to their collapse (see the July 9, 2007 report titled “Throwing Good Money After Bad” followed by our warning that “the model is suggesting that the XBD is positioned similarly to the HGX in 2005 and brokers look to be down 50% into Q2 2008” found in the 8-20-2007 report titled “Escapology.”  (The “Escapology” report also included a reiteration of the model’s very negative view of SHLD (which traded as high as 140.95 that day) along with a target price of 67.67.  The stocks low this year was 67.39 so SHLD tracked the model there as well. 


The model is predicting price moves never before seen by this generation.  Circuit breakers will only be a temporary “speedbump” according to the BAM-VI–Velocity Indicator and all of you should be prepared to survive through 1000-3000 point moves on a daily basis and/or weekly basis.  The government is going to be in uncharted waters so assume they will make major changes on the fly with regard to normal trading practices.  Who knows what they will try but I would want to structure my portfolio so that is can survive an entire day without adjustment regardless if the market trades down 1000 and then back up 1000, down 2000, up 1000, and back down 1000. etc. etc. I’ll be covering this phenomenon in greater detail next week so stay tuned. 

AIG-Melt Down into 10-6ish 

This company was called “too big to fail” for a very good reason but a more honest description would have been “too many derivatives to fail.” AIG is literally like an insurance company who collected hurricane insurance during the calm period–and insured other insurance companies who insured against hurricanes—and then once the hurricane struck they said…”sorry, we have no money…we accidentally wrote insurance against about 5000x the cash we had on hand.  Something else people aren’t talking much about is the fact that AIG’s CDS exposure is what the government is trying to address right now but since 66% of the 596 trillion (or more) derivatives floating around out there are interest rate contracts, what’s going to happen when interest rates blast through the roof based on the US dropping 700 billion on this single isolated problem?   Ironic that we’re bailing out the knuckle heads who got rich selling derivatives (scraps of paper) they called “insurance policies” and that bail out will most likely cause sky-rocketing interest rates—the exact opposite of what the housing market needs now, not to mention the potentially cataclysmic effects of interest rates blasting to 12-14% on the 30YR which could easily dislocate that 66% portion of the 596 trillion derivatives market.  Debacle is now a garden-variety word and I’m officially looking for a new one.

Full report coming soon


SPECIAL REPORT: Are We Facing The Biggest CRASH in History?

I’ve decided to post a series of what I consider to be the most frightening charts I’ve ever tracked in real-time. 

Chart work in and of itself is not what concerns me as I place very little faith in pure “technicals” but when I consider what these charts might be telling me along with what the BAM model is most certainly telling me…well, lets just say I hope I’m wrong. 

The primary speedline I’ve been tracking since the market topped back in October of 2007 (shown as the black dotted line in the first chart below) told me way back when it formed (during the initial decline phase off that October top) that this decline was going to have crash characteristics i.e. a very steep trajectory during bearish periods and very high downside price velocity.

 The previous crash set ups I’ve warned about this year were quickly halted through FED intervention but it looks to me like we’re all going to pay a HUGE price for those interventions.  The past crash set ups were pretty nasty—in the range of 10-17%–but the crash set up I’m tracking now is an unequivocal MONSTER with 50% risk in the EMINI FUTS Daily model according to my speedline study. 

I warned a banking analyst/portfolio manager back in 2005 that my AIG model looked like a complete disaster and that I expected it to trade down to single digits over the coming years…and he laughed at me.  Nothing is impossible, especially given many portfolio managers’ apparent propensity toward gambling with other people’s money.  Derivatives expose all stocks and indexes to unknown risk and with the insane amount of leverage being used they are a recipe for disaster. 

I’m assuming we’ll see INDU 6606/6565 within the coming weeks and I just hope it’s not worse…


Full report coming soon


BAM Model Sticking With the Original 2008 Forecast

There has been absolutely ZERO change in my very bearish forecast throughout all of 2008 and, once again, we’re moving into a new POTENTIAL crash zone 9-24 through 10-7ish.  

The idea that investors ever thought the enormous mortgage related losses—that must be realized by someone at some point—could simply be swept under the rug was something that astonished me this entire year.  The FED gave investors numerous opportunities to lower leverage, hedge, or exit the markets completely…but they just continued to pick bottoms and throw good money after bad.  You would think investors would have been much more cautious given the fact that this debacle is much different than previous debacles in that the problem (the catalyst) is not something that can be addresses with a single recapitalization/merger/takeout/ etc.  Unlike 1998, when LTCM was a singular problem that could be addressed by a singular solution, this mess involves almost everyone in finance and it, more importantly, involves problems that cannot easily be quantified as far as the total loss or longevity of the bleeding.  Bottom-line…weakness into 9-18 followed by a sharp bounce into 9-23 followed by a FULL-BLOWN CRASH 9-26 THROUGH 10-7.


Crude Oil Speculative Bubble to be Followed by a Surprising Price Collapse 

As crude oil melted up into the 147 level and the talking heads said we were headed for 200-300 dollar per barrel oil, I sent you all a special report telling you that the BAM Crude Oil Model was expecting a total collapse of prices with a first-stop target of 87.75 into September of this year followed by a return to the 36-47 dollar level over the coming 24 months.  To prove that conviction I chose the DUG as my #1 long-side recommendation and told you all that the model expected to see that ETF double in price (from the 38 level) as we trade into the end of 2008/first quarter of 2009.  Crude has now traded down to 90.20 coming less than three dollars from that forecasted target price and although I do see a sharp rally into the 9-18/9-21 period, the first decent lift we see will place crude oil in a position to trigger one of the most vicious sell signals on the board which should create a mind-boggling collapse into year-end. 

Deflationary Spiral Followed by “Last-Gasp” Hyper-Inflation 

As new data has been generated throughout this trading year, I’m now comfortable passing along information about the coming seven years.  The outlook for price action remains unchanged i.e. a return to the INDU 6565 level followed by a return to the INDU 3971 level, but what has become more clear in my work is a potential timeline for revisiting those price levels.  My work is now suggesting that we will revisit the 6565 level during 2009/2010 (if we don’t crash to 6565 during the Fall of 2008) and that we could revisit the 3971 level as early as 2010! 

Full report coming soon