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


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