I am short the S&P 500… but 500 by November seems almost preposterous. Last year essentially all the bulge bracket firms capsized.

Doesn’t happen that often. What could possibly follow as an encore to that and drive the stock market down 50% in three months?

Ed Note: It happened in 1930 – trade has collapsed this year on a scale not seen since well 1930, so the stock market is way too high right now – do you disagree?

US market would have tanked this morning had oil not been up $3.25. The invisible hand at play again.

US market is up now, oil has gained nearly 5% and Dollar is down. So you missed on this one. You can never predict the direction these days. However, I think there might be some sell offs towards the close. I have been shorting the market for the last 3 days and i’m very surprised that it bounced back yesterday and today. Still holding my short position (inverse ETF) and buying more at the dip. We need to pull back and stabilize for a short while before going back up.

S&P at 500!! Come on Peter, Do you want to bet on this?

This school has closed doors and you might be one of the last students going there. It’s a very unrelastic statement, like telling you know that the S&P will go up 1400 by end of this year.

Ed note: 50% down from peak of bear market rally is perfectly possible – where is the economic recovery? In China? There was little warning of last year’s crash, do you think it will be any different this time?

Market is ahead of itself at the moment, this is something i can’t debate. But I don’t know how you can confidently claim that a 50% drop from here is perfectly possible. Please don’t start comparing it to 1929 because i don’t believe in this School of thought. History does not repeat itself, and if it does there are a lot of variables involved. Otherwise, let’s seek advice from Historians when we make investment decisions going forward.

You are saying that “There was little warning of last year’s crash” but I totally disagree. There were a lot of worrying signs, but we (you included) in the Middle East chose to neglect it and thought we were at a different phase of the economic cycle – the infamous decoupling theory. This year the signs are less worrying and are indeed positive considering that we were positioned for dooms day 6 months ago. Now you are trying to convince your readers that we are going back there.

I really can’t get how your investment rationale? You want the market to wait till we return to growth and become 100% confident that we have recovered, and then start to rally! This would actually be the ideal time to sell, right after the recovery when everyone is happy and ecstatic. When Obama gives his motivating speech about how America has finally recovered from the worst recession in 70 yrs. By that time the market will be sugar-high and everyone will be bullish. So its time to sell!!!

Markets are forward looking and many renowned analysts (though I don’t believe all what I hear) feel that the US might return to growth by end of this year or early 2010 at the most. Even Roubini is more or less in agreement on that. Japan, France and Germany have returned back to growth, so it’s only logical that investors expect the US to follow. Trade will gradually improve; it will not bounce back quickly it needs a bit of time. So this doesn’t mean that we wait till trade is fully recovered and then start to invest. Consumer spending will also improve, American were born to spend and they will not suddenly become a savings oriented nation – just give them sometime to absorb all the positive signs coming from the market.

You constantly talk about hyperinflation, if this theory is correct then what’s happening in the stock market today is perfectly logical and sooner or later other hard assets will follow. Trust that you have read Warren Buffet recent article in the Times

If you are so confident about the double dip, then let’s have a bet. No money involved, just a challenge between me and you and your readers can witness it
You are claiming that the market will drop again by 50% i.e. S&P at 500 or anything lower than the march 09 lows.
I’m saying that we will only pull back by 5, 10 or 15% at the most before going up again towards the end of the year. S&P today closed at 996, so I don’t think we will go below 850.

Cut off date is Dec 09 or Jan 2010….what do you think?

Ed Note: sorry I am not a gambling man, I just read history and make comparisons to the present stock market, and right now it does not stack up so that means a big correction: 50% is an extreme position, it could be less – but all you need is to get the direction right. The market is way ahead of reality in the worst economic slump since the 30s. For one thing we have not seen a climactic sell off with everyone giving up on stocks – that is a bear market bottom. It is coming – after all this is the worst economy since the Great Depression. This sort of market anomaly situation – where prices simply and obviously do not reflect what is coming do not happen that often. The idea that we can painlessly inflate our way out of collapsing demand and credit is nonsense. Governments caused the problem (with cheap credit), they can not be a solution.

Usually what pulls up the US Index is when oil goes up. I reckon China bought a ton of oil so demand for oil went up as China ordered extra stock for their reserves which in return sent oil rpices up and kept US markets crashing today. Oil has been quite volatile these last few days and China’s Index has bounced back this morning.
Ed note: yes, oil is the finger in the dyke – but the price is far too high for the economic mess we are in.

yes, peter, anything is possible.
s&p 500 is possible!
in fact probable if not for the plunge protection team and other invisible hands …

By Reuters on Thursday, August 20, 2009
China’s stock market crashed before the economy’s steep slowdown last year, and it soared before the strong recovery earlier this year – so does the current sell-off presage fresh economic troubles?

China’s benchmark share index SSEC fell 4.3 per cent yesterday and is now down 20 per cent from two weeks ago, sending tremors through equity markets worldwide.

The collapse in share prices came at the same time as analysts from Goldman Sachs to Citibank were upgrading their already bullish forecasts for China’s GDP growth. The trigger for the market sell-off was fears of monetary tightening, not a no-confidence vote in the economy. But as the downward spiral intensifies, it risks knocking the broader economy off kilter and hemming in government policy.

Peter, am not a gambler either. I’m just challenging you that your S&P @ 500 assumption will not happen. Getting the direction right these days is a no brainier – there is some sort of a universal consensus that it should go down. I also think that we had enough and need a breather.

Despite of all that, the market has also gone up today again and i lost again on my short position ) I’m unable to decode the market for the last couple of weeks, so i will pull out and watch for a while.
Global trade activity is still down but manufacturing and exports data are improving, so trade will eventually improve
Forget about the 50% correction peter. 15% is the worst case scenario and I strongly doubt that the pull back will be that bad. I can understand why you might be unhappy with the government policies and I respect that, but that doesn’t mean that I bet against the governments. They want the market to go up and stay up, so you need to put emotions aside and take advantage of that. One can be so naive to think that they will do the same mistake again this year and let the economy collapse

I will remind of today’s discussion in December and we will see where the market will be then.

Ed Note: OK I had a similar comment last summer, things just go round in circles. The Baltic Dry Index also crashed then China – we have been down this road before and very recently. Did the government manage to avoid last autumn’s downturn?

Ed Note: It happened in 1930 – trade has collapsed this year on a scale not seen since well 1930, so the stock market is way too high right now – do you disagree?

I agree. Way, way too high. Yet a stock market mania can persist for quite a long time. In the 30’s the gold standard provided a check on the Fed’s money creation, there is no such constraint today.

Furthermore the criminal banks–Goldman Sachs, JP Morgan and their ilk–have been the most vociferous proponents of this latest rally. These money center banks are like wounded animals, a 50% drop from here and some might not survive.

So they are fighting like they have never fought before. I wish it were that come November that GS trades at 50 again…

China went down almost 5% in one day and back up nearly 5% the following day. Truth is they have huge dumping power and huge buying power. When demand is there for a share or even the stock market it can climb with no stopping and even tank with no stopping.

If the US market continues to gain which I suspect it will due to better than expetced BS, I would guess that AIG,FNM,FRE and C will rock in the short term. When things get ugly then SPXU and FAZ should rock along with SKF but until the bloody known months of September and October come around I suspect they will try to squeeze what is left of the shorts on the market with short positions.

Aug. 21 (Bloomberg) — China plans to tighten capital requirements for banks, threatening to curb the record lending that’s fueled a 60 percent rally in the nation’s stock market, three people familiar with the matter said.

The China Banking Regulatory Commission sent draft rule changes to banks on Aug. 19 requiring them to deduct all existing holdings of subordinated and hybrid debt sold by other lenders from supplementary capital, said the people, who have seen the document. Banks have until Aug. 25 to give feedback, said the people, declining to be named as the matter is private.

As a result, banks may need to rein in lending or sell shares to lift capital adequacy ratios to the 12 percent mandated by the regulator. Chinese stocks briefly entered a so- called bear market this week on concern the government would stymie new loans that exceeded $1 trillion in the first half. A news department official at the regulator declined to comment by phone and didn’t immediately respond to a faxed inquiry.

Peter – agreed, things go around in circles. But the circles are much wider than you think. It will be quite a few years before we see what happened in 2008 again, maybe 5, 10 , 20 or 30 yrs….who knows?
If they got it wrong last year, then it doesn’t mean they will get it wrong this year as well. Just because things go around in circles!

Honestly, i don’t think that the 2008 meltdown happened because the Americans got it wrong. I think the whole world thought the Americans got it wrong, but they are the ones who actually got it right.

After 20 or 30 yrs from now, people will look back at 2008 and 2009 as one of the best money making opportunities in history. All of a sudden the markets severely collapsed in 2008 and trillions of dollars vanished from the markets in the form of direct investments (an paper investments) – most of it was of course in America by the Arabs, Chinese, Japanese and Russians. Then the government got involved as the lender of last resort and started throwing trillions of dollars. So markets rebounded again in 2009 and America will inflate its debt and sacrifice the dollar. Don’t you think this sounds like a well orchestrated scenario? Don’t you feel that there are people out there who benefited from this global downturn?
2009 presented a lucky few with a once in a life time money making opportunity. Forget about the average retail investor, there are a few people out there who made billions or even trillions from this rally. Do you really think that this was a coincidence or they maybe got lucky in timing the market?
Anyway, this is my view and i believe that things always happen for a reason and there is a motive behind it. Anyway, it doesn’t matter if I’m right or wrong. I only try to make use of this opportunity because it won’t be available for long
Ed note: Not sure I agree, most people lost money in the crash, and a further aftershock is to be expected.

Alright guys… Who saw what happened to FRE and FNM today?? A pop just like I had predicted. Huge gains today for FRE and FNM. As long as the market did not tank this was bound to happen. If they decide to milk this market further then things will get ineresting but from what I am seeing in Asia is that China is getting towards the end. It could be China that starts this major correction this time around. Question is whether it will be Asian markets that trigger this coming sell off or US that starts it??