THE DOT - if this turns orange or red be alert

Wednesday, September 17, 2008

at the brink of a crash - central banks need to cut rates

Technically, the SPX needs to hold the 1165/70 area or we could enter panic selling. The NDX is at the lows again testing the 1670 lows. The XBD has now reached our 110 target and GS is going to fair value, which is double digits. What's amazing is the crash of MS a bit today, after the good numbers, but indicates that the market has lost all faith in these phony numbers - since so far it never turned out to be truthful.

In any case, we need a trigger to turn around the markets. That can only be a concerted cut of interest rates of central bank by 50BP and this should happen a.s.a.p., but likely at the weekend or, as Bernanke did it the first time, on Friday before the markets open this week.

Russia has suddenly a bank crisis as well and Swiss banks do not look good at all with UBS loaded with toxic stuff. The one no one talks of these days is Citibank. They wrote down $50 bil. so far, but had in SIVs and CDO's combined assets of close to $600 bil. - that is ridiculous. They also lose money on plenty of loans and credit card receivables. Their loses should be south of $100 bil. on a conservative approach. The risk that they falter soon is huge and they are too big to fail. So far, the FED and Treasury have exposed $500 bil. of taxpayers money (FNM, FRE, BSC, AIG) plus the risk they carry in so much borrowing, but Citi would double that easily with roughly $500 bil of toxic stuff. They need to turn around the sentiment for a while to buy some time, but so far they did not make good use of time.

Technical picture says that something will be done til Friday / Monday since our expectation of a retest and slightly new lows has been traded. Now we need a trigger to a short covering rally and the only possible way is a global interest rate cut. It will not solve the problems on a fundamental basis but still get people to cover shorts.

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