Monday, December 22, 2008

Linear Regression Charts

These are some updated charts of the S&P 500 Index and the Nasdaq 100 Index. Both indexes are shown in daily charts and 3-day charts.

S&P 500 Index 3 Day Chart (click to enlarge)

S&P 500 Index Daily Chart (click to enlarge)

In the first chart it is important to notice that the prices are starting to test the second standard deviation from the short term linear regression line(21 period). Any momentum above this level, could lead to a move up to the second standard deviation line from the medium term linear regression line(55 period). This is roughly the 970 area that was calculated in an earlier post.

This second daily chart shows a series of higher lows inside of the short term linear regression channel(21 day). At the same time prices are meeting resistance from the medium term linear regression upper channel line. If prices can stay above this channel(yellow line), it can act as support for a move up to the 940 area. There is still an overhang on the market, so any move higher should be scrutinized as to its volume and full participation across various other indexes. Commodities and Infrastructure related companies could be leaders in any move higher. It is still prudent to be skeptical and sell rallies.

Nasdaq 100 Index 3 Day Chart (click to enlarge)

Nasdaq 100 Index Daily Chart (click to enlarge)

Sunday, December 14, 2008

Making Preparations and Taking Action in Today’s Deflationary Environment

December 12, 2008

Editor’s Note: The following article is adapted from Robert Prechter’s 2002 best-selling book, Conquer the Crash – You Can Survive and Prosper in a Deflationary Depression.

In addition to this article, visit Elliott Wave International to download the free 15-page report about how to protect yourself, you wealth and your family in this environment. It contains details about what you should do with your pension plan, valuable tips for business owners, insights on handling loans and debt and important warnings against trusting the government to protect you.

By Robert Prechter, CMT

The ultimate effect of deflation is to reduce the supply of money and credit. Your goal is to make sure that it doesn’t reduce the supply of your money and credit. The ultimate effect of depression is financial ruin. Your goal is to make sure that it doesn’t ruin you.
Many investment advisors speak as if making money by investing is easy. It’s not. What’s easy is losing money, which is exactly what most investors do. They might make money for a while, but they lose eventually. Just keeping what you have over a lifetime of investing can be an achievement. That’s what this my book, Conquer the Crash, is designed to help you do, in perhaps the single most difficult financial environment that exists.

Protecting your liquid wealth against a deflationary crash and depression is pretty easy once you know what to do. Protecting your other assets and ensuring your livelihood can be serious challenges. Knowing how to proceed used to be the most difficult part of your task because almost no one writes about the issue. My book remedies that situation.

Preparing To Take the Right Actions

In a crash and depression, we will see stocks going down 90 percent and more, mutual funds collapsing, massive layoffs, high unemployment, corporate and municipal bankruptcies, bank and insurance company failures and ultimately financial and political crises. The average person, who has no inkling of the risks in the financial system, will be shocked that such things could happen, despite the fact that they have happened repeatedly throughout history.

Being unprepared will leave you vulnerable to a major disruption in your life. Being prepared will allow you to make exceptional profits both in the crash and in the ensuing recovery. For now, you should focus on making sure that you do not become a zombie-eyed victim of the depression.

Taking the Right Actions

Countless advisors have touted “stocks only,” “gold only,” “diversification,” a “balanced portfolio” and other end-all solutions to the problem of attending to your investments. These approaches are usually delusions. As I try to make clear in Conquer the Crash, no investment strategy will provide stability forever. You will have to be nimble enough to see major trends coming and make changes accordingly.

The main goal of investing in a crash environment is safety. When deflation looms, almost every investment category becomes associated with immense risks. Most investors have no idea of these risks and will think you are a fool for taking precautions.
Many readers will object to taking certain prudent actions because of the presumed cost. For example: “I can’t take a profit; I’ll have to pay taxes!” My reply is, if you don’t want to pay taxes, well, you’ll get your wish; your profit will turn into a loss, and you won’t have to pay any taxes. Or they say, “I can’t sell my stocks for cash; interest rates are only 2 percent!” My reply is, if you can’t abide a 2 percent annual gain, well, you’ll get your wish there, too; you’ll have a 30 percent annual loss instead. Others say, “I can’t cash out my retirement plan; there’s a penalty!” I reply, take your money out before there is none to get. Then there is the venerable, “I can’t sell now; I’d be taking a loss!” I say no, you are recovering some capital that you can put to better use. My advice always is, make the right move, and the costs will take care of themselves.

If you are preoccupied with pedestrian concerns or blithely going along with mainstream opinions, you need to wake up now, while there is still time, and actively take charge of your personal finances. First you must make your capital, your person and your family safe. Then you can explore options for making money during the crash and especially after it’s over.

For more information, Prechter has made five full chapters from his book available for free download.
What to do with your pension plan
How to identify a safe haven (a safe place for your family)
What should you do if you run a business
Calling in loans and paying off debt
Should you rely on the government to protect you?

Robert Prechter, Certified Market Technician, is the founder and CEO of Elliott Wave International, author of Wall Street best-sellers Conquer the Crash and Elliott Wave Principle and editor of The Elliott Wave Theorist monthly market letter since 1979.

Monday, December 8, 2008


The makers of I.O.U.S.A. have created a free 30 minute version of their movie that not only discusses how this crisis began, it also foreshadows the impending retirement crisis. I encourage you to invest thirty minutes of your time to watch this video and share it amongst friends and colleagues who are also struggling to find answers to some very complex questions we have all been asking ourselves.

30 Minute Video Link

Thursday, December 4, 2008

The Government Doesn’t Want You to Read This Article About the Financial Crisis

Editor’s Note: This article has been excerpted from a free issue of Robert Prechter’s monthly market letter, The Elliott Wave Theorist.

The full 10-page market letter, Be One of the Few The Government Hasn’t Fooled, can be downloaded free from Elliott Wave International.

By Robert Prechter, CMT

“Who Will Benefit From The Housing Act?”

This question is an actual headline from a national daily paper. The real answer is: mortgage lending corporations, developers, real estate agents, speculators and politicians. The government is also pledging tax money to providers of “financial counseling” and grants for speculators who want to “buy and renovate foreclosed housing”; in other words, it will hand tax money to charlatans and unfunded wheeler-dealers. But a far better headline would have been, “Whom Will the Housing Act Hurt?” The answer to that question is: (1) prudent people, i.e. savers, earners, renters and people who have waited to buy a house at a reasonable price; and (2) innocent people, i.e. taxpayers.

Government action (unless it is aimed at destruction) always causes the opposite of its stated effect. If taxpayers ultimately have to shoulder the burden for all the bad mortgage debt, those who are on the edge of being able to make their mortgage payments will be forced over the edge, causing more missed mortgage payments and more foreclosures.

There is never any need for a law granting privilege except when the goal is to reward the undeserving and to punish the innocent. If the goal were otherwise, there would be no need for a statutory law, because the natural laws of economics, when unencumbered, serve to reward the deserving and punish the imprudent and the guilty. Populists loudly challenge this idea, but they are wrong.

I thought the Fed was created to “help manage the economy.”

After a secret meeting on Jekyll Island (GA), Congress and a handful of bankers created the Federal Reserve System for two purposes. The first one was to allow the government to counterfeit money, thereby letting it steal value from savers through inflation. The second was to allow bankers to make profits through debt creation, also at the expense of savers. Any other claim is a smokescreen.

So shouldn’t we blame the Fed for the country’s financial problems?

That’s like blaming the collapse of your house on the biggest termite. The Fed is only one of the monsters that Congress has created. In the financial realm, others include Fannie Mae, Freddie Mac, Ginnie Mae, Sallie Mae, the FDIC, the FHA, the FHLBs and the income tax. But there are also a hundred other havoc-wreaking agencies of the federal government. Congress is to blame for ruining America. The Fed is only one of the mechanisms it created along the way. It’s a big one, and it’s fine to campaign against it, but to blame it for everything is to give its creator a free pass.

This is an important distinction, because many people seem to think that abolishing the Fed will cure America’s money woes. They seem to think that once the Fed is abolished, Congress will behave responsibly. One website even calls for abolishing the Fed in favor of giving money-printing power directly to the federal government! Abolishing the Fed is a worthy goal, but Congress will work tirelessly to create one disastrous institution after another, because that’s what campaign donors pay for.

For more information on the government’s role in the financial crisis, download Robert Prechter’s free 10-page market letter, Be One of the Few the Government Hasn’t Fooled.

Robert Prechter, Certified Market Technician, is the founder and CEO of Elliott Wave International, author of Wall Street best-sellers Conquer the Crash and Elliott Wave Principle and editor of The Elliott Wave Theorist monthly market letter since 1979.

Tuesday, November 25, 2008

Sample Linear Regression Charts

S&P 500 Index 50 day linear regression with 2 standard deviations(click to enlarge)

NDX 100 Index (click to enlarge)

Dow Jones Industrial Avg. (click to enlarge)

U.S. Dollar Index (Click to enlarge)

These charts are generic charts of the three major equity indexes and the U.S. Dollar Index. After the strong rally starting last Friday, equities in general are approaching the upper 2 standard deviation line. This does not mean that prices will stop there, it does mean that crossing that line will show how much momentum there is at that level. If it is weak volume, expect prices to retreat back to the linear regression line.

The U.S. Dollar Index is outside the 2 standard deviation line below the linear regression. This shows the extreme move over the past two days has reached an extreme. It is important to watch the next day or so and how prices act as they rally back to the 2 standard deviation line. A weak rally followed by a failure to re-establish prices inside the channel will point to a change in trend.

Monday, November 24, 2008

Linear Regressions 1

This discussion is meant to go over a functional elementary approach to using linear regressions and standard deviations off of linear regressions of variable time frames. Text book definitions will be avoided, and references to the math used will be kept to a minimum, google searches give enough resources on this.

One way to look at a linear regressions is to view it as a trend line. It is not a trend line connecting lows or other particular price data. It is best approached as a trend line that includes all price data. It does not connect various price points, but instead bisects all price points for a specified period in time. Below are three charts of Agilent Technologies Inc. The green line bisecting the bars on the chart is a 10 day linear regression. As the prices change, the slope(angle) of the linear regression line changes to fit the most current 10 days of data.

A - Agilent Technologies Inc. (click to enlarge)

A - Agilent Technologies Inc. (click to enlarge)

A - Agilent Technologies Inc. (click to enlarge)

These three charts show how the slope of these regressions changes and follows the most current 10 days of price data. While a 10 day linear regression might not be of much use, comparing the slope of the 10 day to a longer term, 50 day, might be incorporated into a larger data scan. Below is a chart of Agilent Technologies Inc. with a 50 day linear regression(Blue Line) and the 10 day linear regression(Green Line).

A - Agilent Technologies Inc. (click to enlarge)

This 50 day linear regression shows that prices over this time frame are moving lower in steady fashion. Looking at a linear regression line alone doesn't provide much help other than showing the general trend or slope of prices. One tool to apply to a linear regression is standard deviation lines. In the same chart above, the 50 day linear regression line will have two lines applied. One will be 2 standard deviations above and one 2 standard deviations below this linear regression. With 2 standard deviations above and below, 95% of prices should take place inside these limits.

A - Agilent Technologies Inc. (click to enlarge)

This chart shows how most prices are contained inside these two lines. Fighting the slope of the linear regression and entering trades at the upper standard deviation line can make life difficult. This is an introduction to provide a basis for the next series of articles to follow on how to incorporate these tools into any trading system or investment strategy. If there are ever any questions, feel free to send questions and comments using the button on the right side of the page above the blog archive.

Sunday, November 23, 2008

Citigroup Rescue....#*@&%bank

To boost investor confidence in Citigroup the government unveiled a bold plan Sunday, including taking a $20 billion stake in the firm as well as guaranteeing hundreds of billions($306,000,000,000) of dollars in risky assets. The move, announced jointly by the Treasury Department, the Federal Reserve and the Federal Deposit Insurance Corp., is aimed at shoring up a huge financial institution whose collapse would wreak havoc on the already crippled financial system and the U.S. economy.

Does this shore up confidence? It sure makes in obvious that those in charge of putting band-aides on bullet-holes can't see past their own nose. What has happened between tonight and a few weeks back when the government invested the previous $25 billion in Citigroup? How many more weeks will it be before the government offers Citigroup another $25 billion or so. They all better go on an expensive retreat and think about it.

Maybe they(WE) have to do this, maybe we don't, but why didn't these geniuses see this coming a few weeks back. They actually thought that $25billion was enough a few weeks back. After injecting nearly $300 billion of capital into financial institutions, federal officials now appear to be willing to absorb bad assets, on a targeted basis, from specific institutions. This will not be the last attempt to save sinking ships. In addition to $2 trillion in assets it has on its balance sheet, Citi has another $1.23 trillion in entities that aren't reflected there, according to reports. Some of those assets are tied to mortgages, and investors have worried they could cause heavy losses if they are brought back on the company's books. It doesn't only have fleas, it has ticks and the mange.

Citigroup(shitibank)---click to enlarge

If we as tax payers are going to fund a distressed equities hedge fund, how can we now not bail out the auto industry? This mess with Citi is going to cost a lot more than the money Detroit is asking for. If we are going to invest in failing banks and other troubled and burdened industries, where does it stop? Where do we draw the line? We sure better be investing in companies that offer some growth to offset the boat-anchors we own preferred stock in currently. We will not get preferred stock in solar and new fuel cell companies that the government is going to surely offer tax incentives to jump start that industry. We will not get preferred stock in the infrastructure companies that will most likely get business as the federal government attempts to restart the economy with spending. These last two will at least create jobs and give some people some benefit. Tying up $351 billion in Shitibank isn't the best investment. With the additional 1.2 trillion in assets currently off its books, we will be throwing more money into this fire in 6 weeks time.

Link to terms of the "deal".

Fed Pledges $7.4 Trillion To Ease Frozen Credit.
That is equal to $24,000 for every U.S. citizen and 9 times the Iraq war. Scary.

Thursday, November 20, 2008

Price Effects of Inflation and Deflation

Robert Prechter Explains the Price Effects of Inflation and Deflation
November 19, 2008

Editor’s Note: On Nov. 19, 2008, the U.S. Labor Department reported a 1 percent drop in the consumer price index for October 2008. The drop marked the largest decline in 61 years, and it was the first decline in that measure in nearly a quarter of a century. The 1 percent drop was twice as large as many mainstream analysts had forecast. Such a large decline in consumer prices is forcing U.S. policymakers to rethink the possibility of deflation in America. For more on deflation, we turn to Robert Prechter, the man who literally wrote a book on how to survive it. The following article, adapted from Prechter’s book Conquer the Crash – You Can Survive and Prosper in a Deflationary Depression, will help you understand exactly what to expect from deflation.

In addition to this article, visit Elliott Wave International to download the free 8-page report, Inflation vs. Deflation. It contains details on which threat you should prepare for and steps you can take to protect your money.

By Robert Prechter, CMT

Before explaining the price effects of inflation and deflation, we must define the terms inflation, deflation, money, credit and debt.

Webster's says, "Inflation is an increase in the volume of money and credit relative to available goods," and "Deflation is a contraction in the volume of money and credit relative to available goods."

Money is a socially accepted medium of exchange, value storage and final payment. A specified amount of that medium also serves as a unit of account.

According to its two financial definitions, credit may be summarized as a right to access money. Credit can be held by the owner of the money, in the form of a warehouse receipt for a money deposit, which today is a checking account at a bank. Credit can also be transferred by the owner or by the owner's custodial institution to a borrower in exchange for a fee or fees – called interest – as specified in a repayment contract called a bond, note, bill or just plain IOU, which is debt. In today's economy, most credit is lent, so people often use the terms "credit" and "debt" interchangeably, as money lent by one entity is simultaneously money borrowed by another.

When the volume of money and credit rises relative to the volume of goods available, the relative value of each unit of money falls, making prices for goods generally rise. When the volume of money and credit falls relative to the volume of goods available, the relative value of each unit of money rises, making prices of goods generally fall. Though many people find it difficult to do, the proper way to conceive of these changes is that the value of units of money are rising and falling, not the values of goods.

The most common misunderstanding about inflation and deflation – echoed even by some renowned economists – is the idea that inflation is rising prices and deflation is falling prices. General price changes, though, are simply effects of inflation and deflation.

The price effects of inflation can occur in goods, which most people recognize as relating to inflation, or in investment assets, which people do not generally recognize as relating to inflation. The inflation of the 1970s induced dramatic price rises in gold, silver and commodities. The inflation of the 1980s and 1990s induced dramatic price rises in stock certificates and real estate. This difference in effect is due to differences in the social psychology that accompanies inflation and disinflation, respectively.

The price effects of deflation are simpler. They tend to occur across the board, in goods and investment assets simultaneously.


For more information on deflation and inflation, including money-saving steps for protecting your wealth, download Elliott Wave International’s free 8-page report, Inflation vs. Deflation.

Robert Prechter, Certified Market Technician, is the founder and CEO of Elliott Wave International, author of Wall Street best-sellers Conquer the Crash and Elliott Wave Principle and editor of The Elliott Wave Theorist monthly market letter since 1979.

Monday, November 17, 2008

Time Out From Trading....

Every four years the Olympics remind us of some of the greatest athletes in our country. Once the Olympics end, many of these incredible people fade from the headlines and go back to training in the sports they love. One of the greatest stories of the Beijing Summer Olympics was that of Dara Torres. She exhibited uncommon and incredible sportsmanship while swimming a personal best and winning a silver medal in the 50 meter women's freestyle. She did this at the age of 41, competing against swimmers more than half her age. She was competing her 5th Olympics and won her 12th medal. This was all accomplished while swimming with a heavy heart because her coach could not make the trip to Beijing. Weeks before the Olympics, Coach Michael Lohberg was diagnosed with aplastic anemia, a rare and life-threatening blood disorder.

While many of Coach Lohberg's swimmers were in Beijing swimming for gold, he was at the National Institutes of Health, NIH, in Bethesda Maryland fighting for his life. Aplastic anemia is a condition where bone marrow does not produce sufficient new cells to replenish blood cells. The term 'aplastic' means the marrow suffers from an aplasia that renders it unable to function properly. Anemia is the condition of having reduced hemoglobin or red cell concentration in the blood. Typically, anemia refers to low red blood cell counts, but aplastic anemia patients have lower counts of all three blood cell types: red blood cells, white blood cells, and platelets. This not an easy or inexpensive medical condition to fight. I encourage people to read about the disease and help Coach Lohberg cover the costs in fighting this condition. Many of the coaches and teachers in society are our the most valuable commodity, yet the also the most under appreciated. Below is the information for helping Coach Michael Lohberg.

Donate Now to Swim Coach Michael Lohberg

Those interested in donating money to help defray the medical expenses for Michael Lohberg, USA Olympic Coach and Coral Springs Swim Club Coach, may mail contributions to:


4695 N University Drive
Coral Springs, FL 33067

Payable to: Michael Lohberg

Account # 0066065580
Routing # 267083763

For additional information:
Please call Dorie Vega at BankAtlantic 954-344-2488 Ext. 7000

We all cheer for the athletes, so lets support those who help make things happen for them!

Revenue generated by this blog for the remainder of November and the month of December will be forwarded to Michael Lohberg. Let's see how much we can raise for a great cause.

Tuesday, November 11, 2008

Top 100 Safest U.S. Banks

Why Your FDIC-Backed Bank Could Fail
November 11, 2008

With big bank bailouts dominating the news, there’s no better time to get the truth about bank safety.

This informative article has been excerpted from Bob Prechter’s New York Times bestseller Conquer the Crash. Unlike recent news articles that are responding to the banking crisis, it was published in 2002 before anyone was even talking about bank safety. However, you may find the information even more valuable today than ever before.

For even more information on bank safety, visit Elliott Wave International to download the free 10-page report, Discover the Top 100 Safest U.S. Banks. It contains details on how you can protect your money from the current financial crisis, updated for 2008.

Risks in Banking

Between 1929 and 1933, 9000 banks in the United States closed their doors. President Roosevelt shut down all banks for a short time after his inauguration. In December 2001, the government of Argentina froze virtually all bank deposits, barring customers from withdrawing the money they thought they had. Sometimes such restrictions happen naturally, when banks fail; sometimes they are imposed. Sometimes the restrictions are temporary; sometimes they remain for a long time.

Why do banks fail? For nearly 200 years, the courts have sanctioned an interpretation of the term “deposits” to mean not funds that you deliver for safekeeping but a loan to your bank. Your bank balance, then, is an IOU from the bank to you, even though there is no loan contract and no required interest payment. Thus, legally speaking, you have a claim on your money deposited in a bank, but practically speaking, you have a claim only on the loans that the bank makes with your money.

If a large portion of those loans is tied up or becomes worthless, your money claim is compromised. A bank failure simply means that the bank has reneged on its promise to pay you back. The bottom line is that your money is only as safe as the bank’s loans. In boom times, banks become imprudent and lend to almost anyone. In busts, they can’t get much of that money back due to widespread defaults. If the bank’s portfolio collapses in value, say, like those of the Savings & Loan institutions in the U.S. in the late 1980s and early 1990s, the bank is broke, and its depositors’ savings are gone.

Because U.S. banks are no longer required to hold any of their deposits in reserve, many banks keep on hand just the bare minimum amount of cash needed for everyday transactions. Others keep a bit more. According to the latest Fed figures, the net loan-to-deposit ratio at U.S. commercial banks is 90 percent. This figure omits loans considered “securities” such as corporate, municipal and mortgage-backed bonds, which from my point of view are just as dangerous as everyday bank loans. The true loan-to-deposit ratio, then, is 125 percent and rising. Banks are not just lent to the hilt; they’re past it.

Some bank loans, at least in the current benign environment, could be liquidated quickly, but in a fearful market, liquidity even on these so-called “securities” will dry up. If just a few more depositors than normal were to withdraw money, banks would have to sell some of these assets, depressing prices and depleting the value of the securities remaining in their portfolios. If enough depositors were to attempt simultaneous withdrawals, banks would have to refuse. Banks with the lowest liquidity ratios will be particularly susceptible to runs in a depression. They may not be technically broke, but you still couldn’t get your money, at least until the banks’ loans were paid off.

You would think that banks would learn to behave differently with centuries of history to guide them, but for the most part, they don’t. The pressure to show good earnings to stockholders and to offer competitive interest rates to depositors induces them to make risky loans. The Federal Reserve’s monopoly powers have allowed U.S. banks to lend aggressively, so far without repercussion. For bankers to educate depositors about safety would be to disturb their main source of profits. The U.S. government’s Federal Deposit Insurance Corporation guarantees to refund depositors’ losses up to $100,000, which seems to make safety a moot point. Actually, this guarantee just makes things far worse, for two reasons. First, it removes a major motivation for banks to be conservative with your money. Depositors feel safe, so who cares what’s going on behind closed doors? Second, did you know that most of the FDIC’s money comes from other banks? This funding scheme makes prudent banks pay to save the imprudent ones, imparting weak banks’ frailty to the strong ones. When the FDIC rescues weak banks by charging healthier ones higher “premiums,” overall bank deposits are depleted, causing the net loan-to-deposit ratio to rise.

This result, in turn, means that in times of bank stress, it will take a progressively smaller percentage of depositors to cause unmanageable bank runs. If banks collapse in great enough quantity, the FDIC will be unable to rescue them all, and the more it charges surviving banks in “premiums,” the more banks it will endanger. Thus, this form of insurance compromises the entire system. Ultimately, the federal government guarantees the FDIC’s deposit insurance, which sounds like a sure thing. But if tax receipts fall, the government will be hard pressed to save a large number of banks with its own diminishing supply of capital. The FDIC calls its sticker “a symbol of confidence,” and that’s exactly what it is.

For more information on bank safety, including how to choose a safe bank during the current financial crisis, download EWI’s free 10-page report, Discover the Top 100 Safest U.S. Banks.

Thursday, November 6, 2008

Election Year End Of Year Market Results

The spreadsheet below covers the year end results for the market following November presidential elections. This information covers 1912-2004.

Thursday, October 30, 2008

U.S. Dollar


In September, employers took 2,269 mass layoff actions, seasonally
adjusted, as measured by new filings for unemployment insurance bene-
fits during the month, the Bureau of Labor Statistics of the U.S.
Department of Labor reported today. Each action involved at least 50
persons from a single employer; the number of workers involved totaled
235,681, on a seasonally adjusted basis. The number of mass layoff
events this September increased by 497 from the prior month, while the
number of associated initial claims rose by 61,726. Layoff events
reached their highest level since September 2001, a month that experi-
enced substantial layoff activity due to the September 11 attacks. Mass
layoff initial claims reached their highest level since September 2005,
which was a month with high layoff activity due to Hurricane Katrina.
The effects of Hurricanes Gustav and Ike contributed to the higher
September 2008 layoff activity. In September, 603 mass layoff events
were reported in the manufacturing sector, seasonally adjusted, result-
ing in 81,414 initial claims. Over the month, mass layoff events in
manufacturing increased by 4 and initial claims increased by 9,170.
(See table 1.)

From January through September 2008, the total number of events
(seasonally adjusted), at 14,811, and initial claims (seasonally
adjusted), at 1,510,446, were the highest for the January-September
period since 2003 and 2002, respectively.

The national unemployment rate was 6.1 percent in September, sea-
sonally adjusted, unchanged from the prior month and up from 4.7 per-
cent a year earlier. In September, total nonfarm payroll employment
decreased by 159,000 over the month and by 519,000 from a year earlier.

Table A. Industries with the largest number of mass layoff initial claims in
September 2008

This shows the number of unemployment claims in September for each industry and then it shows the worst September for the industry, the year it happened and the total number of claims in the worst year. Notice that most industries aren't even close to their worst month. The single exception is Professional Employer Organizations. In English this means Wall Street. It also means the rest of the economy hasn't been impacted by mass layoffs... yet.

The unemployment rate in the US is 6.1%. Look a little deeper into the data and you'll find that the unemployment rate in the financial services industry is only 4.2%. Financial services is also a smaller part of the over-all economy. One way to think about it is that for every one person who is unemployed on Wall Street there are twenty two 'real' unemployed people. 22:1 is another reason people are upset with Wall Street.

How much worse can unemployment get? Today American Express Co. announced it will cut 7,000 jobs, or nearly 10% of its work force, as part of a cost-cutting effort as the credit-card company girds for further weakening of economic conditions throughout the world. American Express will not be the only company to announce lay offs. In the coming weeks, this will be a repeated story as companies try to lean themselves out for potentially tough times ahead. As companies merge, the announced cuts in the workforce are usually ignored in the excitement of the new news, but mergers in the current economic environment will effect thousands of employees. How many workers will lose their jobs if General Motors and Chrysler strike a deal? The effects also trickle down the line to suppliers as the newly formed company will try to streamline costs and survive what will be tough times.

A story discussed almost half of Nevada homeowners with a mortgage owe more to the bank than their homes are worth. 50% is an amazing number! If you add in the homeowners like them in California, Arizona, Florida, Georgia and Michigan, together they account for nearly 60 percent of all homeowners who are "underwater" on their mortgages. The fact that these states account for so much is not surprising, because some of them experienced the greatest growth in the housing market the last 10 years. Nationwide, almost one out of every five homeowners with a mortgage owes more to their lender than their properties are worth. The new data underscore the staggering scope of the U.S. housing recession, but also the challenges that government officials face in designing a massive new program to help homeowners avoid foreclosure, with layoffs soaring and the economy sinking.

Nationally, home prices are already down about 20 percent from their peak in mid-2006. By the time the housing market hits bottom, prices may be down 40 percent from the top, leaving 40 percent of homeowners underwater, according to Nouriel Roubini, economics professor at New York University. "There is a huge incentive to walk away from your mortgage," said Roubini, who has attracted attention for his gloomy -- and accurate -- predictions of the U.S. financial market meltdown. He gave no forecast for when the real estate market would bottom out.

It is important to watch the news for the types of assistance the government is going to come up with in the coming weeks. Congress is not going to wait for the new administration in 2009, they are set to attempt to tackle the problem in the lame duck session now. There are two sides to the help that will be coming. How much will it help to stop the decline in housing prices, and what the cost will be. If it is a band-aide on the bullet hole, things will get worse. In this case not only will we take on additional debt in the newest stimulus, it might not be effective in attaining its desired result, putting a halt to the falling home prices.

As we take on more debt as a country, and if this debt becomes irresponsible or ineffective in attaining its desired result, it will be important to watch its effect on the U.S. Dollar. The chart below shows the U.S. Dollar Index in both a daily and weekly view.

U.S. Dollar Index Weekly (click to enlarge)

U.S. Dollar Index Daily (click to enlarge)

Commodities are important groups to follow when there are any significant moves in the U.S. Dollar. Below is a chart comparing the U.S.Dollar, in the top pane, to Light Sweet Crude and Metals in the bottom two panes. Each chart is market with the red 55 day exponential moving average.

U.S. Dollar vs. Oil & Metals (click to enlarge)

This chart clearly shows as the U.S.Dollar became a beneficiary of the flight to quality in uncertain times, the negative effect on commodities has been significant. Commodities are experiencing the double effect of the strong dollar and the view that demand is going to be less going forward. Supply and Demand aside, the fluctuations in the Dollar will provide significant opportunities in the commodity area. Jim Rogers has come up with and index that tracks commodities and it is further broken down into sub-sectors. RJI is the international commodity index, RJA tracks agriculture, RJN tracks energy, and RJZ tracks metals. While these tracking stocks are lower in price, they have significant percentage moves.

Another way to speculate and profit from the movement in the U.S.Dollar is by investing in either UUP Powershares U.S. Dollar bullish Fund, or in UDN Powershares U.S.Dollar Bearish Fund.

UUP Powershares U.S.Dollar Bullish Fund (click to enlarge)

UDN Powershares U.S.Dollar Bearish Fund (click to enlarge)

Monday, October 27, 2008

S&P 500 Index Range And PNF Charts

This first chart has support and resistance levels calculated from the opening range starting Jan.1,2008.

S&P 500 Index Opening Range (click to enlarge)

Currently the futures are at 828.10, down 4.3%. This will most likely lead to a break of the 865 level and set up a test of 805. Below are some Point and Figure charts. Looking at these charts it isn't until a rally above 970 that things might turn short term bullish.

S&P 500 Index PNF Daily (click to enlarge)

S&P 500 Index PNF Weekly (click to enlarge)

Great Source of information based on Point and Figure charting, Dorsey Wright & Associates link. They offer free online lessons on Point and Figure charting, a lost art. There are also free weekly podcasts that cover various market conditions and outlooks.

Friday, October 24, 2008

Has Cash Been King for the Past 10 Years?

If you're like most investors, you've been nearly brainwashed with conventional market "wisdom" that stocks are the best way to grow your portfolio.

You would be crazy not to have your money in the markets, right?

But when markets drop, as we've seen in this credit crisis, it's amazing how quickly the story changes.

Steve Hochberg and Pete Kendall, editors of Elliott Wave International's Financial Forecast, challenged the notion of stocks' superiority years before this latest downturn.

Learn how cash has been king – and will remain so – far longer than the latest news headlines may have you believe in this free excerpt from Elliott Wave International's Credit Crisis Survival Kit.

Elliott Wave International has also made the full Credit Crisis Survival Kit available free for a limited time. In addition to this excerpt, it contains 14 other articles, reports, and videos that reveal how to survive and prosper during the credit crisis. Visit EWI to download the kit, free.

Cash's Invisible Reign Made Visible
[excerpted from Elliott Wave Financial Forecast, August 2008]

With respect to cash and its status as the preeminent financial asset, however, we are starting to wonder if investors will ever come around to our point of view, which, as we explained in the March special section, is that there are times when "the phrase 'focus on the long term' means "get out and wait.'" As we also pointed out, the last eight years are clearly one of these times, as cash has outperformed all three major stock averages over this period. A July 3 USA Today article shows how this outlook is actually becoming more farsighted as the bear market intensifies:

3-month Treasuries Beat
S&P 500 for past 10 Years

The article says, "Investors who bought stocks for the long run are finding out just how long the long run can be." But the farther back in time cash's dominance stretches and the rockier the stock market gets, the farther investors seem to move from ever taking anything off the table. After stating that "there can be times, long times, when stocks won't beat T-bills," a professor and popular buy-and-hold advocate is cited as "optimistic that the next 10 years will be better than the past decade." In March EWFF stated, "Cash will continue to outperform until stocks are no longer fashionable." There is no sign that such a condition is even close to happening.

It's somewhat amazing that cash is not capturing anyone's fancy because a tremendous society-wide thirst for cash is spreading fast. "In a deflation," the Elliott Wave Financial Forecast has stated, "Rule No. 1 is to unload everything that isn't nailed down. Rule No. 2 is to sell whatever everything remaining is nailed to." The banking system is surely deflating, because, echoing Elliott Wave Financial Forecast's wording again, "Desperate American Banks Are Selling Everything That Isn't Nailed Down." SunTrust is selling its stock in Coca-Cola, an asset the bank held for 90 years. Merrill Lynch sold its founding stake in Bloomberg as well as various other subsidiaries.

Meanwhile, "Americans are selling prized possessions online and at flea markets at alarming rates." Pawnshops and auction sites are booming. At, the number of for-sale listings soared 70% in eight months. This fits with our review of Craigslist's prospects when it was getting started in 2005: "This is just the set-up phase. Once the global garage sale really gets rolling, truly astounding volumes of dirt-cheap goods will be available on-line and elsewhere." The global garage sale is on. The chart of the U.S. savings rate shows that the bull market in cash has come to life.

A 30-year downtrend in savings rates ended at minus 2.3% in August 2005. In May 2008, the savings rate skyrocketed to 5%. This jolt may be somewhat overstated due to the arrival of the government's stimulus checks, but the burst should be the start of a critical new mindset among consumers. When the government showered the economy with $600 checks, many did something they never would have thought of through most of the bull market: They put the money in the bank, which is exactly what the administration did not want. In fact, federal, state and local governments are desperate for the tax revenue that a little ripple-effect spending would have generated.

According to the National Conference of State Legislatures, states must close a $40 billion shortfall in the current fiscal year. "The problem today is that tax revenue is vanishing," says a story about the sudden appearance of the worst fiscal crisis in New York since 1975. Even cities like East Hampton, New York, where someone paid $103 million for an oceanfront house last year, are out of money. "Nobody understands how it happened," says one resident. The pages of this newsletter show otherwise. If we are right, a deflationary decline is depleting and destroying cash flows in novel new ways that no one alive has experienced before.

The previous analysis was excerpted from Elliott Wave International's Credit Crisis Survival Kit. The kit, featuring 15 free resources to help you survive and prosper during the credit crisis, is available free. Visit EWI to download the kit, free.

Thursday, October 23, 2008

Trading In A Tough Market

With the volatile moves in the market lately it isn't easy to get a gauge on where things are headed. Every day there is a parade of "experts" saying this is the new market bottom. It can make for some confusing times.

The idea of spread trading is something to consider in this crazy market. Suppose you decided it was time to own a coal stock. One way to do this is to buy the one you determine to be the healthiest strongest company, and then decide who is the weak stock in the group and short that one. This is just an example, but in the chart below compares two coal companies, Peabody Energy BTU and Massey Energy MEE. The bottom pane is the spread of these two stock, BTU divided by MEE. When the moving average is sloping upward, Peabody Energy BTU is outperforming Massey Energy MEE.

Peabody Energy BTU / Massey Energy MEE (click to enlarge)

In this example Peabody could have been purchased on September 5th for 51.43 and Massey Energy could have been short sold at 50.95. It is important to use equal dollar amounts on each side of the trade. These two companies are similar in price, but in most cases the prices are very different. The idea is to benefit from the percentage out-performance of what was determined to be the stronger company. The advantage to this system is that if you are wrong, and the market continues to experience strong selling, the short side of the trade will allow you profit or limit your loss and market exposure.

This is another example of a potential trade. It involves BNI-Burlington Northern Sante Fe and CSX-CSX Corp, both railroad companies.

Burlington Northern / CSX Corp. (click to enlarge)

BTU/MEE Spread current position +9.8%
BNI/CSX Spread current position +6.7%

The key concept to remember is to employ equal dollar amounts on each side of the trade. Options can also used instead of outright positions, but they can be more complicated.

Wednesday, October 22, 2008

S&P 500 Index Update

S&P 500 Index (click to enlarge)

A break of the 865.97 level could lead to the 805.39 area. A bounce off of the 865 level will most likely lead prices to the 987 area.

Credit Crisis Survival Kit

Download Your Free Credit Crisis Survival Kit

Before it became the worst credit crisis since the Great Depression, the credit crisis used to be an arcane topic discussed only in financial publications. Now, it's on every computer, television screen, and front page of every newspaper in the world.

It may have you worried about what you can do to get through it with your personal finances still intact. What can you do about it?

Download Your Free Credit Crisis Survival Kit

Elliott Wave International, the world’s largest market forecasting firm, put together this free resource featuring 15 hand-picked reports and videos that will show you:

1.How we got into this mess

2.How to survive and prosper from it

3.When you can expect the crisis to end

The detailed analysis covers topics worrying you and millions (if not billions) of other people around the world who are learning more and more about the dangers of the Credit Crisis every day.

Here are just 5 of the 15 topics covered:

*How Do I Find a Safe Bank?
*What Happens During a Credit Implosion?
*How Do I Ride Out this Crisis?
*What If You Can’t Sell Your House?
*Buy & Hold or Sell & Fold?

Read All 15 and Download Your Free Credit Crisis Survival Kit

Saturday, October 18, 2008

Gann Grid And Gann Angles

This is a chart of the S&P 500 going back to the early 1980's. Two of W.D. Gann's techniques are added to this chart. One is Gann Angles which look like trend lines. The other is a Gann Grid which looks like a criss-crossed checkerboard.

S&P 500 Index (click to enlarge)

Gann believed that the ideal balance between time and price exists when prices rise or fall at a 45 degree angle relative to the time axis. This is also called a 1 x 1 angle (i.e., prices rise one price unit for each time unit).

Gann Angles are drawn between a significant bottom and top (or vice versa) at various angles. Deemed the most important by Gann, the 1 x 1 trendline signifies a bull market if prices are above the trendline or a bear market if below. Gann felt that a 1 x 1 trendline provides major support during an up-trend and when the trendline is broken, it signifies a major reversal in the trend. Gann identified nine significant angles, with the 1 x 1 being the most important:
1 x 8 - 82.5 degrees
1 x 4 - 75 degrees
1 x 3 - 71.25 degrees
1 x 2 - 63.75 degrees
1 x 1 - 45 degrees
2 x 1 - 26.25 degrees
3 x 1 - 18.75 degrees
4 x 1 - 15 degrees
8 x 1 - 7.5 degrees

Note that in order for the rise/run values (e.g., 1 x 1, 1 x 8, etc) to match the actual angles (in degrees), the x- and y-axes must have equally spaced intervals. This means that one unit on the x-axis (i.e., hour, day, week, month, etc) must be the same distance as one unit on the y-axis. The easiest way to calibrate the chart is make sure that a 1 x 1 angle produces a 45 degree angle.

Gann observed that each of the angles can provide support and resistance depending on the trend. For example, during an up-trend the 1 x 1 angle tends to provide major support. A major reversal is signaled when prices fall below the 1 x 1 angled trendline. According to Gann, prices should then be expected to fall to the next trendline (i.e., the 2 x 1 angle). In other words, as one angle is penetrated, expect prices to move and consolidate at the next angle.

Gann developed several techniques for studying market action. These include Gann Angles, Gann Fans, Gann Grids and Cardinal Squares.

Friday, October 17, 2008

Stock Market Bottoms

Lately it seems like every other day there is a list of "experts" on television calling another market bottom. There is one pattern that seems to occur that is worth committing capital to. It gives a defined stop area and in more times that not, gives a great risk reward ratio. An example of this pattern is shown in the chart below of the S&P 500 Index from 1974.

S&P 500 Index 1974 (click to enlarge)

The pattern in 1974 shows the market making a strong move down. This is followed by a bounce re-tracement that is more than a few days. The time frame of this bounce usually has a relationship to the time frame of the sell off. If the sell off is over a few weeks, a bottom pattern is not going to be made in a day or two. It is going to take time to form. It is important to follow the price and volume after the bounce and the market trades down trying to make a new low. If the previous low is the bottom, the second move down will have less momentum and less volume, and usually fall short of making a new low, as in the end of 1974.

Another example can be seen in the chart below from 1990. The sell off is not as dramatic and the recovery matches the "personality" of the sell off.

S&P 500 Index 1990 (click to enlarge)

In 1998 the market had a dramatic sell off the resulted in a pattern that is different than the two above. In this example as the market traded back down to the previous low, it made a new intra-day low but the close of the day was higher that the previous low close. It is important to watch volume on this type of day. Once the price on this second new low recovers and passes above the previous low, buying and short covering will usually propel the market higher with strong short term momentum. When the hope of new buyers wanting to have the market go higher is joined with the realization by short sellers that the low is most likely in place, a strong up move can follow. It isn't always worth chasing this move if you miss it. Wait for a pull back.

S&P 500 Index 1998 (click to enlarge)

S&P 500 Index Now (click to enlarge)

Thursday, October 16, 2008

Chairman Bernanke Statement

Chairman Ben S. Bernanke
At the President’s Working Group Market Stability Initiative Announcement
October 14, 2008

Good morning. Before I begin, I want to express my appreciation of my colleagues, Secretary Paulson and Chairman Bair, for their efforts in what has been an extraordinary collaboration. As Americans well know, the challenges evident in the financial markets and in the economy are large and complex, but I believe that the steps taken today will help us to overcome them. Our strategy will continue to evolve and be refined as we adapt to new developments and the inevitable setbacks. But we will not stand down until we have achieved our goals of repairing and reforming our financial system and thereby restoring prosperity to our economy.

Over the past year, the Federal Reserve has actively used all its powers and authorities to try to help our economy through this difficult time. And central banks around the world have consulted closely and cooperated in unprecedented ways to reduce strains in financial markets and to bolster our economies. We will continue to do so. However, clearly the time had come for a more comprehensive and broad-based solution.

History teaches us that government engagement in times of severe financial crisis often arrives very late, usually at a point at which most financial institutions are insolvent or nearly so. Waiting too long to act has usually led to much greater direct costs of the intervention itself and, more importantly, magnified the painful effects of financial turmoil on households and businesses. That is not the situation we face today. Fortunately, the Congress and the Administration have acted at a time when the great majority of financial institutions, though stressed by highly volatile and difficult market conditions, remain capable of fulfilling their critical function of providing new credit for our economy. The Congress's prompt and decisive action in passing the financial rescue legislation made possible the critical steps that have been announced this morning. I also find it heartening that we are seeing not just a national, but a global response to the crisis, commensurate with its global nature. Indeed, this past weekend, the finance ministers and central bankers of the Group of Seven industrialized countries announced a set of principles embodying a comprehensive approach to dealing with the crisis. The steps we are taking today are fully consistent with those principles.

As in all past crises, at the root of the problem is a loss of confidence by investors and the public in the strength of key financial institutions and markets, which has had cascading and unwelcome effects on the availability of credit and the value of savings. The actions today are aimed at restoring confidence in our institutions and markets and repairing their capacity to meet the credit needs of American households and businesses. The voluntary equity purchase program will strengthen financial institutions' capacity and willingness to lend. The guarantee of the senior debt of all FDIC-insured depository institutions and their holding companies will restore the confidence of these institutions' creditors and reinvigorate the crucial inter-bank lending markets. Additionally, the Federal Reserve is pressing forward with its facility to provide a broad backstop for the commercial paper market, so vital to the functioning of our businesses.

Policymakers here and around the globe have taken a series of extraordinary steps. Americans can be confident that every resource is being brought to bear: historical understanding, technical expertise, economic analysis, and political leadership. I am not suggesting the way forward will be easy. But I strongly believe that the application of these tools, together with the underlying vitality and resilience of the American economy, will help to restore confidence to our financial system and place our economy back on a path to vigorous, healthy growth.

Tuesday, October 14, 2008

Dow Jones Industrial Average Rally Of 1939

Yesterday's rally required some digging to come up a comparable action for the Dow 30. The chart below is from 1939. The rally then was not a 1000 points, but on a percentage basis probably felt the same. On September 1, 1939 the market had a low of 127.50 with a close of 135.30. The next trading day, September 5, 1939, had a daily high of 150.10 and a close at 148.10. The percentage move from close to close was around 9.4%. The range from low on 9/1/39 to the high the next trading day was 22.6 points or 17.7%.

Dow Jones Industrial Average 1939(click to enlarge)

There are some significant differences in the rally in 1939 and what was experienced yesterday. Most importantly the rally in 1939 was not a "V" bottom. The low for the year was made earlier and this rally occurred after some attempts to test this low. The price action yesterday might have felt like a low, and can make last Friday feel like the low, but there will be a test. As Art Cashin says, it's the second mouse that gets the cheese. The buyers who bought attempting to buy the bottom on Friday, most likely had tried to do the same earlier the past few weeks. They might be right for the short term, but major commitments of capital will be made as we test the low from last Friday, if it proves to be a bottom. Picking bottoms is a messy way to make a living!

This chart below is a larger view of prices in the late 1930's, followed by a current chart.

Dow Jones Industrial Average 1930's(click to enlarge)

This next chart shows prices in May of 1940. As fun as the upward moves feel, the down moves impart more emotion and feelings that last. The fear of the next down move will return.

Dow Jones Industrial Average 1940(click to enlarge)

Dow Jones Industrial Average Current(click to enlarge)

Dow Jones Industrial Average Weekly (click to enlarge)

Monday, October 13, 2008

George Soros Bill Moyers Interview

October 10, 2008

Video Available Here

BILL MOYERS:Welcome to the Journal.

You are not alone if you are worried about the financial melt down. So is my guest George Soros, one of the world's best known and successful investors, making billions in times of boom or bust. He's been warning for years of a financial melt down fueled by easy credit and sleepy regulation. Now he's out with this timely book, "The New Paradigm for Financial Markets: The Credit Crisis of 2008 and What It Means."

In the interest of full disclosure, you should know that I served three years on the board of George Soros' foundation, the Open Society Institute, dealing with such issues as a free press, the rule of law, and human rights. But I've had no involvement in his political activities and nothing to do, with his business interests unfortunately. It's good to see you.


BILL MOYERS:Let's imagine for a moment that we're not in a New York studio but we are in Neely's Barbecue Stand in Marshall, Texas, my hometown, and we're surrounded by people I know, people who have lost half of their 401(k)s in the last three or four weeks, and what they want to know is does this financial meltdown represent the end of the American dream as they have known it.

GEORGE SOROS:No. No. I think it's got nothing to do with the American dream as such. There has been some kind of an ideological excess; namely, market fundamentalism for the last 25 or so years. And now that world is collapsing...

BILL MOYERS:What do you mean "market fundamentalism"?

GEORGE SOROS:It's that markets will correct themselves, that you should leave it to the markets, and there is no need for government intervention in financial affairs. Letting markets run rampant. And that doesn't work.

Markets have the ability to adjust and they're very flexible. There is this invisible hand. But it is also prone to be mistaken. In other words, markets instead are reflecting reality. They always look at reality with a bias. There is always a prevailing bias. I'll call it, you know, optimism/pessimism.

And sometimes those moods actually can reinforce themselves so that there are these initially self-reinforcing but eventually unsustainable and self-defeating boom/bust sequences or bubbles. And this is what has happened now.

This current economic disaster is self-generated. It was generated by the market itself, by getting too cocky, using leverage too much, too much credit. And it got excessive.

BILL MOYERS:You used the word "disaster."

GEORGE SOROS:The financial system is teetering on the edge of disaster. Hopefully, it will not go over the brink because it very rarely does. It only did in the 1930s. Since then, whenever you had a financial crisis, you were able to resolve it. This is the most serious one since the 1930s, there hasn't been one as serious as this.

Unfortunately, the authorities are behind the curve. They are reacting to these crises as they emerge. One thing leads to another, one market after another gets into difficulty. And they react to it. And they don't quite understand what's hitting them. So they are not anticipating and not gaining control of the situation.

BILL MOYERS:This is what's interesting, why wouldn't the government be able to look at what you looked at and see what's coming?

GEORGE SOROS:Because actually they have been working on false premises. This sounds very strange, but there's been this development of, this belief of market fundamentalism. And particularly the idea that markets always revert to the mean and deviations from the mean occur in a random fashion. And you can calculate it.

And you will get a nice distribution and you can anticipate it. And based on that, you can manage your risk. And that actually was based on a false idea. This namely, the markets self-correcting because the market moods have a way of affecting the fundamentals the markets are supposed to reflect.

And there's always a divergence between our perception and what actually exists. For instance, take the simplest situation, namely housing.

Banks give you credit based on the value of the houses. But they don't seem to somehow understand that the value of the houses can be affected by the amount of credit they are willing to give. Now, we've developed these fabulous new ways of securitizing mortgages, which has made credit much more amply available.

And we've been able to calculate risk. And, therefore, we were willing to give more and more credit. And that has pushed up the value of the houses. Also, of course Greenspan kept interest rates too low, too long. And so you had very low interest rates, easy credit, and house prices have been appreciating at more than ten percent a year for a number of years. And the willingness to lend actually increased. There was an insatiable appetite for these new fangled securities.

BILL MOYERS:Yeah. Nobody understood, really.

GEORGE SOROS:Which they didn't properly understand. And there was always a separation between the people who generated the mortgages and packaged them and sold them to you and the people who owned them. So nobody was paying attention to the quality of the mortgages because they didn't have an interest. They — all day collecting fees. And then there were other people holding the mortgages.


GEORGE SOROS:And that was not factored into those instruments. The idea was that by distributing risk, you actually reduce risk. But by separating the principal from the agent, you actually greatly increase the risk. And that was not reflected. And the rating agencies didn't realize it. So they gave triple-A ratings. And then a few weeks later, those triple-A bonds became practically valueless. And that's what has happened.

BILL MOYERS:But how does the system become deranged like that? So separated from reality like an individual who goes insane because he or she is separated.

GEORGE SOROS:Well sometimes we get carried away. I mean, you know, let's say in the Middle Ages, people were religious. And so they had tremendous discussions about how many angels can dance on the eye of a needle. Now, if you believe that angels can dance then that's a legitimate question. And this is exactly what has happened here. You thought that you could slice and dice and engage in this kind of financial engineering. And it became very, very sophisticated and got carried away.

BILL MOYERS:What happened that we lost control?

GEORGE SOROS:There was a failure of regulations because they couldn't understand these new instruments. But they said, "Oh, well, the banks have very good risk management techniques. So we leave it to them to calculate their own risks."

And, you see, it wasn't only in the housing market. There were all kinds of other financial instruments. So there was not just one bubble. I describe in my book there is the housing bubble. But this housing bubble, when that burst, it was only the detonator that exploded the bigger bubble, the super bubble.

Which is this 25 years of constant credit expansion using greater and greater leverage. The amount of credit in the economy has been growing at, I don't know, I don't know the exact figure, but maybe at least twice as fast as the economy itself. I think it's more like three.

And now, suddenly, you have a contraction of credit. And it's a sudden thing. And it's a period of great wealth destruction. And that's how these poor people in Texas suddenly find that their 401(k) is worthless.

BILL MOYERS:So as we talk, Secretary Paulson and the government seem to be coming around to what you've been advocating and that is taking taxpayer money, public capital, and injecting it directly into the banks — in effect, nationalizing some of these banks. Why do you think that will work when everything else has failed?

GEORGE SOROS:Well unfortunately because they are delaying it, it may not work so well because there's a certain dynamism. And they're always behind the curve. So there are many things that they're doing now if they had done several months ago, it would have turned things around.

BILL MOYERS:That's a very gloomy assessment. You're saying that everything they're doing is coming too late? How does that ultimately play out?

GEORGE SOROS:Unfortunately, that is the case. I'm quite distressed about it. I hope that you know, eventually they'll catch up.

We are determined to put the money in, not to allow the financial system to collapse. And that's the lesson we learned in the 1930s. It's an important lesson. But because we are behind the curve, the amounts get bigger and bigger. If we understood it earlier, we could have brought it to a halt perhaps sooner. But they've got still a number of things to do. And this idea, you see, of just buying noxious instruments of you know, off the balance sheet of the banks was a non-starter.

BILL MOYERS:But that was the idea.

GEORGE SOROS:But it was the wrong idea.

BILL MOYERS:But this is disturbing, George. If everything we're doing keeps accelerating the downward negative feedback and isn't working, are you suggesting, can one insinuate from what you say that we're heading for 1930?

GEORGE SOROS:Hopefully not. But we are heading for undoubtedly very difficult times. This is the end of an era. And this is a fact.

BILL MOYERS:End of an era?

GEORGE SOROS:At the end of an era.

BILL MOYERS:Capitalism as we have known it?

GEORGE SOROS:No. No, no, no. Hopefully, capitalism will survive. But the sort of period where America could actually, for instance, run ever increasing current account deficits. We could consume, at the end, six and a half percent more than we are producing. That has come to an end.

BILL MOYERS:So what do we do now?

GEORGE SOROS:We are probably at the height of the financial crisis. I think it can't get much worse. I think it could get a bit worse yet. But then you have the fallout in the real economy.

BILL MOYERS:We're in a downward spiral.

GEORGE SOROS:We are in a downward spiral.

BILL MOYERS:How long will it go on?

GEORGE SOROS:Look the one thing that my theory says is that you can't predict the future because the future depends on how you react to it. So if we do the right things then things will not — will be less painful. If you do the wrong things, they'll be more painful. Now, so far we've been doing the wrong things. I very much hope that we'll have a different government in a few months and they'll be doing the right things.

BILL MOYERS:Well, don't be shy. What do you think the new government should do?

GEORGE SOROS:Well, first of all you have to prevent housing crisis from overshooting on the downside the way they overshot on the upside. You can't arrest the decline, but you can definitely slow it down by minimizing the number of foreclosures and readjusting the mortgages to reflect the ability of people to pay. So you have to renegotiate mortgages rather than foreclose.

And you provide the government guarantee. But the loss has to be taken by those who hold the mortgages, not by the taxpayer.

BILL MOYERS:You mean the homeowner doesn't take the loss. The lender.

GEORGE SOROS:The homeowner needs to get relief so that he pays less because he can't afford to pay. And the value of the mortgage should not exceed the value of the house. Right now you already have 10 million homes where you have negative equity. And before you are over, it will be more than 20 million.

BILL MOYERS:But, you're talking about taking action three months from now, whether it's a McCain administration or an Obama administration. What happens in these next three months? And I'm serious about that.

GEORGE SOROS:I am very worried about it. And I hope that they will have a new secretary of treasury, somebody else.

BILL MOYERS:Sooner than later?


BILL MOYERS:You don't think...

GEORGE SOROS:It would be very helpful if...

BILL MOYERS:You don't think Paulson's up to it?

GEORGE SOROS:Unfortunately, I have a negative view of his performance.


GEORGE SOROS:Because he represents the very kind of financial engineering that has gotten us into the trouble. And this buying off the noxious things was a...

BILL MOYERS:Buying the bad assets, that was his...


BILL MOYERS:First idea.

GEORGE SOROS:Yeah, and before that, he wanted to create a super SIV, special investment vehicle, to take care of the other special investment vehicles. That didn't fly. And they are now within a week recognizing that they have to change and inject money into the banks to make up for the whole in the equity because those banks lost money. And they can't make it up by taking their assets off their hands. You have to recognize the losses and replenish the equity.

BILL MOYERS:Is that what you would do with the bailout money now? Right now?

GEORGE SOROS:Yes, yes, yeah.

BILL MOYERS:You would put it where?

GEORGE SOROS:Into the capital of the bank so that the capital equity can sustain at least 12 times the amount of lending. So that's an obvious thing. And every economist agrees with this.

You see, what is needed now the bank examiners know how those banks stand. And they can say how much capital they need. And they could then raise that capital from the private market. Or they could turn to this new organization and get the money from there. That would dilute the shareholders. It would hurt the shareholders.

BILL MOYERS:Of the bank?

GEORGE SOROS:Of the banks. Which I think Paulson wanted to avoid. He didn't want to go there. But it has to be done. But then, the shareholders could be offered the right to provide the new capital. If they provide the new capital then there's no dilution. And the rights could be traded. So if they don't have the money, other people could, the private sector could put in the money. And if the private sector is not willing to do it then the government does it.

BILL MOYERS:The assumption of everything you say is that the government is going to be a big player now in the economy and in the financial markets. But what assurance do we have that the government will do a better job?

GEORGE SOROS:We don't. Right now they are doing a bad job. So you want to use the government as little as possible. The government should play a smaller role. In that sense, people who believe in markets, I believe in markets. I just want them to function properly. To the extent you can use the market, you should use the market.

Governments are also human. They're also bound to be wrong. Moreover, they are bureaucratic. So they are slow and they are subject to political influence. So you want to use them as little as possible. But to not to use them, see, assumes that markets are perfect. And that is a false belief.

BILL MOYERS:Has the whole global system become so complex with such gargantuan forces interlocked with each other, driving it forward, that it doesn't know how to obey Adam Smith's natural laws?

GEORGE SOROS:No, I think our ability to govern ourselves doesn't keep pace with our ability to exercise power over nature, control over nature. So we are very complicated civilization. And we could actually destroy our civilization because of our inability to govern ourselves.

BILL MOYERS:Would this all be happening if we still had a strong sense of the social compact? I mean, our social safety net has been greatly reduced. The people have a real sense that the gods of capital have left little space for anyone else. People at the top don't have much empathy for people at the bottom.

GEORGE SOROS:There is a common interest. And this belief that everybody pursuing his self-interests will maximize the common interests or will take care of the common interests is a false idea. It's a suitable idea for those who are rich, who are successful, who are powerful. It suits them to justify you know, enjoying the fruits without paying taxes. The idea of paying taxes is an absolute no-no, right?

BILL MOYERS:Unpatriotic.

GEORGE SOROS:Unpatriotic. So, yes, you must have, in my opinion, you need, for instance, a tax on carbon emissions. But that is unacceptable politically. So we are going to have cap and trade. And the trading will have all kinds of loopholes and misuse of the regulations and all kinds of ways of making money without actually dealing with the problem that it's designed to cure. So that's how the political process distorts things.

BILL MOYERS:So let's think about those people down at Neely's Barbecue going home tonight having heard you. What they've heard you say is the system is really disfunctioning right now. It's out of control. Nobody's in charge. They've heard you express your own worry that in the next three months it could get much, much worse.

And they've heard you say that you don't see much good news immediately on the horizon. So let's leave them something to think about as they go home. Let them go home and say, "Mr. Soros said here are three things we can do, simply." One?

GEORGE SOROS:Well, deal with the mortgage problem. Reduce foreclosures. Recapitalize the banks. And then work on a better world order where we work together to resolve problems that confront humanity like global warming. And I think that dealing with global warming will require a lot of investment.

You see, for the last 25 years the world economy, the motor of the world economy that has been driving it was consumption by the American consumer who has been spending more than he has been saving, all right? Than he's been producing. So that motor is now switched off. It's finished. It's run out of — can't continue. You need a new motor. And we have a big problem. Global warming. It requires big investment. And that could be the motor of the world economy in the years to come.

BILL MOYERS:Putting more money in, building infrastructure, converting to green technology.

GEORGE SOROS:Instead of consuming, building an electricity grid, saving on energy, rewiring the houses, adjusting your lifestyle where energy has got to cost more until it you introduce those new things. So it will be painful. But at least we will survive and not cook.

BILL MOYERS:You're talking about this being the end of an era and needing to create a whole new paradigm for the economic model of the country, of the world, right?


BILL MOYERS:One of the British newspapers this morning had a headline, "Welcome to Socialism." It's not going that way, is it?

GEORGE SOROS:Well, you know, it's very interesting. Actually, these market fundamentalists are making the same mistake as Marx did. You see, socialism would have worked very well if the rulers had the interests of the people really at heart. But they were pursuing their self-interests. Now, in the housing market, the people who originated the houses earned the fee.

And the people who then owned the mortgages their interests were not actually looked after by the agents that were selling them the mortgages. So you have a, what is called an agent principle problem in socialism. And you have the same agent principle problem in this free market fundamentalism.

BILL MOYERS:The agent is concerned only with his own interests.

GEORGE SOROS:That's right.

BILL MOYERS:Not with...

GEORGE SOROS:That's right.

BILL MOYERS:The interest of...

GEORGE SOROS:Of the people who they're supposed to represent.

BILL MOYERS:But in both socialism and capitalism, you get the rhetoric of empathy for people.

GEORGE SOROS:And it's a false ideology. Both Marxism and market fundamentalism are false ideologies.

BILL MOYERS:Is there an ideology that...

GEORGE SOROS:Is not false?


GEORGE SOROS:I think the only one is the one that I'm proposing; namely, the recognition that all our ideas, all our human constructs have a flaw in it. And perfection is not attainable. And we must engage in critical thinking and correct our mistakes.

BILL MOYERS:And that's one...

GEORGE SOROS:That's my ideology. As a child, I experienced Fascism, the Nazi occupation and then Communism, two false ideologies. And I learned that both of those ideologies are false. And now I was shocked when I found that even in a democracy people can be misled to the extent that we've been misled in the last few years.

BILL MOYERS:The book is "The New Paradigm for Financial Markets: The Credit Crisis of 2008 and What It Means". George Soros, thank you for being with me.