Year 2007 in review

2007 was a great year for my trading & investing account. It was a transformational year where I was able to identify my weak points and capitalize on my strong points.

Listed below are key items that contributed to my success. I hope this will be a useful guide to my other fellow traders as we navigate the stock market through 2008 and beyond.

* Very disciplined trading. No hopes and emotions. Losses were sold immediately without a second thought.

* Accurate and complete trading records with comments for each trade. The comment provided the reason for the purchase.

* Month-end summaries, where I had to provide the monthly performance -monthly gain/loss to my better half. Helps as you are answerable to someone and you would ensure that you complete the month on a gain. I also tried improving on my monthly gain each month.

*Strict money management principles. In the beginning of the year, based on the portfolio size, I determine the amount of loss that I can take in any stock. Then, before I buy a stock, I enter the following three details in excel: Buy price, Sell price and Stop price. Based on the stop price, and the amount of loss I can bear in a stock, the excel file calculates the number of shares of the stock I can purchase. So, the further away the Buy price is from the stop price, the lesser the number of shares I purchase.

*Strengthened my TA skills , learnt Elliott Wave theory from a great trader whom I truly respect. I believe his classes on TA and learning to count waves have set me apart from other TA traders. He goes by the alias name BT or BlackTruck and his email is black.truck@verizon.net. Please send him an email if you are interested in joining his class.

*Read and implemented the 2% Shark rule and 6% Piranha rule mentioned in Dr. Alexander Elder's Come into my trading room. This is an amazing book. I read this book in October 2006 and since then I have been able to view the stock market in a very different angle.

* Last but not the least, starting this blog and sharing my thoughts with all of you have helped me to streamline my thoughts and identify trends. If I have learnt something that makes a big difference, I strongly believe in sharing those thoughts and helping others.

Money flow data- Amgdata

I will be looking at this information on a weekly basis. This will help me keep track of BIG money. Trading/ investement decisions should always follow the BIG money. It is the path of least resistance.

Source: AMG Data Services
For the week ending 12/26/07
Including ETF activity:
Equity funds report net cash inflows totaling $12.645 billion
Domestic funds reporting net inflows of $9.970 billion
Non-domestic funds reporting net inflows of $2.675 billion;

Excluding ETF activity:
Equity funds report net cash inflows totaling $3.587 billion
Domestic funds reporting net inflows of $2.047 billion
Non-domestic funds reporting net inflows totaling $1.540 billion;

Domestic funds outperform Non-Domestic funds by a big margin.

2008 Thoughts- Tobias Levkovich

Posted on National Post:

Citigroup’s chief U.S. equity strategist Tobias Levkovich provided clients with eight key concerns, eight unasked questions and eight plausible and interesting outcomes to consider for 2008.

Key concerns:
--------------

1. Stagflation
2. Global recession
3. Presidential elections in the U.S.
4. Energy costs
5. Counterparty risks in the financial sector
6. Plunging greenback
7. Sharp declines for home prices
8. Apparent ineffectiveness of the U.S. Federal Reserve’s action

Key questions:
---------------

1. Everyone may agree that real estate prices in the U.S. are trending downward, but where is the value? Where should buyers be looking?
2. If oil is near US$100 per barrel, why are energy companies not earning more?
3. With at least 95% of equity mutual fund flows going international in recent years, why aren’t more people worried about this craze?
4. Why do hedge funds continue to attract money despite mediocre returns?
5. What ever happened to avian flu and will other global fears just fade away?

Key plausible outcomes:
-------------------------

1. The Republicans could hold on to the White House and give the American people what they want – a divided government.
2. Oil prices could fall to the US$70-US$75 per barrel range on slower global growth
3. The U.S. dollar could hit $1.25 versus the Euro when the ECB finally cuts rates
4. The financials are the top performer in the S&P 500
5. China’s equity bubble bursts
6. Hedge fund consolidation rises.

Updated chart of QQQQ

Updated chart to Santa Rally chart.
We broke above the downtrend line (dotted green).
Now we sit right at strong resistance. Two more days left for the year. Future action will depend completely on how we handle this resistance.
Good luck !

Perfect timing

Timing is everything. I strongly believe in this adage.
This morning I perfectly timed the money flow from solars to chinese. This was even before any volume bars showed up on any of the Chinese stocks. Within few hours, huge volume bars across the screen. My BIDU, CHNR, CPSL are doing just great.

Great run with solars & now Chinese stocks

My prediction has turned true for both Solar momo stocks- CSIQ and SOLF.
SOLF won the race to 30s on Friday followed by CSIQ today. SOLF is now sitting at 37s and CSIQ at 31s. 40% returns in a few days.

My next focus group is Chinese stocks- BIDU, CHNR, CPSL, YTEC.
Have been holding BIDU from high 370s. Will be focusing on CPSL and YTEC today.
CPSL is sitting at nice BO point.

Enjoy the Santa Rally :)

Solars

Today, Solars were the strongest.
SOLF made a BO above the triangle posted here.
CSIQ, on the close heels followed with a BO.
The race to 30 nowbegins.

Market has sustained the strong rally from yesterday. Many people were caught off-guard with this rally. Actually I think many technical analysts missed drawing the correct trendline. They were connecting Aug lows with the Nov lows. The trick was connecting the highs and then extending into a parallel line for the support.

RIMM earnings

From Marketwatch:

For the quarter ended Dec. 1, the company reported earnings of $370.5 million, or 65 cents a share, compared with earnings of $175.2 million, or 31 cents a share, for the same period last year.

Revenue doubled to $1.67 billion from $835.1 million last year.

The results were ahead of Wall Street's expectations. Analysts were expecting earnings of 62 cents a share on revenue of $1.65 billion, according to consensus estimates from Thomson Financial.

- Basically Revenue doubled leading to doubling of earnings coupled with beating of estimates. Market likes it as indicated from the pre-market run-up. It closed yesterday at 106.99 and now it is close to 120. I will be adding this on my radar for a buy.

Solarfun SOLF

If you see SOLF breaking out above the upper triangle- then just BUY !!!
This will make a quick move to old highs as first step.

Santa Rally to begin

Time for Santa Rally..I don't see any reason for us to break the lower trendline..Do you ?

DRYS 60 min chart

I am using this chart for all entries and exits. Andrew's pitchfork applied successfully here.

Nice ride on DRYS

DRYS broke down further today. It broke the critical support around 81-82 and that accelerated the downfall to 71. I have covered my short here. My entry was in 85, 89 and then at 81. I am expecting to see a bounce from 69. If it breaks 69, I will reenter my short but I guess it will more likely bounce from that level.

Weekly chart of DRYS

Weekly chart on DRYS shows that it has been closing outside the channel for the fourth consecutive week. Simple TA tells that there is more downside ahead. If it ever closes inside the channel, that would be the only time to become a bull. DRYS is probably holding up till year-end as it was one of the hottest stocks of this year and fund managers will continue holding till year-end.

Gold breaking down ?

Gold seems to be breaking down from this triangle formation. The above chart is for streetTRACKS Gold ETF- GLD. I have entered a short position here at 78s. We had inflation data coming in this morning which was hotter than expected. Following this news, GLD broke down. I am not sure if the 38.2% retrace will stop this slide. This should be safe and good trade. I will stop-out if enters back into the channel.

Why the Fed bailout might not work

Interesting article on CNN Money/Fortune:

The announced plan to make credit markets more liquid could end up having the opposite effect. NEW YORK (Fortune) -- The Federal Reserve's latest move to make credit markets more liquid could deepen problems in the banking system and actually cause the markets to be even more illiquid.
Wednesday, the Fed, along with other central banks, announced a plan that is designed to enable banks to borrow money directly from the Fed at below-market rates. This will allow a wider range of banks to access Fed credit, and simultaneously allow them to submit a broader range of collateral to the Fed when taking out those loans.

Why do this now? The Fed explained in a release Wednesday: "This facility could help promote the efficient dissemination of liquidity when the unsecured interbank markets are under stress." In layman's terms this means that rates on loans between banks - measured by something called the London Interbank Offered Rate, or Libor - are too high for the Fed's tastes, so it is now prepared to itself lend to banks at much lower rates.
Before this move, banks could borrow directly from the Fed through the so-called discount window, at 4.75 percent. The key Federal funds rate is lower, at 4.25%, but that is open to a narrower range of financial institutions and accepts a narrower range of collateral than the discount window. The new program - called the Term Auction Facility (TAF) - will auction funds to banks at rates very close to the lower Fed funds rate. The first TAF auction, for $20 billion, is scheduled to begin on Dec. 17.
What could go wrong with such an approach? Surely, it makes sense for banks to be lending to each other at lower rates, since that can spark more lending across the whole financial system. But Libor is a market rate, ultimately reflecting banks' views on each other's creditworthiness. Indeed, at 5.06% before news of the TAF was released by the Fed, Libor was considerably higher than the Fed funds rate, reflecting banks' caution about each other. But maybe the widened spread between Libor and the Fed funds rate is an inescapable product of the times. Given the credit problems U.S. banks are facing, they are naturally wary of each other. Maybe the Fed thinks banks are being overcautious, so the TAF is its way of bypassing what it sees as unwarranted skittishness.
But it makes more sense to believe the banks' view of each other than the Fed's. Banks do business with banks each day, so they're far more likely to have a good handle on each other's balance sheet problems. Moreover, as theoretically profit-making entities, private banks have to carefully assess the creditworthiness of the borrowers, which means they have far more incentive to do their homework than the Federal Reserve.
The potentially dangerous aspect of the TAF is that it will allow banks with problems to borrow their way out of trouble, rather than by taking measures like issuing large amounts of stock to bolster their balance sheets. Struggling banks are struggling chiefly because they were mismanaged and wrote too many risky loans when credit was cheap. The TAF potentially gives mismanaged banks even more cheap credit, which will delay a much-needed restructuring of the banking sector. Nervousness about banks could then deepen, leading to even fewer loans being made.
One of the big lessons of the credit crunch is that overly cheap credit causes massive harm to the economy in the long run. The TAF suggests that the Fed still hasn't learned that.

Market Update

We had two positive news- good retail numbers and money flow into Citigroup. Think about the worst affected sectors that drove down the market, were they not Consumer Discretionary and Financials. If these negatives are eased, they allow for good ingredients for a rally. Keep this mind over the next few weeks, this can really help play the market.
Even though there was havoc on Tuesday, the volume was very low. So, probably the big money was not selling yesterday. That concluded to a nice rally today. But the overriding factor is ease of negative news and oversold levels.
Keep in mind the following chart posted here. Once that red line is crossed, we will setup for a meaningful rally. As far as my stocks are concerned, my predictions has turned true for DRYS short which I covered yesterday. Still holding my TSL short. It broke the earning day's low today at 33s and snapped up two points. Will see how it moves from here. Short was initiated it the 37-38 range. Other than that I still have a lot of longs on my list.

DRYS Weekly chart

On the weekly chart, DRYS confirmed a breakdown from the uptrend channel.If you see last week's candle it clearly indicates that it fully travelled outside the channel. This further confirms the breakdown from the daily channel as posted last week here.
If you are long-term short holder, keep your stop at 89. If you are a shorting on a short-term basis, your stop will be at 82. Target is at mid 60s.

Market Update- Bottoming out soon?

Observe the above chart carefully. This is the Nasdaq-High-Low index. Look at each of the BLUE arrows at the bottom of the chart. These indicate past lows in the market. Now if you check any of the market indices, you would see that these points roughly correspond to the market lows in the indices. Similarly the RED arrows on the top correspond to the tops in the market. To validate the reliability of this condition, I compared the last RED arrow which indicated a top in the market. As posted on the chart it seems that though this indicator pointed to a top in the first week of October, the market continued going up for another 3 weeks. But the action in October was very back and forth during this period as we all painfully remember and then the market took a big dive.

Now coming to the current market action and the bottom shown on the above chart for the week of Nov 12; are we in a bottoming out phase before the next uptrend begins ?
The BLUE arrow shown as market bottom in the first week of August proved that Aug 16 was the bottom for the market indices (about 15 days apart) and proved that buying the STRONGEST stocks during the bottoming out phase gave returns in excess of 50%. So where do we go from here- you be the judge as the market forces unravel their actions this week. Good Luck All !!

Solars- TSL missed earnings

TSL missed earnings today and is down 26% . This is now in a big corrective action. Baased on Elliott Wave theory analysis, it seems to be working on the C downwave. The C-wave will be very nasty and I believe this stock will move in the down direction. Very good short. If you again see 37-38 short another lot.
Target in 25-26 range.

Volatility continues unabated

We had some crazy volatility today. The markets first tricked the bears by doing a BO, moving above the red line and then in the afternoon failing the BO and going all the way down to the blue line. That blue line is the trendline formed when you connect the Aug 16 lows with last week's low. The market turned at exactly today on the touch of that trendline.
Now we have formed a massive doji on the chart. Atleast the better part of today's action is nowwe know the upper and lower supports.


For shorting, I have my former trend stock- DRYS. Today it conclusively broke the trendline that has been in place for several months. I believe this a good short with target in the 60s.

Market this week

My prediction for last week turned out to be true. I sold many long positions on Monday. Nasdaq and QQQQ with their huge large cap tech stocks were safe havens for this year. This week with CSCO earnings all that was shattered. Mr. Market is very good at shattering safe havens. Ok, now where do we go from here ? This is a very difficult question to answer. Would we turn around here and go back to new highs-possibly not. All I can say for sure is that Friday's low will be taken out. The QQQQ will make a trip to 49.70. That should (hopefully) provide a good support for a bounce rally. So, it is not wise to sell your long positions in panic on Monday. The likelihood of a bounce is very high. Good Luck !!

FSLR comes out with blowout earnings

One of my favorite stocks First Solar posted huge earnings. Check my earnings table that shows the comparisons with other company earnings.
A 900% year-over-growth and beating estimate by 200%. I think this is one of the best earnings for this season. I was long this stock from the 90s and sold all a few days before earnings in high 150s. I missed the huge next-day effect of 35%. I don't mind missing the earnings jump. My plan is to pick a good entry in the near future.

Dollar's fall affecting other economies

The fall of the dollar not only affects US economies but also other economies. One of the ways their economies are affected is that their products become more expensive in US and hence less attractive.
Excerpts from Bloomberg article follow:

Central banks from Bogota to Mumbai are imposing foreign-exchange curbs to take control of their soaring currencies from traders dumping the dollar.

In Colombia, international investors buying stocks and bonds must leave a 40 percent deposit at Banco de la Republica for six months. The Reserve Bank of India created a bureaucratic thicket to curb speculation by foreign money managers. The Bank of Korea is investigating trading of currency forward contracts to limit gains in the won, now at a 10-year high.

Instead of using currency reserves or interest rates to influence foreign exchange markets, central banks and finance ministries are setting up obstacles to keep the falling dollar from threatening company profits and economic growth. The U.S. currency slumped 10 percent this year against its biggest trading partners, the steepest decline since 2003, while Treasury Secretary Henry Paulson has reiterated that the U.S. supports a ``strong'' dollar.

``Central banks are struggling to find new ways to intervene against their currencies and some of the proposals simply can't work,'' said Mirza Baig, an analyst in Singapore at Deutsche Bank AG, the world's biggest currency trader. Some plans are ``truly bizarre,'' he wrote in a report.

The U.S. hasn't attempted to stop the decline as the worst housing slump in 16 years forced the Federal Reserve to lower interest rates. The dollar has weakened 19 percent against the Canadian currency this year to a record 90.58 cents, and fell 18 percent versus Brazil's real.

The euro strengthened 1.2 percent last week and reached an all-time high of $1.4752 on Nov. 9. The yen rose 3.6 percent in its biggest weekly gain since December, and touched 110.51 per dollar on Nov. 9, the highest level since May 2006.

`More Violent Correction'

An index tracking the dollar against seven major trading partners dropped to 71.11 on Nov. 2, the lowest ever, a week after the Fed reduced its target rate for overnight loans between banks by a quarter-percentage point to an 18-month low of 4.5 percent.

Stephen Jen, head of currency research at Morgan Stanley in London, said on Nov. 2 that the dollar's slide threatens to turn into a ``more violent correction'' that may require joint intervention by the U.S., European Union and Japan. The dollar will trade at $1.51 per euro by year-end, Jen said on Nov. 8.

The extent of the dollar's slump reminds some traders of 1973, when former President Richard Nixon's Treasury Secretary John Connally abandoned the Gold standard while the U.S. was in recession and inflation exceeded 10 percent. The dollar lost 40 percent against the yen in the next five years.

Since 2002, the U.S. currency has fallen 40 percent against the Canadian dollar, 33 percent versus the euro and weakened 24 percent compared with the British pound.

Exports Increase

There's little evidence this year's decline is hurting the economy. Gross domestic product increased 3.9 percent in the third quarter, the highest since March 2006, the Commerce Department said on Oct. 31. The annual inflation rate was 2.8 percent in September, the Labor Department reported on Oct. 17.

The U.S. trade deficit unexpectedly narrowed 0.6 percent in September to $56.5 billion, as exports increased 1.1 percent, the Commerce Department said Nov. 9.

The pain is being felt elsewhere. U.S. sales for Hyundai Motor Co., South Korea's third-biggest exporter, may decline for the first time in nine years with the won the ``No. 1 obstacle,'' Vice Chairman Kim Dong Jin said in an interview last month. The won's 3 percent gain in the past year helped send Hyundai's shares down 9 percent.

Profit Squeeze

Infosys Technologies Ltd., India's second-largest software exporter, cut its full-year earnings forecast on Oct. 11, blaming the rupee's 13 percent rise. The shares fell 24 percent this year.

India may miss its $160 billion target for exports in the year through March 31 as local goods become more expensive abroad, Commerce Secretary G.K. Pillai said on Oct. 8.

Munich-based Bayerische Motoren Werke AG, the world's biggest manufacturer of luxury cars, and Paris-based Hermes SCA, the maker of Kelly and Birkin handbags, blamed the currency market for disappointing profits.

European Central Bank President Jean-Claude Trichet said Nov. 8 that the decline in the dollar has been ``brutal,'' while Canadian Finance Minister Jim Flaherty said he's ``concerned'' by the surge in his currency. French President Nicolas Sarkozy told a joint session of the U.S. Congress on Nov. 7 that the Bush administration must stem the dollar's plunge or risk a trade war.

`New Mechanisms'

``New mechanisms need to be considered because the exchange rate is affecting us a lot,'' Colombian President Alvaro Uribe said in a May 9 speech in Medellin.

Overseas investors have bought $18.8 billion of stocks and bonds in India this year, double the previous record in 2005. The increase ``is building bubbles'' in the country's stock market and real estate, Finance Minister Palaniappan Chidambaram said last month.

To curb speculative flows, regulators in Mumbai adopted measures in October to bar some funds from investing in Indian equities and imposed investment caps and deposit requirements.

Foreign companies licensed to invest in India can only issue participatory notes, or offshore derivatives linked to local stocks, backed by 40 percent of the shares they hold. They were barred from selling notes backed by other derivatives, contracts whose values are derived from other assets.

Indian Restrictions

Trading on India's Sensitive Index was suspended and $120 billion of its market value was wiped out in a minute on Oct. 17, when the regulator proposed the measures.

The Bank of Korea and the Financial Supervisory Service said Oct. 23 that they will study forward currency transactions by exporters and financial companies. Companies use forward contracts to lock in exchange rates at a future date, helping fuel gains in the currency.

``We need to find out the cause of excessive forward sales,'' said Park Shin Young, an economist at the Bank of Korea. Interbank transactions jumped to $850 million a day in the third quarter, up 35 percent from the previous three months, central bank data show.

Policy makers told parliament in October that they will probably lose more than $1 billion for a third year because dollars purchased to stop the won's advance earn less interest than the bonds sold to control money supply.

``Central banks are trying noninterest rate methods to stabilize growth and capital flows,'' said Bank of Tokyo- Mitsubishi's Fullem. ``It's something extraordinary. They haven't used these venues for a long time. It's sort of the last resort the central banks would like to tap.''

This week will be critical

This week will be critical for the markets. As planned, I did not go overboard with any new long positions after the Fed cut. The main reason is the way QQQQ is hanging in the area between the upper trendline and lower dotted line. I am not sure how long it can stay in this area. On Friday it set an hammer and the close of the hammer was right at upper trendline. This is again resistance for the market. QQQQ is a good proxy for the market as seen by the fact that big-cap techs are leading the market.

A few hours back, Charles Prince announced his resignation from the helm at Citibank. There was a lot of angst among investors to oust Prince. So, this will be a welcome news to those investors. The critical point here is the massive writedowns of $ 8 billion to $11 billion. This is much more than the initially announced $2.2 billion during third quarter earnings. Citigroup earnings were already down 57% from last year. This tells you how bad the subprime mortgage mess is and we are still unearthing new dangers. Best is to stay away from any finanical banks that have sub-prime exposure. We lost two CEOs in a week....what is next ?

Why the Fed Will Cut and Cut Again

Interesting article on FXStreet.
Gives a different perspective to the already accepted notion that FED is done cutting rates. The author makes a strong case for future cuts. I am not sure how this can be possible in the wake of the declining dollar. I think FED will stay put for the next 1-2 sessions before cutting again.

Excerpts follow:
The economy added 166,000 new jobs last month, almost double the average estimate. GDP for the US came in at a blowout 3.9% growth, well above trend. The Fed cut its rate by another 25 basis points, but many observers see language in the accompanying statement which they think suggests the Fed is done with cutting, at least for now, as the economy appears stronger.

The Federal Reserve Open Market Committee cut both the Fed funds and discount rates by 25 basis points. Last month they said that "Readings on core inflation have improved modestly this year." On Wednesday they said, "Readings on core inflation have improved modestly this year, but recent increases in energy and commodity prices, among other factors, may put renewed upward pressure on inflation."

In the September meeting they wrote: "Economic growth was moderate during the first half of the year, but the tightening of credit conditions has the potential to intensify the housing correction and to restrain economic growth more generally."

And the last Wednesday: "Economic growth was solid in the third quarter, and strains in financial markets have eased somewhat on balance. However, the pace of economic expansion will likely slow in the near term, partly reflecting the intensification of the housing correction."

It is clear they are concerned about inflation, irrespective of the Commerce Department saying it was only 0.8% last quarter. (How bogus!) Numerous commentators read into the statements on inflation and the credit crisis seeming to get better, that the Fed is signaling it will not cut rates at its December 11 meeting. Further, there was one vote on the committee to not cut rates, so there is some discussion in that direction.

However, I think the important sentence is the last one: "However, the pace of economic expansion will likely slow in the near term, partly reflecting the intensification of the housing correction."

If the economy is slowing, then the Fed will cut and cut again. "But John," I hear you ask, "the economy is not doing that badly. There were 166,000 jobs created last month, over double the average estimate."

When a Positive 166,000 Jobs Number is Really a Negative 211,000

According to the household survey, there was no growth in jobs last month. "The labor force contracted by 211,000, total household employment fell by 250,000, and employment adjusted to match the payroll concept was off by 55,000. The year-to-year gain in adjusted household employment is 0.7%, compared to 1.2% for the establishment survey, a gap of 0.5 point; just six months ago, the household measure was 0.6 point ahead of the payroll number." (The Liscio Report)

Let's put aside the fact that 166,000 jobs is not enough to keep up with growth in the population, and certainly well below the average for the past four years. Let's look at how the establishment survey found 166,000 jobs when the household survey says we lost 211,000. To do that we need to go to the birth-death ratio. Below is the table from the BLS web site. (http://www.bls.gov/web/cesbd.htm)

In October, the BLS added 103,000 jobs as an estimate of the BD ratio. They added 14,000 jobs in the construction industry. Does anyone really think that we saw an increase in construction jobs last month? Supposedly we saw an increase of 25,000 jobs in the financial industry. The reality is that financial jobs, especially in the mortgage industry, are being shed left and right.

As I noted above, when the economy is slowing the BD ratio will overestimate the number of jobs being created. And I think the household survey is suggesting just that.

Look at the chart from Lombard Street Research below. It shows the employment surveys on a 3-month moving average. You can see that the two surveys tend to move together, except at times when the economy changes direction.

Quoting Charles Dumas (and emphasis mine): "The payroll jobs number of 1% growth [for three months] is 1% or more below its long-run average, ... If the implied GDP variance - 2-2 1/2% below trend - Lombard Street Research proves to match the past average, the GDP is growing at or slightly below 1%. The same analysis applied to the household number gives GDP growth close to zero. If either is true, these numbers are inconsistent with the results for Q2 and Q3, which ought - given that labor market data are usually lagging indicators - to have produced payroll jobs growth at well over 2%."

Employment is a lagging indicator. Typically, employment does not turn down until after a recession has already started. However, the unemployment level has already risen from 4.4% to a current 4.7%. And the household survey suggests that the rate is rising faster than in the payroll survey. As unemployment rises, consumer spending will also soften. And the Slow Motion Recession will become evident.

Round Two of the Credit Crunch

The credit crisis this summer ended up with the Fed and central banks worldwide adding massive amounts of liquidity into the system. This last two weeks have seen one bank after another make large write-downs of subprime debt on their books. Merrill found a few billion dollars more in losses than they had only a few weeks ago. My bet is that Citi will find a lot more as well.

The problem is that more and more CDOs and other forms of mortgage debts are being downgraded. It is highly doubtful that banks have written down assets in anticipation of future downgrades. As Dennis Gartman says, there is never just one cockroach. The Fed injected $42 billion into the system in the last few days. I believe that is the largest injection that has ever been made.

Take this to the bank: There are going to be more write-downs as more and more mortgages go into foreclosure, forcing more downgrades of mortgage asset-backed paper. Foreclosures are up over 200% in a number of states, and 800-900-1000% in some. Scary. Look at this list of the rise in foreclosures over the last year, from Greg Weldon (www.weldononline.com).

Arizona up + 201.7%, Arkansas up + 254.2%, Connecticut up + 920.7%, Delaware up + 389.4%, Florida up + 130.6%, Iowa up + 180.5%, Maryland up + 491.0%, Massachusetts up + 1,127.7%, Minnesota up + 124.9%, Nevada up + 212.2%, Ohio up + 136.0%, Vermont up + 400.0%, Virginia up + 516.4%, Wisconsin up +155.6%, Georgia up +84.5%, Michigan up + 78.6%, New Jersey up + 56.7%, New York up + 66.7%, North Carolina up + 99.0%, North Dakota up + 85.7%, Tennessee up + 57.3%. And on and on.

A Congressional report suggests that over 2,000,000 homes financed by subprime loans will go into foreclosure in the next 18 months. This means that more and more of the mortgage-backed assets on the books of banks, CDOs, and SIVs are going to become losses.

I think we should be getting ready for a second round of the credit crisis. And I would certainly be uncomfortable with owning any financial stock with exposure to the mortgage markets. We may not know the full exposure of many banks until the middle of next year.

The SIV Superfund is just one signal that this is serious. Last week I gave you charts that showed even AAA assets associated with recent-vintage subprime mortgages securities losing 20% of their value. That is going to bleed over into Alt-A mortgage assets, as home values drop 10 and then 15 and then 20 percent.

The asset-backed commercial paper market declined another $9 billion last week, down for the 12th straight week. It has dropped 26% since August 8, and there is no reason to think that trend will not continue for several months, as commercial paper linked to mortgage assets is simply not being rolled over. The Financial Times talks of one banker who is bartering his mortgage assets to avoid setting a price.

Bottom line? With rising unemployment, a credit crisis, and a housing bubble imploding, this is not a market or an economy where the Fed will be able to sit tight. We are going to see a Fed funds rate below 4% in two more meetings, at a minimum.

And yes, I did notice that gold went over $800 and oil almost hit $96 today. Neither are good signals. With oil jumping $2-3 up and down almost every day, the chiropractors must be doing good business with oil traders suffering from the whiplash they get almost every day.

And the dollar? It hit $1.45 on the Euro. I actually have a regulated financial entity in Canada for which I have to pay fees about this time each year, and they are of course denominated in Canadian dollars. This year the fee was 40% higher in US dollar terms than it was a few years ago. But then, my income from European-based funds is rising as well. My belief is that markets of all types are going to get ever more volatile. Stay tuned.

FED cuts by 0.25 & 0.25

Federal Reserve cut the Fed funds rate by 0.25%. This brings the Fed Funds rate to 4.5%. Last month in September the Fed had cut this rate 0.5% bringing it from 5.25 % to 4.75 %. The discount rate was also cut by 0.25% followed by a 0.50% cut in September.

The critical takeaway was the statement that showed that further rate cuts were highly unlikely. This is the best response we can get from the FED at this stage. It will REALLY help contain the Dollar slide and at the same time keep the market in bullish mode.

The market reaction though looking positive on the surface is a bit suspect. I am still having all the old longs- AAPL, BIDU, VMW, AMZN, BOOM, STV etc. Yesterday I sold DRYS, FSLR and CROX. CROX is reporting earnings after the bell today. The shippers are showing the first signs of weakness since I tagged them as trendsetters back in Aug/Sep 2007. Sold FSLR since I was holding it from the 90s and I think it was a good time to take profit.

I will be waiting on the sidelines to pick some new good longs over the next few days.

Earnings-Q3-2007

This page will report companies reporting blowout earnings and the next-day effect on price. I believe the next-day effect is more important than the earnings itself. It tells you what the market feels about the earnings and how the market participants reacted.

Company	EPS-Actual	Beat Estimate by	YoY Growth	Next-day effect
FSLR	0.58	200%	900%	35%
AMZN	0.19	6%	280%	-11%
VMW	0.18	35%	200%	12%
SNCR	0.24	41%	150%	10.20%
BOOM	0.58	16%	93%	9.90%
CRNT	0.13	8%	83%	22%
FWLT	1.78	29%	70%	8%
AAPL	1.01	17%	63%	7%
MSFT	0.45	15%	29%	9.50%

Yield Curve & SIV shocks

Credit crisis in the US with rising home foreclosures and defaults is causing a steepening of the yield curve. Such news though very important doesn't get much media attention. Here is an article from Bloomberg that captures the current scenario well. Excerpts follow:

Anxiety over the $300 billion owed by structured investment vehicles, or SIVs, is pushing investors into the relative safety of two-year notes sold by the government and the most creditworthy companies at the same time that rising consumer prices reduce the appeal of 10-year securities. The gap in yields between the bonds is getting wider, reminiscent of 2001, when the Federal Reserve began cutting its target interest rate for overnight loans between banks.
``Across 2008, sustained steepening of the yield curve will be a consistent theme,'' said Ajay Rajadhyaksha, head of fixed- income strategy in New York at Barclays, one of the 21 primary government securities dealers.
Investors seeking safety piled into short-term securities last week after Rhinebridge Plc, the SIV run by Dusseldorf, Germany-based IKB Deutsche Industriebank AG, said it may not be able to repay all its debt, and receivers said a fund run by London-based Cheyne Capital Management Ltd. will stop paying creditors. SIVs borrow in short-term debt markets to finance purchases of longer-maturity assets.

Tumbling Yields
The yield on the benchmark two-year note tumbled the most since September 2001 last week, by 45 basis points to 3.78 percent. The 10-year yield dropped 29 basis points to 4.39 percent.

Derivatives
Mortgages entering foreclosure increased to 0.65 percent in the second quarter, the highest recorded in the 35 years the Mortgage Bankers Association in Washington has tracked the data. U.S. builders broke ground at an annual rate of 1.191 million homes in September, the lowest in 14 years, the Commerce Department said last week. The same day, the government said consumer prices rose 2.8 percent last month from a year earlier, matching the biggest increase of 2007.

Nowhere is the outlook for a steeper yield curve more evident than in the derivatives market.

Inverted Curve

Longer-maturity debt typically yields more than shorter- dated securities because investors demand a bigger premium to lend for a longer period. Ten-year yields have exceeded two-year yields 80 percent of the time over the past decade, Bloomberg data show.

Between June 2006 and May 2007, the curve was inverted 82 percent of the time after the Fed lifted rates at 17 straight meetings in two years.

Investors watch the relationship between short- and long- term yields because the economy has gone into recession six of the seven times since 1960 that the relationship inverted.

Measures of investor attitudes about the outlook for credit suggest that demand for the safest of government debt will continue.

QQQQ- Where do we go from here?

The dotted lines on the QQQQ chart were broken decisively on Friday. Based on past history, it has been seen that the next stop for QQQQ would be the lower trendline. This would mean that the QQQQ would test the low 51 range. This is very simple analysis based on past data on chart. Don't worry what the talking heads on TV say. Just follow your chart -All the answers are right in front of you.

As far as my stocks are concerned, I had sold all DRYS and 1/2 FSLR over the past one week. Sold 1/2 BIDU on Friday when it did not participate in GOOG rally. Will be waiting and watching for the correction to end before entering any long positions. DRYS broke the 9EMA after a very long time, so it seems to be a good short if you want to battle with BDI.

Waiting for VMW earnings, will sell 1/2 before earnings.

Good Luck !

QQQQ Chart

The churning continues. Could go either direction. Watch the dotted lines closely.
Hate these options expiration days

GOOG earnings

GOOG posted great earnings report, 46% higher third quarter earnings in a seasonally slow quarter. This shows the massive force behind tech. I am reiterating that Tech will be the one of the main forces for the rest of the year.
Now at pre-market, GOOG is up $16 at $656. It doesn't make sense to chase GOOG on earnings day as there is not much differential between gap-up and closing price. I had picked up BIDU yesterday at 321 for the spillover effect from GOOG earnings. BIDU has hardly moved pre-market, up just $2 at 322. I am expecting BIDU to break resistance at 323. This will move very fast once this resistance breaks. My stop is at 310.

The World's Greatest Get-Rich Formula

Motley Fool discusses the Future Value formula in a very simple, easy to understand way.

My comment: Moving a step further, if you can identify the best trends in the market, you can increase the value of 'R' in step-2. When one trend has reached its peak you move onto the next trend. Currently the best trends out there are Dry Bulk Shippers, Solars and Technology.
Motley Article follows:

The formula
It is, simply:

FV = PV * (1+r) ^ n

Where:

FV = future value
PV = present value
r = rate of return
n = time (or number of years)

Compounding 101
Now, some astute finance brains will know that equation not as some mystical secret but as the "future value of money" (FVM) equation taught in college.

The FVM formula simply states that your future wealth (FV) is a function of three variables: the amount of money invested today (PV), the rate of return generated (r), and the length of time in which that money is put to work (n). So maximizing future riches requires three steps.

Step 1: Increase PV
It takes money to make money. But by actively and consistently slivering off a portion of your earnings every month to save and invest, you'll have more and more of that money working for you.

All things equal, the greater amount you invest today (PV), the greater wealth you'll build for tomorrow (FV).

Step 2: Increase r
Next, you'll need a way to grow that capital. Historically, the stock market has been the most effective wealth-building vehicle of all. Plowing your money into a low-cost index fund wouldn't be a bad idea.

But if you really want to maximize r, you'll need to allocate a portion of your portfolio to the best segment of the market over the past 50 years: small-cap value stocks. The reason is simple. Unlike behemoths such as $115 billion Merck (NYSE: MRK) and $190 billion Johnson & Johnson (NYSE: JNJ) -- whose spectacular growth days are behind them -- reasonably priced small caps have tons of room to rocket.

All things equal, the greater your rate of return (r), the greater wealth you'll build for tomorrow (FV).

Step 3: Increase n
The last ingredient in our super-simple wealth building recipe: maximum time in the market.

Look back at the equation. You'll see that n is an exponential function -- meaning that for every year you're not invested, you give up the awesome (almost magical) benefits of compounding.

All things equal, the longer you're invested (n), the greater wealth you'll build for tomorrow (FV).

Plug and chug
To get a feel for the three-step process in action, let's go back in time to see what kind of wealth would have been generated had someone:

1. Invested $40,000 in the stock market
2. Started 10 years ago
3. Divided the money among five stocks having: market caps less than $2 billion (to screen for small size), sales growth greater than 15% (to screen for above-average opportunities), and price-to-sales ratios of less than 1.5 (to screen for a good price).

Here's what it would look like:

Company	Amount Invested 10 Years Ago	AverageCompounded Return Over Past 10 Years	Total Value of Investment Today
Best Buy (NYSE: BBY)	$8,000	33.9%	$148,075
FTI Consulting (NYSE: FCN)	$8,000	27.7%	$91,892
Expeditors International of Washington (Nasdaq: EXPD)	$8,000	24.2%	$69,682
Florida Rock Industries (NYSE: FRK)	$8,000	23.7%	$66,947
Fossil (Nasdaq: FOSL)	$8,000	25.9%	$80,332
	Total amount invested (PV)	Avg. annual return of portfolio (r)	Total value of portfolio today (FV)
	$40,000	27.6%	$456,929

By having bought into five high-quality, reasonably priced companies while they were still babies, that $40,000 stake would be worth nearly $500,000 today.

Of course, you can always fiddle with the numbers to generate different levels of FV, but our objective should remain the same:

1. Maximize PV by sticking to an investment plan.
2. Maximize r by devoting a chunk of your portfolio to superior small caps at attractive prices.
3. Maximize n by investing as soon as possible and for as long as possible.

The final Foolish variable
So don't waste another "n." Start plugging whopping returns into your own real-life wealth equation today.

Massive hammer on QQQQ

Interesting to note that yesterday's reversal was seen prominently in the Q's. Shows the hot money is in Techs. INTC and YHOO reported great earnings. In contrast, check the Dow, S&P, the candle looks more like a doji. This indicates that there is still some indecision. So we are still not out of the woods. This morning Bank of America reported very ugly numbers. Most of the losses were in the corporate sector. Today after close would be GOOG earnings. The stock rose a solid 20% in the past one month. GOOG earnings are supposed to be good considering YHOO's report. Looking forward to their earnings. Will be playing BIDU based on GOOG report.

Trends- Aegean Marine Petroleulm (ANW)

Aegean Marine Petroleulm article on Barron's-Sept 24:

(ANW) supplies fuel to ships both in port and at sea, and offers an alternative vehicle to ride the shipping boom. At 31.70, shares have jumped 40% since Jefferies analyst Douglas Mavrinac first flagged the stock on Sept. 14 but still lag behind the 42 target he says they ought to be worth.

With shipyards bursting with orders, Aegean should see increased demand for its services in the years to come. The task of schlepping fuel to ships, undertaken by oil companies decades ago, increasingly is falling to independent suppliers, and Aegean -- which already has service hubs in the Mediterranean, Singapore, Jamaica, United Arab Emirates and on the west coast of Africa -- should continue to snag market share from its smaller, regional peers.

A strong balance sheet with no net debt also gives Aegean financial flexibility and the option to buy smaller, undercapitalized companies. Aegean is expected to double the number of its service hubs and nearly triple its fleet by 2010, and Mavrinac expects sales volume to rise four-fold from 2.3 million metric tons of fuel in 2006 to 9.2 million by 2010. He expects earnings per share, at about 68 cents in 2007, to reach $1.72 in 2008, $3.22 in 2009 and $4.50 in 2010.

Another catalyst: The world's supply of bunkering tankers that can deliver heavy-grade marine fuel will fall off sharply after 2008, as single-hull oil tankers are phased out in accordance with an international rule aimed at reducing pollution in an accident. But Aegean's 16-strong fleet consists of 14 double-hull bunkering tankers. And it has orders for 28 new vessels.

Market update

As of Monday-Dow down 108 points and Nasdaq down 25 points.
This is the start of the first round of retreats. More to come on the way. Also check ^VIX- showing first rounds of reversal.

DRYS keeps going up even though the market retreated. The shippers follow the Baltic Dry Index (BDI) more closely than the general US markets. It is best to stay away from shorting them. TBSI, which is in the same sector tacked on a good 6+ yesterday.

Picked up ANW yesterday at 40.90 and 43.09. 43 was the previous high. Had an excellent close at 45.07. That was a good 7% intraday return. I expect it to run to mid-45s today. If it breaks 46, this will reach 55+.
ANW-Aegean Marine Petroleum Network Inc. is a marine fuel logistics company that physically supplies and markets refined marine fuel and lubricants to ships in port and at sea.

Will markets continue to rally?

That is a very difficult question to answer. My charts indicate that the damage inflicted on Thursday is not yet over. We probably have only two more days up here near this level. What can cause volatility on each side? Tons of earnings this week. Citi reports Monday morning. INTC, YHOO report on Tuesday evening. GOOG is reporting on Thursday. Add some more volatility- Oct options expire on Friday. Be prepared to brace a wild market.

Ugly Q3 reports from Financial companies?

As the credit turmoil continues, it may be possible that we have only seen the tip of the iceberg. It would be very interesting to watch the Q3 reports from the various banks. Many of these banks would surely love to write down as many bad loans as possible. This is their best opportunity to come clean. Citi has already reported that the mortgage mess will cost them a whopping 60% of their earnings in Q3.
Earnings:
Citigroup - Oct15, before market open.
JP Morgan - Oct 17, before market opem
Bank of America- Oct 18, time not supplied

Oct 1987 crash and measures since-NY Post

BIDU finding good support

After yesterday's debacle, BIDU is finding good support at purple line.
Question remains if it can go back to 359. I am staying on sidelines to watch the action play out.

Market pullback has officially started

One slight tremor from BIDU and the stock corrects a whopping 60 points in 2 hours. I had my target set at 360 but could only sell at 345. Not bad considering where it finally closed. My entry point at 303.
The impact of BIDU was huge- it not only affected US markets but markets world over. The BIDU news was just a cut of 2 million in revenue. How does that affect world markets. Think about it. The answer lies in TA. How did I know that my target should be 360 and why did the news come out at that time. Again the answer lies in TA. The markets corrected big time because it was very very overbought and had broken the upper trendline. I am now expecting a correction to lower trendline.

As planned I picked up OCT 50 puts on QQQQ at 0.03 a piece. It closed at 0.10.
My plan today is to pick some good shorts. Anything commodity will be good. ATI came with bad numbers. Also bad news on RTP and BHP.

Chinese Stocks- JRJC, RCH, BIDU

I couldn't find an entry for STV today. Instead I picked up JRJC and RCH at morning pop.
JRJC at mid 37s and RCH at mid 16s. JRJC closed at 40.24. RCH closed at 20.35. Nice quick one-day returns. Holding them for tomorrow. If you look at the charts, all the Chinese stocks are setting up the B-waves. I will hold for the B-wave to complete and will sell before C-wave starts. They can give wild gyrations, so not for the faint at heart.

BIDU continues to rock. I have been playing since 170s. My last entry was at 303. Will continue to hold.

I am having a good plan for STV. I think I will get in this time for the ride up.

My portfolio stocks - VMW crosses 100 and DRYS is at 115s. FSLR is also good at 137. BOOM at 53. GS at an impressive 240. XLF at 35.70. Had picked up this ETF on the day FED cut the discount rate by 0.50.

As far as option trades, I am tempted to pickup some QQQQ-Oct puts this week.

STV- New Chinese IPO- Third Day IPO rule

CHINA DIGITAL TV HOLDING CO., (STV)

I will be following my third-day IPO rule and try to pick this up tomorrow. The first and second day would set some boundaries for the high and low prices for the IPO. I feel buying on first day is a gamble, you never know how low they can take it. Two days gives me enough information to do some technical analysis.
I have been successful with the last two IPOs- VMW and WX. Still holding VMW from 56s and today it closed at 95.

Cramer is going to make it difficult for me to get a good entry though. He made the following comment on the Mad Money TV show.

China Digital (STV - Cramer's Take - Stockpickr): "I gotta tell you, man, I read through the prospectus. ... This is as good as a Baidu (BIDU - Cramer's Take - Stockpickr - Rating), this is as good as a China Telecom (CHA - Cramer's Take - Stockpickr), but this thing is up. ... It does feel like VMware (VMW - Cramer's Take - Stockpickr). Could it add another 20 points? Yeah, I say BuyBuyBuy!"


So, I am going to try to get an entry tomorrow but if Risk/Reward ratio doesn't warrant an entry, then I would wait for an entry at a later date. Otherwise there is always a next cab..or should I say next rocket :)

LDK update

LDK has broken the trendline and the hammer bottom. It is prudent to stay away from this on the long side. Breaks all the criteria that listed it as a buy.
Focus on other solar stocks. FSLR is the best in the pack. Will post chart later.

Solars-LDK

LDK was one of the leading stocks in the Solar trend till last week when news broke out that its financial controller had alleging cooked financial books and inventory discrepancies.
The stock experienced a major fall from 70 to as low as 43 in just 3 days. It was a major shock if you were long the stock and had not set the proper hard stop limit or mental stops.
I have been playing this stock on the long side since mid Aug in low 40s and I am glad I exited my positions in 70s. If you look at the chart carefully, you would know why I sold it in 70- hitting of upper trendline.

I think it is a good time to buy this stock for a bounce back to 56-60 for the following reasons:
1) Nice strong hammer on Friday
2) Bounce from lower trendline
3) Fibonacci retrace of 61.8% completed
4) Slow STO oversold

This will be a technical bounce and has nothing to do with the fundamentals of the stock or inventories/financial statements.

Good Luck Everyone !!!

Article on why stocks are rallying after FED cut

Financial Times- Why stocks are still rallying

Stocks are rallying like there’s no tomorrow, emerging markets are “on fire” - and in a Wednesday analysis of market trends, the FT’s John Authers finds out why.

First, the scene: As fresh news of severe losses by financial giants UBS and Citigroup on Monday revealed even more damage inflicted by this summer’s credit squeeze, the reaction of stock markets was clear. They rallied, notes Authers.

In Monday’s trading, the Dow Jones Industrial Average, still the most widely watched gauge of the US stock market, topped the all-time peak reached on July 19. This was broadly representative of the most important developed market indices. The US S&P 500 index and Germany’s Dax index are within 1 and 2 per cent respectively of their mid-July highs.

Neither the S&P nor the Dow have closed as much as 10 per cent below their highs since July. Thus, technically, they never even suffered what analysts would call a “correction”, notes Authers.

Meanwhile, as readers may have noticed, emerging markets are “on fire”. The MSCI Emerging Markets Index is up more than 50 per cent over the past 12 months, and has leapt by more than 25 per cent since August 18, the day the Fed cut the rate at which it lends to banks. The biggest emerging markets have rallied even though they were “already in nosebleed territory”, he says; in dollar terms, China’s Shanghai Composite is up 416 per cent since the beginning of last year, India’s Sensex is up 112 per cent, and Brazil’s Bovespa is up 133 per cent.

All of this has been achieved in the face of credit market conditions that have made finance much more expensive for companies, Authers notes. Cheap credit had been seen as a key factor in supporting equities, but now this crutch has been removed nobody seems concerned.

The rally also comes amid exceptionally tight conditions in the money market, which suggest that the big banks at the heart of the world’s financial system are still anxious. Further, gold has just touched a 27-year high.

So why are equities rallying? The instinctive reaction of many in the fixed income markets is to put this down to stupidity, says Authers. “Equity traders simply do not know what they are doing, or at least do not understand the ramifications of the damage that has been done to the structured credit market”.

But there are more rational reasons for the equity rally. First, and most importantly, the Fed:

Rate cuts tend to be good, at least initially, for stocks. If they are not, it is because they tend to coincide with the start of a recession. But the Fed’s action last week was plainly inspired less by worries about the economy than by a concern to avert a crisis.

Recent history, in turn, suggests that such “emergency” rate cuts by the Fed have the effect of inflating asset price bubbles. That is potentially great news for equity investors.

In October 1998, when the Fed under Alan Greenspan was forced to cut the Fed funds rate to bring back liquidity to the markets after the near-meltdown of the LTCM hedge fund, the result was also to stimulate markets that had not needed the help, Authers reminds us.

Large technology stocks, and the growing wave of dotcoms, were the greatest beneficiaries. The Nasdaq Composite index gained 40 per cent in three months, and tripled in less than 18 months as it roared through 1999. This, he says, helps explain the current reference to stocks as “partying like it’s 1999″.

There is another example, he notes: In 1987, after Greenspan’s Fed cut rates to avert a crisis in the wake of the Black Monday stock market crash, the response was again a bubble.

Traders know that both these incidents created bubbles that eventually burst. But they also know that in both 1998 and 1987, the euphoria created by the rate cuts lasted more than a year — plenty of time to make strong short-term profits, notes Authers.

Teun Draaisma, European equity strategist at Morgan Stanley, advocated selling in June, and then aggressively re-entering the market in August, for exactly these reasons. He says another bout of ‘equity mania’ is possible, with retail investors piling in and companies indulging in strategic mergers and deals.

He also predicts that the episode will “end in tears” — but that still leaves time for investors to make fat profits in the interim.

As everyone is working on the same assumptions, gains could be limited this time, Authers warns. Tobias Levkovich, US equity strategist at Citigroup and a bull on the market for most of this year, sounds a note of caution. “As most investors are now searching for performance data on past beneficiaries of Fed actions, we suspect some ‘institutional herding’ may arbitrage away much of the opportunity fairly quickly”, notes Levkovich.

The Fed itself is also acutely conscious of what happened in 1999. If crisis in the money markets is indeed averted, the Bernanke Fed might well move much quicker than the Greenspan Fed did to raise rates and avert the risk of a big bubble.

A second, perhaps more solid reason for the equity boom comes from corporate earnings, according to Authers:

Profits made by S&P 500 companies grew at a clip of 10 per cent or more for a record 14 consecutive quarters, until that streak ended at the beginning of this year. But results for the 2007 second quarter - published to little attention as the credit crisis was intensifying - remained very robust, with an increase of 8.7 per cent, much ahead of expectations.

Now, expectations for the third quarter, just finishing, are very low indeed. According to Reuters, analysts expect a rise of only 3.3 per cent year on year for S&P 500 companies. Many are betting that it will be easy to beat those expectations and land a surprise.

However, expectations for the fourth quarter and beyond suggest that analysts are banking on the credit squeeze to blow over completely, and for the US to avoid recession. According to Reuters, they are expecting growth of more than 11 per cent both for the fourth quarter and for the first quarter of next year.

These numbers could turn out to be wildly optimistic in the event of a consumer-led slowdown in the US, which looks a real possibility. If growth is this strong, moreover, it would seem likely that the Fed would raise rates.

A third reason for optimism comes from the most popular valuation systems, says Authers . “They all suggest that stocks are cheap”.

The price/earnings ratio on the S&P 500 has dropped to its lowest level since 1996. The p/e on the UK’s FTSE 100 is similarly at its lowest level in more than a decade, he notes.

Another popular valuation system involves comparing earnings multiples on stocks with the yields on government bonds - often called the “Fed Model” because at one point Mr Greenspan himself appeared from congressional testimony to be using it.

Bond yields have dropped sharply over the past few months and so, this model makes the stock market look like a very appealing “buy”.

There are strong theoretical arguments against both these valuation models, says Authers.

Profit margins tend to be cyclical, and appear to be peaking. Earnings multiples, in turn, tend to be lowest when profit margins are high. Thus, some analysts would say current low earnings multiples simply show that the market wisely does not expect corporate profits to continue at their current heady levels.

Another reason cited for optimism is that companies have been heavy buyers of their own stock (using cash, generally, rather than debt) to boost their earnings per share. This buying picked up during the crisis.

A further driver, says Authers, is the weak dollar. “In many ways, the rally is a bet that the dollar, already at all-time lows following the rate cut, will fall further still.”

Meanwhile, for US investors, continued falls for the dollar make international investing look more profitable. For example, Germany’s Dax index is up 28.6 per cent in dollar terms this year, and only 19.2 per cent in euros.

With the Fed cutting, the dollar lost critical support. One of the simplest ways to bet on further falls for the dollars was to buy emerging market equities and switch out of smaller companies into multinationals.

This ties in with a final theme that has sustained equities, says Authers: faith in the story of secular growth in the emerging markets remains intact. According to Emerging Portfolio Fund Research of Boston, last week alone $5.53bn went into emerging markets funds, the strongest inflows in almost two years.

Mining and materials stocks, most exposed to demand from emerging markets, have performed best during the rally: consumer discretionary stocks, vulnerable to a consumer slump in the US, have done worst.

So the boom in equities is more than a rally based on the belief that cheaper money from the Fed will be enough to avert a systemic financial crisis, concludes Authers:

Equity investors are also betting that growth will come more and more from the emerging markets, which successfully “decouple” from the US, while the US economy will continue to weaken. And they are ready to pull their money out as soon as the bubble seems ready to burst.