First it was the credit crisis, now its earnings.  When will it stop?

Tokyo’s Nikkei 225 tumbled 5.9% to 8,796.10 points in early afternoon trading, as investors nervously anticipated a season of modest to dismal earnings reports and outlooks. Earlier, the Dow Jones industrial average fell 231.77 points, or 2.5%, to 9,033.66, after blue-chip companies posted bleak earnings. [via Forbes]

It’ll stop when people throw in the towel.  I thought I saw that recently but people are still too optimistic.  Maybe I’m just a permabear.

This just in.  My timing model issued another SELL signal.  I think we’re setting the stage for another leg down.  I sure hope not but I follow my model religously.  My ultimate target is 700 on the S&P500 but we’ll probably hang at 900 for a bit.

Trading Forex is a lot like watching Nature.  Its all about the survival of the fittest.  Often when banks intervene in a currency to halt its slide or stop its appreciation, the result is an outlier in the overall trend.  As money floods or leaves the system, the currency will be shocked into the opposite direction.  After a few days or hours, the same trend reasserts itself and the country would’ve wasted all that time, energy, and money.

Interventions in the stock market are a lot like Forex interventions.

The trillion-dollar infusions by the U.S. and European countries into their financial systems didn’t seem enough Wednesday to fuel more than a two-day rally. Major Asian markets fell on disappointing earnings and worries about a global recession.[via Forbes]

Why should this time be any different?  My targets for the S&P500 are still at 900 then 700.

Or did I mean Wall Vegas?  Now that its after the fact, everyone wants to take the Las Vegas out of Wall Street and return to a kinder and more advisory role for clients. But to do so, you’ll have to make some harsh changes to allowable leverage and even get rid of some financial instruments.  Charlie Munger, Warren Buffet’s sidekick, suggests we ban all options!

To rid Wall Street of its Las Vegas tone, Munger suggests leveling the options exchanges in Chicago and New York, and banning completely all derivatives contracts, a rather impossible vision but one that’s true to his spirit. He’s also furious with the accountants, in particular for letting Wachovia (nyse: WB – news – people ) report actual profits on accrued interest from risky mortgages when, in fact, the interest wasn’t paid but added to the principal amount due on the mortgages.[via Forbes]

The idea to return to a more normal role for Wall Street institutions and sounder accounting methods is a great one and I welcome it, but I believe options have their place in the market. What are your thoughts?

We took a big step toward nationalization this weekend as the Federal Reserve and Great Britain decided to inject taxpayer money into the banking system to stabilize things, emphasis mine.

Before markets opened in Europe, a statement from the Federal Reserve in Washington said that it, along with the Bank of England, the European Central Bank and the Swiss National Bank would provide funds at a fixed interest rate in advance of each operation “against the appropriate collateral in each jurisdiction.”

The Federal Reserve said it would increase its swap lines with those central banks “to accommodate whatever quantity of U.S. dollar funding” institutions demand. The Bank of Japan was considering joining the plan, the Federal Reserve said in a statement. [via NY Times]

This bailout plan is probably going to work but it will come at the expense of the US Dollar and a lot higher inflation.

I hope.

While Nouriel Roubini comes across as a bit of a kook sometimes, he does make a valid point about investing in infrastructure rather than buying troubled assets as a way to help us get out of our current financial mess.

If the private sector does not spend and/or cannot spend, old-fashioned traditional Keynesian spending by the government is necessary. It is true that we already have large and growing budget deficits; but $300 billion of public works is more effective and productive than spending $700 billion to buy toxic assets. [via Forbes]

As an Austrian School of Ecomomics believer, I feel that the government should just be in business to create policies (i.e. taxes) and incentives that encourage private entities to build new infrastructure using their money instead of the governments.  Why keep spending our way to another debt ridden future?

After watching yesterday’s market plunge, followed by the 9.4% selloff in Tokyo last night, I’m thoroughly convinced that the race for the bottom is in on.

In Japan, the benchmark index dropped the most in 21 years as investors were chilled by a report in the Nikkei business daily based on unnamed sources that asserted that Toyota’s profit was likely to fall around 40% in the year to next March on weak sales in the key North American market and slower growth in China–far worse than the automaker’s previous forecast. [via Forbes]

As I said before, my simulations show a race to 700 for the S&P500.  I still have a little bit of cash left to inject into my 401k at that level.  If it goes lower I’ll be injecting my capital into new shotgun, spam, and toilet paper.

The only bright spot I can see for our economy is lower oil.  It’s sure to help with heating costs this year as people struggle to heat their McMansions or fill the tank on their Hummers.

“Sentiment is extremely pessimistic, people believe we’ll see a global recession despite the measures being taken by governments,” said Jochen Hitzfeld, an analyst at UniCredit Markets & Investment Banking. “Many commodities like platinum, agricultural commodities or gasoline have fallen below their production costs.”[via Bloomberg]

It might be time to buy a bicycle and start walking to the grocery store.  This market crash in equities and commodities will rewrite human history, as it did in 1932.

My friends, these are the times that try men’s souls.  I believe we are starting “the race” to the bottom (or not).

“We’re seeing panic all over the markets right now,” said Javier Barrio, head of equity sales for Spanish clients at Banco BPI SA in Madrid. “Governments are taking steps to try to reduce investors’ fears but confidence is weak.”[via Bloomberg]

The scary thing is that one of my simulations show the S&P500 could reach 700 rather quickly.

I remember Warren Buffet getting long Yen about a year or two ago.  Was he lucky or just shrewd?

After seven years of providing the cheapest source of funds for investors buying higher-yielding New Zealand dollars, Australian dollars and Brazil reais, the yen is appreciating as $587 billion of subprime mortgage-related losses force banks to restrict credit. It strengthened 4.4 percent on a trade-weighted basis in September, according to the Bank of Japan’s effective exchange rate, the most since August 2007, when the seizure in capital markets began.[via Bloomberg]

Shrewd is the answer.

The one nice thing about Genetic Algorithmic stock market models is that they evolve with new market data. The bad thing about them is that they’re a pain in the ass to create.  My current GA model is surprisingly simple and works in conjunction with my S&P500 Volatility Timing Model.

Although its highly secret, what I can tell you is that I use the Genetik Solver Excel Addin.  I specifically use it because its free and integrates with MS Excel.  Its a bit clunky to use but if you read my tutorial on it, you should be able to learn it in no time.

I take a snapshot of market data in real time using the input variables from my volatility model and use the Genetik Solver to analyze those data points.  I make sure to grab the max and min data points for each variable, load it into the Solver, enter my population size, cross over probability, mutation, and then run it.

The answers I get from running this analysis helps me understand at what levels my input variables (to the timing model) should rise or fall to for things to return to a state of calm.  From this I can better understand the current market internals and  what things to look for as the market evolves in real time.

Right now my Genetic Algorithmic stock market model tells me that in order for the markets to return to a calmer state,  Gold has to drop (no-brainer) and T-bills have to increase in yield to the 2% level.  What wasn’t so obvious was that fact the technology sector must remain fairly flat and the Nikkei 225 has to rally like crazy.  If Gold sits tight, T-Bill yields weaken, and you have a rally in the tech sector, watch out!  At least for for this week.

:)