A few weeks ago, I mentioned in a conversation with a client that I would not be surprised to wake up one morning and find the Dow down some 500 points. Well, it did not start out that way yesterday, but we ended up with a drop of 504 points.

Of course, the news all weekend was focused on Lehman as to whether they would find a suitor or not. Other hot topics were Merrill Lynch and the sudden drop in stock price of AIG. As Lehman headed for bankruptcy, the futures pointed to a sharply lower opening.

To me, it’s hard to understand how a company like Lehman, which was founded 158 years ago, could be destroyed in less than 12 months. It was nothing but stupidity, ignorance and sheer greed that contributed to its speedy demise.

The Lehman meltdown sparked a harsh reaction from one floor trader in Chicago:

“These are supposedly sophisticated suits — there isn’t a commodity trader on the floor who would do what they did. Every trader knows it isn’t what you make, it’s what you don’t lose,” said Lenny Pomerantz, a 30-year veteran of the Chicago Mercantile Exchange and Board of Trade.

“I am appalled that major financial institutions that are theoretically advising other investors and institutions on what to do to be financially stable would put themselves at such enormous risk by leveraging anywhere from 30 to 35 times. They went out on a limb without even knowing it was a twig,” said Pomerantz.

Of course, the big unanswered question remains as to how the rest of the industry and trading partners will be affected when somebody like Lehman has $613 billion in debt and no market capitalization.

However, since we don’t control the clowns on Wall Street, we will continue to focus on where the trends are. They appear to be the only thing that is “real” in this crazy environment. Trying to make any fundamental assessments is simply an exercise in futility.

No question, yesterday we slipped deeper into bear market territory, and our Trend Tracking Indexes (TTIs) confirm this direction:

Domestic TTI: -3.33%
International TTI: -12.01%

The biggest threat to further downturns will be the outcome of insurer AIG. If their credit rating gets reduced, the fallout and impact on the market could be so severe and far reaching, that it would make yesterday’s drop like a walk in the park.

Sitting on the sidelines in the safety of our money market funds never felt so good.

With the markets having been in a tizzy fit all year, with no signs of imminent change apparent, investors and traders alike are having difficulty making sense out of the violent swings and unprecedented write-downs due to assets having gone sour.

Reader Steve had this to say:

I have been following your Blog and commentary, thanks for the good advice and guidance.

The market is so volatile and choppy; it is difficult to even trade in this environment. What do you think needs to happen before the market can correct and start a new Bull Run?

As I have repeatedly mentioned, the current credit crisis has to play itself out. Until it is 100% known which company holds how much in overvalued toxic assets, and all related skeletons are out of the closet, the current volatility and bear market trend is bound continue.

Right now, there are simply too many unknowns in the market place with former investment powerhouse Lehman most likely facing a bankruptcy/liquidation today while other death row candidates are having similar troubles and are trying to find a last minute partner for a shotgun marriage.

The key to investing in this environment is risk management. The risk right now is simply too great to make any wise moves, so watching this spectacle unfold from the sidelines is the best course of action. There will be great opportunities ahead; right now patience is your best ally in avoiding making stupid and costly mistakes.

I personally have a very low opinion of politicians, but once in a while I get surprised by candidness, which is usually not a quality most of them possess.

Bloomberg featured a story called “Senator Bunning Says Paulson Acts Like Socialist, Should Resign.” Let’s listen in:

Senator Jim Bunning said Treasury Secretary Henry Paulson, by rescuing Fannie Mae and Freddie Mac, is acting like China’s finance minister and both Paulson and Federal Reserve Chairman Ben S. Bernanke should step down.

When asked if he expects more multibillion dollar rescues by Treasury, Bunning said, “You bet I do.”

Good for Senator Bunning; he appears to be the only politician with the balls to step up and call a spade a spade. While most hide behind the stupidity of political correctness, at least one man said out loud what may be on the mind of many. Iacocca couldn’t have said it any better.

In view of the government take-over of Fannie and Freddie, Nouriel Roubini wrote a timeless piece a couple of days ago titled “Comrades Bush, Paulson and Bernanke Welcome You to the USSRA (United Socialist State Republic of America)”.

Here are some highlights:

The now inevitable nationalization of Fannie and Freddie is the most radical regime change in global economic and financial affairs in decades. For the last twenty years after the collapse of the USSR, the fall of the Iron Curtain and the economic reforms in China and other emerging market economies the world economy has moved away from state ownership of the economy and towards privatization of previously stated owned enterprises. This trend was aggressively supported the United States that preached right and left the benefits of free markets and free private enterprise.

So Comrades Bush and Paulson and Bernanke will rightly pass to the history books as a troika of Bolsheviks who turned the USA into the USSRA. Fanatic zealots of any religion are always pests that cause havoc and destruction with their inflexible fanaticism; but they usually don’t run the biggest economy in the world. But these laissez faire voodoo-economics zealots in charge of the USA have now caused the biggest financial crisis since the Great Depression and the nastiest economic crisis in decades. So let them be shamed in public for their hypocrisy and zealotry that has caused so much financial and economic damage.

There isn’t anything worthwhile I feel I can add to this story, other than that time will eventually tell us how bad of a move this take-over really was. With a new line up of candidates preparing for death row (Lehman, WaMu, Merrill and others), I have to wonder how long this propping up of failed institutions will continue.

My latest No Load Fund/ETF Tracker has been posted at:

http://www.successful-investment.com/newsletter-archive.php

Wild swings in the market led to only minor gains.

Our Trend Tracking Index (TTI) for domestic funds/ETFs remains below its trend line (red) by -2.15% thereby confirming the current bear market trend.



The international index now remains -9.07% below its own trend line, keeping us on the sidelines.

For more details, and the latest market commentary, as well as the updated No load Fund/ETF StatSheet, please see the above link.

Lately, I have been receiving a lot of subscriber email wondering what to do with their invested positions. I personally find it hard to believe how some people subscribe to my free newsletter, which spells out exactly when to buy and sell, and then proceed to do the exact opposite.

Even my constant nagging of using sell stops seems to simply fall on deaf ears.

Consider the latest email from an anonymous reader:

My entire portfolio is invested in the following mutual funds……….would you continue to hold or bail out…….I have emerging Markets……..gold …..energy ……natural resources……..oil and gas…energy services…..oil and gas services, and precious metals and precious minerals………. ………….China ……..India………that is 10 areas. I think that covers it…………..I am getting clobbered ……but I know and feel that these are all areas that are going to rebound…….as soon as the i***t is out of office………

Of course, you are getting clobbered when you’re hanging on to investments that are in severe downtrends. None of these should be held during a bear market. Take a look at a chart:




Had you used my recommended sell stop discipline for sectors and country funds of 10% from the high since you bought them, you’d be 100% in cash right now. You’re playing the game without a plan, based on your wild hope that a new president in office will make all the difference and that your holdings are going to rebound.

While that possibility exists, it’s not a basis for making intelligent investment decisions. This is the exact type of wishful thinking that has killed portfolios during the last bear market of 2000 to 20002. I suggest you re-revisit your ideas and become acquainted with the fact that whatever you do, you should always use a sell stop; it will save your bacon many times.

Your investing style is based on a bullish scenario, which will get clobbered in a bear market environment as you have witnessed. I believe that the bear has a long ways to go, but if I’m wrong, then trend reversals, as shown via my Trend Tracking Indexes (TTIs), will give you the opportunity to re-enter the market at a time when the odds are stacked in your favor.