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

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

A market crash was avoided due to government intervention.

Our Trend Tracking Index (TTI) for domestic funds/ETFs remains below its trend line (red) by -2.04% thereby confirming the current bear market trend.



The international index now remains -8.48% 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.

Yesterday appeared to be an “in your face” day as the markets responded with another sharp drop to the downside in response to the Fed/US Treasury announcement of a $85 billion loan to one of the living dead, namely AIG.

I think Wall Street is finally seeing beyond the futile government attempts to prop up failing companies in order to postpone the inevitable pain; instead of facing the facts and letting the free market sort things out on their own.

Recently I read in an interview with Satyajit Das, one of the foremost experts on derivatives, whose book I reviewed back in July.

He was asked to describe in baseball terms as to whether we would be in the 5th or 6th inning in terms of the anticipated end of the credit crisis. He laughed and answered: “You are still singing the national anthem.”

I am certainly not qualified to argue that with him, but I believe that the bear market we are in has the potential to make the 2000 – 2002 period look like a pimple on a gnat’s butt. And there is nothing anybody can do to stop it as much as government officials are trying to convince you otherwise.

The free market has to run its course, but I am sure about one thing. Once the dust settles, there will be tremendous investment opportunities ahead for those who survive the bear with most of their assets in tact.

The markets had another volatile session yesterday with swings from high to low of some 300 points on the Dow. The Fed’s refusal to lower interest rates pulled the major indexes sharply lower, but buying resumed and we closed in positive territory.

The only reason we closed higher was when the remote possibility surfaced that the Fed/US Treasury was considering a $75 billion bailout package to prolong the life of insurer AIG. Yes, it appears if you’re big and stupid, the government will not allow you to fail. How this will ultimately play out is unknown, but we will probably find out more throughout the day.

For months, I have been harping on the fact that while you’re riding this bear market out, you should use a U.S. Treasury only money market option. Trying to attempt to scalp an extra percentage point return by staying in a risky fund simply does not pay off.

MarketWatch reports that another “Money Market Breaks The Buck,” and also freezes redemptions. Can you imagine you have cash in an account, which you might need to cover expenses on a monthly basis, and suddenly your account is frozen? Even if only for 7 days?

Here are bits of the story:

One of the first and largest money market funds has put a seven-day freeze on investor redemptions after the net asset value of its shares fell below $1, in a rare instance in the fund industry of what is called “breaking the buck.”

Phillips said the fact that The Reserve had to break the buck reflects the seriousness of its troubles. “People say that if you break the buck on a money market fund you’re saying that you don’t want to be in the money market business anymore.”

An extra percentage point in money market, while desirable, is not going to make you rich. Don’t be stupid and chase yield in an economic environment where the unthinkable can happen. Safety of your assets should be your priority number one. Don’t screw it up!

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.