The fallout from the credit crunch has been well documented, because the top names in investment banking had to cumulatively write down so far in excess of some $500 billion dollars with no end in sight. In case you missed it, Merrill Lynch has held the dubious #1 ranking when comparing losses to historical profits.

News reports had this to say (sorry, no link available):

Merrill Lynch’s losses in the past 18 months amount to about a quarter of the profits it has made in its 36 years as a listed company, according to Financial Times research that highlights the extent of the global banking crisis.

UBS, which has lost more than $15 billion during the crisis, had the second-highest ratio.

[Emphasis added]

This describes investment banking in a nutshell, as I have posted about previously. Companies use sophisticated computer models that can make tremendous amounts of profits but rely on computations and assumptions which do not include the rare Black Swan event.

Every so often a blow up occurs, which has the potential to completely wipe out companies, such as happened with LTCM (Long Term Capital Management) in 1998, when a stable of the brainiest investment people along with Nobel laureates placed ill-timed trades without a plan to exit in case their assumptions proved incorrect. I reviewed the book in “When Genius Failed.”

Nassim Taleb writes in “Fooled by Randomness” that this is a frequent occurrence and no one seems to have learned from the past. He states that simple techniques such as using sell stops are rarely used by “professionals.” Hard to believe, isn’t it?

Recent news reports state that Merrill is still having problems unloading some troubled holdings. Undoubtedly, this will continue until every company owning garbage assets has finally cleaned up their balance sheets.

Common sense would dictate that coming clean all at once, spilling your guts and getting it over with would be the fastest way to a new beginning rather than hanging on to continuously deteriorating toxic holdings. Maybe some of the companies would prefer that approach, but can’t.

Why?

Could it be that if they produced a “marked to market” type balance sheet that it might disclose that they are no longer a viable entity?

MarketWatch featured an interesting story titled “Is that deflation we smell?” Let’s listen in:

What do you call it when both stocks and commodities are plunging?

Unless Fed chairman Bernanke can pull more rabbits out of his hat, and soon, we should probably prepare ourselves for more days like Thursday.

I agree with that assessment, because it should not be earthshaking news to anyone that, with the continuing destruction of assets across corporate America, deflation has taken a firm hold. With the continuing unwinding of the credit bubble, the Fed is pretty helpless but to let the current scenario run its course. The question in my mind is just which entity will be big and important enough to get bailed out and which one with be not worthy of that option.

While I personally do not support any kind of bailout (because tax payers will be on the hook), choices will have to be made. Given the enormity of the credit crisis, even the Fed’s balance sheet has limits.

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

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

The bears feasted on a bullish carcass, and the major indexes lost heavily.

Our Trend Tracking Index (TTI) for domestic funds/ETFs remains below its trend line (red) by -2.66% thereby confirming the current bear market trend.



The international index now remains -9.96% 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.

Reader Joao has been watching our Trend Tracking Indexes (TTIs) for some time now and had this to say:

I am observing your TTIs very carefully, and plan to take action when you recommend.

I have a question however on the slope of the TTI: how relevant is this slope (as compared, for instance, to a 200 day moving average)? Looking at the US domestic TTI, the slope is now tending downwards for the first time in several years (since 2003).

Would this signify a down trending (bear) market, and therefore, should one not take “shorts” in tune with the falling market rather than go long when the index line goes above the TTI line? I am saying this on the assumption that you’d concur with the strategy of investing “with the trend” … and if the trend is sloping down, then why go long?

Thanks for your insights; I am trying to get a better understanding of your proprietary TTI system.

Let’s take a look at a blown up portion of the domestic TTI to better understand what Joao is saying:



Since our Sell signal on 6/23/08, the trend line (red) has been in fact sloping down confirming that we are indeed in a bear market. As you can also see, prices (green bars) have been on the rebound and may very well break through the trend line to upside into neutral territory. I define the neutral territory as an area between the long-term trend line (red) and a point, which is 1.5% above it (blue). Once prices pierce the blue line, a new domestic buy signal is generated.

To answer Joao’s question, I have to say that in the past 20 years I have not found that a buy signal generated via the piercing of a falling trend line vs. the piercing of a rising trend line has shown any different results.

Sure, a falling trend line would support a bearish viewpoint; however, you still need to apply caution when entering short positions. Why? Bear market rallies are a powerful counterforce to be reckoned with. If you had any short positions initiated based on our last Sell signal, you most certainly would have been stopped out had you worked with a sell stop (which is a must).

Looking at the big picture, I suggest you review my post “Is Short Selling Worth It,” which makes the argument based on a lot of research that, in the long run, short selling may not add as much to your bottom line profits as you think.

Yesterday, the bulls came charging out of the gate pushing the Dow up almost 250 points in the early going. But, to the shock of traders and the bullish crowd, the rally faded and the major indexes ended up in negative territory.

It’s too early to tell whether this total turn-around was a one day event or the resumption of the bearish tendencies, which have been interrupted by rebound rallies during the month of August. Our Trend Tracking Indexes retreated as well and are positioned relative to their long-term trend lines as follows:

Domestic TTI: -1.20%
International TTI: -7.77%

To me, the bear is alive and well and will most likely strike again. Yesterday’s reversal can’t be attributed to any one factor, there was simply no support for the bulls; even lower oil prices weren’t any help at all.

Commodity prices sold off along with oil, which many traders finally realized is a result of slowing economies around the world. Whatever the reasons, it does not really matter, the trend is down, and we will remain on the sidelines.

Some readers have asked me to comment on the upcoming elections, the possible outcome and the effect on various investments. I try to stay away from commenting on politics in general, since I despise the way most positions go about their business. Empty promises and total lack of integrity would be some of the reasons among many others.

However, yesterday Random Roger posted a nice piece about his take on the elections, and I must admit that his view pretty much resembles mine. Here are some highlights:

I’m a Libertarian so I don’t really care for either candidate (have not been of any candidate for quite a long time). They both have flaws galore and they probably each have positives too.

The drilling in ANWR is another absurd debate. It won’t add oil for ten years. If they had started ten years ago we’d have it now. If they started eight years ago prices now might be less with the realization than ANWR would start producing in two years. The land in question is a massive, barren tundra. If you have been reading this site for any length of time you know what sort of animal person I am. With that said, does it make any sense whatsoever that the wildlife that would be displaced or otherwise harmed by commencing drilling ops on a speck of that massive barren tundra is more important than the American economy?

No matter what the outcome of the elections, there will be some effect on Wall Street. Historically, there have been sharp rallies and declines no matter which party got top billing. As we’re heading into the final stretch, market trends (especially in sectors) will develop and point to the direction of potential investment opportunities. Establishing any positions now based on hypothetical assumptions is a risk I would not want to take.