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• Egocentric memory: the natural tendency to forget evidence and information which does not support our thinking and to remember evidence and information which does.
• Egocentric myopia: the natural tendency to think in absolute terms within an overly narrow point of view.
• Egocentric infallibility: the natural tendency to think that our beliefs are true because we believe them.
• Egocentric righteousness: the natural tendency to feel superior in the light of our confidence that we are in the possession of THE TRUTH.
• Egocentric hypocrisy: the natural tendency to ignore flagrant inconsistencies between what we profess to believe and the actual beliefs our behavior imply, or inconsistencies between the standards to which we hold ourselves and those to which we expect others to adhere.
• Egocentric oversimplification – the natural tendency to ignore real and important complexities in the world in favor of simplistic notions when consideration of those complexities would require us to modify our beliefs or values.
• Egocentric blindness: the natural tendency not to notice facts or evidence which contradict our favored beliefs or values.
• Egocentric immediacy: the natural tendency to over-generalize immediate feelings and experiences–so that when one event in our life is highly favorable or unfavorable, all of life seems favorable or unfavorable as well.
• Egocentric absurdity: the natural tendency to fail to notice thinking which has absurd consequences, when noticing them would force us to rethink our position.

In the most basic analysis, a rising TRIN is bearish and a falling TRIN is bullish.

To calculate the TRIN, you take the advance/decline ratio and divide by the advance volume/decline volume ratio:

((Advancing issues/declining issues) / (advancing volume/declining volume))

Examples of TRIN calculations:

In the first example, the ratios were equal and the TRIN was 1, which indicates a neutral reading. The volume flowing into advancing stocks equals the volume flowing into declining stocks. In the second example, the up volume/down volume ratio did not keep up with the advance/decline ratio and the TRIN rose above 1. A TRIN above 1 indicates that the volume in declining stocks outpaced the volume in advancing stocks. In the final example the TRIN was below 1, indicating the volume in advancing stocks was healthy and outpaced the volume in declining stocks.

The way I use the TRIN is much more dynamic than the description above. TRIN readings must be taken into context with other breadth indicators. Moreover, a traders feel for underlying market psychology is critical in determining where the “extreme” readings are. After a significant multi-day sell off, a TRIN reading can get as high as 7.0 or even higher. This indicates extreme panic. However, in a more controlled decline, a TRIN reading of 1.8 or 2.10 can indicate the market is temporarily sold out.

Conversely, when the market is down several hundred points but the TRIN is flashing 0.55 for example, indicates institutional buying into weakness. This generally results in a rally the following day, or much later in the day.

My advice is to monitor this indicator for several weeks. Overlay a chart of the SPX on your TRIN chart to observe how the market behaves around certain TRIN levels. Never use the TRIN as your absolute logic behind a trade. It should serve as a speed bump. For example, if the market is trying to bottom out from a steep sell-off, but TRIN remains stubborn with a reading between 1.25 to 1.35, then it should serve as a red light from taking any long positions. To give the trader a green light in this situation, you would want to see an extreme reading above 2.0.

On the other side of the equation, if the market has been in a sustained rally, and the TRIN is close to 1.0, the rally remains healthy. However, if the TRIN reads .55 or lower, it indicates extreme optimism and calls for a likely reversal, or at least a halt to the rally.

A number of TRIN interpretations have evolved over the years. Richard Arms, the originator, uses the TRIN to detect extreme conditions in the market. He considers the market to be overbought when the 10-day moving average of the TRIN declines below .8 and oversold when it moves above 1.2. Other interpretations seek to use the direction and absolute level of the TRIN to determine bullish and bearish scenarios. In the momentum driven markets, the TRIN can remain oversold or overbought for
extended periods of time.

Campaign - Position trade 2nd tier financial names. Continue to focus on gold stocks and buy on dips, sell into rallies.

PRIORITY- Volume climax in financial names. Short-term trend exhaustion. Dow recovery of 7450 level short term reversal in progress.

Week of Feb. 23

Dow showing multiple pos. divergences with Friday’s doji low. Watch 7450
for recovery. Q’s at 29 major support. SPY near TD9 buy.

POT inv. H&S n/l b/o. Watch MOS too. Put alert for SQM 24/26
PCLN running away after breakaway gap over 200dEMA.

ERX/OIH-  ready for rally here. FSLR high vol. reversal could rally to 150 entry
around 129-130 or >135. GSG TD buy signal confirmed and qualified
good for 3 points. USO TD reversal qualified. UNG close to TD.

Watch airline stocks. DAL showing bullish sticks with $4 July ’07 lows very
close and trying to close above $5. LCC TD16 buy watch for recovery of
3.16. UAUA huge vol. reversal.

SKF target $244.  Watch FAZ around 88-89 for short entry. Watch FAS for accum. around $4-5. JPM high vol. doji at critical support.

The new momo theme is “discounted premium fast food”. Model and monitor: BWLD, AIPC, CMG

MRVL neckline failure about to recover.

SHORT:  BTU, AAPL (watch q’s at 28.96),

Trades:
#1-
Watch BTU on the open. If open is equal to prev. close (28.25), stock
is opening outside primary major downtrend line. This could trigger a
short covering rally to back to $30-$32 area, where it sets up a
powerful short trade for a recovery of the primary trendline, similar
to last week. Below $28, the d/t resumes without a false breakout.
Above $33 then d/t line has been broken as a major trend reversal.

#2
CME- Watch open. If opens <190, there are 3-4 points short to $185.
Long reverse for quick scalp. Downtrend likely to resume if <183.
Fib targets: 179, 171.50. <170 targets new trend lows. LOW risk
entry SS L $199-200. Also monitor this area: $196/.50
If $189.30/.00 area holds, BL with target of $195-197 – $200, for perfect reversal SS at low risk entry level.

#3
STI- TD9w buy signal. Very accurate. Selling climax. Huge bounce coming. Positive divergences.

#4 CRM- Qualified TD9 with confirming vol. Recovered prior low to present possible 2xB 25.86. VMW similar setup

#5 POT/MOS & LIFE- uptrend and at multiple MA cnvrgnc.

His reasoning for taking profits? “I was concerned about a big sell-off tomorrow” (emphasis mine)

_________

[Regardless of the fact that you made 35% in under a week], what you did was create a tax hit. What information did you use that you feel justified an assumption of that magnitude?

That’s like me having a pacemaker installed because I think I might have a heart attack tomorrow. Did I have a hunch or did I actually perform a deep medical examination to come to some sort of a logical conclusion from empirical evidence? What data did you look at? Because as you will see over the next several weeks the rally just started and there are about 2000 points left in upside in the Dow before this is over.

It’s your money, you have to do as you wish. I’m only going to tell you this one more time, and I’ll never mention it again.

If you approach this with short-term ideas, like fearing a “big sell off tomorrow”, you are not going to have any money left by the end of the year, if not by the end of March, or even sooner. What would have happened if the sell-off from earlier in the week would have continued? Would you have cut your losses to “ensure your positions?” Or would you have become a “long term investor”? Think about that.  You are watching your portfolio day by day, and you are also worried about being left behind.

Retail investors tend to take profits too early, and have no problem buying something back at a higher price because they have little conviction… they know there is very little data backing their ideas up.  This will lead to false hopes that you can generate income from trading. You will lose sight of the fact that the market is mostly random in nature and therefore for you to be successful, you have to apply a strategy that is working in the present environment. If you feel like it’s anything but random, then you will pay too much attention to your “feelings” and “gut instincts”, and that will lead you into the trap that every retail investor turned trader falls into, which is that the market will always take your money from you because when you fall on the wrong side of your feelings, that’s when the brain short circuits and you get lost in the headlights.

I tell you this from experience and because I don’t want you to become short-term in focus. Your tax situation will kill you, your transaction costs will kill you, and you will never benefit from the power of long-term compounding. You will not earn a dividend either. Are you interested in making a few hundred dollars, or even a few thousand dollars or are you interested in building a massive portfolio over the long run?

If you want to trade a portion of your money, that’s fine. Set aside a [small percentage] and make short term opportunistic trades using levered ETF’s. But don’t expect to do those trades every day, or even every week.  Park the rest in smart investments and allow the long-term benefits to kick in for yourself.

During these periods, any instrument that achieves a direct and efficient (i.e. liquid) hedge experiences an acute supply shortage. So, regardless of their “class” or “sector”, the correlation of these triple inverse ETF’s have all spiked to 1 (like everything else) and will, together as a group, experience multi-sigma moves (e.g. 5 or 6 Sigma).

The reason has a lot to do with the impact of volatility, which amplifies a stocks move due to the logarithmic nature of these derivatives, which are, at their core, repurchase or “swap” agreements.

In layman’s terms, when VIX is engaged in a multi-day spike, these ETF’s are the exclusive instrument of choice for the professional trader and therefore become the primary focus on an acute basis (don’t get married to the strategy).

TZA, BGZ, FAZ, SKF, SDS, SRS, DIG, DXO, ERY, DOG, SH, SMN, DXD, FXP, MZZ, EFU, EEV, DUG, QID, TWM

Note, I’ve only listed the most liquid names above.

THUR-
Heavy volume on the sell-off. Market’s spooked by the lopsided gov’t. As expected, but didn’t exploit.
Monitor airlines for entry levels (see below).  Many charts look like gaps from Tuesday were closed. Only problem is volume expanding across the board. So many charts look terrible, I feel like we’re going to revisit the lows. This is all because the Dem’s came 1 senate seet away from a super-majority. Maybe we will become full-blown, open, French style socialists. Who knows.

Short Looks-

AGU, POT, AMX, BAC (maybe), CRM, FSLR, GENZ, GOOG (monitor), ISRG, PCLN, WLP,

Long ideas-

JPM, QID, SDS, SKF, UNG (lower), UYG (S2 around 7.30/.85), V (inside day on declining volume),

AAPL has huge support at 100. Monitor this for market directional clues.

CHINA:

---

Week of October 20th: The week when SNL signalled a market bottom.

Start accumulating positions:

Daily: logarithmic illustrating cup & handle with dominant raff regress. channels, pitchfork and multiple positive divergences in momentum and money flow. Handle taking characteristics of FLAG consolidation with volume almost totally gone. Expect volatility burst. Long stock. To add some gearing to trade: Sell some puts and buy calls.

AAPL- 123

POT- 115, 124 (SAR), 129/30, THEN to 160 (a.z.)

SDS- 94 to 85 (Fib support 107, 100)

Monday Morning:

Close out long positions, reverse position SDS, LONG SKF. HOWEVER, do not expect gap closing. More like partial retracement then rally to new highs. Looking at a 500-600 point 1 day rally. Calculate fib retrace levels on intraday. Buy size in UYG on retracement into gap.

SKF Fib support levels: 151, 137. MA convergence alpha zone $120

Long QLD a.z. = 54-61, SSO target 40-42

FIG: unwind victim!!

FITB: CALLS

NOV: forced selling done. INCREDIBLE VALUE here. OIH’s could rally 50% (again, maybe wait until Tuesday)

BIDU- High BETA bounce, GOOG could test 400

CE: German chemical co..

ISRG: re-short $270 (?)

SQNM: At 200d-EMA

CRM (should go to new a.t. High), DE &/or CAT (infrastructure plays), GS, JPM, JRCC, MS (last chance under $10?), BBT, BK, BX, WFC

MA (150 is 2/3 retracement but still gap at $75)

C back to $23

DHIL: major oppty or something wrong?

Rally to be led by commodity & financial names. Big Cap tech will also show leadership.

CLF- at major alpha zone (25-30)

FCX

Futures up 29 handles.

Recap prior week- Tough week, amazing numbers on Friday. 1000 point snap back and u were downstairs. It’s ok, you were forgiven for karma errors on Tuesday and you will have a +$75,000 week this coming week. The market is going to bounce from this low we put in, but we probably head lower later in month. This is to be an oversold rally. There will probably be new lows in this downtrend.

During the prior down leg, the TRIN was constantly hitting 4.0 to 5.0. This time, during down leg, TRIN was constantly below 1.0, around 0.35 – 0.75. Bizarre.

INDU: 9750 (a.z). 9400 (50%), 9050 (38.2%)

Dow INDU Fib projections nailed these intraday extreme swing pivots. Lower boundary of d/t channel broken. Prices should and likely will recover this lower boundary and resume longer term downtrend. At a minimum, an attempt will be made.

Trend from 1990 to 2007 Top. A 9 Sigma move which equals the ’99 high projects a downside target for the Dow of 6900 by December or 6830 in November, hitting alpha zone (see monthly chart).

Short Term Target: 10500

Intermediate Term: 11850 (alpha zone)

200m-EMA = 8917

NDX upside 1900. Swing position in 2x Q’s.

OEX has tested 2002 low. Could bounce to 490-500

Oil index could have huge oversold rally. DIG, CNX, AGU, APA, EOG, EP wait until later in the week for all energy plays….

Small cap stocks put in confirmed 1 day reversal. Which ETF???

VAY: Value Line Arithmetic Index: Upside targets = 1750 then 1950

XBD: Broker/Dealer Index. 1-day reversal. Unlikely Monday’s gap will close soon. Find leaders. Could rally 50% or more in a few days.

On Friday, Marc was down $180,000 and in the last hour made a comeback of $320,000. That’s why I’m a trader. That is why I trade.

HANG SENG Target: 11,000 (c.p `14,000). Establish short china when bounce ending…a.z resistance at 20,500 & 24,000

- Barron’s discusses the bottoming process, saying ‘this could end up being one of history’s quintessential buying opportunities.’ Barron’s lists 25 picks in three categories. Big cash rich companies: XOM, MSFT, AAPL, INTC, DELL, EBAY, MOT, YHOO, ERTS, L. Smaller cash rich companies: NVDA, BRCM, NOVL, IACI, KBR, RNWK, NTE. Industrial Stocks on sale: CAT, CMI, DE HON, ITW, PCAR, TEX, UTX.
- Barron’s looks at master limited partnerships as an investment. MLP’s, which invest in sought-after assets such as oil fields and natural-gas processors look inexpensive and carry double-digit yields. Five MLP’s to look at are Enterprise Products Partners (EPD), Energy Transfer Partners (ETP) Boardwalk Pipeline Partners (BWP), Paso Pipeline (EPB), and OneOK Partners (OKS).
- Barron’s Commodity Corner says silver looks ready to rally. The ‘poor-man’s gold’ is off 46% from a mid-July high but it may take off in the wake of safe haven buying in gold as investors look for a cheap alternative.

A moment of reckoning for many hedge funds may come at the end of this month, when their exposure to credit default swaps must be “marked to market” to reflect the increased obligations at the end of the third quarter.

Olivant, the investment group run by former Abbey boss Luqman Arnold, revealed last week that its 2.8% stake in UBS was held through an account at Lehman in London which the firm’s administrators are refusing to release.

Oct. 3 (Bloomberg) — Maverick Capital Ltd., Greenlight Capital LLC and The Children’s Investment Fund Management LLP fell more than 12 percent in September as stock hedge funds posted record monthly losses and braced for client defections. Lee Ainslie‘s Maverick Capital declined 19.5 percent and Greenlight Capital, run by David Einhorn, was down 12.8 percent, according to investors in the New York-based funds. Children’s Investment, overseen by Chris Hohn in London, fell 15 percent, based on a preliminary estimate.

Stock hedge funds fell an average of 8.6 percent in September, the biggest one-month loss since Hedge Fund Research Inc. began collecting data in 1990. While that was better than the 12 percent decline by the MSCI World Index, a benchmark for global stocks, industry analysts expect investors to increase their requests to pull money from funds. The poor performance of certain hedge funds will have repercussions in the allocation processes, and it may lead to substantial shifts between hedge-funds strategies and between hedge funds.”

Other managers with above-average losses for the month included Stephen Mandel, whose main Lone Cypress fund in
Greenwich, Connecticut, fell 14.7 percent. New York-based Third Point LLC, run by Daniel Loeb, dropped 11 percent. Officials for the hedge funds declined to comment or didn’t return calls.

Defensive Doesn’t Work

Funds in all investment categories fell 6.9 percent in September, according to Hedge Fund Research’s Global Hedge Fund Index. That’s the worst month for the $1.9 trillion industry since August 1998, when the Russian debt default triggered the collapse of Long-Term Capital Management LP.

Key Problems:

• LIBOR bid only, no offer.
• Commercial paper market shut down, little trading and no issuance.
• Corporations have no access to long or short term credit markets — hence they face massive rollover problems.
• Brokers are increasingly not dealing with each other.
• Even the inter-bank market is ceasing up

The Treasury Tarp plan is an irrelevance if we are at a major funding crisis.

We are indeed at the cardiac arrest stage and at risk of the mother of all bank and non-bank runs as:

-The run on the shadow banking system is accelerating as: even the surviving major broker dealers (Morgan Stanley and Goldman Sachs) are under severe pressure Morgan losing over a third of its hedge funds clients); the run on hedge funds is accelerating via massive redemptions and a roll-off of their overnight repo lines; the money market funds are experiencing further withdrawals in spite of government blanket guarantee.

-A silent run on the commercial banks is underway. In Q2 of 2008 the FDIC reported $4462bn insured domestic deposits out of $7036bn total domestic deposits; thus, only 63% of domestic deposits are insured. Thus $ 2574bn of deposits were not insured. Given the risk that many banks – small, regional and national – may go bust (as even large ones such as WaMu and Wachovia went recently bust) there is now a silent run on parts of the banking system. Deposit insurance formally covers only deposits up to $100000. Thus any individual, small or large business and/or foreign investor or financial institution with more than $100000 in a FDIC insured bank is now legitimately concerned about the safety of its deposits. Even if as likely the deposit insurance limit will be temporarily raised to $250000 by Congress there will still be a whopping $1.9 trillion of uninsured deposits (or 73% of total deposits); thus, a huge mass of uninsured deposits will remain at risk as even small businesses have usually more than $250K of cash while medium sized and large firms as well as any domestic and foreign financial institution or investor with exposure to US banks has average exposure in the millions of dollars. Particularly at risk are the cross border mostly short term interbank lines of US banks with their foreign counterparties that are estimated to be close to $800 billion.

-A run on the short term liabilities of the corporate sector is also underway as the commercial paper market has effectively shut down with little trading and no issuance or rollover of such debt while corporations have no access to long or short term credit markets and they are therefore facing massive rollover problems (over $500 billion of rollover of maturing debts in the next 12 months). Indeed, the market for commercial paper plummeted $94.9 billion to $1.6 trillion for the week ended Oct. 1 (and down over $200 billion in the last three weeks). Especially banks and insurers were unable to find buyers for the short-term debt: financial paper accounted for most of the decline, plunging $64.9 billion, or 8.7 percent in the last week; but now even non-financial corporations are also experiencing a severe roll-off in the CP market. Discount rates for investment-grade non-financial commercial paper spiked to 599bp for 60 day maturities. More companies are borrowing against or tapping their revolving credit lines. This is largely due to the dislocation caused in the money markets by the failure of Lehman and the subsequent withdrawals from money market funds, which are some of the biggest providers of liquidity in the short term funding/commercial paper. Even the largest corporations are at severe stress: ATT last week was forced to rely on overnight funding for its treasury operations, as lenders were unwilling to provide more long term financing due to fears in money market funds over investor redemption. The CEO said “It’s loosened up a bit, but it’s day-to-day right now. I mean literally it’s day-to-day in terms of what our access to the capital markets looks like,’’ Things are much worse for non-investment grade corporations and for small and medium sized businesses. As reported today by Bloomberg: Almost 100 U.S. corporate treasurers gathered for an emergency conference call yesterday to warn each other that banks are using any excuse to charge
more to renew lines of credit.

-The money markets and interbank markets have shut down as – despite the Senate passing the bail-out bill - yesterday USD Overnight Libor was still at 268bp after reaching an all-time high of 6.88%; the USD 3m Libor-OIS spread widened to record 270 basis points; EUR 3m LIBOR-OIS spread is at record 130bp; the TED spread is at record 360bps (TED was 11bps one month ago); Money and credit markets are dysfunctional also in emerging markets ; and agency bond spreads are also at highs again.

So we are now facing:

- a silent run on the huge mass of uninsured deposits of the banking system and even a run on some insured deposits are small depositors are scared;

- a run on most of the shadow banking system: over 300 non bank mortgage lenders are now bust; the SIVs and conduits are now all bust; the five major brokers dealers are now bust (Bear and Lehman) or still under severe stress even after they have been converted into banks (Merrill, Morgan, Goldman); a run on money market funds restrained only by a blanket government guarantee; a serious run on hedge funds; a looming refinancing crisis for private equity firms and LBOs);

- a run on the short term liabilities of the corporate sector as the commercial paper market has totally frozen (and experiencing a roll-off) while access to medium terms and long term financings for
corporations is frozen at a time when hundreds of billions of dollars of maturing debts need to be rolled over;

- a total seizure of the interbank and money markets.

This is indeed a cardiac arrest for the shadow and non-shadow banking system and for the system of financing of the corporate sector. The shutdown of financing for the corporate system is particularly
scary: solvent but illiquid corporations that cannot roll over their maturing debt may now face massive defaults due to this illiquidity. And if the financing of the corporate sectors shuts down and remains
shut down the risk of an economic collapse similar to the Great Depression becomes highly likely.

So what needs to be done?
Even several hundreds of billion dollars in emergency liquidity support to the financial system by the Fed and other central banks in the last week alone have not been enough to stop the seizure of liquidity in interbank markets and the shut down of financing for the corporate sector as counter-party risk is now extreme (no one trusts any more in this crisis of confidence even the most reputable and trustworthy financial and corporate counter-parties).

Thus, emergency times where we are at risk of a systemic meltdown require emergency measures. These include the following six ideas, which are also the key points to be listening for as potential catalysts for sudden market surges to the upside:

-A temporary six-month blanket guarantee on all US deposits (not just those below $250k) combined with a rapid triage between insolvent banks that should be quickly closed and distressed but solvent – conditional on liquidity and capital injections – banks that should be rescued. To stop the silent run on the banking system you do need now such blanket guarantee on all (insured and uninsured) deposit regardless of their size. To minimize lender moral hazard from such action the blanket guarantee needs to be followed by a very rapid triage and shut-down of insolvent institutions to prevent such institutions from gambling for redemption, i.e. acquiring more deposits and making even more risky loans. To limit such moral hazard distortions one can also limit the extended guarantee only to current deposits: i.e. any new deposit above a $100k limit will not be insured.

- Extension of the emergency liquidity support of the Fed (both TSLF and PDCF) to a broader range of institutions in the shadow banking system, especially those directly providing credit to the corporate sector. The TSLF and PDCF are already available to some non banks (the broker dealers that are primary dealers of the Fed). But two of such broker dealers are gone (Bear and Lehman) and the other three are under stress. Goldman Sachs, Morgan Stanley, the other primary dealers and the banks that have access to the TSLF and PDCF (and discount window) have massively used these facilities in the last few weeks; but they are hoarding such liquidity and not re-lending it to other banks, to the thousands of the other members of the shadow banking system and to the corporate sector as they need such liquidity and don’t trust any counter-party. Thus the transmission mechanism of credit policy (the non-traditional Fed liquidity lines) is completely shut down now.

- Some members of the shadow banking system will not receive such liquidity support of the Fed (hedge funds and private equity funds) as – fairly or unfairly – there is no political sympathy for such institutions. This means that the demise of hundreds – and possibly thousands – of hedge funds will occur as redemptions and roll off of overnight repo financing for leveraged investments will cause a massive liquidity – and thus solvency – crisis for such institutions. If hundreds of smaller hedge funds collapse the systemic consequences would be limited (even if in the aggregate hedge funds provide significant financing to the corporate sector). If larger and systemically important hedge funds were at risk of failing the Fed will have to engineer a massive private sector bail-in of such hedge funds (a larger scale rescue a la LTCM) where the prime brokers of such funds are forced to maintain repo exposure to such funds rather than be allowed to shut off such exposure. This is a radical suggestion but the alternative of a Fed liquidity bailout of systemically important hedge fund is not politically feasible given the little sympathy that such funds enjoy in Congress. The refinancing crisis of private equity firms and their LBOs is a longer fuse run as covenant-lite clause and PIK toggles will postpone such financing crisis but make the harder the fall as zombie corporations that postpone restructuring will have a bigger collapse once the financing crisis eventually occurs. But since many of these LBOs should have never occurred in the first place any financing crisis for such buy-outs should be dealt with in bankruptcy court; no public funds should be used to rescue such LBOs and the reckless private equity firms that designed such schemes.

- Direct lending to the business sector from the Fed via extension of the PDCF and TSLF to the non financial corporate sector. This could include Fed purchases of commercial paper from corporations and other forms of financing of the short term liabilities of the Administration to small businesses secured in appropriate ways. Given the collapse of the corporate CP market and the banking system reluctance to provide loans to the corporate sector (credits lines are being shut down) the only alternative to the Fed becoming directly the biggest emergency bank for the corporate sector would be to force the banking system to maintain its exposure to the corporate sector, possibly in exchange for further Fed provision of liquidity to the banking system. The former option may be better than the latter to deal with the looming illiquidity of the corporate sector.

- Have a coordinated 100bps reduction in policy rates by all major advanced economies central bank and, possibly, even some emerging market economies central banks. While this policy rates may not directly resolve the insolvency issues in financial markets and in the corporate sector it may ease liquidity pressures and it would signal that global policy makers are serious about addressing together this most extreme liquidity and financial crisis. Also, some of the radical policy actions that have been suggested here for the US will most likely need to be undertaken also by European policy makers as the liquidity and credit crisis is now becoming global.
- Radically redesign the Treasury TARP rescue plan – possibly after its necessary approval today – to make it effective, efficient and fair. This implies that in addition to a more limited government purchase of toxic assets, you need: a) an emergency triage between insolvent and illiquid and under-capitalized but solvent banks should be made; b) a sharp reduction of the mortgage debt burden of the insolvent household sector; c) and a recapitalization of solvent banks to be done via public injection of preferred shares and matching contributions by current shareholders of the banks. Financial markets have already voted no to this plan (that is flawed in its current form) yesterday when after its passage in the Senate US and global equity markets plunged another 4% while money markets and credit markets seized up even further.

Bottom Line Conclusion:
This credit crisis is both a crisis of confidence and illiquidity and a crisis of credit and solvency. But while the insolvent institutions should go bust we have now reached a point where many financial institutions and now non financial firms may become insolvent because of pure illiquidity; and this would lead to an extremely severe economic contraction similar to an economic depression rather than a mild recession. At this point the US, the advanced economies (and now likely even some emerging market economies) will experience an ugly recession and an ugly financial and banking crisis regardless of what we do from now on. What radical policy action can only do is preventing what will now be an ugly and nasty two-year recession and financial crisis from turning into a systemic meltdown and a decade long economic depression.