There is little doubt that the election has eliminated a bit of uncertainity in the markets, but since Obama is very difficult to pin down on exactly what he will do, we still have a great deal of worry about holding US assets. What exactly is he going to do?  My guess so far is that he will raise the top rate to 45% (as he has said) and reduce rates on lower incomes. He is not exactly friendly to large corporations so I suspect he will be looking to end some tax breaks and clip their wings as well. His 150 billion dollar plan over 10 years to create a million or two new jobs in renewable energy, etc....seems like a pipe dream to me, but what I am hearing more of now are large fiscal infrastructure expenditures to fix roads, tunnels and bridges. I suppose the government payrolls will explode in his first term as he begins to tinker with the economy and move money to those who have supported him....many living paycheck to paycheck, they have grand expectations and no doubt some disappointment will be coming.  I would expect a big mortgage savior package too, which in my opinion will prolong the decline in prices as it will take longer for the market to clear once they begin trying to manipulate prices. We have heard very little from Obama about doing things that will increase growth, investment and risk taking in the US economy. We have to give the man a chance, however, and fortunately he has been making it up as he goes along....this might make him more adaptable to current problems. He has after all been handed the keys to the Titanic which is vertical to the water.  His collegues in the House and Senate have grand expectations too. Given all this, I think we are looking at a dead economy for six months with incremental negative news dominating and prices swinging wildly.  The end of year hedge fund redemption numbers also loom and we just don't know how bad that will be, but ,suffice it to say that with average hedge fund strategies down close to 20% this year.....there will be more redemptions.  $100 billion came out of these funds in October alone.

Its time to get realistic. The stock market will test the 775 S&P 500 2002 lows and likewise the the Dow lows of something close to 7100. Get ready for it because it is going to happen and most likely sooner than later.  After that we can talk again about bottoms and about reasons to get long not only the stock market but other commodity markets. My guess is that the soft commodities are about bottomed out along with crude oil which could touch $50 first. The dollar is blugeoning the world right now, getting revenge for all
that dollar negativeness that went on for years. As the banks mark down the dollar assets, they must buy dollars to maintain their reserve requirements simultaneously taking losses. Funny how things change. These are crushing blows to currencies around the world (except the Yen of course).  The overshoot on the downside that everyone is claiming in the media right now
is a myth. We have not overshot anything. The big hammer is body-bagging everyone who stands in its way and we will see a bottom WHEN the US authorities begin to do something to stem plumetting home prices. I expect to see more on that soon as it is commonly discussed now that very little direct intervention into home prices has really ocurred. If it does not happen then we will see round three and four of massive foreclosures, tumbling mortgage securities prices and many
more bankruptcies.  The final bubble in the US treasury market will burst at a much later date once the dollar hammer has crushed everyone and things begin to improve across the world. Then investors will start to evaluate treasuries again
and whether some unanticipated future inflation has been created. Not something to worry about right now when the world is in the death spiral.

Now that the Feds have intervened in the markets in every which way imaginable, one might wonder why the volatility is higher than ever.  The reason is simple....by intervening erratically and in ways that nobody could ever imagine, they have created more uncertainty and volatility as investors wonder what the hell they will do next.  It seems that the treasury and the Fed can now do whatever they want to do (except save Lehman Brothers) and force financial institutions to comply as in this last forced equity investment scheme that did not allow the big banks to say no. The confusion they have created is on several levels:  one the one hand they are printing massive amount of dollars saddling future generations with more debt, promising a positive return on this money while snickering behind closed doors. The investing public is not stupid.  On the other hand they have done very little to help out the physical housing market where prices continue to go down, continuing the growing feeling that 2009 will be a depression. 

I don't know what it is about October that makes it a crazy month historically for the stock market, but certainly the volatility in all commodity markets has hit a high.  The grains are off 50%, oil has come down nearly 50%, and the stock market is off anywhere from 35-40% since last October. That must present some real opportunity going forward. The question is what to buy and in what proportions. Short term, the US bond market looks very expensive and we might expect yields to rise significantly due to what certainly will create future inflation (the huge govt bailouts that throw good money after bad).  The unwillingness of the Fed to let anyone drown (except Lehman) will ultimately prove to be a big mistake, as in fact we see now with locked credit markets and a stock market so volatile that no one dare stick their toes in the water.  The US will have to learn to live without credit now and most will remain in denial regarding what is happening around them. The de-leveraging of banks, households, and individuals in the US will continue and unless unemployment can stabilize, we are in for a very scary 2009.  Cash will remain king for the time being until the deflationary spiral ends.  Perhaps, as many previous Octobers have shown, the bottom will come during this month.  It's really hard to know but best to keep putting off large purchases as everything get cheaper tomorrow.

The Fed has used 1/4 of its final clip in an attempt to stabilize markets and cool volatility.  Like another heroin injection for the patient it is well received, initially.  But by stealing more of savers income he has now set in motion what I call...the end of the line.  He has ensured the collapse of equities to the old lows of 775 in the S&P 500.  Investors have no choice now but to liquidate substantial amounts of their stock holdings else face a complete loss of their net worth.  There is no confidence in paper assets, nor should there be considering companies with an $80 book value can go bankrupt the next day.  The Depression of 2009 looms and investors cannot wait around any longer to see if this move by central banks, or anything else they try in the next few weeks can save the system. The equity market is so illiquid that if you do not put in sell orders on the opening, you have no idea if your fill will come down another 200--300 dow equivalent points.  Sell now, ask questions later....there are no rallies that won't be sold hard by smart investors now. Get out, get out now and worry about the rest later.....that is the current mantra and I doubt this 50bp cut changes that....if anything it gives smart traders another little pop to sell into and preserve capital.  What is more interesting about all this is that none of the current rescue measures do much to prevent home prices from falling further.  There are an estimated 10 million homes in the US with negative equity, with only a fraction of those under foreclosure.  If prices fall another 20% then the $700 billion being spent on bad mortgage paper will at least have to double to have an impact.  The level of uncertainty is reflected in the VIX volatility index.....trading above 50% now....the highest ever seen in the equity market.  What this means is that a single day standard deviation move in the S&P 500 is now around $37.  With a 98% certainty we can expect the S&P futures to be plus or minus $75 on any given day.