Many Areas Are Imploding

Gary Kaltbaum is an investment advisor with over 18 years experience, and a Fox News Channel Business Contributor. Gary is the author of The Investors Edge. Mr. Kaltbaum is also the host of the nationally syndicated radio show "Investors Edge" on over 50 radio stations. Gary is also editor and publisher of "Gary Kaltbaum's Trendwatch"...a weekly and monthly technical analysis research report for the institutional investor. If you would like a free trial to Gary's Daily Market Alerts click here or call 888.484.8220 ext. 1.

Did I tell you Fox Business Network is now up and running? I thought so. Good cover and article in the latest Fortune Magazine on the network. Speaking of the latest Fortune, great article on page 117 explaining the -----house, known as the subprime lending debacle. It explains in understandable terms what the crooks did.

I don't know why but every now and then, I get emails from my readers and listeners (all 8 of them) wondering why I sound so pessimistic. Some of those emails I cannot reproduce because of the language. I don't get it. Those who know me know I am one of the most optimistic people you will ever meet. When I rant about the bad things I see, it is only to point out the bad so you can protect yourself. When I called a top in Housing 2 years ago, I received emails that sounded like threats. When I called a top in REITS and FINANCIALS in February, I was laughed at. When I yapped about the potential for credit problems over 18 months ago, I was told I was nuts. When I ranted about Paulson and Bernanke calling for a housing bottom every month, I was told I am an idiot and they were the ones in the know. They are both now admitting that things are not so contained. I am not a pessimist. But I am a student of financial and corporate history. I am a student of psychology and the markets. I have studied the chicanery people have tried to get away with in the past. Why? Because chicanery repeats itself....bad acts repeat...greed repeats...fear repeats. All one needs to do is study cycles. There is a simple equation. Greediest at the tops...most fearful at the bottoms. We have seen both extremes since 1999...with the greed side in the internet and tech in 99, housing into 05. We have seen the fear near the lows in 02 and 03 as well as the fear of 9/11. It is in the studies of these extremes that one can figure things out.

In 99, people turned me down to manage their money because I would not guarantee 30%/year in returns. In 03, they came to me and just did not want to lose. In 05, I watched how people lined up for days before a Miami condo auction like they were lining up for Springsteen tickets. Websites were created to flip houses and condos. Colleges started to teach courses on it. TV reality shows were created to follow this madness. Lenders gave money to people without income or net worth statements. Ladies and gentlemen...it was a gimmee. Now the auctions are not out of greed, they are out of desperation.

I do believe the majority of corporate America does the right thing. I do know that most loans are solid. I do know the housing market will eventually come back. I am the guy who constantly harps about the greatness of this country. But recently, I have seen just a little too much crooked activity to ignore...and by some of the so-called "Masters of the Universe." Just my warnings of housing, lending, financials, mortgages and the like have saved bundles. That is my only goal...to save bundles when things do go awry. So relax!

For the past several weeks, while the "market" has continued higher, I have taken great pains to explain to you that you can no longer just talk about the market as a whole and that the tape had become as split as split could be. I went on to tell you what groups were working but also what groups were in their own private bear market. As I wrote, those groups were: Most Retail, most Transports, Housing, Lending, most Brokers, Banks, S&Ls, most Restaurants, Hotels/Motels, most Semiconductors. Not only were these groups not keeping up, they were actually sinking into new lows. Throughout this recent move back up, I have told you that only 50% of stocks were participating and that small and midcaps were underperforning the large caps. All those divergences are now coming back to haunt the market.

Just remember this move back down started with the nasty reversal on Thursday, Oct. 11th. Since, the market has chopped around. On Friday, the market followed through to the downside.
To simplify, the bad just got badder...and the good finally started pulling back...but there is now more to it. For starters, the FINANCIALS are not just dropping, they are imploding...and I am not talking fly-by-night names. I am talking the cream of the crop. You must know that FINANCIALS are quite important to the market.

Citigroup, Wash Mutual, Merrill Lynch, Fannie Mae, Freddie Mac, Countrypuke Financial, Fifth Third Bank...the list goes on and on. FINANCIALS are in a bear market....and are going lower. I continue to see massive distribution all across FINANCIAL land...and you should continue to avoid it like the plague. To repeat, MONEY CENTER BANKS, REGIONAL BANKS, S&Ls, SUPER REGIONAL BANKS, LENDERS, MORTGAGE-RELATED, HOUSING, MORTGAGE INSURANCE. I would not even attempt a falling knife here. Before I get into the rest of the market, I digress into opinion.

Why are Citigroup, Merrill Lynch and so many others imploding before your eyes? To start...a one word answer...ENRON! Enron was guilty of setting up off-balance sheet crap and pricing that crap the way they wanted to. Remind you of something you are reading about these days? It is my contention...that some of these companies have committed fraud...and classic fraud at that. I believe this "superfund" is nothing more than a cover-up of that crap...in order to spread out massive losses over time. Furthermore, I believe a ton of this crap is sitting on the shores of Citigroup. In fact, I am hearing many saying this fund is nothing more than a bailout of Citigroup. I believe there is tens of billions unaccounted for or mispriced...and more importantly, I BELIEVE THE MARKET NOW KNOWS IT. Just remember what I have always told you...chicanery, criminal activity and bad ethics do not show up until the market goes down. Regulators do not get off their butts until people are losing money. In this arena, people are now starting to lose money.

The bigger problem now is that these so-called investments are untradeable, unpricable and unmarketable.. They are nothing more than illiquid low-quality bonds and loans. The other guilty party is the rating's agencies as they rated illiquid low-quality bonds and loans (hot air) as high quality AAA stuff. Yes...the rating's agencies created AAA paper out of junk with a touch of their magic wand. The owners are now scratching their heads on how to price...but the problem is that a security is only worth what someone else will pay. With no buyers...well, you do the math. The game has been lost.

In the end, you are going to see massive resignations in the Financial community...and hopefully, you will see a few perp walks. I am not a mean person but for things to really change, people need to know there are penalties and repercussions to all this. It is becoming obvious to me that many did not learn any lessons out of the ENRON/WORLDCOM/GLOBAL CROSSING episode.

Back to the market!

Over the past few weeks, I have told you to overweight OILS, COMMODITIES, SHIPPERS, FERTILIZERS, BIG CAP over SMALL and MIDCAP, BIG-CAP TECH and the slew of growth names that have been working. I have warned that if these areas topped and there was no rotation into other areas, look out. I am now downgrading the OILS as they were belted on Friday off of Schlumberger's earnings. I believe there is a decent chance they have put in a good top here which means markets have lost another linchpin. I am saying this knowing OIL PRICES are still in the trees. The other sore thumb from this past week was the action in many DOW stocks that HAD been leading. It is bad enough that a bunch topped but it is worse that they topped on earnings reports. This is a negative and tells me the DOW has probably seen its highs for the short-intermediate term. Just take a gander at C, IBM, UTX, MMM, CAT, HON. The only decent DOW reaction was in INTEL. On top of this, the lagging SEMIS are now breaking down off a massive top...which now looks to be in place.

Friday's action changed the complexion. The bad got badder, some of the good broke down...and the rest of the good pulled back. Small caps have already broke below both short and long-term moving averages. This was expected as they lagged all the way up. I think you may just want to sit back and see where this takes us as this market has been feast or famine. I am in hopes that we just continue to have a split tape where leading stocks continue to lead while the bear market stocks continue to do their thing. I have no problem with narrow markets as most of the money goes into the few. We just find the few. Ultimately, the problem with narrow markets is that they usually do not end well.

As we head into the week, there is an eerie feeling out there especially with Friday's close as well as it being the 20th anniversary of the crash. For me, there is absolutely no correlation. But I do want to make note that with all the unknown leverage out there...all the derivatives out there...anything is possible. There is a junkyard littered with people who have predicted crashes and depressions...as well as the ones who predicted Dow 100,000. We don't need to predict anything. The market will give us all the clues we need. A probable top is in place off of the nasty reversal as well as Friday's ugly. Because of this, I am back to defensive. If it turns into something worse, I am ready. I will now be watching leading names like AAPL, RIMM, ISRG, GOOG and others. it will be vital that they hold up. If they don't, it will just be another pin pulled from an already suspect market.

Gary Kaltbaum