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Monday, November 2, 2009

Passing Thru the Eye of the Storm

We've been in the eye of the storm for months now.

The relative calm and tranquility had lulled everybody into complacency.... until last week, when the cracks became too large to ignore.

On Friday 9 banks failed and were seized by the FDIC, the largest number of failures since the crisis began. Included was California National Bank, the fourth-largest U.S. bank failure this year.

Then over the weekend, a mortally wounded CIT finally succumbed to its self-inflicted wounds. The death of this lending behemoth will leave small and medium sized businesses suddenly without access to credit. CIT is also a lesson in throwing good money after bad, as taxpayers lose $2.33 billion in bailout money.

Slowly but surely, the eye of the storm is passing overhead....

1) Volatility - VIX climbed higher all week, from a crisis low of 20.10 to 30.69. Friday also marked the first time the VIX crossed the 200 day EMA (green line) since April. Clearly market participants smell something ugly and are loading up on protection.

2) Major Distribution Days - Wednesday and Friday were both Major Distribution Days, and on good solid volume too. Down volume has been exceeding up volume in general for weeks now.

3) Volume - On this last push up, volume all but disappeared... only to re-appear on the way back down. Buyers couldn't find compelling value at these lofty prices and stepped back, while sellers couldn't wait to lock in these lofty prices and stepped up.

4) The Banks are Still Furiously Hoarding - Bloomberg: "Citigroup Inc. and JPMorgan Chase & Co. are hoarding cash as if another crisis were on the way."

They know that the next crisis will be in CRE and that it will dwarf the residential mortgage crisis. Bloomberg: "Billionaire investor Wilbur L. Ross Jr,, said today that U.S. is in the beginning of a "huge crash in commercial real estate."

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