The markets were relatively calm on Friday but is this the calm after the storm or just the eye of the hurricane?

Market Statistics

The Fed raised the recession storm warning flag on Wednesday and global traders took heed and ran for the shelter of cash. The Dow/S&P declined -6.4% for the week and the Nasdaq -5.3%. It was the worst week for the markets since October 2008. The indexes were knocked back to support levels from early August as the sellers came out in force.

The overriding worry is fear of a global recession thanks to worries over Europe. The U.S. is still expected to show positive growth but the estimates continue to weaken. Although the Fed saw "significant risks" to the economic outlook they announced only a lackluster change to their current monetary policy. Investors were confused. If the Fed is warning about a potential recession why didn’t they take more aggressive action? The answer is simple, the Fed has run out of bullets and has little left in the way of economic stimulus in their arsenal. The economy is on its own and investors are worried the recovery will falter.

Europe has not improved in the last 48 hours and the outlook continues to decline. German Chancellor Merkel was on the campaign trail trying to convince Germans they had to support the EFSF because a country failure was not acceptable. Merkel said, "A Greek default is not an option. The damage would be impossible to predict and could start an uncontrolled domino effect." Also, "Greece must complete the tasks it has been given." Since that is not a likely scenario it continues to suggest there are more problems ahead.

The G20, IMF and World Bank are holding meetings this weekend over problems in Europe. Nearly every major developed country is now leaning on Europe to fix their problems immediately. Germany's vote on expanding the European Financial Stability Fund (EFSF) is now scheduled for Thursday. A vote to approve the changes increases Germany's liability to the €440 billion fund from €123 billion to €211 billion. The measure is expected to pass but by a slim majority. Germany's four leading business associations issued an urgent appeal to the German parliament to vote in favor of the EFSF or face "incalculable consequences" for the European Union and its common currency.

The letter from the combined organizations was unprecedented. They admitted that the parliamentarians faced very difficult decisions in agreeing to extend the financial size and powers of the EFSF, allowing it to use its money to buy sovereign bonds in secondary markets, to recapitalize banks, and provide precautionary loans to euro zone governments facing liquidity crises. All such measures were initially rejected by Berlin, but Chancellor Merkel has been forced to accept them as the crisis, and the danger of contagion across the currency union, has worsened. Greek Prime Minister George Papandreou will travel to Berlin on Tuesday to talk with Merkel.

There were no economic reports of note on Friday. However, next week will be entirely different. There are numerous regional activity reports and they have the potential to either turn the market around or send it lower. If the reports show even limited improvement over the prior month it could weaken the worries over a new recession. If they are weaker than the prior month the recession worries will likely increase and the markets move lower.

Consumer confidence and sentiment will be updated and both are expected to decline further thanks to the market crash.

Bernanke speaks on Wednesday but the topic of the speech is not relative to the current economy. The ISM reports on Friday and the national ISM on the following Monday are going to be critical.

Economic Calendar

Equities were fairly calm on Friday with the major indexes closing in the green in a minor oversold bounce. The weekend event risk is so strong there was no incentive for traders to rush back into the markets. The equity indexes dipped at 10:00 as the forced margin selling hit stocks but dip buyers quickly appeared, only with a severe lack of conviction.

The real selling on Friday was in the commodity sector. Despite a monster sell off on Thursday the drop on Friday was even worse. Gold declined over $100 intraday and closed at $1650. Gold lost -9% for the week. Silver was crushed for a -24% drop for the week and a close just over $30. Silver lost -15% on Friday alone. Copper lost -17% for the week on worries demand will decline if a global recession returns.

The real reason for the selling in commodities was related to margin calls, rumors of margin hikes and rumors of hedge fund liquidations. In commodities the damage from a losing position can be much stronger than a losing stock position. Prices move a lot faster and in big increments. When a sell cycle like this occurs it does not matter why traders are selling. The stops get hit and the decline accelerates and traders without stops are faced with blowing out positions rather than meet the margin calls. Commodities can move very fast when these events occur and they can rebound with equal speed as the short that piled in on the decline get squeezed.

After the bell on Friday the CME announced a hike in margin requirements for gold +21% $9,450 to 11,475), silver +16% ($21,600 to $24,975) and copper +18% ($5,738 to $6,750). Those are the full size contracts. The miny gold went from $4,725 to $5,738, silver $10,800 to $12,488 and copper $2,869 to $3,375. Do you think maybe somebody leaked that information since those three commodities were the only ones crushed on Friday? Surely we can trust everyone at the CME, right?

Copper Chart

Gold prices declined to the 100-day average at 1650 and that would be an ideal place to buy the dip. The way to do this with less risk is the Gold ETF (GLD).

Open interest in the gold futures barely changed despite the significant drop and that means there was intense shorting at the same time longs were closing positions. Selling short creates new contracts. That means there is a high probability those shorts will eventually get squeezed.

How many traders and institutional funds have been kicking themselves because they did not get in on the gold rally? I am sure there are tens of thousands. Now they have a chance of buying it -$275 off its highs. Do you think that will attract a lot of buyers? It would seem likely but we have to wait and see.

Gold Chart

Silver was heavily bought by retail investors because the margins were low and it took less money to play. That has changed dramatically. Gold had run away from the retail trader and silver became the poor man's gold. If they did not have stops in place they are even poorer this weekend. A -24% drop for the week is unbelievable. The demand metrics and mine production have not changed only the conviction and capability of those traders who were holding silver futures.

Silver chart

I believe the precious metals will rebound and they will set new highs. It may not be next month or even next year but the stage is set for higher inflation and higher consumption in the years ahead. I am a firm believer in the long term value and in having some investments in the safe other than paper money. The drop in silver has created a buying opportunity for me as an individual. I am going to a trade show this weekend where there will be dozens of vendors selling silver coins, rounds and bars. When possible I like to buy silver coins. There is no doubt about the value and authenticity of a silver quarter but there can be doubts about unfamiliar rounds or bars. They can be easily counterfeited.

I updated my list after the close today based on the closing price of silver at $30. A silver quarter is worth $5.43 this weekend and a silver dollar $23.20. When silver was over $49 back in April those were worth $9.00 and $38.50 respectively. Since I believe silver will eventually be higher than $50 I view this weekend as a significant buying opportunity.

If you do keep gold and silver it is better off in your home safe than a safe deposit box. Don't forget Executive Order 6102. Think it can't happen? If you can tax the rich millionaires you can definitely confiscate from the rich.

Silver Coin Values

Executives from Solyndra, the solar panel market that filed bankruptcy after getting a $535 million stimulus loan from the U.S. Treasury, took the Fifth Amendment in testimony before the House on Friday. Lawmakers quizzed them on how they could continue to paint a rosy picture as late as five weeks before they filed for bankruptcy. The CEO was under the gun for his positive presentations and representations to lawmakers right up to the filing. In a July letter to the House Energy and Commerce Committee the CEO bragged Solyndra's revenues grew from $6 million in 2008 to $100 million in 2009 and $140 million in 2010 and would double in 2011. "You lied to me" claimed representative Cliff Stearns, the lawmaker leading the probe into Solyndra. It would appear the CEO and CFO may be making license plates in prison instead of solar panels in California.

The Solyndra bankruptcy is causing major problems for other solar manufacturers. First Solar (FSLR) is the largest maker of thin-film solar panels. They sold off hard last week after saying they would not get a $1.9 billion loan guarantee from the DOE because of new documentation requirements. There is a September 30th deadline for the loan and First Solar does not believe it can qualify. The DOE is not in a negotiating mood after the Solyndra bankruptcy.

SolarCity is a solar panel installer and they also said they will not get finalization of a $275 million loan guarantee. The company said the increased paperwork resulting from government reviews after the Solyndra bankruptcy was the cause. SolarCity was going to use the loan to install up to 160,000 rooftop solar systems on military family homes.

The DOE has $9 billion in loan commitments it has not finalized and they are now under the gun to thoroughly review every application to make sure there is no repeat of Solyndra. They have increased the documentation necessary to a ridiculous level. That reminds me of the saying about closing the barn door after the horse had already left.

Dish Network (DISH) unveiled a streaming service for movies over the Internet under the Blockbuster brand. They will also offer DVDs by mail. The company said current subscribers to the Dish satellite-television service can pay an extra $10 per month to access the Blockbuster Movie Pass service starting October 1st. Dish says it can stream over 3,000 movies and has over 100,000 titles of DVD movies and video games available by mail or though Blockbuster stores.

By comparison Netflix has 20,000 movies and shows to stream. Wal-Mart's Vudu service offers more than 30,000. Amazon has more than 100,000 streaming titles and subscribers to Amazon Prime can stream 9,000 titles for free. Dish bought Blockbuster in April for $320 million.

This move by Dish puts more pressure on Netflix since they are going to lose access to content from Starz in February. Starz aggregates content from multiple providers including Disney.

JP Morgan joined the crowd slashing estimates for Netflix after last week's disaster. JPM cut their price target to $205 compared to the NFLX close at $129. I am sure NetFlix shareholders would be thrilled it that came to pass. JPM cut earnings estimates below current consensus. The JPM analyst projects 23.7 million subscribers for Q3, 24.1 million in Q4 and 31.6 million in 2012. The analyst said NFLX shares should remain range bound for some time as competitors try to steal subscribers with announcements of their own like the Dish announcement on Friday.

Netflix Chart

Amazon (AMZN) has announced a press conference for Wednesday in New York and the Internet retailer is expected to formerly announce their new tablet computer. The tablet is expected to be priced aggressively and below the competition. Getting an Amazon tablet into customer hands will increase sales of other Amazon merchandise. Rumors claim it will be a seven inch device, full color, touch screen, run Android software and cost $250 or less. The only part of that I don't like is the seven inches. As you get older size does matter in terms of viewing pleasure. You have to wonder if there will be a sell the news event since it has been expected for so long. Hopefully last week's $25 drop already solved that problem.

Amazon Chart

Mosaic (MOS) joined the S&P-500 at the close on Friday. It is replacing National Semi (NSM), which is being acquired by Texas Instruments. In conjunction with the inclusion into the S&P Mosaic announced a secondary offering of 18 million shares in anticipation of more demand by fund managers. The shares are being sold by the Margret Cargill trust. These are existing shares and will not change the outstanding share count of 276 million. They priced the offering at $57.65 per share and it closes on September 29th. Mosaic will not receive any money from the offering. The Cargill trust is the sole beneficiary.

Mosaic also released preliminary earnings of $1.17 compared to 67-cents on a 41% increase in revenue to $3.1 billion. Analysts were expecting $1.29 per share. Mosaic said the miss was due to higher costs for ammonia and sulfur. Mosaic did say they expected sales to remain strong thanks to higher global demand and low global stocks of grain and oil seeds. Mosaic has a rocky chart thanks to the weekly stories about droughts and floods, feast and famine in crop expectations.

Mosaic Chart

Currencies are typically the lowest volatility of all the things you can trade. They have very small intraday moves and pretty stable trends. Same with bonds. Last week that historical trend changed. Art Cashin pointed out there was massive liquidation across all asset classes. It was a sudden desire by some large institutional traders to get liquid. The massive moves in the futures and currencies triggered stops and sell orders that flooded the system.

As I related in my Thursday night commentary there was a convergence of numerous factors that pushed institutions to liquefy positions. European banks were being downgraded and 16 needed immediate recapitalization. The U.S. had "significant" economic risks. China was suddenly seeing a decline in production. Some suppliers to Chinese manufacturers were reporting problems with payments for goods. FedEx confirmed the slowdown with news shipments from Asia had declined -4%. United Continental and Delta said freight traffic was falling. Mercedes said sales in China slowed over the summer. Luxury car sales had been China's fastest growing auto sector.

It was a perfect storm of events that brought back memories of the financial crisis in 2008. There were sudden and unexpected events popping up everywhere. Cashin believes the selling was much more determined than just a combination of events. He said it screamed of forced liquidation. Were we about to have an AIG event from somewhere in Europe? We will only know in retrospect but it was definitely a rough two days.

The S&P declined -6.7% and traded as low as 1114 intraday before rebounding slightly on Friday to close at 1136. The current support at 1120 held but the rebound was lackluster considering the massive decline. This could have been due to the weekend event risk or due to the rising worries over "significant risk" as it was called by the Fed.

The year-end targets by the major analysts have been sliding almost weekly now. The obvious reason is the current S&P level and the 95 days left until year end. To rally from our current level to the forecast highs of some analysts would require an instant end to the European debt crisis and a sudden and unexpected improvement in the U.S. economic reports. It is not likely to happen. The average target is 1311 and there is a remote possibility we could see that level but it is definitely remote and require a major change in sentiment. The targets in the table are several days old but the most recent I have. Some may have changed and I missed it.

S&P Targets

I believe we are seriously oversold but there are very few bullish points that could produce a strong rally. With a handful of critical economic reports next week it is definitely possible but every one would have to be better than the prior month. The bad news bulls have indigestion from consuming too much bad news already.

One positive point is the lack of follow on selling on Friday. The sellers may have run out of shares to sell. The low volume indicated a severe lack of conviction from either side. Only 4.8 billion shares traded on Friday. That was the lowest volume of any day since New Year's Eve. This came after nearly 14 billion on Thursday. The lack of conviction was probably due to the bulls being wary of the weekend event risk. The last three Monday opens have been significantly negative. For example last Monday the S&P gapped down -25 points. What investor would want to buck that three week trend when Europe appears to be worsening almost daily?

If we can manage to get past the open on Monday, without a break of support at 1120, I think we could see a bounce. The economic reports will still be a key and negative economics is not going to play well in the market. As long as we hold over 1120 there is a chance of a rally. A break and close below that level would be seriously bearish and could target 1050.

S&P Chart - Weekly

S&P Chart - 90 Min

The Dow was negative much of the day and barely pulled out a positive close at the end on what was probably short covering. Hewlett Packard and DuPont were the biggest losers. Lackluster trading would be an understatement here but I have already covered those points above. The Dow needs to break above 10,800 and make a serious run at 11,000 before anyone is going to get very excited. Support is now 10,600.

Dow Chart

The Nasdaq had a respectable day with a +27 point gain. Support at 2420 held on Thursday and 2465 emerged as support at 11:AM. The positive Nasdaq finish was never in doubt but there was still a lack of enthusiasm.

Nasdaq 2500 is the next psychological target. The chip stocks are in rally mode but the big cap techs were only mildly positive. It is that lack of conviction thing again.

Nasdaq Chart - 90 Min

Like the Nasdaq the Russell had a decent day. Not exciting but decent. Prior support at 650 was regained with the 652 close but there was no excitement.

The Russell should now be our window on the market. When the market reacts violently to news and hits critical support levels the Russell is the index to watch. When it begins outperforming the other indexes we will know the fund managers are losing their fear of further declines.

Russell Chart

The markets are oversold and due for a bounce. Unfortunately they are also at the mercy of the events in Europe and the heavy calendar of economic reports next week. With the Greek prime minister visiting Germany on Tuesday I don't expect any surprising news from Europe this weekend. Hopefully that will allow us to break the chain of severely negative Monday opens.

I am expecting a rate cut from the ECB soon, probably by Oct 6th. While that will not help the U.S. specifically it will show some commitment on the part of the ECB to help revive the European economy. That should help our markets.

On Saturday Treasury Secretary Geithner told the IMF policy committee at a meeting in Washington "Time was running out to stave off potential domino-style defaults in Europe. European governments need to join with the ECB to provide stronger support and calm market fears." Also, "The threat of cascading defaults, bank runs and catastrophic risk must be taken off the table. Decisions as to how to conclusively address the region's problems cannot wait until the crisis gets even more severe."

Mark Carney, the head of Canada's central bank called for overwhelming the problem by raising the current €400 billion EFSF to 1.0 trillion euros. The IMF meeting ended with a generic statement pledging to work decisively and in a coordinated way to deal with the debt crisis but conveniently left out any specifics. The market was hoping to get something more concrete out of the meeting so I don't know how this will impact our open on Monday.

I was looking for the mother of all "sell the news" events on the FOMC announcement and it came to pass. I don't see anything on the calendar for this week that could be that dramatic on the downside but there is the potential for some positive news events. Keep your fingers crossed.

I would look for an S&P move over 1140 and Russell move over 655 as early signs of a potential rebound. "If" we do get a rebound I don't expect a rocket ride to prior resistance at 1220. I think the road will be rocky until the market gets some economic and European news it likes. Metals are likely to be rocky at the open because of the increased margin requirements. Those caught unawares will be forced to sell something. However, anyone in the market on margin was likely already blown out on Thr/Fri. Once we see the beginning of a rebound in metals my favorite vehicles for a short term trade would be the SLV and JJC.

Jim Brown

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"Every man is a damn fool for at least five minutes every day; wisdom consists of not exceeding that limit."
Elbert Hubbard