We had a mini-panic today for no apparent reason (other than exhaustion, of course). I suspect this little affair when the Nasdaq 100 index swung from +20 to -50 or thereabouts is an indication of what can happen when the robo-traders start to feed on one another to the downside. If you were watching the action today I suspect you feel the idea of a full-scale panic is not so far-fetched, after all.

Bill Fleckenstein commented about the current market’s disconnection from reality: “So, as someone who has witnessed a lot of insanity, I would say that this moment (not necessarily this morning) is perhaps the craziest I’ve ever seen, and maybe the craziest in the history of the country. Which of course doesn’t mean it can’t get crazier, because once you get to points like this, there’s no telling how wacko things can be. But my feeling has been that this will be a landslide when it goes, which is why I have continued to be on red-alert every day. ”

As thought likely, year over year expected third quarter earnings growth for the S&P 500 has turned negative and is now at -0.65%.

Also from Reuters columnist James Saft: “Retail sales rose just 0.3 percent in August, and when motor vehicles and parts were stripped out, sales fell 0.4 percent, the sharpest drop since September 2006.

Considering that people always have to eat and many Americans have only limited discretion over how much gasoline they use, a period when credit card debt is expanding rapidly while retail sales are contracting points to debt financing of necessities, rather than luxuries.”

Over the weekend, two big banks, UBS and Citibank, coughed up hairballs and admitted big losses in their fixed income businesses. A small Internet bank (Netbank) was taken over by the FDIC and its insured accounts transferred to ING Bank. Another LBO deal (Acxiom) bit the dust, interestingly the banks involved paid part of the breakup fee, implicitly admitting that their unwillingness or inability to finance the deal was at least part of the reason for its failure. The ISM manufacturing index fell, holding barely above the 50% mark which is supposed to signify the onset of shrinkage, although considering this is an unweighted sentiment index one wonders why so many decimal places are published, one feels that a single significant digit might be too much. Early indications are that real estate sales in September were down substantially, probably as a result of the still-crippled mortgage market. Some of the lower quality ABX indexes are even now making new lows.

None of this has discouraged the continued buying of stocks. Bill Fleckenstein opined last week that the continued buying pressure is simply the result of “quant” or “black box” automated trading, where fundamentals are ignored and price action is the only consideration, feeding on itself. I have pointed this out in the past, as investment considerations have obviously long since departed the stock market. The Dow is up nearly 200 points as I write. As far as I am concerned, it is just a matter of waiting for the inevitable panic. I freed up some extra cash by rolling down my profitable positions in the mortgage bankers and homebuilders, in order to be ready. I also added to my SPX volatility play, buying a bunch of the SPX Dec 950 puts.

It became apparent that the main engine of S.S. Bull Market, unlimited cheap credit, has been shut off.

The stock market sold off today, although it closed well off its lows. Despite the talking heads, it isn’t really meaningful to say anything “caused” it. Even if you knew the news ahead of time, you still couldn’t predict the market’s reaction. Talking of “cause” is meaningless when there is no reliable relationship of cause and effect.

Having said that, what did happen today was further deterioration in the credit markets. Risky bonds fell sharply, and default swaps rose. The “private equity” or LBO game is over for the time being. The stream of debt that has been the engine propelling the stock market higher has stopped cold. It even seems likely that some of the deals in the pipeline won’t get done.

Bill Fleckenstein summarizes the situation thus: “In short, virtually every problem I’ve been discussing in the credit arena — whether that be consumer, structured credit, or junk debt — is getting worse, and at a faster rate. That is not bullish for anything. However, at the very same time that’s occurring (which the market is now beginning to recognize — witness the action in financials of all flavors), there is an absurd party happening in big-cap tech. That, as the OPM (other people’s money) crowd assumes that if it’s big, liquid, and a tech stock, they can speculate there and make money while financial system implodes. (This activity makes those who bet on an inside-straight look smart.)”

From today’s “Ask Fleck” (reader emails on Bill Fleckenstein’s site): “Fleck……..My B/D is going under after our clearing firm NFS (owned by Fidelity) made a margin call upon repricing CMO’s held by my firm. This seems like the real thing because if Fidelity is repricing, everyone else is going to follow.

I’ve spent over a year preparing for trouble and its still going to be damn painful. However, at least my clients and I will be survivors in part thanks to information provided by you.”

From a reader’s email on Bill Fleckenstein’s site: “A friend of mine works as a Portfolio Manager for a $2.2b CDO pool of subprime loans. I spoke to him today for an hour. Asked how he is doing, he says “nothing”. I ask what do u mean nothing, i hear all these stories about CDO’s and losses (Bear Stearns for example), he shrugs and says nothing will happen until the Rating agencies do something. Asked about losses, he says they are there but he doesn’t have to mark to market his portfolio until someone discovers it or the Rating agencies force his hand. So his plan is to lie low and collect the management fees and pretend as if there are no losses. Asked about management fees, he laughs and says it’s a low 50 bps. On $2.2b, that’s a cool $10m yearly which he and his four colleagues have to split up at the end of the yr. He says he has the best job in the world and says there is really no work to every day. Just wait and hope that the rating agencies don’t downgrade his CDO pool and voila, at the end of the yr, he and his partners can split the $10m spoils (minus the expenses for one Park Avenue office, and a secretary). I am amazed that no body (regulators, investors, the public) hasn’t beseeched the Rating agencies to review all the Subprime CDO’s by now given the headlines and the incredible losses hidden there. This is a SCAM and somebody needs to stop it.”