Yesterday's ominous selloff (today's very temporary EURUSD, and 100% cross-asset correlation, bounce notwithstanding: after all the data just got even worse courtesy of the Philly Fed, meaning much more pain for the S&P before QE 3 comes) got you a little jittery, with Flash Crashy overtones? You are not alone. Market veteran Art Cashin recounts that yesterday's market action was not so much reminiscent of 2010, or even the 2008 uber-volatile market, but really 1987.
Some Echoes of 2008 (And One, Faint, Slightly Scarier Echo) – (For those of you who listen to me throughout the day on the UBS squawkbox this may be a little “old news” – but hang in there.)
The stock market got hammered by a one-two punch yesterday. Actually, it was more like a one-two-three punch.
Early on, stock futures were in the hole as the Euro sagged on the breakup of the emergency Greek rescue meeting late Tuesday and signs of new unrest in the Athens streets.
Then, into that weakened and nervous environment, strode a series of lousy economic stats in the U.S. At 8:30, the CPI was a notch high which might be a hindrance to further Fed easing. Worse, and far more shocking, the NY (Empire) Fed Index imploded to -7.8% from +12. It had been expected to come in at +12. The plunge sent the already weak equity futures reeling.
At 9:15, Industrial Production came in weaker than estimates and Capacity Utilization actually fell, reinforcing the suggestion that the economy was stalling.
The Dow opened down about 100 points and the bulls immediately began to circle the wagons. They trimmed the losses slightly but were unable to mount a credible rally. Then, around 11:30, things began to unravel with a vengeance. There were confusing (and occasionally conflicting) headlines about the actions and intentions of the Greek PM, Mr. Papandreou. Had he been asked to resign? Did he say he would? Did he say he wouldn’t? Would there be a “unity government?” As a backdrop to all this, TV screens filled up with the likes of smoke canisters, riot batons and rock throwing mobs in Athens.
What really broke the back of the Euro and the markets (we think) were reports of a “leaked” EU email about the breakup of Tuesday’s rescue mission. It was said to have a very pessimistic tone and cast doubt on an effective ultimate rescue. As stocks and oil and grains got pounded, some folks heard echoes of 2008. Some TV pundits saw similarities to Lehman in September. Most traders, however, saw things more analogous to March and Bear Stearns. The rumormongers had begun to shift the discussion from European banks to the unknown counterparties on European Credit Default Swaps.
That universe is potentially enormous, populated as Captain Renault might say – by the usual suspects. That clearly runs the risk of some 2008 potential.
By the closing bell, the ugliness had not lifted. The breadth was negative and outright atrocious. It was a “90% down day” and, we think, the third or fourth in this selloff. It not only erased all of the gains of the prior two days, it took us to new lows for this down leg.
At the post close seminar of the Friends of Fermentation, the chatter about the echoes of 2008 grew a bit louder and more animated. A few of the geriatric veterans were a bit more somber and reflective.
They recalled another volatile expiration week that followed a growingly aggressive selloff from a high only weeks before. That was not 2008. It was 1987. But that’s so unlikely, right? Pass the peanuts, please!