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Back on 10/14/2010 I wrote an article titled, “We’ll Never See Dow 10,000 Again". It was about a guy I know who invests other people’s money for a living. The fellow made the crack about DOW 10k (not me). He was right for a while. But he is long and wrong today.
I bring this up for a reason. In the week before the debt ceiling deal about 99% of Wall Street was convinced there would be a last minute deal. They were also convinced that a big stock rally would be the end result. I heard it from the folks I talk to. We all heard it on the TV.
Last week’s “Sell on the news” reaction was a consequence of Uber-enthusiasm going into the “Ceiling Deal”. Today’s crap out is a consequence of S&P. I watched more TV today. I listened to all the smart guys I know on WS. They all had the same view; “Buy of a life time!”
Wall Street only understands earnings and top line sales. WS has no clue that what is driving equities the past few weeks has nothing to do with equities. It appears that the public sector finances of governments around the world are imploding at the moment. It doesn’t matter if APPL is trading at (only) 8Xs forward earnings. Not if governments are on fire.
I have no clue what happens next. I’m pretty sure that the “Pro” investors on Wall Street are still long, and yes, wrong. Usually that means we have lower to go. After all, those Smart Guys are not so smart in the end.
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No, not the USA; Puerto Rico. Moody’s dropped PR to B status.
I went looking for the External Debt report for PR. I found it no problem at all. But I was very surprised to see that the information was only available in Spanish. Interesting for the 51st State. Also interesting in that the vast majority of that debt is in US bond funds and 401’s.
This chart tells the story even if you don’t read Spanish. The bottom line is that PR had a very lumpy $64 B of debt on the books as of the end of 2010.
Could PR be a monster puke in the Munis market? Yup.
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The EU went to the next level today with bond purchases in the five-year area for both Spain and Italy. A very major escalation. The problem with ramping up the stakes is that there can be no certainty that the ECB will prevail. They put on a good show today. But is this a one trick pony?
In spite of the big bond market intervention the CHF hit a new high against the Euro. This market barometer shouted out; “It’s a one tricker!!”
The Swiss are pretty much at their rope's end with the ever-stronger Franc. A week ago they cut deposit rates for foreign money to zero. That did nothing to stem the tide. The only remaining option is direct intervention. Given that the ECB is actively intervening in the bond markets, it’s not impossible that the Swiss National Bank will show its hand in the currency market sometime this week. Just one big happy party of interveners.
The SNB did this a year ago and got crushed. They have tens of billions of Francs in losses on their books. This one year chart says it all:
I’m Swiss. I like to think I understand a bit of the Swiss psyche. They love to double down.
Seat belts on.
"Financial markets are markets in stories, and financial analysts are strongly influenced by the mood context of the moment," he said. "At the same time, they tend to simply extrapolate from what has happened forward and they tend to do it as a group. There's a lot to be lost from standing out from the crowd -- they want to stand out a bit but not too much." Tuckett describes the phenomenon as "groupfeel." "Groupfeel is the same as groupthink, except it is based on wanting to feel like everyone else rather than wanting to feel dangerously out of the crowd. That naturally makes it difficult for them to change quickly, unless everybody else is changing." Some "top-down" strategists are now moving on earnings. Credit Suisse on Friday hacked backed its 2011 forecast for euro zone earnings growth to 7 percent from 12 percent and cut U.S. estimates to 12 percent from 14 percent. "Bottom-up" analysts, looking at individual companies, are slower. Being a good analyst means being close to the company you follow and those companies will tend to maintain rosy outlooks for as long as possible.”
Bureaucracy must eliminate the Department of Education and make drastic cuts to Medicare, but it prefers to threaten Social Security as a WMD. Socialism/fascism cannot change course of its own cognition; the corporation cannot think, demonstrate consideration, or love. Agency tried to employ technology to replace individual liberty only to replace itself, to deliver a much more effective adjustment mechanism for gravity, currently migrating into Treasuries. Fits of volatility should be expected.
If SNB wants to reverse the flight to safety they need to start buying italian and spanish bonds en masse. That´s the only possibility.
Generally speaking we have - Markets up based on devaluation of dollar, you don't really gain anything. Markets go down everyone deleverages at a loss and gets into the "safety" of Treasuries. Extra printing overnight and everyone wakes up a little poorer. Wake up and look for a place that has fewer printing presses. Meanwhile, Fed is printing and propping up markets over the world, letting everyone know that the life guard is on duty and it is safe to go back into the pool. (step 1 Devaluation , step 2 ...., step 3 profit!).
So my only worry is if the Fed can't handle it alone anymore and needs to bring in it's G7 Superfriends.....
Double
If that photo is of you, you have held up quite well for 61 years. Or, it's a really old photo. Or, it's really Clark Kent. Appreciate reading your stuff.
Old Man
1984 when that pic was taken. Just a boy.......
Hoi Bruce, bisch au schort im Schwizerfranke gägä EUR und USD?
Of course, CHF/USD can be shorted right now. Never mind Bruce. He watches television to get ideas!
I'm 61 years old. I have made a ton of trades. Not once have I sold at the top or bought at the bottom. I'm not going to do it this time either.
I'm keeping my Francs.
So you are the CFO of Apple sitting on a big bag of US$ which is starting to eminate a strong foul odor, what would you do?
DJIA futures up 249 as I type.
S & P up 14.
Nasdaq up 23.
Gold down 1.50 and accelerating.
You gotta love Pento. Some perspective on our so-called balanced budget:
Let’s take a look. Here’s the reality about the debt-ceiling deal that S&P seems to be concerned with... perhaps we’re getting the math wrong too. In any case, we’ll enlist the help of Michael Pento of Euro Pacific Capital: “The debt ceiling agreement virtually assures that over the next decade the U.S. will add an additional $8 trillion in public debt, an increase of nearly 80% in 10 years.
“The back-end-loaded deal will cause the amount of deficit reduction to be just $21 billion in 2012 and $42 billion in 2013.”
If we play with those last two numbers a bit, as David Thomas of Equitas Capital Advisors did in a client letter last spring, we get a federal “budget” that looks something like this:
“It helps to think about these numbers,” Mr. Thomas wrote then, “in terms that we can relate to. Let’s remove eight zeros from these numbers and pretend this is the household budget for the fictitious Jones family.”
Rocky, nice analogy. I would add that they took $21,700 from their friends (Social security) and called it income to avoid adding it to the credit card debt.
And they signed a contract to buy a $810,000 parcel of land (Medicare and Medicaid,SS) with payments starting in 2015.
And then when their banker suggested that they be frugal, they told him it would put the malls out of business if his kids stopped spending. The banker said you're right and went home satisfied.
i surely do love silver
when all is falling 'round our ears
and markets crash and burn
it's saftey that you cherish most
it's not a "sound return"
Bruce,
I'm half Swiss so I have a little understanding about the Swiss psyche and doubling down. There's a reason why they were the worlds mercenaries for hundreds of years.
What I'm finding interesting/curious/disturbing/alarming about this market meltdown is that it's happening without the USD making any significant upward moves whatsoever.
To me, this puts Bernanke in an interesting if not impossible position: Any announcement of QE 3 or the like is bound to send the USd tumbling to all time lows...and nobody will be too happy about that. And failure to announce QE 3 or the like will send the markets plummeting further.
Quite the conundrum.
markets plummeting further puts a significant bid under Treasury bonds...Hmmm.
Meanwhile, the USD/JPY is on the cusp of going back to a 76 handle, the 4.5 trillion Yen BOY intervention wiped out in a week.
Beggar thy neighbor -on steroids. How long can they continue to throw $60 billion a week into the market? What happens if they stop, or when it unwinds? I've heard the preaching of the printing press wars, for years now, without interest, but $60b in a week? With all our federal overspending we don't churn through cash even half that fast.
Somebody is dumping dollars tonight.
Bruce,
Is your closing art piece indicative of a trend you see coming for the "Pro" investors to be downsizing into caves and stoking the market for neo-realistic cave paintings?
barliman
The artist for that piece is Jacqueline Veuve. There are many similar to this one.
I'm not sure there are "pro" investors. Consider Paulson. He was thought to be a genius for a while. But he has made one mistake after the other of late. I think he is the source of the BAC blowout.
Some have "hot hands" for a period of years. But sooner or later they all get hammered.
When they do get buried, they have nice caves to go to.....
I could not agree with you more. Not only are all the beta chasers who marketed themselves as "long/short", "arb", and other forms of hedge funds going to get washed away by this storm, but those who had intimate ties to the government and large flows will see their insider-trading-like guaranteed profit machines break down in the coming months.
I do believe there are pro investors, but they tend to stay under the radar - and practice the kind of ego-negating risk management that avoids -30% blowouts like the one Paulson is rumored to be experiencing. I also believe that when you get as big as Paulson, your fund(s) become similar to an aircraft carrier - it takes so long to make a turn, you've gotten smashed by the Exocets by the time you've brought your Phalanx cannons to bear.
Greed created these monsters, and greed will undo them.
this will be a swing trade market of brutal proportions once the selling subsides. e-mini shorts/longs on indexes...thats the play, puts on risk sells FX; cause any FX rate that hasn't cut will start cutting
So at the hacker convention last week, some guy mentioned HFT code was very spare so it could work super fast....thus it has essentially no security, and could be hacked "easy peasy".....isn't Anonymous really pissed off?....
Didn't we read here recently that MF cash was at the 4% level? If so, will they be liquidating tomorrow to meet redemptions; or was that driving today's down volume?
I am an idiot.
Bought SPY Aug-20 $120 Puts on Friday for 2.39. They closed at 9.45 today. I guess that sux?
so that's it, what about the crap outs last week?
Perhaps, just perhaps this soft patch is actually quicksand and that is what is being discounted.
Bruce, in my very first course on investments (for IT people) we were told an anecdote after hearing the answer to "what was the lowest ever interest rate" to be not zero, but -2%:
The last time the CHF was so strong and attractive to foreign money, the Swiss introduced some kind of tax on interest earned only for foreigners, which lowered the effective interest rate for them to -2%. That measure didn't have much impact, though.
Do you know when that was? Do you think something like that could be repeated in the existing Verrechnungssteuer?
FWIW, I was asked by a couple people this evening what they should do with their portfolios... meaning they have not done anything with their portfolios yet. I don't know what to tell them at this point. I can imagine quite a few firms are blowing up now and would rather steer clear of the wreckage for a while.
Bruce
If Fall street is long and not hedged, we are going a lot lower. The speed that marks this decline caught many off guard and they are like deer in headlights. Anything the Fed does will result in a short term bounce at best. Too much fear and many portfolios are vulnerable.
That's kinda the the way I see it. They've been algoing this thing up and there is no one to sell to...but themselves.
A snake starting to munch on its tail.
HFT cannibalism. They have stolen everyone else's money leaving one target left, each other.
Careful with that gun, Eugene!
watched Fast Money for the 1st time in a year maybe, and they were talking about what the hedge funds were doing, (selling financials, duh) but they did think the funds aren't as highly leveraged this time. and most of them own GLD, so they have sold their losing stuff, financials, and they are holding their winners.
Then the bald option trader guy did a thing on the HFT players, and how disruptive they have been. The traders recos were complex options spreads and currencies, in case you are an individual investor, nothing here for you. most of them expect a rally. and they want to sell into that rally.
thats' the cliff notes version.
my own feeling is that as long as the mining stocks hold up we are okay, that you shouldn't short the same things that were good shorts in 2008, because they have cleaned up their balance sheet, probably, and you should find something new (to short) , like consumer discretionary, just my thoughts
You'd be an idiot to buy options in this market. Gold is your put-all elze will be dis honored. The pigs are just starting to get slaughtered. Soon they will be eaten and found to be yummy. If the us army makes a vengeance move "look out."