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We Had Short Covering in 2008 Too... It Didn't Stop the Collapse Then...
I wanted to take a moment to discuss the current stock market rally.
For starters, this rally has largely been driven by short covering. Before the market exploded last week, short interest on the NYSE was at its highest levels since March 2009: a time when the entire investment community thought the world was ending and had gone short to profit from it.
So there were plenty of shorts to shred with a market ramp job. And that's precisely what has happened.
Now, I know that most commentators believe that anytime stocks go up it's a good thing, but short-covering rallies are in fact quite dangerous.
The reason for this is because these moves are caused by articifial buying interest (people covering their short positions) NOT by investors actually buying stocks because of some perceived value.
So when the short covering ends, the market implodes again. Indeed, during 2008, between September 15th and December 1st alone we had no less than FIVE RAPID double digit rallies: 11%, 19%, 12%, 11%, and 13% all brought about by short-covering.
Suffice to say, none of these ended well.
So let's be honest about what's happening in the financial system today... and why this current rally is in fact just another head fake as we enter the Great Crash.
1) Europe's banking system faces potential systemic collapse: the insolvency issues are beyond PIIGS' debt at this point. Even Belgian banks which no one thought were problematic are now going to $0.
2) The "powers that be" have lost control of the markets. Both the IMF and the Bank of England have warned we are facing a financial meltdown of historic proportions and possibly the worst ever in history. These are the very groups that are supposed to hold up the financial system... telling us that we're facing a "meltdown."
3) The world Central Banks cannot hold the markets together anymore. Indeed, even China is now having to actively buy shares in its own banks to prop up its financial system. This is CHINA, the supposed largest creditor nation in the world... having to step in to BUY bank stocks to stop its ongoing Crash.
4) The US Federal Reserve is insolvent. With only $50 billion in capital and a portfolio of $2.8 trillion, the Fed is leveraged at OVER 50 to 1. Lehman Brothers was leveraged at 30 to 1 when it collapsed. And the Fed's portfolio of toxic debt and other junk it bought from Wall Street has tainted the US's balance sheet.
I could go on and on, but the fact remains that we have now entered a Financial Crisis to which 2008 was just the warm-up.
You see, 2008 was caused by toxic debts on private bank balance sheets. Today, thanks to US Federal Reserve and other Central Banks' moves, these toxic debts have moved onto the PUBLIC's balance sheet.
So this time around, the market collapse is ALSO going to feature the bond bubble bursting, sovereign defaults (including eventually
the US), MAJOR bank failures (Bank of America?), bank holidays, government shutdowns, civil unrest, and food shortages.
In short, we're entering the Greatest Depression: the full-scale collapse of the entire credit-based financial system in the developed world.
If you have yet to prepare yourself for what’s coming, now is the time to do so. Whether it’s by moving to cash and bullion, opening some shorts, or simply getting out of the markets altogether, now is the time to be preparing for what’s coming (remember, stocks took six months to bottom after Lehman… and that was when the Fed still had some bullets left to combat the collapse).
And if you’re looking for specific ideas to profit from this mess, mr Surviving a Crisis Four Times Worse Than 2008 report can show you how to turn the unfolding disaster into a time of gains and profits for any investor.
Within its nine pages I explain precisely how the Second Round of the Crisis will unfold, where it will hit hardest, and the best means of profiting from it (the very investments my clients used to make triple digit returns in 2008).
Best of all, this report is 100% FREE. To pick up your copy today simply go to: http://www.gainspainscapital.com and click on the OUR FREE REPORTS tab.
Good Investing!
Graham Summers
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Can someone tell me how this short covering rally works, apart from covering short positions that fuel this rally, someone (large hedgefunds?) has to be so stupid to buy shares due to an engineered rumor and promises? Or is this just HFT algorithm gone wild.
daily TA has turned bullish. (higher high, 50dma, rsi, macdaddy)
Weekly ta on the otherhand is still signaling a new bear market. (aside from the 200wma). macdaddy,rsi,below the 50 and 70 ma)
Disclamer: Long 200 QID (100 yesturday 100 today). Will hold till the coveted 70wma breaks = 925 / another 4%.
Will buy more QIDs every 2% up from here.
You can't use logic to figure out what the market will do, the market is ignorant, corrupted and manipulated. Only the insiders know what is going to happen next, and only they will profit.
If a short is covering it means he's handing the share over to the real buyer. What's the real buyer going to do?
I call bull$hit.
First off, remember that short-covering, while synthetic in it's buying, was also equally synthetic in it's selling.
Secondly, short sellers are among the savviest investors and a good portion of them will cover at the most appropriate times.
Third, a second epic crash in a span of just three years? GTFO. This is just fear-mongering.
Third, a second epic crash in a span of just three years? GTFO. This is just fear-mongering.
The "lightning never strikes twice in the same place" theory. Actually, lightning prefers to strike repeatedly in the same places. This European crisis is just an extension of the US subprime crisis. Both were caused by banking deregulation which encouraged banks to make risky loans and linked everything together into one huge financial system which is fundamentally unstable.
Amen Dangertime. Do we want to make money as trend followers (the only folks that do it consistently over time = fact) , or do we want to do it following trend following heresey to satisfy somes predictive will over the markets.
An axion of succesfull investing and trading or even long term shorting (which is a pseudo investment if managed right) is you never....never....predict. You only react.
Thus again Phoenix Capital stuff is garbage and anyone who uses their ego to justify shorting more because Zerohede says or anything like zerohedge says....well all I can say is a fool and their money are often separated....
You must be balanced in your research...and never let broken clock blogs or research that only shows point to support their views obfuscate making money when the trand and price says they are wrong.....and I imagine most on here want to make money......
The world is ending BLAH BLAH BALH. Collapse is just around the corner BLAH BLAH BLAH. The market is going to crash BLAH BLAH BLAH.
ZH never fails to fail! Every day the end of the world. Every day an excuse for why ZH is wrong.
Damn people; get a grip. They will kick this can far longer than any of us will be alive. They've been doing it for hundred's of years. Get used to it.
I look forward to reading about the EU this time next year. And all will be well.
I was initially intrigued by Phoenix Captial's content untill I realized it to be a terrible for trading and possibly investing. Graham Summers is a broken clock and all he does is compare to a point estimate to the day and week of 2008 when 2008 is anamalous. Markets rhyme at best and repeating especially a 6 sigma outlier just 3 years ago is short of lunacy.
You can't have a crash if everyone is out of the market and looking for a crash. That is why sentiment is key to performance. This guy wouldn't know the effects of overly bearish sentiment (which is bulllish) if it is hit him in the face. He probably lost all his subrcibers tons of money from March 2009 to August 11 telling them to hide in a bunker and short stocks.
His newsletters go right into my spam folder.
As Mr. Markets do - especially in the short to intermediate term - is they crush one-sided long term bets like Mr. Summer's "sure thing." He's heretical garbage. The market is about to humble everyone to the upside finishing the year likely unchanged or positive as is often the case in 3rd years of presidential terms.
As a true trend trader who believes the tape and price are predictive of news and not teh other way around (the only style that works), I don't even know why the markets are going up. All I know is that based on sentiment, price action, and the fact that even slightly good news will catch the net short bears like Mr. Summers and his followers with a pole up their ass going deeper when the squeeze extends further.
The turn higher that continues may come from Bernanke printing who is our "white swan". It may come from even partial resolution to the Euro issues. But its coming.
Again, I am a true trend trader who rides (hence my handle) long term swing trades until they are stopped out. The trend is up. Sentiment backs the smart money (which apparently Graham is not) getting bullish on all hugely important sentiment indicators on sentimenttrader.com.
He will be proven wrong - 100% over the next 6 to 12 months. Dead wrong.
History rarely repeats. It rhymes at best. But it does not repeat black swans that happen 1x a 100 years every 3 years. That's just garbage.
So let's be honest about what's happening in the financial system today.
Just to play devils advocate:
Europe's banking system faces potential systemic collapse: the insolvency issues are beyond PIIGS' debt at this point. Even Belgian banks which no one thought were problematic are now going to $0.
Merkozy is well aware of this: per Sunday night agreement they will recap the banks. Story over when implemented. The banking contagion which means U.S. markets are affected near term: zero.
The "powers that be" have lost control of the markets. Both the IMF and the Bank of England have warned we are facing a financial meltdown of historic proportions and possibly the worst ever in history. These are the very groups that are supposed to hold up the financial system... telling us that we're facing a "meltdown."
The IMF advisor you're referring to said there would be a "financial meldtown" worse than 2008 if Europe didn't take bold action. with their banks. Go back to #1, Merkozy will print money and dodge the collapse for now--but not later. market rallies.
the world Central Banks cannot hold the markets together anymore. Indeed, even China is now having to actively buy shares in its own banks to prop up its financial system. This is CHINA, the supposed largest creditor nation in the world... having to step in to BUY bank stocks to stop its ongoing Crash.
Really? The world central banks can print money endlessly and with most major indicators point to deflation, this won't catch up to then until inflation starts running out of control (Europe, U.S., Japan, etc. are fighting a deflationary depression with printed money for now. Which all means, markets can be ramped longer than you can stay sane.
The US Federal Reserve is insolvent. With only $50 billion in capital and a portfolio of $2.8 trillion, the Fed is leveraged at OVER 50 to 1. Lehman Brothers was leveraged at 30 to 1 when it collapsed. And the Fed's portfolio of toxic debt and other junk it bought from Wall Street has tainted the US's balance sheet.
Agreed. Only problem is: the market doesn't agree. you don't loan money at record low rates collectively as a market if you believed the fed was "insolvent."
I don't disagree there will be a crash. But it will not happen this fall. The markets might go down 15-20%, but Bernanke will only print even more at that point. And think about it; the volitility today is NOTHING like 2008, which I remember so well. This much lower volitility in this lower bound range means markets should they fall will fall a hell of a lot less this next time around. 3% up and down days are far different from the 10% up and down days the market saw in '08. Which means the route should it come, which I don't think it wll yet since every major developed country is now outright printing money, willl not be nearly as extreme or severe as '08.
The collapse will happen, but it'sn not happening this year.
Belarus, you say "...you don't loan money at record low rates collectively as a market if you believed the fed was "insolvent."
Is there a "market" lending at low rates? I contend there is not, do not be fooled by the quotes on treasury bonds or even mortgages, the US government does still issue a lot of debt that the Fed is forcing market makers to buy up but then they just sell it on to the Fed at a small (by their standards) but risk free profit. That is not the same thing as a functioning private commercial market. Even private borrowing for autos and real estate is severely depressed by any standards, if we judged the economy or markets by those two major big ticket items we would have to conclude the collapse has already happened and we are in a depression. Add to that un and under employment, falling incomes both nominal and real, consumer necessity inflation in the midst of an insolvency deflationary cycle, and all efforts to solve the problems amount to salvaging a very few TBTF bankers at the expense of generations of future taxpayers, it means that there are no markets as we knew them.
If volatility has calmed it is only because volatility is a feature of having many independent players at the gaming table make wagers, most of the players that churned the equity and commodity VIX ever higher back then have been either badly hurt and left the casino, or are playing for the house, more employee than speculator or investor at this point. Saying that 3% up or down days is a lot less than the scary 10% days you remember simply does not preclude a series of 10% plus down days in the future. And it can be as sudden as a heart attack.
The global problem is not a liquidity problem and never was in spite of a few brush fire cash flow issues, it was and still is a solvency/debt issue, central banks and governments are creating a Potemkin Village of hollow economies propped up by some printing and low interest rates which are essentially both meaningless because Main Street has no access to the credit, what is the point of low interest rates when you do not have a job or a decent credit score? Incomes are inadequate to service existing debt no less consider new debt which in any case is not really available to you and me, unless you happen to be GS, or Citi, or Chase, or BAC, or a sovereign.
I also want to point out that printing money in a very low interest rate environment as the Fed is doing (though so far quarantining it to Wall Street) did not work in Japan. They are now in the second lost decade. They got so desperate to get the money out onto Main Street there that the BOJ took to leaving sack of cash in public toilets, in mail boxes, falling from the sky, around large cities. Still did not stimulate the economy, all it did do was fuel a massive carry trade. Which judging by the strength of the yen is still around.
Final word for today is this, we are in a vicious deleveraging cycle and they are trying to fight it with more leverage from the public sector, it cannot work to trigger growth, the only way I see us returning to real growth is post devaluation by at minimum 20 to one, that of course is a de facto default on existing debt, but one which solves more problems than a deflation and outright default would, but they will not permit it because it dilutes the wealth and assets of the power elite ruling class by 95% with a stroke of the keyboard. What will happen is they will continue to allow Greece's, and Dexia's, and Lehman's to fold up with the good assets being bought up at pennies on the dollar by favored companies (GS) while the bad assets get foisted off on their next target (BAC) and sovereigns (taxpayers). One day years from now we will have way lower standards of living and a lot more debt, while the TBTF PTB will have all the wealth on the planet, they will be politically correct enough not to call us their "property" but that is just what we are and our situation will just get more and more difficult. What they are now doing will work, but it will work to enslave and impoverish every single person not already very wealthy.
I agree with you generally boiltherich. I too think that the Treasury market is nothing but a Ponzi market that will ultimately collapse. But with the dollar scamble with the Euro banking problems and the Federal Reserve not expanding their balance sheet currently, and no newly issued fiscal stimulus coing anytime soon, plus exporters still looking for PPP (Price Parity with currencies) and therefore are still buying tsy's, there is some "collective" buying of U.S. treasuries. Remember, too, that all this money sitting around in money markets etc. are generally speaking in tsy's.
But, yes, I generally agree with you that there isn't much of a "market" and certainly won't be enough of one at these yields to demand any real support. I've said it right here many many times on ZH: the only way the unfunded deficits can get plugged at this point is with a stock market crash, debt monetiaztion, or a balanced budget. I pick debt monetiaztion as the real economy contracts and stocks start to hollow out (not crash but correct to around 950 on the S + P) and then Benny has to come in again. A balanced budget is so far off that it's laughable: which is why eventually the greatest bubble in U.S. history--Treasury's--will be sure to crash. But fist, I seriously won't be suprised to see yields hit 1.25% or so on the 10 y. These things always go far longer than anyone can possibly anticiapate.
The Fed has ways to expand the money supply without it appearing on their balance sheet, there are numerous ways of getting it out there, the Federal Home Loan Bank for one is huge and can quietly channel money into favored TBTF's, there is the Treasury's ESF that is ditto huge. And they can hose the contenent of Europe from the Aran Islands to the beaches of Cypress with cash swap lines without it showing up on the Fed's books. As to market pricing it is like the LIBOR recently, the benchmark 3 month has floated up from .25 bps to .40 bps but it no longer indicates the availability of cash for overnight lending since both in the USA and EU the Fed/ECB windows are open to any major market player, they no longer need interbank borrowing.
I am not really agreeing about the foreign purchases of US treasuries, the net in July, as of the last report available, was pretty close to negative, and was way negative when you consider short terms. I think the TIC comes out the end of this week and we will see. By the way, often the largest foreign buyer/seller has been the Caribbean, and that does not mean Jamaican rum money looking for a nesting spot, I do not count Caribbean buys and sells as foreign because they in reality are a tax dodge by our own good corporate "citizens." It leaves New York untaxed and is deposited in Island banks which turn around and seek alph around the world and rarely ever returns to the states because whiney bastards on Wall Street would rather set it on fire than pay a reasonable tax. All of that takes less than one second to happen of course. And it is why you can find 50-75 "banks" in a single 18x20 office in the Cayman Islands.
I just checked, Treasury budget is out later in the week, it is next Tuesday for the TIC for August.
Ah, I also copied for you part of the HIGHLIGHTS of the last TIC:
Highlights
Foreign investors, during the run-up to the debt-ceiling deadline, showed caution over US financial assets. Net inflow into long-term US securities during July totaled only $9.5 billion which is very low though above June's inflow of $3.4 billion (revised from $3.7 billion). When adding in short-term US securities, which are usually a safe-haven favorite for foreigners, the data show a net outflow of $51.8 billion which is the third outflow in a row.
Riddle me this, ZHers- How can JPM cover their shorts and the paper price of Ag stays flat the whole time? When the markets cover their shorts, the price goes up temporarily, but not in metals, not when the banks buy. I are confoosed.
Here is the temp solution to your riddle. Just as a temp is the riddle to todays jobing market.
Massive take down in long specs first, followed by massive short covering...
So much trauma that the long specs have been destroyed, and an orgy of short covering without shooting the price higher. At least temp.
Now we have no long specs, and JPM can play silver for a while, take it lower and spook out more specs in the high twenties even. Keep spooking and keep covering. With no longs coming in, its their metal. They own it all. They have won again.
Except the physical, which you can still buy today at JPM's obscene spot price.
I guess I don't understand why bankers bother with barbarous relics when they are already long bureaucrats. Is this diversification?
Thanks, TC.
So they must cause fear and loathing then just mop up the proceeds. It must be nice to have the PTB, the printing press, and the algoes on your side. When I got into this a few years ago, silver looked like a smart investment to me, seemed under-priced so I began to dabble in it to protect a small savings I had.
Little did I realize I was going up against the Powers of Hell arrayed against me and my paltry stack.
Should have bought baseball cards, I guess. Oh well, my gutter metal ain't for sale, and I have a shovel.
This is Spam in the can.
If I subscribe to your service does it include a map of where I can jump off a cliff or bridge?
Maybe you shills could put it in the form of a "Pirates of the Carribean" Map, only to lead your subscribers to sink hole, mine shaft, abandoned bridge, or maybe a skyscraper ledge.
Put your little Phoenix Capital logo on a sign that says "Jump Sucker"
And the funniest part of all Thunderchief, no ones making you read anything or do anything.
Yeah, that's the bitch about freedom of speech, action, choice, association ... etc. People act chaotically. Bruce posts his thoughts to the internet and someone decides to post theirs. Then, people like you choose to jump in. Before you know it, there's public discourse.
No doubt, it sucks.
Unlimited free money printing has already been fully priced in, and free money is worthless to begin with anyway...they got nothing left, get ready for the hard fall people.
Umm. How in the Hell do you price in unlimited free money?
You will never see a serious crash in stocks denominated in dollars while the free money solution is in effect. To quote Darth Vader:
"The power to destroy a planet is insignificant next to the power of the printing press". -- Or something to that effect.
'Umm...How in the hell do you price in unlimited free money'
Thats easy, anyone with a brain can do it....its WORTHLESS!
Plant a garden. Buy some chicks...clarify.....bitties
"Plant a garden. Buy some chicks...clarify.....bitties"
now i'm getting aroused
Money for nothing, and chicks for free.
Dog, I left that plantation a long time ago. Chicks ain't free.
The new mantra everyone believes in 'short covering' will save the U.S. stock markets'....yeaaaaaa sure.
3) The world Central Banks cannot hold the markets together anymore. Indeed, even China is now having to actively buy shares in its own banks to prop up its financial system. This is CHINA, the supposed largest creditor nation in the world... having to step in to BUY bank stocks to stop its ongoing Crash.
Well,with nearly 2 Trillion in REAL cash Reserves,I ain't sweating them being able to funds a few of their own banks.