From Peter Tchir of TF Capital Markets
The Market From The Eyes Of An 8 Year Old
After two incredibly volatile weeks, where more Americans now know the ticker symbol for Gold (GLD) than its Periodic Table Symbol (AU), I'm just not sure what to write. Trying to make sense of it all is hard enough, and by this time on a Sunday, what hasn't already been written? I guess I could have tried to write something title "Circular reasoning and cognitive dissidence in the markets" , but that seemed fairly complex. Instead, maybe looking at the past couple of weeks through the eyes of a child, is a better idea.
Son: Dad, do you FINALLY have time to go fishing?
Me: Sure, sorry about this week, but it's been just crazy in the markets.
Son: Sure, but you always say that.
Me: No, really, it has been crazy ever since the debt ceiling weekend.
Son: Debt ceiling weekend? /raises eyebrows/ What is a debt ceiling?
Me: It is a limit on how much the government can borrow, and the market was really concerned about it.
Son: Ah, the market was worried we were borrowing too much?
Me: No, that we couldn't borrow more to pay our debts.
Son: How is borrowing more the same as paying debts?
Me: It's complicated, but we needed to borrow more or else we might have been downgraded.
Son: What's a downgrade?
Me: Its something the rating agencies do, you don't need to worry about it, since its complicated. But anyways we raised the limit and could borrow more, so everyone should have been happy.
Son: Don't you tell me to save and not borrow? That borrowing for stuff you don't need is bad.
Me: Well, yes, but some people think that it's different for governments than people or families.
Son: But why is it good for me to save, but bad for the government to save?
Me: You wouldn't understand.
Son: Okay, so what happened.
Me: Well, one of the rating agencies downgraded us.
Son: For taking on more debt?
Me: No, because our politicians can't agree.
Son: Don't you always say politicians never agree? And what does that have to do with debt?
Me: It's all complicated, someday maybe you will understand, but then it got worse.
Son: What got worse? No one wanted our debt after this downgrade?
Me: Well, actually the debt did even better.
Son: The debt did better after a downgrade? So what was the big deal?
Anyways, want got worse?
Me: People started to worry that Italy couldn't pay its debts.
Son: Couldn't they borrow more like us, so they could pay their debts?
Me: No, not really, they have too much debt, so they can't borrow more to pay their debt.
Son: But you said it was good if we borrow more to pay debt, why isn't it good for them?
Me: It's just different for them, you wouldn't understand. And if that wasn't enough, people started to worry about France and they would get downgraded.
Son: Because they didn't raise their debt ceiling? /hopeful face that he has figured it out/
Me: Nah, only we have a debt ceiling.
Son: So they need to borrow more to pay their debt, but they can't?
/really expectant face that he has nailed it/
Me: Not really, they could borrow more.
Son: So you were just worried they might get downgraded, but didn't have a reason?
Me: Well, it's complicated, but even though the rating agencies said they wouldn't downgrade, people got worried they aren't better than us, so were still nervous.
Son: That whole thing sounds stupid.
Me: Yes, but it ended ok.
Son: How come?
Me: Well after people got worried about banks /interrupted/
Son: You never mentioned banks! /annoyed tone of voice/
Me: Well, after all the stuff on the countries people got really worried about whether banks can pay their debt.
Son: Can they?
Me: So they say, but by the end of the week people were cool with it, because France and Italy sound like they will help their banks.
Son: But didn't you say that you were worried about the countries?
Me: Yeah, but now they are going to help the banks.
Son: But how does that help the countries.
Me: You wouldn't understand, it is all very complicated
Son: Maybe you don't understand, it doesn't make any sense! /exasperated voice/
Long pause for thought.
Me: Hey, let's go catch some fish.
Son: You sure, or is that going to be too hard for me to understand too? /dripping with sarcasm/
It has been a long couple of weeks. By the end of it, there have been so many twists and turns it is hard to figure out what is priced in and what isn't. Guessing at positioning is more of a guess than usual. People were reacting and putting on trades that made sense at the time. Current direction of the market was the single biggest investment factor last week.
All else was secondary. Investors got so hedged and wedged, it is going to take time to get themselves positioned as they want.
I don't think the data is priced in. There were so many contradictory reactions, that even an 8 year old could spot them, that it is going to take time for the market to truly digest them. So, although it is hard to figure out what is priced in, I do believe we have not seen the lows. Unless the governments enter a "Print it and they will come" mentality across the globe, we will test the lows. There may be enough bad hedges on and enough hints at printing that we can regain some ground, but much above 1200 on SPX would be a surprise, and without new massive government intervention, 1230 would seem extremely hard to get to. On the downside, 1100 seems easy to reach, and if it breaks, 1050 or lower is a real possibility. The short selling ban will once again cause problems on the way down as you remove the short covering bid.