Market Commentary: What An Ugly, Ugly Day

From Peter Tchir Of TF Market Advisors

Market Commentary: What An Ugly, Ugly Day

We are finishing at the lows or within spitting distance of the lows across the board, except for Gold, which traded like gold, all day long.  Nothing really did anything to slow the increase in the price of gold.  Overnight stock trading was less painful than many people expected (and more than some), but basically S&P futures traded in a range from down 35 to down 15.  Bad, but not extreme.  We even had a few rallies as the ECB seemed to buy a lot of bonds.  The only true bright spot in the day (other than gold), was totally ignored for now. That other bright spot was that Spanish and Italian 10 year yields managed to get to around 5.25% and stay there.  That actually seems like a big accomplishment.  An even bigger accomplishment was how few European politicians spoke today.  Those that did speak had recognizable names.  They seemed to manage to muzzle the deputy ministers etc, who often like to get their names in the paper.  Trichet did seem to be unsupportive.  Yapping about not turning the ECB into a bad bank.  Feels like he is trying to pin as many of his mistakes as possible on his successor, but honestly, Europe seemed as co-ordinate as they have been and seemed to focus more on a direct approach of putting capital to work than on coming up with elaborate plans, with lots of initials that never get implemented.  Hmmm, maybe that is a sign that the Germans have taken charge from the French since it is all their money, and if anyone loves a complex solution where a simple one would be better, its the French. 

Ultimately, it was the U.S. that disappointed the market.  There was a slew of downgrades announced by S&P.  Most were pretty well expected as they were a direct result of the U.S. government downgrade. The insurance industry came under pressure, that was a bit more of a surprise, and a definite negative.  Ultimately, BAC became the story of the day.  It was down 20% or so, and its CDS was out 90 bps, to 300.  Scary numbers without a doubt.  

In spite of that, the market held off on full capitulation waiting for Obama.  And then waiting for Obama.  Then waiting some more.  By the time he finally addressed the nation stocks had already slipped to new lows.  His completely uninspiring speech just accelerated the sell-off.  He did nothing at all to give any comfort to the market.  I thought it was one of his worse performances ever.  Stocks proceeded to new lows.  Somehow they managed to bounce back after 3pm for some magical reason.  Maybe the PPT.  After anyone who had held longs into the president's speech sold into this rally we faded into the end of the day.

There is no point talking about being oversold because clearly every indicator showed oversold coming into today, and left anyone betting on them, nothing but 1 day older and deeper in debt.  The Fed was very quiet today.  Yes I know they have a meeting tomorrow, and are in a "quiet" period, but maybe today was a good day to break it.  Maybe they aren't planning on doing anything.  Maybe they want the market to feel pain.  I assume there are a lot of phone calls coming from Europe trying to figure out if their translation of "co-ordinated" was wrong?  Had the Fed done something today on the back of Europe, I think we would have bounced.  They didn't do anything, so there was no bounce.  If the plan is to do something tomorrow, I think they made a poor decision.  The ECB may not be able to keeps Italian and Spanish bonds bid for another day.  If those bonds start trading back hard, it will be difficult for the Fed to stop the bleeding, certainly much harder than it was today.

The only remaining positives in the market, and they are small positives, is that many who saw only positives 2 weeks ago, only see negatives now.  Perception has shifted a lot.  Two weeks ago, if you said HYG could go to 85, people looked at you like you were from another planet.  I get that look a lot, so I'm pretty good at recognizing it.  HYG at the time was at 91.5.  Today, if you tell people you think HYG can go to 85, they once again look at you like you are from another planet, but now it is at 83, having hit a low 82.33   That is about 12% in 2 weeks.  Remember that case study I wrote about bond markets grinding higher and getting clubbed like a baby seal?  Well the seal just got clubbed.  Not a pretty sight.  But the bearishness does get extreme.  The only time I heard about earnings, it was in relation to how bad they could be in a double dip.  No more talk about how they supported 1,450 valuations on SPX.  VIX also got very high. It has been higher, but this is near the top of a pretty long term range.  I don't think VIX is a leading indicator anymore.  It is part of the risk on/risk off crowd, but just like when the CDS indices start trading too cheap to fair value, when VIX gets this high, it is a decent sign a lot of hedges are in place.  Maybe too many. 

I have no idea on the next move.  Headlines will continue to dominate.  If the ECB can't or won't keep Spanish and Italian rates down tomorrow, and the Fed doesn't initiate QE3, it could get really ugly.  Seems weird saying that it could get really ugly after a down 6.66% day in SPX, but it could.  BAC is another wild card.  With market volatility so high, and liquidity minimal, the one thing that makes the most sense is to stay small and nimble.