Was it Greece? Was it a fat finger trade? Was it high frequency trading? Was it quant funds run amok? No one knows for sure, but it was ugly to say the least. I believe the selloff was very, very real and a matter of no one left to buy the dip. We fell within 1.5 points away from all trading being halted and we miraculously reversed course and rebounded some 700 points. Some think it was the Fed or the plunge protection team, I would say that is not farfetched either.
The one thing this was definitely not was a fat finger trade, like originally reported. When trades are entered for equity orders they only use numbers, not letters so the whole “B” versus “M” argument is a bit irrelevant and merely makes a good news story. I believe this whole thing was a perfect storm of a hugely overbought market, yes it is and was overbought, mixed with Greece contagion fears sprinkled with a bit of tight orders by HFT or quant funds and no one left to buy, anything. All liquidity was sucked out of the market and when that happens, well you saw what the results are.
I believe this is only the beginning and things will get much worse. It was also odd to see mining stocks remain in the green along with gold. If this was a trading error these stocks should have tanked as well, but they did not. This tells me that the selloff was more than a bad trade or order imbalance and any other ludicrous reason the media can come up with. It was selling, real live selling from people who know what it is like to lose 40-50% of their money and did not want to repeat that again. Watch fund flows to verify this, I bet we see more bond fund inflows in the very near future.
Even if you were short it was a tough market for you, especially option traders who saw the bid/ask spread widen to levels I have rarely seen before. I am long VIX August and September calls and it took an hour to get pricing back to normal and there was no premium being given for being in the money. It was amazing to see the selloff today as I jokingly went to my wife’s office and said the market is crashing, it was down only 280 at the time, and when I turned it to CNBC to show here it was down 400 and moving fast to the downside. It was breath taking and luckily I was hedged, but the talking heads on TV and perma bulls that you talk to probably told you that hedging was not important and the market now only moves up, it doesn’t, sorry to tell you.
I always find it odd that when the market tank there is talk of manipulation, but if the market goes up for 8 straight weeks that is normal, come on now. I do not believe anything about today was manipulated, except for the massive rebound that “just happened” all of a sudden. No one seems to be really looking for the cause of this, in a serious manner I mean, and are chalking the decline up to a fat finger event, etc. I am a bit more inquisitive though and while I do not have an answer, I have some theories.
I have heard rumors that the overnight repo market in Europe is frozen, I do not know if this is true yet, and if you notice the overnight LIBOR has been creeping up and is close to the 1 and 3 month rate, this might mean the rumor of the repo market is true. On top of that the risk of contagion is extremely real, I wrote about that a week ago in the “Greece Does Matter” post, and the next up is Portugal followed by Spain, Italy and France who owns tons of PIIGS debt, $781B to be exact. After that it is anyone’s guess to who is next, but it is more than likely going to be the UK. What is happening in Europe should be a lesson, in advance, for the US who, ever since Obama has come into office, seems to think the European way of doing things is better than our system, it is not.
The reason for the debt crisis is the massive debt these countries accumulated to give away free health care, massive pensions, paid vacations and other luxury things to their populations. Clearly following the European lead is not a wise move, but that will not stop our politicians who are immune to market downturns because, A) they are all wealthy and B) they are paid very well for what little work they do. We are the next Europe and we will suffer the same issues they have now if we do not get our act together. I am fairly certain that the funding crisis which is a rumor today will be public knowledge in a few days and is one of the main reasons for our selloff today.
If Europe cannot fund itself, other than through the printing press, today will seem like good times moving forward. This is bigger than Greece and it is 10 times bigger than Lehman, we are talking about countries now, not banks. Essentially, we decided to save the banks at our own peril and we are now seeing the results of this action. We should have let them fail, all of them, because we now run the risk of major countries failing. Was Goldman Sachs really worth it? I think not.
What really stood out today was gold, it went up and is on the verge of a tremendous break out. Are gold bugs really that creepy now or is it that we knew something in advance? For those of you wondering, it is the latter. Gold is now the new reserve currency, period. We may suffer from deflation when this funding crisis escalates, but that will quickly turn into inflation, very, very fast. When dollars come into high demand and they are not available we will see this deflation, but remember, we have Helicopter Ben at our disposal. He will literally get into his helicopter and drop dollars all over the country. This will seem like nothing as the dollar stays strong, but that will be very short lived.
After the dollars are dropped inflation will be swift and unlike anything we have seen before. You see, even though Ben flooded the banks with dollars over the last 3 years none of those dollars made it to us, the people who spend them. Instead the banks bought treasuries, also a good option for investors right now, and this time the dollars will bypass the banks and hit us directly, think Bush stimulus instead of green energy stimulus from Obama. Putting that money in our pockets will mean people will spend, that is what Americans do, don’t ask me why. There is where inflation begins and that is only the start. I am not sure what they will do after that, but I am confident it will involve more spending and giving us money, thanks china!
There is where the problems will really begin because there will be a global funding crisis at that point. This means that no one will buy our debt so we can buy iPods. Ben will have to print it, literally print it to get it into our hands. Inflation is a funny thing and very misunderstood, but I assure you that we will not enjoy it, we will at first though if we pay off our personal debts. In the end we will merely be left with tons of worthless paper and sky high prices. What happens next is a mystery to even me and I am a doom and gloom guy, but it is not going to end well. This is why you must own gold, in your possession, because it will get that bad. The worst case scenario is the value of said gold drops, but it will still be better than holding only USD’s. I think the biggest risk is not owning it versus owning it at this point.
Perhaps this was a one day event though, I doubt it, and everything will be fine. Tomorrow we will receive news that the government hired tons of people and private companies hired more temporary workers, we know the number will be good because Obama already scheduled an 11 AM press conference to go over the jobs report. However, those who continue to think temporary jobs and government jobs are a good thing will be very disappointed to learn it is not. I believe that we will open up much lower, working off unclosed sell orders, and we will rebound some tomorrow, who wants to be short into the weekend.
The real show might be next week, depending what happens over the weekend. I am not sure of the near-term outcome or what will happen, I am holding my shorts and VIX calls though, but we did get a glimpse of what will happen longer term today. I do not know about you, but I did not think it looked pretty. As far as believing some trader pushed the wrong button, come on we can do better with our excuses than that.
Greece received its bailout today, pending an approval from some EU members which should prove interesting. Do European politicians care about reelection as much as U.S. politicians? If that is the case I suspect the longer term bailout is in question. Even in Greece itself the bailout is not widely accepted, who would figure that the unions would be opposed to higher retirement ages and lower payments. The current system is kind of insane, 14 annual payments, there are only 12 months, even in Greece, and the minimum retirement age was 53, new proposed retirement age is 67, welcome to the real world.
The primary issue, as I see it, is that we are curing debt with more debt. The EU member countries will have to pay for this bailout through higher debt to GDP ratios and higher taxes. This is why in Germany the bailout is unpopular, as it should be. At the end of the day all they are doing is saving France and other Greek debt holders, they should not be rewarded for speculation, but that is what is happening. As David Rosenberg said, we should all be opposed to bailouts, the madness must end. By allowing failed states or companies to survive when the free market decided otherwise has never worked long-term.
On top of the ridiculous bailout of Greece we now have to worry about the other PIIGS. Are they going to get bailed out? If so the EU and IMF will need another few hundred billion Euro’s. I suspect that Spain and Portugal spreads will widen tonight and tomorrow as the Greek issue is temporarily resolved, but their issues are now at the forefront of concerned world citizens. Bailing out these countries will be a huge mistake as it condones bad behavior. Let them fail or implement an ejection mechanism to the EUM Constitution.
I am sure the markets will be positive tomorrow as the crisis was “averted” and the good times are here again. Although I believe Friday’s selloff was unrelated to the Greek tragedy, but in reality the markets are facing a very overbought situation. Whether you want to believe this or not is your choice, but the markets are not supposed to go up every day or week. In fact, the past 2 months have been very, very abnormal to say the least, but the bulls will disagree, of course, citing some preposterous data point or use a forward looking P/E, which is just dumb I might add. But those of us living in reality know that conditions are not that good and the underlying economic data really does not support a parabolic move in the markets.
However, those in reality will look at the Greek tragedy and say, how can you fix one countries debt load by increasing another countries debt load? It just does not work and eventually we will see defaults. When that will be? I do not know, but soon I am sure. I am also confident that the Greece issue will spread first to Spain and Portugal, then to Italy and finally to France, since no one can bailout all those countries. Where it goes from there, I do not know, but I do know that it will eventually travel around the world as debt crisis usually do. This is why gold is going to go parabolic in the very near future… Got Gold?
I am a bear and that should not surprise anyone at this stage of the game, but I have long positions and individual holdings. Just because I think the market is going to tank that does not mean I am opposed to being long. However, I am long very specific items and not, generally, long U.S. stocks except for a few biotech’s, tobacco and some defensive names. I am long fixed income and have been for some time, high yield and emerging market debt has been very good so far with about a 5% blended return YTD, not bad for bonds, but my real winning positions are Russia, Africa-Middle East and Poland, up between 8 and 11% YTD.
I guess I am saying that even a bear can be long and in my case I had sought international, yield and strong dividends. One might say my positions are boring, but boring means consistent and low standard deviation. Investors should be embrace boring yet they are not as they pile into AIG (that was, evidently, a short squeeze today) and other very low quality stocks. Typically, when you see crap catching a strong bid that should signal a top to the market, but we are in a continued melt up still so I just take the dash for trash stocks as a warning sign that things are probably about to change. I think the change is not going to be triggered by the Fed either.
What is interesting, even though I think he is bluffing, is the Great Hoenig from the Fed has “put the market on notice” about excessive risk. What that means will be realized soon enough, but I am convinced that interest rates are not going to be raised anytime soon. What Fed Chairman would raise rates with prices falling and unemployment pushing 10%? It is not going to happen. There is zero money velocity, no wage inflation, no significant rise in the PPI or CPI, and deflation is written all over the place, credit contracted again(!), which is very deflationary. All of that means rates are staying right where they are. Although they may raise the discount rate again, big deal.
The risk is not from the Fed at all. A simply look at the front page of any newspaper in the finance world will tell you were the risk is coming from, Europe. Greece to be precise, but I see Greece as one simple cog in a very broken machine known as the EU. Greece may have significant funding issues starting right about know as Germany is giving them a cold shoulder and, supposedly, are cutting them off from easy liquidity, as they should. In response to this lack of liquidity Greece’s bond yields spiked above 7% which will guarantee a default if they cannot get cheap money to borrow. The other broken cogs in the wheel are Italy, Spain, Portugal and Ireland. If Greece falls so will the rest of the PIGS and that will bring the Euro down and could trigger a run on the currency, we saw this story before in 1997 in Asia I believe.
The very reason the Euro is selling off is why I own and have advocated owning gold, silver, palladium and platinum as currency uncertainty means the value of these commodities will rise. Look at today as the dollar gained value gold and silver continued to break higher, that is not supposed to happen. The reason for the rise in metal prices is because of Greece and that issue seems to have some people concerned enough to run to hard assets. Can a European default really be a problem for the U.S? You bet. Consider that French, German and every other European bank owns some form of PIGS debt and U.S. banks hold European bank debt as well. Just remember, sub-prime brought down the mortgage market and sub-prime was tiny in comparison to the overall mortgage market, the same lessons apply here.
On top of the new debt problems, foreign banks if the PIGS default, U.S. banks are still holding all the same toxic assets as before. Another shock from bad debt could be the straw that breaks the camel’s back and as I said yesterday the government and the Fed are out of ammo. On top of the European issues, California was downgraded and about $1T in more sub-prime debt was downgraded. As hard as I tried today I could not find any good news out there. You also have to remember that the credit (bond) market is where all the smart money is so when they see trouble that means bad news could be just around the corner for stocks.
The bottom line is that earnings might be good for 1Q10 although I think top line revenue will be weak, but that might be meaningless as sovereign debt is rearing its ugly head again. There is no harm in going long equities, but with such a huge rally and shaky fundamentals I do not think it is wise to marry this market or have zero shorts. This melt up could very well be coming to an end as stocks cannot go up forever and there are serious problems out there that are completely unresolved and are not priced into this market. If these problems get priced into the market I can assure you the Dow will not even be close to 11,000.
We are not talking about bailing out Citi or Bank of America, but whole countries now. What is wrong with this story? Greece is a tiny portion of the EU’s GDP and has always been a problem child for Europe, but this is insanity. What happens is Greece gets bailed out will the EU bailout the rest of the PIIGS as well? They would have to because no matter what deal you give Greece those other countries will demand similar treatment.
This is how moral hazard develops into a currency crisis because you cannot be selective on who you bailout and let the rest fail. It is also an extremely complex problem since none of these countries can print their way out of this mess. Typically, a country in these types of problems would simply devalue its currency and be done with it, but the PIIGS cannot do this under EU rules. If they drop out of the EU they are stuck with debt priced in Euros which would utterly destroy the country forcing a true default. There is simply no way out for these countries and we may be seeing the whole EU dissolve right in front of our eyes.
The ramifications for what is going on are enormous to say the least. From my lens it looks and feels like a currency crisis in the making as the entire EU is becoming unstable at best. Germany cannot single handedly hold up the Euro nor can they bailout all of the problem children in the group. The charter of the European Union, as Rosenberg pointed out today this was one of the latest versions of a European Union, the others failed, does not allow for countries to be bailed out. However, an individual country can help out its neighbor if it so desired. This was the rumor today, Germany was going to bailout Greece, but that would have killed the German Bund, which reacted negatively to the news.
The reason why the EU proper cannot bailout of country was established for a reason. Bailing out a country would mean a devaluation of the Euro currency and the EU wanted individual countries to be held responsible for their own troubles. The interesting thing is that Greece totally benefited from the EU versus what it contributed to the rest of the union. However, their benefit was to the detriment of the union itself. Regardless, think about it a country needs a bailout and people think this is not a big deal?
This is probably one of the biggest deals I can think of especially as it is hitting the Euro as hard as it is. I have been expecting a currency crisis for some time now, but always figured it would be the UK followed by either the US or Japan. It does appear that the Euro is first and this is a major problem for everyone, whether you realize it or not. Think about 1997 when Thailand devalued its Baht and what happened there and then magnify that problem by 1000 and you can begin to see the problem this situation can become. I would be very cautious on what you do with your money at this stage of the game, this rally is low quality and based on rumor. I am keeping my shorts.
GMAC is apparently close to yet another $3.5B in additional aid from the government. This is on top of the original $12B the firm already received the first go around. Of course, the government will insist that this ‘investment’ will be profitable just like CIT, GM, Chrysler and anyone who invested with Bernie Madoff. This news comes on the heels of the Freddie and Fannie announcement that the government will backstop all, not just the original $400B, of the GSE’s losses which could be trillions at the end of the day.
Of course in the case of Freddie and Fannie the top executives will continue to receive millions in compensation because it takes talent to lose billions, it must because Brewster, of Brewster’s Millions, could barely do it if you remember. I find it hard to believe that anyone could possible argue that these bailouts are not permanent or will end at any point in the future. I think this latest blast of reality from the state owned automaker and mortgage issuer is proof enough that these bailouts will continue indefinitely.
The irony is that we are seeing all of these bailouts or ‘additional investments’ in the face of the greatest economic recovery that never was. Let’s face it, when the fantasy 3.5% GDP was whittled down to 2.8% you could live with that because that meant there was still private sector activity, but now that the official 3Q09 GDP figure is 2.2% that means there was no private sector activity at all. That was also with cash for clunkers and the housing tax credit in full force as well. Of course last week’s housing numbers showed us what the housing numbers will look like without government help, in a single word awful, but imagine when mortgage rates are at 6%. Regardless, if things were rosy then I find it hard to believe that GMAC would need more money.
Oh, I forgot, Citi and the rest of the banks are paying back TARP, sure, that means that banks are doing fantastic. Did you read the beginning of the story, the bailouts are permanent and these banks know 2 things, 1) the government will never let them fail; and 2) TARP is not going anywhere. Not only that, but these banks also carry massive guarantees on their portfolios and FDIC issued debt so the repayment of TARP, I am stealing this from Whitney Tilson, is the greatest scam ever. Basically the banks now can pay themselves whatever they want, they have guarantees on the crap on their books, implied guarantees, can issue guaranteed debt (in some cases), now they pay far less for many of those privileges and the government lost 90% of its leverage – nice job guys.
The payback of TARP does not mean banks are healthy it simply means the banks can go to the market and get other suckers to buy their debt to get Uncle Sam off their back. I did not think it was very hard to figure out, but apparently it was because the media and investors are swallowing this stuff hook line and sinker. The proof is in the pudding and bank stocks have done nothing since August and, frankly, the only good one is JP Morgan and who really knows what is on their offshore books or what they are really on the hook for through Bear? To think there will not be a need for another TARP bailout in the near future is crazy, banks would not be holding all this cash if; 1) the economy was really recovering; and 2) they were really as healthy as they want us to believe.
I may have been wrong about a correction this fall, I admit that, but there is no way that the continuous flow of bailouts can be framed as a good thing. Oh, if you are happy about Freddie and Fannie executives paying themselves millions, I would suggest calling your representatives and letting them know how you feel, especially if your in Barney Frank’s district because he really doesn’t care about you.
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