Tuesday, September 2, 2008

Market Instability is a Huge Warning Sign

A quick update this morning folks.

Stocks shot out of the gates like a rocket this morning, but I don't buy it for a second. We had major market dislocations last night and this morning.

Stocks are up today because Gustav did basically zero damage to the oil rigs. Oil plunged as a result. Its down almost $9 a barrel on the Gustav news. Gold then followed suit dropping a whopping $35 to fall below $800 an ounce. These are huge moves folks.

The third jolt to stocks is the continued rumor that Lehman is close to a deal on new financing from a private Korean bank. Adding to the bullish sentiment on Wall St. was the fact that Australia cut rates and Great Britian came out with their own stimulus plan on real estate taxes.

So what did the traders do in reaction to all of this news? They piled right into equities and boom we are off to the races.

Here is the problem for the bulls

Bloomberg reported today that stocks are now at 25.8 times profit. Socks haven't bee this expensive since 2002. The last time this happened, the S&P dropped 38%. Here is the piece from Bloomberg:

Sept. 2 (Bloomberg) -- The best already may be over for the U.S. stock market this year.
The Standard & Poor's 500 Index, which had the worst first half since 2002, added 0.2 percent this quarter, the only gain among the world's 10 biggest markets in dollar terms. Shares in the benchmark index for American equity climbed to an average 25.8 times reported profits, the highest valuation in five years. The last time that happened, the S&P 500 fell 38 percent.

Money managers at Federated Investors Inc., Russell Investments and Morgan Asset Management, which oversee a combined $600 billion, said the gains won't last because corporate profits will fail to meet analysts' estimates. Wall Street forecasters, who were too optimistic about earnings for the past four quarters, predict income at America's biggest companies will grow by a record 62 percent in the final three months of 2008, according to data compiled by S&P.

``The market is pricing in the expectation of a good quarter, but we just don't see it,'' said Philip Orlando, who helps manage $350 billion as chief equity market strategist at Federated in New York. ``The fundamentals are going to be poor, earnings are going to be bad, and there are going to be more huge writedowns. We think stocks probably need to work 5 to 10 percent lower over the next month or two.''

Final Take:

Don't be fooled by this bounce. The bears were whacked over the head with a perfect storm of bullish news. Stocks are NOT cheap at these levels. This is a Gustav/oil relief rally. It will flame out shortly once the attention is focused back to the credit crunch.

I see desperation in the bulls eyes as they pump this bounce. I had to turn off bubblevision. It was simply too disgusting to watch the pump monkeys pump stocks based on zero fundamentals. The market is not rational right now people. Gold should not be dropping $35 in one day. There are major market dislocations out there.

Speculators are taking on huge risk and placing huge bets in commodities markets long or short. This will eventually end ugly. The instability I am seeing in the markets is of great concern to me.

Buyer beware. Lets see where we end up at the end of the day.


Avl Guy said...

Peculiar that the individual investor participation is at an all -time low (see forum-FT report) and yet the street’s volatility remains high. Cant blame the easily duped 'little guys' for allowing frequent positive effects from Wall Street's 'pump-n-dump' guys (even these short-lived up-ticks)...cuz ‘little guys’ are not the bulk audience.
So do we have professional fund managers falling for their own pig-mens' antics??

Or is program-trading at play as well? Maybe the quants are over-rigged to oil-price movements.

Well volumes should jump now that summer's nap time is over.

In less than 70 days, we'll have an election to digest while year-end profit-taking approaches closer.

Jeff said...


I have watched the markets for a long time and this stuff is just crazy.

Maybe you have nailed it. Without the individual holding the majority of equities, the market has morphed into a manipulated trading machine based on zero fundamentals.

It seems like everyone just ignores research and just piles into whatever trade is working.

The "old" trade was short the dollar and go long oil. Now its go long the dollar and short oil.

Its insane. I can't see the value investors jumping back in with a market 25.8 times earnings.

Especially when they see that the only trades that work these days are the ridiculous momentum/speculative trades.

You are gonna continue to see these bounces followed by pullbacks until fundamentals take back the market. They always do. Look at tech.

This type of crap can last awhile though so you need to be careful.

At some point, this warped view of the market will end.

Minton Mckarkquey said...

This schizophrenic volatility is going to last until earnings are released, and when they're not good, it's going to hit the fan big time. Price discovery is just not happening and anyone who jumps into stocks right now is going to get pummeled.

I think avl's point about program trading being over-correlated to oil is a good one. But subtracting the lower oil prices, everyone is still ignoring the on-going credit crunch and recession.

Hold on to your hats!!

Jeff said...


Yeah, good point. They are focusing on the wrong things! Maybe the quants have taken over avl.

Notice we have given most of the gains back. up only 100 points. We were up 240 at one point.

It looks like many were selling into the big bounce.

If we end up in the red today and don't hold these gains, tomorrow could be really interesting.

Especially if Lehma's deal doesn't get done.

Its been a wild day so far.

Minton Mckarkquey said...

Yeah that was a short-lived rally this morning.

Btw, I just saw that Fitch has cut Freddie/Fannie:

Fitch cuts Fannie, Freddie preferred stock ratings

SAN FRANCISCO (MarketWatch) -- Fitch Ratings on Tuesday downgraded the preferred stock ratings of Fannie Mae (FNM:
Fannie Mae

FRE 4.84, +0.33, +7.2%) because capital markets have significantly discounted the value of both common and preferred stocks. Fitch lowered the preferred stock rating of Fannie to BBB- from A+ and Freddie to BBB- from A. The ratings are on review for a further possible downgrade. Fitch affirmed its AAA long-term issuer default ratings on Fannie and Freddie.


A drop from A+ to BBB- is going to be *extremely* expensive for debt servicing. And seeing that debt servicing is about all those guys are doing now, this could be one of the biggest nails in the coffin so far.

Jeff said...


YEah I caught that. Thats UGLY for Fannie and Freddie.

Its just a matter of time until the Treasury does something with them. Who knows what that answer is.

Hopefully nobody got suckered into that rally today.

I smelt a rat as soon as we took a rocket shot this morning.

Tomorrow should be interesting. I bet many bulls got spooked by the retrace today!

growler said...


Great job in calling today's action as bullsh_t.

Jeff said...



That bullsh_t really stunk today.

I am sure we will get another dose of it soon.

Like I was saying to Minton earlier, closing red after that bounce sets us up for a nasty day tomorrow.

It should be interesting!

growler said...

Cash is king in the utmost certain of terms. I'm not getting back in until this mess is straightened out and the market obtains transparency.

Jeff said...


Me too..I have a few trading positions but I am about 85% treasuries and CD's and bonds.

The market will eventually settle back down. All the crooks need to either go BK with speculative bets or be rounded up by the SEC for fraud.

Either way I look forward to the days of a stable market!