Tuesday, October 7, 2008

Ouch!

Good evening!

Thats going to leave a mark! The market is starting to look like a waterfall. You need to go back to 1937 to see a yeear this bad:

"Oct. 7 (Bloomberg) -- U.S. stocks fell, sending the Standard & Poor's 500 Index below 1,000 for the first time since 2003, on speculation banks and real-estate companies are running short of money as the credit crisis worsens.

Bank of America Corp. tumbled 26 percent after cutting its dividend in half and saying it plans to sell $10 billion in common stock to brace for a recession. Morgan Stanley, KeyCorp and JPMorgan Chase & Co. slid more than 10 percent as investors shrugged off signs the Federal Reserve will reduce interest rates. General Growth Properties Inc., a mall owner, plunged 42 percent on concern it won't be able to repay debt.

The S&P 500 slid 60.66 points, or 5.7 percent, to 996.23, extending its 2008 tumble to 32 percent in the market's worst yearly slump since 1937. The Dow Jones Industrial Average dropped 508.39, or 5.1 percent, to 9,447.11, giving it a 29 percent retreat in 2008 that would also be the worst in 71 years. The Nasdaq Composite Index lost 5.8 percent to 1,754.88.

``We've approached the edge of the cliff,'' Leon Cooperman, 65, who manages $6 billion at hedge fund Omega Advisors Inc., said at the Value Investing Congress in New York. ``Do we go over the cliff or begin to recede? History says we recede, but there's no guarantee. This is the most difficult financial environment I've lived through.''

My Take:

Folks, there really isn't much to analyze here. We are watching a combination of fear and lack of trust take over in the market, sending it into a free fall. The fact that the market ignored Bernanke's radical sticksaves was surprising to me. This is something important something that I will take notice of. Maybe the public is starting to tire of Bennie's bailouts?

I take notice of this because the market has responded very favorably to every large intervention other than the housing "bailout". The market completely ignored both the article that I posted above, and a hint that they were ready to cut rates.

You need to take this into account moving forward with your investing strategy. It tells me that fear now outweighs intervention in the market. The sticksaves may no longer be as effective as a result. In fact, they may start to have a negative effect as the public starts to lose confidence in the government as the market continues tio drop. Perhaps the next sticksave might even cause a panic? This is what happens when you intervene and things get WORSE! The Fed may be instilling fear into the marketplace versus confidence.

"The Fed will save us" strategy is a fantasy. I have spoken about this for months!. The Fed loves to talk about their "infinite" balance sheet. They promise us everyday that they will do whatever is necessary to keep the economy going.

This simply is a pipe dream folks. The Fed can only spend so much money before the bond market has a fit and raises yields on treasuries as we watch inflation soar. The Fed doesn't have "infinite" money. If it did then the Fed would have used it by now and gotten us out of this mess.

We all know they can't do this because you need to print money in order to do so. Printing money causes hyperinflation which is an end game. Ben knows he can't do this or its over.

They also risk losing their foreign buyers of treasuries if they spend too much. China may decide to stop buying treasuries if the Fed starts spending like a drunken sailor. They may ask: Why should we buy the debt of a country that's spending themselves into oblivion?

Don't believe the hype that the Fed can save the day with their balance sheet. Lets all hope they use it in a way that allows us to navigate through this financial catastrophe without heading into a depression.

Bottom Line:

I am speechless about the selling today. It reminded me a lot of the relentless selling during the tech wreck. Some great companies are being beaten senseless for no reason other than people are scared and don't trust the market. This will create great buying opportunities down the road, but now is not the time to think about this.

Stay mainly in cash folks. Get out of the way! I know its boring, but look at the bright side of this strategy. If you have stayed mainly in cash this year, you have saved 1/3 of your nest egg. If you followed the "Bubblevision" strategy and began this year with $450k invested fully in the market, you would now be receiving your September 401k statement revealing that your nest egg is now only 300k. Ouch!

On the other hand, if you went to fixed income with the same 450k at the beginning of the year and earned 3 percent, you would have about 470k. Not bad eh? One thing is for sure! You would be kicking Jim Cramer's charitable trusts ass this year if you followed this strategy.

If you threw on a few shorts at the beginning of the year you would be up even more!

Short term, its very difficult to predict where we go from here. When fear has taken over the market, you need to let it run its course until the selling has capitulated. Was today the day? Maybe.

I reduced my short positions this morning after a week of severe selling. Unfortunately I missed most of todays selloff! This doesn't mean that I think the selling is over as of today. I just locked in some profits. We appear to be severely oversold but I said that yesterday so who knows! The one thing I do know is the market never heads straight down. Only Lehman's checkbook does that!

I plan on adding shorts on any significant bounce. I think we will see a second wave of selling down the road as we settle into a severe second half recession that will destroy earnings, and it could potentially last throughout all of 2009.

Be careful out there. This bear has some big claws!

14 comments:

Avl Guy said...

I wasn't much surprised by today...not sure 'fear' is the word I use...no more than we just 'fear' a hurricane. Rather, it's more like we anticipate damage and hope our hunkering down plans (boarding-up or even evacuating) will be sufficient, but with no certainty how grueling or expensive the recovery will be.
Im seeing more of the major media realize that neither Obama nor McCain have assembled a team or offered us evidence they will be measurably effective on debt unwind and a possible 'L' or fat-'W'-shaped recession. Smells like both plan to do like Paulson/Bernanke and wing it as 2009-2010 unfold, and end up as 1-termers either way by 2012.
Ya know, we had 4 presidents during the grueling 9 years of the 1973-1982 recession'triple play' that also featured 2 gas price spikes, and 2-digit interest rates, unemployment rates and wage & price inflation rates? [Some of you were playing T-ball back then]. U cant have political stability during economic INstability. Note the dual stability since: Only 4 president for 1982 to 2008=26 years.

Jeff said...

avl

Great point.

I might not even watch the debate tonight. Whoever wins will never be able to survice the financial tsunami thats slamming into us.

Both candidates seem lost when it comes to economics. Obama's key advisor is from the Fannie/Freddie family. Uhhh, bad choice!

Futures look fairly flat. Nikkei dropped 350 on the open. The nightmare continues!

johndaniels said...

jeff: by what basis do you think we are "oversold?" is this an instinct? a feeling? a premonition? I think there is a blatant logic that the system is so corrupted, and trust so low, that it cannot see a bottom until we are grinding metal. These financials have no other sources of capital besides current equity holders, long term investors, sitting there like sheep; waiting ot be fleeced. theres no way it can go up. wheres the capital going to come from? what is going to support this bottom, when even bernake is saying the recession will get worse, the global economy is collapsing (the UK real esttae market, which is tied directly to the US market? remember how inflated that was in '05?). I disagree on your oversold assessment; i think it has been overbought since it 7,500 in 2003. we will need to "regress to the mean" on the broad chart...eliminating ALL the economic progress that was built on debt money and credit for the past 10 years, at least.

Avl Guy said...

Im posting Ambrose's piece in the UK Telegraph about Brazil's market tanking so badly they closed the exchange.
"Brazil shut the Sao Paulo exchange after the Bovespa index crashed 15pc in panic trading, led by flight from the resource giants Vale and Petroleo Brasileiro. "

Ya know, Obama was here in lil ole Asheville all weekend; when I got a whiff of the Secret Service approaching as I chilled outdoors, I just departed to avoid the scene; Ive discovered Ashevillians are not really Obama fans (they dont really get his 'doughnut' policies); they are actually incredibly frightened adults looking for a "daddy" figure to "rescue" them from these nightmares. I remember back in March when Wall Street felt Paulson was going to 'rescue' them.

Jeff said...

JD

I agree but with your final assesment, but it never happens all at one time.

Take a look at the charts. There are always rallies on hope/intervention etc.

We will still end up somewhere around 7500 but it won't be all at once.

I took profits today based on instinct. I could be wrong, but it never hurts to take profits.

I thought the same way you did in March when the Bear Stearns sticksave shoved a Chrysler building up by you know what.

I am just saying be nimble and careful. When you are convinced the market will go in one direction, it often does the exact opposite!

This is a volatile market.

Jeff said...

avl

thanks for the heads up. I will check it out.

Yikes!

opportunistic said...

"I took profits today based on instinct. I could be wrong, but it never hurts to take profits."

I hope your instincts are better than mine. Watching Monday and Tuesday after dumping everything on Friday has been painful, not as bad as if I was long the past 12 months, but painful nonetheless. Still looking for a rally to get another chance at it.

I think back to the big drop post 9-11 and it seemed like a good bet to buy in as it wasn't an economic disaster. I remember when we went below 8000. Even at those levels I can't see going long with much $ today. I really can't see anything that could create a market bottom. Scary.

I'm was intrigued by the possibility of interest hikes, but that seems out at this point along with the hyperinflation scenario. Personally, deflation would be great with my current allocation but not too exciting.

Being out of the market after the events of the past year+ is a strange feeling.

johndaniels said...

i agree with your contrarian point on market moves...but after all the overall direction is what matters, not trades..i know you have a traders bias... but for the past several months, one trend has been the most reliable: +1, -2. All year, since all this began. knowing that, I dont even bother trading anymore, im just waiting for the collapse.

Jeff said...

oppor

I feel your pain.

I left some money on the table getting out early today.

I have some bears that are friends who are complaining that they have waited for this all of their lives, and find themselves holding 20% of what they started with short.

The bears have been burned many times before so its understandable to see why we would want to sell once the S&P dropped 30%.

We will get another entry point. I plan on posting some graphs tomorrow discussing bear rallies. I might not get it up tomorrow, but it will be up this week.

Its easy to think as a trader that you know the market will drop. I have been guilty of it myself. However, when you expect it to happen is usually when it does the opposite.

We will get another shot Oppor. My trigger finger is ready! I am going to be patient though. This volatile market will tear you apart.

I hope you made good profits getting out on Friday.

Jeff said...

JD

I hear you! I am more of an investor versus a trader.

I have a trading account that I mess around with but its very small versus my total portfolio.

I have some long term bear holds that I am not letting go of soon. I like BEARX now because it owns a lot of gold and is less volatile than the ETF's.

I am probably 80% in cash and bonds right now. 15% long and 5% short after selling some today.

Aren't you holding lots of gold? That may turn out to really work here as the Fed threatens to drop rates and print.

GL with whatever you hold!

johndaniels said...

thanks...i just dont know what these people are capable of, so its scary holding anything, including federal reserve notes. im not afraid of confiscation or anyhting like that, because that would create civil unrest...the last thing these f*ckers want. besides, the political system is too weak, and when roosevelt did it, he was a quasi populist dictator, and the people were frankly alot "dumber" and trusted the government then lol...now? no one does, or they are self delusional/republicans (i.e. watch too much msnbc!)

i figure they value gold in china, russia, iran, india, etc so ill be ok!

Avl Guy said...

Fellas, I dont see the fundamentals, I see a widening ocean of negative-moving domestic & global economic trends.
But Im the guy who noted this Spring that even the so-called Crash of '29 was really 6 'mega-headfakes' spread over a 3-year period, peak to trough, so there was lotsa ways to make money those 3 years IF timing was perfectly aligned with at least 4 earth-friendly sol-mass stars in our arm of the Milky Way.
grin.

Jeff said...

JD

Gold is working nice for you today!

It seems the market is trying to digest this global rate cut.

We seem to swing 100 points up or down every 5 minutes. What a crazy market!

Jeff said...

avl

I know...was looking at the 1929 chart last night.

There were so many head fakes. Lets see where we close today. I have no idea based on the volatility I saw this morning!

Traveling today so I might not get back on. I will try to tonight!