"AAA" Spreads Explode: Market Freefalls at the Close

Good Afternoon Everyone!

What a close today folks! The markets looked like a waterfall as stocks plunged in the final 20 minutes of trading. The DOW and NASDAQ fell 3.9% and 5% respectively.

The markets continue to be extremely jittery and highly volatile. The $40 move in gold today was indicative as to how nervous the market is right now. Whats even more alarming is what is going on in the credit markets. take a look at what "AAA" spreads have done the past few days:


My Take:

Folks this is insane! The spreads on "AAA" rated debt have exploded higher in the last couple days. This is supposed to be the highest rated debt out there. The credit markets are basically telling you that they don't want to touch this stuff with a 10 foot pole. This isn't supposed to happen with AAA rated paper! The bond market has been screaming "warning! warning! warning!" all week and yet the equity markets continue to ignore them.

Remember folks, the brains in the credit markets dwarf those of the "bubble" pigmen in the equity markets. Another little known fact is the credit markets are 5x larger than the stock market. Thats a lot of smart money! You are much better off as an investor listening to Rick Santelli in the bond market on CNBC versus plugging your ears as Jim Cramer screams buy buy buy over in the equity markets. All day long the pigmen call bottoms or tell you to" be defensive and buy consumer staples". Gee, what a brilliant strategy. Hows that working for you? Last I saw, Proctor and Gamble is down $10/ share from a year ago.

I wouldn't be surprised if the "AAA" spread blowout is why we dumped so hard today. Stocks cannot continue to ignore all of the bad news in the credit market and the economy. I mean look at how bad October retail sales were:

"Nov. 14 (Bloomberg) -- Retail sales and prices of goods imported to the U.S. dropped by the most on record, signaling the economy may be in its worst slump in decades.

Purchases fell 2.8 percent in October, the fourth straight decline, the Commerce Department said today in Washington. Labor Department figures showed import prices dropped 4.7 percent, pointing to a rising danger of deflation, and a private report said consumer confidence this month remained near the lowest level since 1980.

``The weakness in growth is intensifying and inflation pressures have evaporated,'' said James O'Sullivan, a senior economist at UBS Securities LLC in Stamford, Connecticut, who accurately projected the decline in sales. ``Deflation is a word that will be increasingly used over the coming months.''

Final Take:

I am not surprised we saw no follow through on the big bounce yesterday. The October retail data is horrendous. Company after company continues to warn and lower guidance. The export price drops in the October retail data were the largest drops that have ever been seen! You think China is going to keep buying treasuries when they have to give away their exports to us for nothing? HAH!

The data is bad and getting worse by the day. You simply can't have sustained rallies in this type of environment. We also haven't seen any capitulation selling that always marks any type of bottom. The early week selloff was way to orderly to mark a bottom.

The only bottom that I will believe in is one in which the DOW capitulates and crashes 1000-1500 points in one day, sells off again the next day and then reverses. You must see a day of total fear in which psychologically everyone wants to get out of stocks all at the same time. Only then will the selling be exhausted.

We haven't seen this folks. We haven't seen anything that's been even close. The increasing credit market spreads on prime paper seen above are absolutely frightening. This is a potential "Mt St. Helens" type explosion that could burst in the credit markets at any moment. Having a high exposure to equities at this point is suicide with the spreads out this far.

Could we still stay in denial and continue to ignore the danger that the credit markets are trying to warn us about and stay flat or move higher? Sure..Nothing would surpise me in this "bubble" market.

I believe one of the reasons we haven't seen capitulation is many "clueless" financial planners continue to tell their clients to stay in equities. They tell their clients "remember, you are in it for the long haul". Yeah ok, did they also tell them that if their portfolio drops 50% they then need stocks to move up 100% in order to get back to even? I bet they forgot to tell them that part. Anyone see a catalyst that sends markets 100% higher in the near future? Yeah me either.

How are these clients going to feel if we drop another 20% from here? They will be lucky to get back to even by the time they retire. Its time to take ownership of your future folks! Buy and hold for the long term simply doesn't work anymore. Find a new financial planner if this is his advice.

Bottom Line:

The credit markets can't be ignored forever. One day we are all going to wake up and realize that a lot of "AAA" paper is almost worthless. God help you if you are "all in" in equities when this day arrives.

Things continue to get worse folks, and my trading positions have stayed the same and reflect this.