Wednesday, November 19, 2008

The Credit Markets Rule the Day

Good Evening Everyone!

All I can say is wow what a day. The stock market was crushed today as the DOW and NASDAQ both plunged almost 6% on continuing weak economic news combined with fears in the credit markets.

Lets get right into it folks. I have been warning that the soaring AAA spreads would eventually catch the eyes of equity traders and create a selloff in the stock market. It looks like today was the day. Take a look at the AAA spreads:

Quick Take:

Spreads are soaring higher than housing prices did from 2003-2005! Folks, spreads have almost doubled from a few weeks ago. The literally gone parabolic the last few days. Hank's insistence of using the TARP to inject capital into the banks versus buying AAA paper is absolutely killing the value of this paper.

This in turn is killing the banks because all of them own gobs of these crap sandwhiches. This explains why Goldman, Citi, and Bank of America are all tanking on a daily basis. If the government doesn't step up and buy this paper, there is a chance that no one will if its not government guaranteed. The non guaranteed AAA paper could very well possibly be worth pennies on the dollar when its all said and done!

The government guaranteed AAA debt is also losing value because investors are starting to question if the government can make good on the promise of backing this debt. This is a flat out disaster folks. If this paper is worthless, our banks that hold this stuff are toast. I guarantee you that one of the big banks like Citi doesn't make it through this downturn when this is all said and done. This is a flat out crisis folks. I don't see any other answer other than to mark all of it to market, creat transparency, and suffer the consequences.

This is a better option than the USA government defaulting on itself in an attempt to prop up this AAA garbage. This is an absolute mess!

Was it investor's or the Fed that flocked into treasuries today?

I am sure it was a lot of both as the markets tanked. The Fed rumor was floated on CNBC(video). If this is true look out! The Fed may be attempting to buy the 10-year in a desperate attempt to lower mortgage rates and prop up the housing sector. Interventions like this are how disasters are created folks.

I mean think about it. How has government intervention been working for us so far? Umm lets see the TARP? Housing Bailout? Bear Stearns? AIG? Ban on short selling? Discount window? I could go on and on but the answer is the same to all of them. None of the interventions have worked. In fact its often made things worse! The fact that they are now potentially interfering with the credit markets is extremely dangerous and could trigger a bond dislocation.

The markets continue to fall despite massive intervention. The scary thing about the Fed buying treasuries is they can only do this for so long. When the music stops and they stop buying the treasuries is when you could see a massive bond dislocation. Yields would then reverse and shoot to the moon! Double bigit interest rates could happen in a matter of weeks.

When you see the historical charts on long term bonds, it does appear that something fishy is going on:

Bottom Line:

We are on the brink of some type of watershed moment in the markets. It appears the Fed is out of bullets as this debt bubble continues to collapse.

A drop in bonds that you can seen above tells you that the credit markets are pricing in a deflationary depression type scenario. The only other way long term bonds drop like this is Fed intervention.

Either scenario are major negatives for the stock market IMO. Keep a close eye on the credit markets folks. If these AAA binds blow it could have devastating consequences for all of the markets.

I have no idea where this all takes us. I am afraid we are heading rapidly into the abyss. Lets all pray we find a solution that gets us out of all this. I am becoming less hopefull by the day.

We are rapidly losing control of this collapse, and the markets may decide to hit the panic button at any moment. I have a feeling that we could see a capitulation in stocks within the next week. I stayed short heading into the close. Santa landing on the trading floor tomorrow couldn't create a bounce in my view.

Technically we closed at 806 on the S&P. This is below the 818 low. The one hope the market have to move higher is we technically haven't strongly broke the lows. The next stop down is the 760's on the S&P which are the 2002 lows. If that doesn't hold then hold onto your hat.


teddy bear said...

now it looks like shot to the ... Mars (Red Planet)

Houston we have a (serious) problem


johndaniels said...

good job jeff, keep it up. what are you doing long term? let us know just before you think the dollar tanks..feels like it could take on a key commodity for key commodity market if credit freezes and currencies crash...but who knows.

Jeff said...



All the spreads are flat out ugly. We need to develop a "super junk" bond at these prices!

We do have a serious problem.

Jeff said...


Right now we are seeing a deflationary flush in my view. The credit markets have made it qiote clear that this is what is going on. As a result, you need to be very careful if you own gold here.

Commodities get flushed down the toilet on a deflationary trade. This includes gold. I am hoping to dump my GDX calls on any bump in gold.

The long term play will involve inflation.


I have been reading a lot of negative things about gold recently. It appears that its not the inflationary hedge it once was because the market is much more complicated now.

It should be used as hedging only versus a core holding IMO.

If you want to trade gold, get out of it and allow deflation to gut it and then pick it back up when the inflation hits from all of the massive stimulus being thrown at the market.

Longer term, you have to trade expecting inflation. This will mean buying assets that get beaten down from deflation, TIPS, and gold (post deflation beatdown).

Thats how I see it for now. I am working on my inflation thesis. For now, I gotta trade the tape and its screaming deflation!

GL its brutal out there.

Avl Guy said...

Hey Guys, we've all earned a good laugh, so read what I found in the fine print on the Nov revisions to the existing Terms of my account with JPMChase:

" 4. A new sentence is added regarding Withdrawal Procedures and Limitations; as follows:
'If you request to withdraw large amounts in cash, we may place reasonable restrictions on the time and method of your withdrawal and may require that you sign a document releasing us from any liability in case you are robbed or assaulted. We may refuse the withdrawal if you do not agree with these conditions.'"

Not only is this a hoot on its own, but due to poor punctuation, it also implies the JPM staff will be the ones preparing to assault me...I guess cuz I insisted on withdrawing funds.

Jeff said...



Thats too funny. What a bizzare statement. I am starting to think the mattress is where my money should be!

What a day today eh?

teddy bear said...

there is a good photo illustrating such conditions

kasa = cash desk ;)

johndaniels said...

Jeff: That is what's being said on bubblevision. But compare golds performance to most paper assets, just in the past 6 months. Its funny... this mass bagging of gold should have your tentacles up, jeff!

Jeff said...


I know you are a big gold fan! Its a very tough call in my view.

One thing to consider is many central bankers are talking about dumping some of their gold deposits.

On the flip side, China is rumored to be in the market for large amounts of gold.

Its a tough one to predict. However, in deflationary environments, gold always gets slaughtered because no one can afford to buy it at lofty prices.

It drops just like housing and other asssets do in deflation beccause no one can afford it.

However, if we print and have hyperinflation, gold will be a winner.

My guess is gold severly underperforms short term as deflation hits, and then over performs when inflation kicks in.


I never hear bubblevision discuss gold very often. they do run that annoying gold ad with the phones ringing all the time!

IMO, its a risky trade because we don't know what the Fed is going to do.

I would rather buy things that I understand better. I will be the first to admit that I don't understand gold in this market. As a result, I stay away. I do remember the famous trader saying: "trading gold always ends in tears".

Jeff said...


Love it! Classic.

Joe said...

Today = ouch

Jeff said...


Well said!

Unbelieveable times eh?

Credit markets were already taking down stocks. Then Paulson opened his mouth and the market went even further south.

Jeff said...

post will be up around 6:30!

Minton Mckarkquey said...

I can officially say that today is the first time in this whole mess that I'm actually scared. I honestly think there's a 50/50 chance of Citi being seized by the FDIC in the next 24-48 hours.

Jeff said...


I agree!

I am worried about them as well. The fact that the prince jumped back in today should have been a positive.

The fact that it coninued to tank is scary.

Crazy times man. I can't believe it!