Monday, June 22, 2009

Crisis of Confidence=COLLAPSE!

Stocks plummeted today as investor's grabbed "bear rally" profits and ran for the exits. All of the major indices were down sharply. The DOW closed down over 200 points.

Show Me The Money Jerry!

Any big movie fan remembers this classic line from Jerry McGuire. I think its a great question to ask the stock market right now.

According to the WSJ, money is flying to the exits in all investment categories:

My Take:

Where is money going? As you can see almost all asset classes were down last week. Where is the capital flight runnign to? Its not diving into treasuries. The 13 and 26 week treasury auctions that were done today both saw very tepid demand.

The bid to cover was around a 2.7-1 on both auctions. That's the worst BTC since early April as seen below:

13 week auction:

Date/ Term/ Indirect/ Bid To Cover /Amount

6/22/2009 13-WEEK 28.6% 2.79 31,000,049,500
6/15/2009 13-WEEK 35.8% 3.42 31,000,359,800
6/8/2009 13-WEEK 34.9% 3.10 31,000,184,000
6/1/2009 13-WEEK 51.2% 3.57 31,000,101,600
5/26/2009 13-WEEK 24.4% 3.42 31,000,304,300
5/18/2009 13-WEEK 21.9% 3.42 31,000,218,600
5/11/2009 13-WEEK 26.7% 3.44 31,000,260,100
5/4/2009 13-WEEK 37.8% 3.24 30,000,150,100
4/27/2009 13-WEEK 23.1% 3.04 29,000,194,500
4/20/2009 13-WEEK 19.7% 3.12 28,000,119,600
4/13/2009 13-WEEK 27.7% 3.39 28,000,465,900
4/6/2009 13-WEEK 40.4% 3.43 30,000,635,900

36 week results:

6/22/2009 26-WEEK 43.8% 2.72 30,000,155,300
6/15/2009 26-WEEK 47.6% 3.08 30,000,355,100
6/8/2009 26-WEEK 49.2% 3.20 31,000,196,400
6/1/2009 26-WEEK 46.1% 3.14 31,000,441,700
5/26/2009 26-WEEK 36.4% 3.09 30,000,182,700
5/18/2009 26-WEEK 30.8% 3.30 29,000,115,200
5/11/2009 26-WEEK 27.5% 3.16 29,000,008,200
5/4/2009 26-WEEK 22.4% 3.03 28,000,185,000
4/27/2009 26-WEEK 35.8% 2.97 28,000,103,400
4/20/2009 26-WEEK 16.3% 3.11 27,000,383,900
4/13/2009 26-WEEK 37.0% 3.73 27,000,468,800
4/6/2009 26-WEEK 38.3% 3.33 28,000,337,400

Continued Take

Folks, the fact that the stock market sold off big on a day where the Fed struggled to sell SHORT term treasuries is a huge DANGER sign to me. Short term treasuries are usually a piece of cake to sell because they mature so quickly. Why did the Fed struggle to sell these on such a down day?

Allow me to answer: "Houston we have a problem":

The problem is we are are trying to selling $165 billion of treasuries almost every week! Where in the hell is the money going to come from that can soak up all of this excess supply?? Is there a money fairy that someone forgot to tell me about?

This gets back the the liquidity issue that I discuss on here often. There is only so much money to go around in the world folks. China's total reserves amount to $2 trillion. This includes their massive treasury holdings. They can't continue to fund $100 billion Ponzi spending week after week after week by the USA! They don't have the money to do it! Neither do any other FCB's.

Stock market collapses almost always occur when the liquidity runs dry. This is EXACTLY what happened in 1987. What this means is there isn't enough money in the market that can successfully prop up this massively bloated credit/stock bubble.

I think the reason you saw equities collapse today was because the money that is typically used in stocks was needed over in the credit markets so that we could sell the masssive boatload of treasuries today. The Fed cannot keep this game going on much longer folks.

You can't pay $10,000 worth of bills when you only have $100 in cash. This is the best analogy I can come up with. The money simply isn't there to sustain what we are trying to do. The Fed cannot keep this game going for much longer.

The Bottom Line:

Moving forward I see a massive crisis in confidence developing. Investor's are running from the markets because they are not confident their investment's are safe. As a result, the money sits on the sidelines in banks, and also IMO, more and more commonly under the mattress.

Folks, I gotta be honest, the market is absolutely scaring the crap out of me right now. I see no "safe haven" anymore. I don't even think treasuries are a safe bet at this point.

I think a hedging strategy with your investment's makes a lot of sense here because you don't know where the next confidence crisis is going to develop.

We have already seen mini crisis in many asset classes. I expect this to continue. This is why I have diversified/hedged myself into a variety of asset classes.

I will share some thoughts here but keep mind that this is not to be considered investment advice:

IMO, if you are long commodities or metals as protection against inflation via a collapsing currency, you should be short the market as a hedge. This strategy has worked nicely for me recently. Another nice hedge is to short treasuries if you own a lot of treasuries on the long side.
Cash in the bank is also a must here. Below the FDIC limits of course.

The reason I am doing this is because I could see several crisis developing down the road:

- We could very well see a deflation crisis. If this develops you want to be short equities and long the dollar.

- You could also see a currency crisis as we continue this Ponzi government spending. As a result, I would own some metals as a hedge here because inflation would be a large risk. If you are "all in" on the US dollar and it collapses under the weight of bad policy making by the Fed you are totally screwed! This is a possability! We all know how bad the Fed has reacted to this crisis to date. QE anyone?

"BTW, a quick side note here on the dollar. The FOMC announcement on Wednesday is huge
from the US dollar perspective. If the Fed continues to huff and puff in an attempt attempt to
blow up this bubble via more massive QE announcements, the dollar could get crushed.
It could also soar if the Fed sits back and shows some restraint. Keep a close eye on this
when the FOMC comes out in a couple days."

I also could see a banking crisis. As a result, have some cash in your house IMO! This economy is a "house of cards" and if it comes tumbling down you will need some cash to hold you over.

Lastly, I am also afraid of a treasury market crisis that would hit in the form of a bond market dislocation. Shorting some treasuries as protection would seem to be a very prudent decision if a large part of your nest egg is hiding in them.

I realized a while ago that diversification and protection in a variety of different assets classes and strategies is the only way to survive this market.

BTW, stay tuned for an announcement here if you are curious about different investment strategies. I have something in the works. E-mail me at if you are curious.

Hold on tight folks. I see a hurricane forming on the horizon.


Toney B. said...

Excellent summary -- one of the best I've read! Kudos. The bottom is falling out of CRE. These are very dangerous times, indeed.

jeff said...


Thank you!

I am glad you enjoyed the piece.

Yes CRE is in bad shape. I think its time to get short there again.

jeff said...


Dollar getting crushed and metals have hardly reacted. Equities down.

Money continues to hide. The question is where?

Minton Mckarkquey said...

I think it's crystal clear at this point that a collapse is inevitable - as you point out (so clearly that it's a wonder the media doesn't ever promote the same point), you can't sell $165bn of treasuries every week without a dramatic side-effect.

While you've been busy providing a public service through your blog, the media has been busy talking about Saint Obama's struggle to give up smoking. Obviously it's more important!

Very soon you'll need to change the name and subject of this blog to recommend which hand-guns and survival kits to buy....

(Here's an interesting graph, btw:

jeff said...



Is it GUNS and GOLD at this point?

Lets hope not


Post up around 7

Minton Mckarkquey said...

Hey - Ford's taking the filthy Obama money, and lots of it: ($5.9-billion+loan+to+retool+plants).

They've been jacking up the fact that they're bailout free (I know the teabag party guys were proclaiming Ford for this).

What's the fallout potential here?

Jeff said...


Great catch.

Whoa! I am beginning to ask myself if there is any fallout in anything anymore?

Red Roof inn missed a debt payment today.

Green Shoots! Yahoo!

Post up a little late. 9ish.