Thursday, May 20, 2010

Wall St Runs For Cover

Hello All

Just a few thoughts about today's dump.

There really was no catalyst for today's move other than pure FEAR:

- FEAR over the upcoming banking regulations and its effects.
- FEAR of a sovereign default in Europe.
- FEAR that Europe's issues will stop the economic recovery in its tracks.
- FEAR over of more job losses as continuing claims unexpectedly rose.
- FEAR around our own trillion dollar deficits. Are we the next Greece?
- FEAR of the rising libor rate as banks begin not trusting one another.
- FEAR that the housing slump is worsening.

I could go on and on but I will end it here.

The bottom line folks is Wall St is reducing their risk and taking profits because they are afraid that things are not turning around.

Viscous selling like this also tend to trigger forced liquidations which only adds fuel to the downward pressures on the stock market.

I get afraid when I see huge selling on days where there is no real catalyst. In fact, I have been rattled ever since that 1000 point drop a few weeks ago. Even though this mess was cleaned up in a matter of minutes, it told me that the markets were not healthy.

I have been talking about all of the "FEAR's" that I listed above for months but the bulls didn't want to hear it. Stocks were rising and the speculators and HFT's just rode the wave.

Folks, there never was an economic recovery. Basically the Fed replaced us as the consumer hoping that we it would stimulate an economic boom that could grow us out of our mind boggling trillion dollar deficits.

This has worked the past 20 years but it didn't work this time because we just completed the greatest financial orgy of all time. We all know the bigger the party the worse the hangover right?

You can't stimulate new economic growth when the debts from the last boom haven't been paid off. Where did they think the consumption was going to come from when millions of people are living in homes that they cannot afford?

The whole country including the government is in debt up to their eyeballs! You cannot stimulate a recovery under such conditions. It's fiscally impossible. That's why this recovery was guaranteed to fail.

The only way to unwind this unmitigated disaster is to wring out the excesses from the previous boom.

This means that insolvent banks must fail. Companies that were bailed out must also fail if they are unable to turn it around.

Mortgage backed securities that are marked at "pipe dream" prices must be sold off at a price in which investors are willing to pay. If this process of marking to market takes down more banks then let it happen.

Continuing to play "hide the sausage" is not working! We MUST take the losses from the Ponzi debt bubble no matter how bad they are. If this puts us into a depression then so be it. It's going to happen anyway so we might as well get it over with.

I am tired of kicking the can! It's been 3 years since this recession officially started and NOTHING has improved! The private sector is in shambles. We continue to shred jobs on a weekly basis. Jobless claims came in at -475,000. How in the hell can anyone think we are in the midst of a recovery with numbers like this!

This country is heading straight off a cliff if we continue down this same path.

The Bottom Line

Futures are in the red after hours. Let's hope we get some kind of a bounce tomorrow. Confidence in this market is rapidly deteriorating and the situation is getting very dangerous.

There is nothing but hot air in between where we are now and the lows from 2009 for the most part IMO. I am not saying we get there but the potential is certainly there to do so.

Let's hope that this banking reform has legs. The way the market is acting I am guessing that it does. The lobbyists from Wall St appear to walking away with their tales between there legs after being told no. This has never happened before so I will believe it when I see it.

Lets hope the government is finally realizing that being held hostage by the banking system is not a very effective way to fix an economy. I hope they told the bankers to take their AIG and shove it where the sun don't shine!

The bottom line here is the fundamentals that were supposed to be the beginnings of an economic recovery have pretty much fallen apart:

- Europe is essentially going to be forced to implement severe austerity in many countries which is going to badly damage global growth.

- China is trying to slow down their growth which is also going to hurt the world economy. Their stock market is in shambles. Even worse: Their export economy is going to take a beatdown now that Europe and the USA are falling apart.

- Continued problems in the USA as a result of high unemployment and a collapsing private sector will also deeply impact the hopes for an economic recovery..

When you add this all up you have the perfect conditions for a global depression.

What scares me the most this go around is the USA doesn't have the financial resources to respond like they did in 2008. They pissed away trillions of dollars throwing money out of helicopters in a failed attempt to bail us out of the last collapse. We won't have this luxury this go around.

This go around the Fed will have fewer tools in the toolbox to respond. Ben has said he will not print: I guess we will see about that one.

My advice? Start working on building a bunker! Just kidding(sort of). If you are in cash stay there. Sell off your longs on any bounce. Got gold? Hedge it with a short position. Deflation is now a serious risk. Do not buy anything that you do not need. Most importantly: Payoff your debts.

There is an economic hurricane on the horizon and you need to begin preparing for it.

Disclosure: Sold 50% of my position in SLV.

8 comments:

Flipdippy said...

Certainly can't disagree with any of that. We find out soon. My money is on the mother of all squeezes here, one last time for the gipper.

Or not. Hard to trust anything right now.

Jeff said...

FLip

Yep

No one trusts anything right now which is a huge problem for the market.

Without trust or confidence stocks are in trouble.

I agree with you though. The Fed and the boys on the street won't go down without a fight.

I could see some type of intervention here that could create a squeeze on the shorts. Futes are up. We are due for a bounce.

getyourselfconnected said...

Jeff,
tomorrow will be green or even and a huge rally on Monday after the "news" this weekend.

OT,
Kid Dynamite seems to think that there is no way algos can trade stocks back and forth for higher prices because there has to be a final buyer (sold to you sucker!). I took issue with that and then it got a bit bad. Check out the comments in tonights post but I think I had to leave it because I was really getting aggravated.

Jeff said...

Get

Read it. That's a tough one. I don't think anyone really knows what happened that day.

I don't know enough about the HFT's to have a take on it.

I do think we need more humans involved when it comes to trading the markets.

Something technically was screwed up that day. The fact that no one has been blamed tells me they don't have a clue as to what happened.

flipdippy said...

Hmm. Looks like wherever we gap down to open will be the HOD. Today is going to be ugly, I thought the financial reform would be a catalyst for driving equities up.

This is completely unexpected - sets up the possibility for an incredibly brutal Monday?

Then again, markets always reverse into holiday weekends, so could today be it and then another low volume no conviction but powerful move up next week?

Just curious - are you guys planning to liquidate retirement accounts? Right now planning to liquidate my retirements and buy metals if gold drops near or below 1k.

Jeff said...

Flip

My 401k acccounts have already been pretty much liquidated into cash.

I am more worried about deflation so I am not going "all in" on gold.

If you want to play for hyperinflation then another option is to buy long dated LEAP calls on the SPY.

So far the actual money suppy of real dollars has stayed flat even though we have guaranteed and backstopped trillions more in the form of AIG etc.

If delfation hits cash will be king.

Holding some gold as a hedge is also a must.

Thats the way I see it. We have rallied back from the lows here. Op ex days are usually very volatile.

I expect today to be wild!

flipdippy said...

What are everyone's thoughts for this week? Bears are all of a sudden, more bearish than I ever recall since 2007.

Are we at an inflection point? Anyone want to guess which way we go from here?

ZMonet said...

I think we go up over the next couple of days. The market wants to go up and the housing data won't be particularly rough because it reflects the period when the tax credit was still in place. I think the overall direction of the market is down from here though.