Breaking BAD!

Posted on 08/08/2011

1


Ok, so the panic is officially on. I contend that it’s been in the mail for months, but nobody appreciates salt-in-the-wound analysis.

From where I sit (and write), I believe the first leg of a serious correction is NEARLY complete, but longer term, I think the bottom is (much) lower on the broad based Indices.

I had given thought to writing market missives for years before I actually set up this blog, but the real impetus came about 6 weeks ago when close friends tired of me sending them “inflamatory market related emails”. I completely understand the aversion to unsolicited, gloomy market commentary (which I am most certainly prone to send), but my conviction regarding the faulty foundation upon which we had seen a major rally is quickly becoming more and more correct (and I genuinely wanted friends/family to understand/consider means of protection).

Below is an email I sent in early April after the market quickly shrugged off the unrest in the Middle East/North Africa as well as the tragic earthquake and tsunami in Japan.

Subject: Just my .02
Date: Tue, 5 Apr 2011 18:56:13 -0500

I realize this is completely unsolicited and potentially unwelcome, but I can’t help myself……….
 
If you have any considerable amount of money in the markets right now I would urge greater caution and if possible, find out if you have the ability (self-directed) to hedge yourself in any capacity (i.e. get exposure to things that do well on the way down – VIX, inverses, or more esoteric products if you wanna have a longer conversation).
 
Again, this is just my opinion, but I feel like the market has become COMPLETELY disjointed from economic reality (I understand corporate profits are outstanding, but the rosy projections for a goldilocks recovery are unlikely to come to pass). In short, things are eeirly reminiscent of early 2008. When all news, and particularly bad news becomes good news because the Fed/Treasury are likely to continue monetizing massive amounts of debt and shovelling money to the “too big to fail” banks – you ought to scratch your head.
 
I could literally go on and on and on and on……….and if you care to, I would welcome the conversation. Actually, if anybody is very bullish (about the next year) I would really like to hear why.
 
I know that when people start talking about term life insurance or Taylor Swift or most technology issue, my eyes have a tendency to glaze over and you may feel the very same way about this…….. but history has a way of repeating itself if we don’t learn from our mistakes _______________ .
 
The Labor participation rate is lower than it’s been in 30 years. The “real” unemployment rate is probably around 16% and far worse in many areas. 43 MILLION Americans are on Food Stamps. (The country has what……about 300 million or so people…..figure out the percentage). Highest ever. Volatility measures are incredibly low which is often a great contrary indicator………and I’m amazed that we are in a world (of high frequency trading – where most stocks are held for about 30 seconds – I shit you not!) where we could see governments in Tunisia, Egypt, and Libya pretty much ousted………add the Ivory Coast to that list now (or Cote d’Ivoire if you’re a French imperialist)……and wait about two weeks to hear shitty news out of Yemen (remember the USS Cole anyone) or Syria or Jordan or look at a fucking map and pick a country……….where we have a 9.0 earthquake that produces a 75 foot tsunami that triggers a fucking nuclear meltdown in the world’s third largest economy and we just keep buying the fucking dips because the Fed has painted themselves into a corner.
 
They can have the Russell 2000 keep humming along if they continue to pump $80 BILLION DOLLARS into the system every month, but they will also get Gasoline prices over $5 and your grocery bill will make you want to vomit. You can’t have it both ways.
 
Enough with my rant, I feel better. Hopefully you’ve made incredible sums of money over the past few months/two years.
 
The S&Ps were 1335 the week of April 7th 2008. Crude oil was about $110 at the same point in time. Gasoline prices had just passed 3.00 a gallon in April of 2008 for the first time ever (right now near term gasoline futures are 3.18 a gallon).
 
Right now the S&Ps are 1332, Crude oil is $108 and RBOB (gasoline) is 3.18.
 
I don’t know if or when the music will stop, but QE2 (the Fed’s way of creating that “wealth effect” you all are feeling) is scheduled to come to a close at the end of June and if rates start to move higher and if banks are forced to write down their real estate holdings (shadow inventory) because the “mark to make believe” accounting won’t work forever……..IT’S NOT GOING TO BE PRETTY. This market is like a meth addict……addicted to stimulus and the comedown is probably gonna be painful.
 
Oh yeah, Ireland, Portugal, and Greece for all intent purposes are insolvent but you can get a 0 interest car loan again……
 
Fool me once………

Well…..here we are on August 8th after an amazing two weeks for the markets (S&P down 17% from July 25th highs) and the “addict” is BEGGING for more speed (quantitative easing). We have an activist Fed that is clearly inclined to intervene if/when the “recovery” stalls. Will it get just ONE MORE DOSE and then PROMISE TO BE GOOD? I don’t know, but I certainly don’t envy Bernanke because tomorrow’s Q&A session after their decision on rates should be very heated.

When I was in brokerage, I would often point out that it takes a LOT of buying to make a market move higher, but it only takes a lack of buyers for a market to move lower. Today and the past few sessions have been case in point as far as that relationship. The investment community is reeling from this pullback. Hedge funds have likely taken a serious hit. Market sentiment has swung dramatically since the FOMC’s meth-like market injections came to an end in June.

In my estimation, the course of treatment has been flawed from Day 1, but we should find out in a few short hours whether Dr. Bernanke intends to just increase the dose.

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Posted in: Recession, S&Ps