OK, Congress played “Kick The Can” and passed a higher debt limit while sweeping the ‘problem’ under a “committee rug” of “Real Soon Now” … expecting that would prevent the (expected) stock market plummet if they “failed to raise the debt limit”.
What these clowns failed to understand is that the stock market takes “The Path of Maximum Frustration”. IF you expect it to do something, it will most often do exactly the opposite (or whatever will frustrate the largest number of players).
There are valid reasons for this. Not the least of which is that folks will have placed bets in the direction of their expectations, and that leaves few folks to MAKE that expectation happen on the news. (So, for example, if folks expect the Dow to rise, so everyone listening to the news has already bought the Dow, who is left to buy more and make it rise more?…)
No, we’ve not (yet) had a down 1000 point day… instead we’re having a “death of a 1000 cuts” series. Why? “Why, don’t ask why, down that path lies insanity and ruin. -E.M.Smith”… So, exploring why:
The Bank of New York began discouraging big withdrawals (the news presenter was a bit indistinct and I’ve not had time to dig out a news print reference, but I think he said they had started to charge for large withdrawals). The Euro Zone is (Gasp!) suddenly discovered to be a basket case with both systemic and banking risks (as though we didn’t know already…) and the latest financial numbers show an economy in the USA that is barely sputtering along.
“When in danger, when in doubt, run in circles, scream and shout! EVERYBODY PANIC OUT!!!”
(I don’t know if that’s an original with me, or not. The first sentence I lifted from someone else, but the second add on bit I think is mine… Tracking attribution sometimes takes more brain cells than it’s worth ;-)
So we’re back in ‘run for the exit’ mode. Watch out for Gold to have margin call impact (as folks sell what has profit in it to fund the margin calls on their losing bets). The news of economic stagnation turning to downturn (‘double dip’ ‘double dip’ ‘double dip’…. that mind numbing mantra of a year ago, finally feared to show up now…) has raised the specter of diminished demand: So commodities have had a sell off.
I’m now stopped out of metals positions (platinum et. al.) other than a small position in GLTR that is a basket with gold, silver, platinum, and palladium in it. I’ll be making a sell / keep decision on that over the weekend. Mostly in $USD (but I’ve been there for a while now) and with a few ‘core’ holdings.
The winner, oddly, has been TLT bonds. This is a ‘Risk Off’ trade and folks run for “safety” and even after our Theatre Of The Absurd Congress the US Bond is seen as ‘safe’ (oddly, despite part of the ‘issues’ being the threatened AAA downgrade even WITH the borrowing / spending lid lifted… due to the fear of too much debt to GDP ratio… FINALLY the rating agencies start to notice that more credit cards is NOT the same as more income… At any rate, “watch this space” as a Democrats vs Rating Agencies food fight develops) But, until then, folks are dumping stocks, Euros, commodities, you name it.
WHERE can you put the cash you get from that?
The “usual answers” were the Euro Zone and Yen. But the Bank Of Japan has started Yen intervention (so time to be out of Yen… don’t fight a central bank, wait for them to get tired of the game…) and the Euro Zone Banks are ‘not your friends’ right now. The only other traditional “risk off” parking spot is US Bonds (that are once again being made available in large quantities with $2.4 Trillion or so of issuance soon to be available…)
What A Mess.
So it’s Duck and Cover Redux.
Later tonight I’ll add the “charts” to this story that show how to read those tea leaves. I’ll also do the analysis over the weekend to figure out if this is a ‘buy the dip’ moment or a “Never try to catch a falling knife” moment… for now, I’d not be buying…
Folks wanting to see them now can look at the last Wall Street Week posting (under the WSW category at the right) and look at the 5 year chart at the bottom. For a while now I’ve pointed out it said ‘near a top’. Then look at the shorter term charts and notice that the 1 year shows a roll down already in progress and the 10 day shows a plunge. IMHO, we’re most likely entering more than a ‘correction’ (that is 10% down) and are headed into a ‘bear market’ (20% down or more) and likely to be of some depth. Why? (don’t ask…) Exploring why: Most likely as the Socialism Shiny Thing mindset continues to feed the Arrogance Of Authority into thinking THEY are in control of the economy (both of Euro Zone and the USA) and they will continue to try to “push a rope” via monetary policy and attempting to power a ‘recover’ via ‘reflation of a bubble’ (or in this case, 2 or 3 bubbles…)
Full analysis will have to wait until I’m “off work” tonight or maybe even to Saturday. Until then, take what comfort you can in cash. (But WHO’s cash? Euro dodgy… Yen Central Bank intervention risk… $US Spendulus… Even the Kiwi has started a dive on the commodity sell off and that puts suspicion on the other commodity currencies of Looney, Aussie, etc. For now, I’m using $US as it is my ‘home currency’ and with BOJ doing intervention, the Swiss might well follow. Perhaps it’s time to explore British Pounds again ;-)
Until then, “enjoy the ride” even if it’s likely to be a volatile one. If you can’t sell positions, you can still hedge them (though hedging an already dropped position can just lock in the drop, so you have to decide if we’re done dropping, or not… I’m going more for ‘be in cash’ than for ‘be hedged’, but the best hedge is likely an options position. Rising volatility will make your options worth more even if the bet direction was wrong, so softens the exit from a ‘wrong way bet’ in a hedging strategy. If anyone really wants to more know about that, I can put together an explanation this weekend, so ‘let me know’.)