Great White Shark Circles Wall Street

 |  Includes: EEV, EFZ, VXX
by: Wall Street Sector Selector

Everyone remembers the classic Steven Spielberg movie, “Jaws,” in which a great white shart terrorized an East Coast island town.

“Just when you thought it was safe to go back in….” was a franchise tagline and I think that’s an appropriate description of recent stock market action as the “Uber Bull” appears to have stumbled, at least for now.

I feel like we’re much like the hapless citizens of Amity who could only watch and wait to see if the shark returned. Return he did, and every new attack was preceeded by “shark music,” “the da da da da” of John Williams’ classic score.

Today I hear “shark music” on Wall Street as danger once again lurks in our so-called modern markets.

Here are some of the major beats of today’s financial “shark music.”

  1. The Euro continues its precipitous decline in spite of the “nuclear” European bailout announced last weekend.
  2. Monday’s one day super rally has become an almost distant memory as major indexes struggled Tuesday and global markets digested the parameters of the European Union bailout and what it might mean going forward.
  3. Fed Chairman Bernanke told Senators in a closed door meeting that the European measures were “temporary” and not a “panacea.” Oh, to return to the “green shoots” days.
  4. Gold touched new all time highs Tuesday and is up again in the overnight markets.
  5. Credit Default Swaps, the cost of insuring debt, rose Tuesday as well, after dropping sharply after the bailout was announced, indicating rising risk in credit markets.
  6. LIBOR, the London Interbank Offered Rate, climbed Tuesday after dropping sharply earlier in the week, an early warning indicator that all is not well in credit markets and that we’re seeing early indications of a “credit freeze” a la the days in the aftermath of the Lehman Brothers and Bear Stearns debacles.
  7. China’s Shanghai Index is now in an official bear market, down more than 20% from its highs as the country grapples with a real estate bubble that just won’t go away.

Add it all up and you can’t help but think the “shark music” is growing louder by the minute.

The European bailout was nothing more than a group of broke countries creating more debt to lend to each other. As I mentioned Monday night, this is like the family who pays off a maxed out credit card with another credit card. It solves the immediate problem but does nothing to get one back on the road to solid financial footing.

It didn’t take the markets long to hear the “shark music” and react accordingly, with the usual flight to U.S. Treasuries, gold and a weakening picture in risk assets around the world. Tuesday night we remain in “Red Flag Flying” mode, expecting lower prices ahead.

It’s a scary situation, to say the least, and I feel like Sheriff Brody in the movie when he caught his first glimpse of the great white’s flashing teeth. Talking into his radio, he said, “You need a bigger boat.”

Tuesday night as the “shark music” grows louder and dark shadows surround us, the European Union and the United States need a bigger boat.

Disclosure: SLV, AGQ, VXX, EFZ, EEV, S&P Put Option