This Isn't a Bottom, It's a Disturbance in The Force 73 comments
Kevin S. Price
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Think of the moment in the original Star Wars when the bad guys destroy Princess Leia's home planet of Alderaan with a single blast from the Death Star. Just then, back on Tatooine, Obi-Wan Kenobi shudders and says "I felt a great disturbance in the Force, as if millions of voices suddenly cried out in terror and were suddenly silenced. I fear something terrible has happened."
We've had a similar sensation here over the last few days as the latest data on mutual fund outflows reveal a time-honored pattern: When individual investors (and, yes, their panicky advisors) simply can't take the pain any longer, they dump stocks very late in the game.* Now, we want to be very clear here. These data alone don't imply a bottom any more than any other single indicator can. Especially when forced selling seems dominant and the credit markets remain broken.
But with the VIX setting daily records, put-call ratios pushing higher, and other measures of bearishness breaking out all over the place (this magazine cover is a classic contrarian item, but daunting and a little scary nonetheless), we could be reaching a point where the rubber band is stretched too tight--at least for the short term.
This morning's (for now very short-lived) hoot-and-holler reversal** off of the first half-hour's plunging lows notwithstanding, this market remains deeply damaged. Whatever current technical-psychological extremes might do to the broad averages in the short run, we continue to be concerned about the prospects for corporate earnings. Now, a loss of 40% or more in market capitalization certainly does imply an adjustment for expected weakness in earnings. But here's the thought experiment: What if the next few quarter's results are flat-out ugly? Is a steady drip of corporate weakness (and thus retrenched spending and hiring) adequately "priced in"?
At some point, when investors have shed their fear in favor of indifference, we'll have reached a real, lasting bottom, one that will have created some truly spectacular investment opportunities. As we've been arguing for months now, the name of the game is still risk management. Capital preservation is a virtue, as those who lives to fight another day will benefit enormously from the wreckage on Wall Street.
~~~~~~~~~~~~~~~~
* The bigger question is when those who have just bailed out of stocks will have the wherewithal to return. If they wait too long, they will have perfected the disastrous sell-low, buy-high sequence that impairs the results of so many individual investors. What people need here is discipline. If you go to cash now, start buying back in whether the market go higher or lower. If it goes lower, great...you'll pick up the merchandise at even better prices. If it bottoms at or near these levels and heads higher (even if slowly and unevenly), you won't wait too long to participate. We could be more specific about this, and maybe next week we will be.
** Which brought back memories of a time when CNBC's Maria Bartiromo actually squealed--there's no other word for it--her approval of the day's trading action. In keeping with the Star Wars theme, and given that stocks were trading roughly 40% higher then than they are now...that moment feels like it took place long ago, in a galaxy far, far away.
Source
Jennifer Ablan, "Flight to quality as money funds rise, stocks dive," Reuters, October 10, 2008
Jeff Kearns, "VIX Options Index Advances to Record Above 60 on Credit Freeze," Bloomberg, October 9, 2008
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This article has 73 comments:
Death Star ... Federal Reserve
Tattooine ... Lehman Bros.
Obi-Wan ... Alan Greenspan
I see it clearly now. Darth Paulson will use the FORCE to unclog the credit system. Meanwhile R2Bernanke2 will stop the elevator's descent and turn it around to move upward again while Princess Bartiromo struggles to free herself from Jim Cramer the Hutt.
YES. It all makes sense.
Obi-wan, "No --- just some gas." from "Hardware Wars"
"R2Bernanke2" ha ha ha!
Also, sheople, I think the phrase you meant to come up with is, "I was born at night, but not last night".
No, don't kill your self. Hang in there and UNDER NO CIRCUMSTANCES accept the mark of the beast (666). It might cost you your head but you will gain your soul forever.
I kid you not.
-distressedvolatility
Personally I think we saw the bottom today. I'll give you two thoughts on the subject...maybe three.
1. When Hank Paulson starts buying up those pesky Mortgage Backed Securities, the Credit Default Swaps designed to insure them will be voided, and nobody will have to pay the premiums any more.
2. Hank Paulson has the option of using the 700 Billion to buy Preferred Shares. Let's say he does that...the banks can now lend out 10 times that amount, ie 7 Trillion. But of course they first have to borrow the 6.3 Trillion from somewhere...maybe China?
3. Hank could do a hybrid of 1 & 2, buying the pesky securities for say... 15 cents on the dollar and then match it with a preferred shares purchase of an equal amount. This might sweeten the deal enough to get lots of bankers on board, and get us a bigger bang for our 700 Billion bucks.
Maybe I should call Hank.......
Just as the call for $250 oil was a good time to sell, the calls of the coming apocalypse are a good time to buy. Sure no need to go all in if you want. Me, I plan to go down swinging. No sense sitting out the last fight, if that's what it is.
When things hit P:E of 1 (as some have) or a .25 price to sales ratio as others have, I think it is ok to start buying some things.
Do you expect him to tell the truth when our economic system is based on FALSE confidence? "Yes, we lent out 90% of your checking account, but don't worry, you can have all of your money at any time."
Best. Post. Ever.
One important thing to consider is that losses in the financial market are only nominal losses. Productive real assets are still there. People that demand products are still there.
I accepted long ago that I don't know and will never know where the stock market bottom is. Instead of spending my time trying to buy stocks at the bottom, I find it much more productvie to figure out which great companies I can buy at attractive valuation.
And let's not forget that buying a stock is only half of the equation, the other half, and probably the harder half, is to figure out when to sell.
Hyperinflation, inflation, inflation.
So sad for our nation, our nation.
For the bankers:
just spam and bad rations.
I loath them, loath them, loath them.
I loath them hi and low.
I loath them with a loath I loath.
I loath those so and so's.
I loath them in the morning.
I loath them in the night.
I'll loath them till I loath to loath,
yet loath them more I might.
that really was your best work yet! I read the post before checking the name...
I knew it was you or curbs...
I got my work cut out for me!
moonbat, do it then!
I'll have ya'll know, you keep me entertained I watch Karl Marx ride his horse into the white house...
I can't wait to see our posts about those policies...
Question: will the 'fairness doctrine' apply to blog posts?
No, but there's no need to lie in such a convincing way, fooled the same people that he was trying to help.
I have that date for you it's 12/21/12 per the Aztec calendar
Since I know government interference in the market place is only destructive and since I know they will continue to inflate, it is a no-brainer (convenient for me!) to guess we will eventually have hyperinflation or at least stagflation. No, I don't trust the USD. Eventually, the foreigners will get wise too.
Sounds like the "greater fool" theory.
China, "fractional reserve central banking" is the "poison pill" of capitalism. Please move to 100% reserves or at least shoot bankers who go insolvent.
Whether 'tis nobler in the mind to suffer
The slings and arrows of outrageous losses,
Or to take arms against a sea of sellers,
And by opposing end them? To go bust: to lose more;
No more; and by going bust I say we end
The heart-ache and the thousand natural shocks
That my brokerage account is heir to, 'tis a consummation
Devoutly to be wish'd. To go bust, to lose more;
To buy: perchance to reocver: ay, there's the rub;
Prepare another one for later. If you think the sell/don't sell is hard ... if you sell wait until you are faced with the decision whether to buy back in ... now, later, now, later, argh!
Brilliant!
"... now, later, now, later, argh! "
Ain't an unstable financial system great? But that is what people get when they accept a dishonest banking system.
A "nation of stockjobbers" indeed! (Paraphrase or quote from T. Jefferson.)
1) In the "tell a believable lie" section. Zero out of 20 correct.
2) The IQ reqirement. I was 30 points too high at 95.
3) I used the words 'Austrian Economics' - that's an automatic fail
4) When asked what my opinion of the state of the economy was I quoted the Mogumbo Guru "We're freakin' doomed."
Great follow-on posts everyone. (I had no idea that there were so many words rhyming with loath.)
I do not buy them with a mouse.
I do not buy them here or there.
I do not buy them anywhere.
I do not buy them in a box.
I do not buy them with a fox.
I do not buy illiquid stocks.
I do not buy them, Sam-I-am.
But I'll sell them short when e'er I can.
Yep, it strained my vocabulary.
To bad about your IQ but it is probably a quite a bit above 95.
Ah, yes, the Mogambo, a national treasure.
I take it you don't find illiquid stocks a solid investment?
It's just paper. No one need starve. Unless Obama advocates dumping milk out on the ground to keep prices up!
I reckon Ron Paul won't look so kooky in 2012. If he ain't elected then, then I reckon the Rapture will be near.
There can be problems with illiquid securities. Like sex, it's usually better to have an eager counter-party. ;-)
See the problems come and you will be a leader. He is no leader.
except for this unread:
I loath them while I sleep not.
I loath them while I dream.
I'd loath them with the LOATH of loathes,
but it's beyond my means.
If you are a value investor then you are buying now with funds from the positions that you have stopped out of on the fall. You pretty much have to be a buyer since everything looks like a bargain to you compared to last year, last month, last week, etc. Hopefully you are buying high quality companies that pay dividends and will still be around when the eventual bottom is reached and once again the force of optimism pokes its head up like a tiny flower in the desert ashes of overwhelming pessimism.
If you are trader or market timer then you are acting on whatever your technical analysis, previous experience and instincts are telling you to do and keeping your wits about you.
If you are neither of these then safest cash equivalents in the safest institutions are the place to be right now.
Cash as king has only just begun and preservation of your precious capital is quite an admirable strategy. When the dust settles and the next great bull market is getting it’s legs and everyone is saying how stocks are the worst thing you could ever spend your money on then you will have the opportunity of a lifetime. We are not there now and still have several years of bear market downslopes and countertrend rallies until we get there.
May the force be with you always Jedi knights. All of this will come to pass right here and not in a galaxy far, far away.
I laugh when these young people think that the market will be where it was a year ago in just a few weeks. I think they've been playing too many video games and listening to the talking heads that have a vested interest in pumping it up...
Don't you mean DECLINE?
Negative growth... In the soup lines they'll call it Pollio a la Bush et Paulson.
This way, when the S&P rebounds by 20% to 1100, you'll come here and tell us this is a "dead cat bounce".
When we hit 1300, you'll explain it as a "bear market rally", and advise us to stay out.
When the S&P gets to 1500, you'll tell us that valuations are too high, and the market is due for a correction, and talk about soup lines the likes of which we haven't seen since 1929.
Sometime over the next four years, when we get to 1700, you'll call this a "bubble", and tell us we are irrational to own equities at these prices.
Finally around an index value of 1900 or so, you'll realize you are missing the bull market of the decade, and change your tune. You'll have a new theory about the "new economy" and why valuations don't matter when it comes to solar energy/oil sands/pet rocks, and along with your like-minded buddies allow us to unload our stocks for a nice 100-150% gain, as is typically the case for bull market runs.
If not for people like you, we'd have no one to buy from at the bottom and sell to at the top. Keep up the good work!
We go back and forth between regulation and deregulation and the problem does not go away.
The morale? Brains can get you money but money can't get you brains (otherwise Soros would have bought a better one.)
Here... Read: End of America's era - now it is China that calls the tune, from the Sydney Morning Herald. Now it make sense why Paulson, et.al. always made these savior moves before the business day in Asia. Not to save Main Street... Unless, of course, you live on Main Street in Shanghai Owen.
business.smh.com.au/bu...
Here's just a small sample...
"By now China has accumulated more than $US2 trillion ($3 trillion) in foreign exchange reserves. The holdings are not transparent. Australian officials, for example, have no idea how much Australian currency is held by China's State Administration of Foreign Exchange.
But experts in both China and the US estimate that 70 per cent of China's foreign assets are held in the form of loans to the US Government and its agencies. That means America's official debt to the Chinese Government is worth 10 per cent of America's GDP, 40 per cent of China's GDP and more than twice as much as the combined value of all of the companies on the Australian Stock Exchange."
So what does this mean Owen? We'd BETTER pump the markets or China will do WHAT? What will they do to us? Has China made the United States an offer we couldn't refuse? I mean, at least Bush and Paulson can tell the American people the truth about what is going down.
No wonder Congress is bailing out China... Uh... I mean Wall Street. What will they do next?
*Lead paint in our babies toys
*Poison in our pet food
*Poison in milk
*Poison in chocolate bars
Wait Own! They've already done all of that...
Now that I know if Wall Street goes down it is REALLY hurting COMMUNIST CHINA, I say let it fall another few thousands. Couldn't happen to a bunch of nicer Commies. Let them eat fried rice.
WHAT THE FUTURE HOLDS RIGHT NOW IS NOT KNOWN.
WHEN ALL THE STIMILUS DOES NOT REVIVE THE ECONOMY AND UNEMPLOYEMENT KEEPS RISING STOCKS WILL HEAD LOWER THAN THEY ARE NOW.
HOLD ON TO CASH AND GET IN THE MARKET WHEN THERE IS SIGNS THAT THIS DISATER IS CLEARING UP.
RIGHT NOW I SEE PERHAPS A WORLD WIDE MINI DEPRESSION NOT RECESSION.
Owen, what do you think would happen to the US Dollar and interest rates if China just started dumping $2 Trillion in USTreasury debt? (Or Japan, they are the two largest holders of our debt.)
Dollar would tank, interest rates would skyrocket.
What do you think would happen to housing prices if mortgage rates went up to 13% like back in the early 1980s? They'd collapse even further than they have already.
China and Japan hold the financial hammer. They are calling the tune and Paulson & Bernanke are the ones dancing as fast as they can trying to keep up.
I have no problem with a US dollar decline and a rise in interest rate. In fact, for full disclosure, I am currently short Treasuries (10 and 30 year) through the Futures market. I don't see hyperinflation ahead, but I do see a rise to the long-time average range of 5-7% on the 10-year.
Is that a problem? Not for me or other equity investors. Stock markets have done very well during periods of increasing interest rates--don't take my word for it; check it for yourself.
I'm also not concerned with China and Japan taking a bigger portion of the world pie. My investments include a large portion of European and Asian stocks. Only a fool would limit themselves to the US market.
Housing prices will plummet? Again, not a problem for me. I'm not looking to sell a house.
While you are trying to make it sound over-dramatic, your predictions aren't as wild as you'd think. Personally I don't see China or Japan dumping $2 trillion worth of treasuries all at once. They're smart enough to know how to avoid flooding the market and destroying their own wealth. In time, they will diversify away from US treasuries. In fact, I believe it's happening right now, although we'll only find out about it a few months from now.
Yes, I have no doubt Chinese sovereign funds are buying US and European companies right now at these ridiculous prices, paying for their purchases with US treasuries. And if they're doing it, I'm happy to make the same trade along with them, selling treasuries and buying stocks. Are you confident enough to bet against China and Japan?
I'm not saying the Chinese or Japanese are dumping anything. I only said they can threaten to do so and use it as a political crowbar.
If they did dump everything, it would cause complete chaos in US financial markets and the FED/USTreasury's only means of counteracting such a move would be to close markets or put the printing presses into overdrive to offset Chinese/Japanese actions. That in itself would bring about other problems.
Before the bailout bill was passed the US was calling China at least every other day to tell them what was going on. The last thing the US powers want is to anger their massive creditors or the "borrow to spend beyond our means" game comes to an end and the federal budget would have to start balancing immediately (or again, print in earnest).
As for investing, I'm glad to hear you're well positioned. I too am prepared for what I believe will transpire with a 'feeler' position in gold. It may not surge higher next week, but it will eventually. Probably in a like timeframe for the T-bonds/notes to start falling seriously as they are both bets on inflationary pressures.
If the Chinese start investing enough to move the stock market back up in earnest I will be among the first to get back in before the move goes too far, but not before that. I have seen too many "bottoms" turn and drop even further to jump in at this point. For now I'm content to watch and see what happens next while my cash sits ready to use.
Makes sense. Just be sure you don't miss the boat--we're already 12% above the Friday intraday low of 837. Rebounds after major selloffs are sharp and violent. If you blink, you miss it.
A free crow stew for the first analysts to use the term "dead cat bounce".
Always two there are. But which is the apprentice, and which is the master?
(BerPaul? Lord Greenspan & Darth Cheney? the evil Count Rove?; Soros claims that Episode I goes all the way back a mysterious Reagan & Thatcher and those who fought them in the DeRegulation Wars. Others quote either the founding of the Empire in 1913, or the prior Morgan years.)
And what of the evil SEC Federation, their robot Rating Armies and the secret build up of Clone Regulators?
Finally, Darth Dubya. Oh yes, the Farce is strong in this one, and he has brought disbalance to the marketplace. The Farce can have a strong effect on the weak minded.
ps: I'm a Keynesian. Mind tricks have no effect on me. Only credit. No credit, no economy. And I guarantee you no other economic theory has a hyper-credit generator, so don't try any funny business.
Please stick around, we want to hear more from you.
The crow has been stewed.
The Market to decide
who gets their due.
Very entertaining and thoughtful post, you engineer you.
The response I received was "If a person is going to quote StarWars in a Nationally distributed article, they should get their facts straight. Everybody knows that Obi Wan Kenobi was a passenger on the Millenium Falcon when he uttered that quote, not on Tatooine. Geesh!'
Yeah I thought the star wars gaff was pretty bad too. Moonbat your post are right on.