Category Archives: crash

Excellent interview with Michael Lewis on the “oddballs” who made the big short.

Posted on
Reply

Here on Bloomberg. Very long but worth the time — just put it on in the background.

He says that the only guys doing serious credit analysis on mortgage bonds in 2005, 2006 and 2007 were those looking to find the very worst and go short.

Also, Goldman would have been just another bagholder if the market had cratered a year before it actually did. They didn’t start to get their trading book in order until Spring 2007.

So, who does he think were the villians? Not just guys who were going with the flow, but the knowing perpetrators. He fingers bankers such as those at Goldman who created and sold synthetic CDOs and pushed them on firms like AIG. Goldman and certain people there are among the “genuine elites” and don’t have a “sense of social obligation.” Basically, they have no shame.

The TARP recipients were “unnaturally selected.”

As much as I like Michael Lewis as a narrator, I do not agree with his take on the role of government. He still believes that regulation can contain the market. When Goldman owns the regulators, it just can’t. Markets find a way around regulations, and connected players find ways to use regulations as a weapon. Simply take away the moral hazard of the Treasury and Fed, and these firms would have had the incentive neccessary for caution.

What comes after a sugar high?

Posted on
Reply

Sugar futures are down about 20% in one month (ahem):

-

Look at that contracting triangle last fall — it is a thing of beauty and foretold higher prices, especially since DSI was only 20% by the end.

Let’s put this in perspective:

-

I was stopped out of my short from 29 cents at 24 last week after tightening the stop too much. Once more the market schools me to let my winners run. I’ll be looking for a re-entry before long since there is a lot of dowside left.

-

Here’s an earlier post from last fall with some historical charts.

1987

Posted on
Reply

Since Graphite senses some parallels here, I thought I’d throw up a chart of the run-up to the crash of ’87:

prophet.net

I was just a kid, but I remember watching the news that evening. Upon hearing that the market had crashed 22% in a day, I thought to myself, “that doesn’t sound so bad – people still have most of what they had yesterday.”

Ok, “PPT”, it’s up to you.

Posted on
1

How about a little of that late-day magic?

Source: Prophet.net

-

Of course I think the whole Plunge Protection Team theory is nonsense. Not that there isn’t one, but that it matters — how come we still have crashes, and how come every stock market in the world goes up and down together (not to mention commodities, currencies, credit spreads, etc)?

At any rate, check out the upsloping RSI on the 5-min bar. That’s good for the bulls, maybe very good.

EDIT (2:05 EST): Noticed we’ve got a wedge forming — that’s an ending pattern. If we break the upper line it’s bullish:

The tables are turning, and panic is on the way back.

Posted on
1

I was extremely, almost uncomfortably short for the last couple of weeks, and with the Dow down 175 a few minutes ago, I covered my stock futures shorts and bought a few contracts to hedge up my long-term puts. It’s looking very good for the shorts — dollar up across the board, bond spreads wider, and stocks and commodities down together. Classic deflation trade.

Here’s the Dow. You can see that RSI says we’re already into oversold territory on the daily bar, which indicates the power of this move. There could be a bounce here, but I think stocks are where gold was after it fell hard from $1228 last month: they can rally, but the high is in. Now the bulls will be the ones fighting the tape.

Source: Prophet.net

-

Of course, the rally taught us bears to go easy and hedge up after little sell-offs like this, but that is going to be a frustrating stragegy if we’ve turned. As with the euro since the dollar index put in its low, surprises will be to the downside. I suspect not even this initial move down is over yet, maybe just the most violent part.

Take a look at the VIX. It has just blasted off – jumping over 50% in a week, most of it in just two days! This is giving us a very, very strong signal that panic is coming back, and in fact, was never very far off:

Kevin Depew interviews Robert Prechter

Posted on
2

This is from a month ago, but it is a wide-ranging discussion from a long-term point of view. Depew is a very sharp guy who saw deflation coming himself, so this is one of the best Prechter interviews I’ve seen.


-

-

“Yes, a depression is a period that’s difficult for many many people, but it’s not the apocalypse, it’s not the end of the world. It’s just a tough period that’s gonna last, you know, five to seven years and then we’ll come out the other side.”

For a speculator, “there’s no better time than a bear market — they’re fast, they’re violent, they’re great.”

Eric Sprott: new lows ahead for S&P 500

Posted on
1

From Bloomberg:

Dec. 29 (Bloomberg) — The Standard & Poor’s 500 Index will collapse below its March lows as an expected rebound in economic growth fails to materialize, according to hedge fund manager Eric Sprott.

The Toronto-based money manager, whose Sprott Hedge Fund returned 496 percent over the past nine years while the S&P 500 lost 32 percent, said the index’s 67 percent rally since March reflects investors misinterpreting economic data. He’s predicting the gauge will fall 40 percent to below 676.53, the 12-year low reached on March 9.

“We’re in a bear market that will last 15 or 20 years, and we’ve had nine of them,” Sprott, chief executive officer of Sprott Asset Management LP, which oversees C$4.3 billion ($4.09 billion), said in an interview Dec. 18.

-

Here’s what a 20-year, deflationary bear market looks like (Nikkei 225):

Source: Yahoo! Finance

-

Sprott also still likes gold, and from his perch in Canada he picks up smaller mining and exploration stocks. Although I like gold for the long term, I do take issue with the idea expressed here:

“If you get into this thing where you’ve got to keep printing more and more and more, who knows about the price of gold?” he said. “It will be the new currency in due course.”

Japan of course tripled its money supply and debt load in the aftermath of the bubble, but the central bank’s refusal to let bad debt and bad banks go under has locked the country into deflation and the Yen has remained strong. The debt situation in the US is much worse than in Japan, so our deflation should be even stronger. Japan was also bouyed through the ’90s and ’00s by strong exports as the rest of the world continued to grow, whereas the current bust is global. I do agree that after this deflationary stage clears the way, the government and central bank are bound to destroy the currency. The same could be said for the euro, pound and all of the rest, since none have any gold backing anymore.

The issue is timing — I have been saying since before the crash that deflation would be the situation for longer than almost anyone anticipates, myself included. This is because we have a credit system, not a cash system — in our economy it is credit issuance that controls the value of the currency unit, and credit will be contracting for years to come.

The 2000′s in one chart

Posted on
Reply

The Global Dow since 2001:

Source: wsj.com

-

This chart makes it clear that the bubble still has a lot of air left.  The 2009 lows were well above those of 2002/3, and now stocks are back into boom-time 2006 valuations, as if the credit collapse and associated declines in earnings and dividends had never happened. This year demonstrates better than any other in modern times that stock market action has very little to do with economic reality.

The carry trade returns

Posted on
Reply

Graphite here.

One development which has been making the rounds in the financial news lately is the development of a US dollar carry trade. I won’t ponder the details of the carry trade here, as I’m sure most readers are familiar with its mechanics. Shorting low-yielding assets like the dollar to fund purchases of higher-yielding ones — which is just about anything besides the dollar these days — doesn’t take a whole lot of work or talent or luck. All it really takes is a lot of that classic elixir of speculation, leverage.

Less interesting than the character traits of carry traders, though, is the spectacular and totally unforgiving fashion in which their speculations can come to grief. Throughout the bull market of the 2000s, AUD/JPY was the king of the carry trades. (Take a look, for example, at this Investopedia article touting the dazzling 83% gains from 2000 through 2007 in the pair.) With the Aussie dollar yielding nearly 600 basis points more than the Japanese yen, the cross pair was an absolute cash cow. As long as risk appetites remained robust, this trade proceeded in a virtuous cycle: its profitability attracted new JPY shorts, who drove the yen further down and made the trade still more profitable.

Then came the financial crisis, and suddenly the carry traders found themselves all leaning the wrong way in a very crowded trade, in a market with leverage as high as 200:1. The chart tells the tale:

Interactive Brokers

Source: Interactive Brokers

From July 2008 to January 2009, nearly the entire 2000-2008 bull move in AUD/JPY, from a low of 56 to a high around 104, was retraced. “Puking” doesn’t begin to capture the desperation with which longs exited this trade.

Earlier this year and a couple hundred S&P points ago, I had been somewhat dubious of EWI’s forecast for the next move down in equity markets to produce a VIX print higher than what was seen during the crash of October 2008. In the 1930-1932 period, the long, steady march down to the ultimate low never really matched the drama of the Great Crash.

However, the development of a dollar carry trade in risk assets shows that complacency and yield piggery, remarkably enough, still reign supreme in the minds of investors. The lessons of 2008 have been quickly unlearned, and its sickening drops in asset prices are now written off as temporary “liquidation events” unlikely to return for an encore performance, especially with the all-powerful U.S. Treasury and Federal Reserve backstopping everything with a wall of “free” cash.

If financial companies are truly protected by an unassailable wall of cash, why are they asking to borrow it from depositors at rates far above LIBOR? Here are just a few of the solicitations for cash I’ve noticed in the past few days:

Contrary to a common misconception of the Fed’s liquidity injections, money borrowed at 0% is not “free.” At some point, traders must liquidate their carry trade-financed assets to obtain the cash to repay the principal balance on that borrowing. In the meantime, those assets had better keep going up in price, or they find themselves in the position of upside-down and potentially distressed sellers. The instability of such trades, and their susceptibility to even the slightest downside shocks in prices, are obvious.

I doubt that anyone is buying stocks with 200:1 margin these days, but if carry trade dynamics are now driving global asset markets, this could presage an eventual explosion of volatility and liquidation of the sort usually only seen in the forex and futures markets.

Trading notes

Posted on
10

I thought I’d make a quick post here to update some of my thoughts on the markets. Here’s the S&P 500:

-

Most major world markets and US indexes look more or less like the above. Every one has rolled over since mid-October, and some made their highs several weeks before that. Based on measures of breadth and volume, this has been a strong and broad decline over the last two weeks. Fear has returned in pretty good measure, as witnessed by a 50% jump in the VIX and a breakout from its downward trend. Oil and precious metals fell, and the dollar broke its own downtrend, though it still needs another boost to confirm the move.

I was positioned very short equities, oil, metals and long the dollar, but over the last couple of days I’ve been tightening stops, closing positions and hedging the remainder. I believe we’ve seen the start of a major trend change, but for the next few days I would not be surprised by a minor stock rally. If one develops, I’d expect weak breadth and plenty of divergences if the primary uptrend has indeed been broken. That could be an excellent entry for short positions.

Tops are generally rounded affairs, though occassionaly declines from peaks will morph into waterfalls just when you’d expect them to ease up. We definitely have that potential here, and I will be expecting some fireworks on the other side of any little rally. It is entirely possible that the March lows could be revisited early in the new year, if a decline matches the aftermath of the 1930 and 1937 rallies.