Irregardless of today's payroll number coming in and making equity players seem like teenagers on prom night, it still doesn't change the intermediate/long term thesis on the averages. Short term there is a lot of market testosterone that can propel prices higher. My guess is even if we don't rally higher, we go sideways until the economic reports are no longer supported by the spin. The employment report was so vulgar that it behooves me to say the government is no better then Wordlcom, Adelphia, and Enron combined. How in the world can you possible tell us that the unemployment rate ticked down this month? Totally bogus and ludicrous.
So in the absence of total apocalypse and fraud/market manipulation, the cave dwellers will have to cover shorts, buy back portfolio insurance, make spreads tighten, sell treasuries they bought for a rainy day, and lick their wounds. All in time for the Wall Street Spin Cycle Machine to say the coast is clear and all systems go. Its at this moment the cracks and fault lines that have been there along start start to shift once again. Once again by that time, the sellers would have overshot the treasury market, and of course equity magnets would have used what ever margin they have plus HELOC to leverage in to buy the markets after the markets have already rallied some 70%. This is when Goldman Sachs comes out with their conviction buy list for 2010, which will have some 10,000 stocks in it. This is when Crude Oil marches to 100, killing the US Consumer. This is when buying stocks on margin will hit a yearly high on the NYSE, coinciding with reduced short interest activity.
Back to Crude.
You cant have lower Crude Prices to coincide with a stronger economy. Its not happening. If you want to kill the Crude Oil trade, its quite easy, ask the Europeans. The Crude Oil trade was effectively wiped out when the ECB hiked interest rates last year around this time.
Anyway, without further a do I give you my reasons why the market crashes later on this fall.
Some of these will take longer to play out, but are still dangerous enough to make investors aware.
In no particular order:
Crude Oil Rising
A weaker USD coupled with lower short rates will have speculators long Crude. Remember Crude is denominated in USD, weaker USD makes Crude much more expensive. The rise in Crude will effect Labor Day travel plans as price at the pump will slowly approach $3.50 and above. It certainly looks to me that Wall Street institutions are long crude oil and will take this up a lot higher. Only thing that can stop this is CTFC regulation, which is not happening, and most importantly when USD reverses its course, which is also not happening anytime soon. Be aware when Crude was dropping like a brick, it was an added tax break for all Americans as they were paying 50% less at the pump. It almost mitigated some of the pain in the stock market as well as in the general economy, people started to go out a little more, travel slightly more, have less aggravation. This all changes when Gas goes back above $3 headed to $4. Consumer spending currently sucks, it will suck more when Gas is high enough to dent peoples wallets.
Odds: 2-1
Higher Bond Yields/Sinking Treasury Prices - Asset Inflation
These bears watching very closely and aggressively. The entire planet went to the safety of USD and Treasuries when equity/credit deleveraging was taking place. This relatively happened way before bailouts/bloated Treasury balance sheets/obscene Treasury auctions. What will happen if similar deleveraging happens again? The backdrop currently is totally different. The US credit system had lots of ammo (QE) to fight credit weakness last fall. How much more juice/ammo is left? Higher long term interest rates pose a risk to the entire global market. Its basic risk aversion in reverse. If Treasuries are no longer viable globally, how can we continue to pump money into the system via printing press? How are we going to finance the deficit? At much higher rates is the answer. All of this just brings the inflation picture back to the fore front. The FRB is going to be put in a horrible position of raising short rates while in the midst of another epic collapse. The conundrum that the treasury/FRB has is if they do make a stand against long term asset inflation, they risk LIBOR going higher, which in turn basically will bankrupt many floating rate mortgage/HELOC participants and owners.
Did I mention that higher rates and swooning Treasury prices were a prelude to the 87 crash?
tradersutra.blogspot.com/2009/08/never-learn-form-history.html
tradersutra.blogspot.com/2009/07/markets-evolve-uncoilget-used-to-it.html
tradersutra.blogspot.com/2009/06/black-swans-and-unthinkable-stuff.html
This really is the unthinkable "Black Swan" event that nobody wants to acknowledge. A simultaneous USD/Treasury Market/LIBOR meltdown. It can happen. I just hope it doesn't.
Odds: Even money that rates spiral out of control. Even money that USD sees further weakness. 2-1 odds that inflation becomes a problem.
100-1 odds that FRB raises rates. BTW...if this does happens, then the rest of it really is all about the crying and jumping.
The Rise Of The Machines
I have written quite extensively about High Frequency Trading. Please do a search on the site.
tradersutra.blogspot.com/2009/08/pondering-hft-marketplace-system.html
These programs which are run and dominated by Wall Street Institutions collect up to 1/4 of a penny rebate on every transaction they make. They only trade for this rebate and what ever spread there is. This is also basic front running of institutional order flow.
tradersutra.blogspot.com/2009/08/how-wall-street-rolls-part-1-front.html
tradersutra.blogspot.com/2009/08/how-wall-street-rolls-continuing-series.html
This type of trading currently makes up some 70% of market volume.
tradersutra.blogspot.com/2009/07/volume-vs-liquidity.html
These are all fictitious trades, not moving on real order flow. If HFT is taking 70% of volume, then the real volume is only about 1.5B a day, which is not enough to sustain a mkt collapse. HFT system proponents state they add liquidity to markets, they do to some extent when markets go up. When markets go down is another question. These guys have been propping up and manipulating the markets to such an extreme that any weakness will spell serious carnage. Another point can be made that even with HFT volume included, total market volume has just collapsed. Most investors were blown out of the market. I have been noticing that every time the market sinks on huge volume, then subsequently rises on weak volume, the end result is always bad.
This Entire Rally Aside From HFT is all about Short Covering/Unwinding Of Safety Trade
You will notice that the markets are up over 50% since March. Unbelievable considering the job losses, credit destruction, and overall crappy economy. You would think that we were in the 4Th inning of an economic recovery with the consumer leading the way. The market is trading like GDP growth will be in the 5.5% Range for 3rd Qtr.
tradersutra.blogspot.com/2009/07/gdp-growth-expectations-are-pipe-dream.html
tradersutra.blogspot.com/2009/08/this-trend-is-not-your-friend.html
Looking closely, this rally is all about crappy stocks doing better then not so crappy stocks.
The 50 smallest stocks have outperformed the largest 50 stocks by 7.5%.
The 50 most shorted stocks have beaten the 50 least shorted stocks by 8.8%.
Too many people bet black at the Roulette table. Too many shorts in concentration. World economic contraction should hammer basic industries, yet they are the biggest to rally. Short interest has plunged badly the last few months. When this extinguishes itself, where are the buyers? Just the fact that crappy stocks in crappier industries doubled and tripled on no volume led by massive short covering lets me know that there is a major ugly correction coming.
Unemployment trends getting better but employment trends are not.
Some 13MM Americans will lose unemployment benefits by the end of the year. I don't have to explain what this means to consumer spending.
Housing Trends are not getting better
We have seen Case Shiller give better results nationally, but home prices are still dropping although at a much slower rate. This is purely seasonal. Also millions of ARM mortgages are set to reset later this year, coupled with what I wrote about LIBOR, this can get real ugly. Did I mention shadow inventory?
tradersutra.blogspot.com/2009/07/shadow-banking-for-dummies.html
tradersutra.blogspot.com/2009/07/shadow-home-market-holds-key-to-housing.html
tradersutra.blogspot.com/2009/07/next-wave-of-failures.html
Far to much derivatives exposure that needs to be deleveraged.
There is big speculation of the actual figure here. Is it 500 Trillion? 1000 Trillion? Does it matter?
No one really cares to spend time on this because they basically leave it up to Wall Street to figure it out. But this is entirely a US Financial System problem, as we have some 90%-95% of the total notional exposure. JP Morgan itself has over $75T in exposure. Read my comments about "Black Swan" events above to get a picture of what can go wrong.
BTW, my friends hate the word "notional", they say it doesn't classify risk. OK then 1% of 1000T is only $10T in exposure. I hope you feel better.
If you thought MBS, Treasury, Stock, Options, Commodities had no regulatory framework with regards to financial institutions, then you surely don't want to know the risk of an eventual Derivative Time Bomb.
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