MB and Gang:
Nasty day for the bulls, but as Yoggi so eloquently put it, "it ain't over until it's over". A few thoughts that might be useful in plotting strategy for the coming week or two
Bull markets need several things to sustain them, the three most important for this observer being growth of money flows into the markets, stable or falling interest rates, and above all else, earnings growth.
"Big Bang" (part one), on April 1, 1998, provided a massive "add-on" to the money flows coming into our markets, as the Japanese savers stripped their banks and walked the dough to the local American bank branch. That money flowed into our markets as a river after a dam break. While initially it was an add-on, over the last few months, it acted as a replacement, as the flow of funds to mutual funds declined by half on a year-over-year basis. Now, the big "R" word has raised its ugly head in mutual fund land, and the Japanese money has peaked. Worse still, as of this morning, those unfortunate Japanese savers are staring at a staggering 50% currency-plus-stock price decline, and they've only been here for a few months. Think of it. Eight years of falling native stock markets (no chance to make money there), lousy 0.5% interest rates and now, when he finally has a chance to jump into that gorgeous American (grass is greener) market, he immediately gets clobbered.
What happens now? Two things,...the beaten-up Japanese saver retreats, and part two of "Big Bang", (which has been a worry for this bear), disappears and is of no concern. In passing, kiss goodbye to the big inflows of funds.
Next, consider rates. Yes, Alan chopped them a tad, but it was not consequential. More importantly, DEBT is the big global problem and the largest debts in the world are called U.S. treasuries. The world is afloat in them and they are starting to return to the roost. We called the U.S. dollar lower months ago, and it is starting to happen. As the Euro kicks in, treasury selling will accelerate (already moving into gear) which will pressure the dollar more, and push rates up. Younger market participants are about to learn the meaning of the old expression "pushing on a string". You can flood a system with liquidity but if there are few who wish to borrow, or even fewer with the required collateral, no borrowing takes place. Japan is a perfect example,....real estate down 85% means that the former valuable collateral is now close to worthless. Falling currencies also put rates under upward pressure.
In summary, while Alan can diddle with the rates at the short end, the bond vigilantes will dominate the rest of the bond spectrum and a "borrowing strike" is about to emerge in any event.
Earnings growth has been heading south for three quarters, at least for those of us who manage to read a quarterly or two, rather than relying on the nonsense of the AJC's of this world. It will get much worse. The statistical figures already provide plenty of evidence from which much slower earnings growth can be expected (GDP, capacity utilization, etc). The real crunch relates to the fact that most consumer buying has been based on borrowing and the borrowing has been based on "wealth effect" (stocks up). As the market falls, American consumers stop borrowing. No borrowing equals no buying. No buying equals an economy heading for the dumpster. Unfortunately, the momentum is now building. Sub prime borrowers and lenders have both tanked (witness the many corpses floating to the surface of late). And Alan was doing his darndest to cut this off in any event. Middle class America is worried (stocks down, lay-offs increasing), and debt is HUGE. Carriage trade types have cashed in plenty of stock (see capital gains tax explosion) and are hunkering down for the long winter ahead. In short, the buying is and will continue to dry up, which means the economy will wind down considerably. This is not the stuff of which wondrous "earnings rebounds" are made. It does provide the ingredients for a meltdown, when the world's last remaining bastion of purchasing, quits buying.
Big picture to me is an inevitable slide from this point onward. But what type of slide,....a slow grind down, or off the edge of the waterfall?
Tomorrow is Friday, and the market has been hit on Friday-Monday combos in the past, especially in its favourite month of October. If today ends badly, the margin calls tomorrow will be big, and the credit managers will be brutal. (interviewed plenty of them over the last few weeks). Could be the trigger. On the other hand, if we limp through the next two weeks without a meltdown, we'll get a decent "relief" (phew,...we got through that nasty month again) rally. For the moment, it makes sense to me to hold about 50% of one's resources in short/put positions and hold back 50% in cash. If the meltdown occurs over the next week or so, money is made. If the relief rally occurs, I suspect it will represent a wondrous last opportunity to whack the lambs in a consequential way.
We live in interesting times, especially this current and coming week. (g)
Sorry for long post, but have been "off-air" for many weeks so it can be viewed as a catch-up post. (g)
Best, Earlie |
