There is a lot of news swirling around about various central banks injecting liquidity including the Reserve Bank of Australia which also raised its rate this week.
Ashraf Laidi from CMC Markets said on the show Foreign Exchange that this is worse than 1998. If that is correct we should brace for a lot more equity selling. I have to say I don't know if it is worse than 1998. If it compares to 1998, well we have already had one of these and so while there might be more selling, might there be a faster snapback?
In terms of managing emotion, for anyone feeling emotion, this is a fast decline. People worry during fast declines and don't worry during slow declines. The nature of fast declines is they snap back quickly. We saw some of this earlier this week and I think we would see more snapback whenever this round of the selloff exhausts.
I repeat this sort of thing often because it always seems to be true and also to try to convey the extent to which this sort of trading is normal market behavior that has happened many times before and will happen many times in the future. I also try to convey my lack of emotion during all types of market moves. I think that my remaining unemotional and showing this over and over might help some folks be less emotional too.
In managing your own portfolio calm and rational is probably the better way to go. Hopefully you have some sort of trigger point for some sort of defensive action and all you need to do is stick to it, this is also something I repeat over and over.
No matter what you think about this, it has happened before, been worse and come back.
Wikinvest Wire
50 comments:
Rog,
You selling or buying or just talking?
great unintentional comedy.
Fair warning; I won't delete your comments unless they become profane.
i recall 1998 well...the stock market sagged rather badly, the ipo window closed, and all kinds of really wierd things happened in the credit markets. the on-the-run (i think that is the term) treasuries all traded wildly different than off-the-run treasuries. for example, the 29 year bond (off-the-run) came with a yield to maturity of 7% while the 30-year had a ytm of 8% (i don't recall the actual yields, but i know the difference was HUMONGOUS (as is a 100 basis point difference in ytm between a 29 year and 30 year bond). no one seemed to know why this happening, but after the dust cleared the world found out about long term capital management. the reason for the huge difference: ltcm and then the investment banks was massively liquidating an incredibly highly levered portfolio that probably included boatloads of on-the-run treasuries as part of the hedging strategies.
the bnp paribas thing doesn't seem to justify the two days of massive liquidity injections from the ecb. something else a lot bigger is happening and the ecb and the us fed reserve know about it. i would bet that we'll find out what that something is sometime between now the end of september.
maybe the amount of liquidity being injected stems from the realization that there are a lot of pools of capital with exposure. maybe none of them as levered as LTCM, but still very wide spread nonetheless?
roger,
one other thing to consider, and a big potential difference: the ltcm portfolio consisted of assets with measurable value that needed to be liquidated in an orderly way. they just experienced a statistical outlier that killed them and made the high leverage work against rather than for them.
bear stearns' and bnp paribas appear more related to virtually worthless "assets", or at least a near absolute inability to value those "assets". as a possible result, no one wants to take on the assets as either a buyer or a lender (collateral against the assets). if that's the case and bnp's fund was highly leveraged, perhaps the fund owes some large amount that they can not repay (although $200 billion--the amt that the ecb injectged over the past two days--looks awfully high compared to the alleged $2 billion value of the fund). in that sense, some lenders may be at risk.
i have become very wary of this whole mortgage scene. it seems like a "hot potato". i personally converted 75% of my money market funds into t-bills on wednesday (btw, i saw a short reference to the holdings of a fido mmf on barry ritholz's blog recently and the timing just ahead of bnp was a pure coincidence) as i don't really know what my money mkt funds hold. i know that i won't lose all my money mkt value if some institution goes under, but occasionally money mkt funds do need to break the $1 unit value when really ugly things happen, and this mortgage mess looks uglier than anything i have seen (and i am 57 years young).
in 1994 there two or three money market funds that broke 100 cents on the dollar; one of which was from Piper Jaffray.
I hope your buying tbills will turn out to be an unnecessary trade (insert nervous smile).
I have mentioned b4 that if this is a big deal someone will go under. I wonder what the trade sports line is on countrywide?
roger,
i hope it is unnecessary as well (although the yield should be very similar to a mmf anyway.)
since the ecb is the party injecting the liquidity, i would look for something in europe--the ecb is "involved" while the fed seems to be a bystander at this juncture. i'm not in any kind of position to have any idea on countrywide.
i should also mention that while several people posted comments on not understanding your strategy, i not only understand, i am doing exactly the same thing. i just took off some limit orders and put stops orders in that will probably trigger if the market breaks much more. the s&p broke its 200 day moving average again this morning and the chart looks rather uncomfortable. we should always give the market a little leeway on the 200 day ma, but i would bet that a lot of people are looking at the charts right now and waiting for the market to tell them what to do. if it breaks much further, they are all going to move toward selling, not buying. long term, i want to own stocks, but not in front of a 10% to 20% decline.
kudos for offering us your thoughts.
I don't pretend to understand the nuances of all this credit-related stuff, but why don't investors take some solace that world bankers are on the case and taking steps to manage the "crisis?"
two reasons I can think of right away.
one is "well how bad is it that central banks need to do this."
The other might be the expectation/fear that the central banks can't possibly get it right.
If it was really really bad, wouldn't central banks just (emergency) cut rates? Much simpler and cheaper.
I completely agree with you on the snap back, BUT I am not sure it will not go down a lot more before the snap back.
the CBs have two things to manage; reality and perception.
I would hope perception is worse than reality and that it can stay that way. The ramifications of the actions they take can be severe and I would have no idea how they make this decision but my hunch is an emergency cut would cause even bigger ugly.
more decline before a snapback? Exactly why I don't devote much energy to trying to predict this sort of thing.
gjg49,
Excuse my ignorance, but how do I puchase T-bills with my broker? I normally purchase SHV or BIL ETFs as a substitute for MM, however, with these, you still face the risk of the ETF sponsor going under.
Anon 8:13 said, "why don't investors take some solace that world bankers are on the case and taking steps to manage the "crisis?"
Dude, if you trust this sleaze to look out for your interest, you should not be investing. Unless you meant that as "ironic black humour", in which case take a look at the smirk/grin on my face..........
Roger, the gap between perception and reality was exactly the point I was trying to make. Not making the rate cut, makes for a smaller problem I think (hope).
Jey,
If you aren't joking, any discount broker will have access to us treasury bills.
You may need to call in, but you can buy them.
Interest rate cuts do no good if people are afraid to borrow and the two largest economies, the US and Japan, want to avoid that solution regardless: the former because the dollar is already too weak, the latter because a lower yen provides the primary stimulus for their economy (and a lot of other economies too via the carry trade).
There are a lot more liabilities out there than cash available to pay them off so all the major players do not want this liquidity 'scare' becomes a full-fledged credit crunch. Apologies to the governments/central-banks are evil crowd but if these actors botch the response a nominal panic could drop into a deflationary recession rather quickly and it is unlikely even those with cash stuffed in the mattress will enjoy the experience.
Personally I think this gets turned around a la 1998 but I have increased hedges in mid-caps, financials, etc and raised a bit more cash just in case it doesn't.
At about 10am I was a buyer. Bought some VWO and DBC for the long term holdings.
phillipe,
you asked why the fed would not just cut rates.
the first and foremost priority for the fed is to avoid a collapse of a bank and the banking system. cutting rates won't necessarily do anything to assist a failing institution. instead, the fed will do some behind the scenes maneuvering such as lending money directly to a troubled bank or, in some cases, lending to (or financing) other stronger banks that will, in turn, assume most of the liabilities and assets of the failing institution. by doing this essentially "behind closed doors", the central bank avoids panic (no one wants a run on banks as happened in the 30s) but, more importantly, they also avoid an economy-wide impact. cutting rates could potentially change behavior on main street as well as on wall street. the fed wants to fix problems at the lowest possible cost and simply lowering rates could well impart the unintended additional "cost" of incorrect signals (isn't everyone watching for the signal effect at all the fed meetings??) or higher eventual inflation.
you should also be aware that in reality the fed does not dictate interest rates, the fed only sets the short term overnight rate at which it will lend--other banks can take it or leave it. the fed funds rate sets a tone for everyone, but the market really determines what the price of borrowing will be based on supply and demand. the interest rate set by the fed (fed funds rate) usually mirrors the supply/demand for credit in the real economy, but the markets can, and often do, disconnect from the fed funds rate.
I was emotional last week and bought some puts on sp500. for 2 grand I got 140grand of downside protection. They've been from zero to 4 grand, but their purpose is for the grand collapse, not short term gain. For those worried, or cautious, isn't this a highly leveraged but safe bet? Insurance?
Yup, that's a safe bet at the cost of lowered returns. If it's something that makes you sleep better at night, then it's probably worth it. You're also guaranteed to underperform the indexes since you're allocating a portion of your funds for insurance. It may be prudent depending on your situation though. Hedging is an art, not a science.
well said billb. I would add that when truly thought of as insurance, like on your house...you pay your premium expecting/hoping to never rely on the insurance.
Roger, thanks for the explanation. Every bit of extra insight is appreciated in these dark times.
Roger,
Can you offer an approximation of your status of cash and double short exposure? Did you increase the double short? Personally, i keep meaning to when there is a bounce but failed to act.
i'll answer that in this week's video.
RW,
Since you're hedging, IF you were to put on a hedge now, and don't mind venturing a choice, which index would you choose? I'm thinking: small cap, mid cap, dow, or spx. My thought is that midcap mzz has the best relative strength but the dow looks more vulernable. Rationale: highest quality returns, as the rumour goes, are getting sold by hedge funds to raise cash.
I hope you all do not think this will be over quickly. Not that it will be that bad.
This will likely continue at least many weeks.
So I would plan on volatility and the market to continue to slip. I just wish I knew how far and how long. Right now I am just pretty sure of more of the same.
I did get rid of my double shorts today though. I think we are more likely to rally some in to options expiration on Thursday before continuing to slide.
Anon 11:46, it's a bit late to establish new hedge positions I think, as opposed to raising some cash and/or buying a bit of insurance, but if you were to do it now then I think your logic stands up fairly well -- folks fled to quality and now realize it may not be enough so DXD could work well -- but I'd also look to sectors that suffer the most when credit tightens generally and/or that continue to be overextended; e.g., real estate (SRS), financials (SKF) and emerging markets (DXESX); or short individual issues if you are knowledgeable about them and/or their sector.
Wouldn't go overboard with any of this at this point, particularly if you haven't worked this end of the field much before. The central banks are going to be working the printing presses overtime to make sure no money centers fail to endure a run and they'll be lots of jawboning too, calming folks down, implying they'll be a rate cut soon, and so on and so forth. Credit crunches are serious business and the powers that be will do everything they can to stop this freeze-up from spreading into a full-scale rout, I'm very sure of that. I just hope the Fed doesn't get spooked into a rate cut (Europe might cut but they have room), at least for awhile; I believe that would be very bad juju WRT $USD, moral hazard, additional bubbles and inflation here.
But, who knows, if folks come to believe the powers that be will really save the liquidity day and re-float the boats we could get a melt up in some sectors or even the market at large: Be surprised at nothing and ready for anything, for now at least, volatility is back in town.
Regards and good luck.
rw,
Thanks for your response. As the dow improves, i'm chicken. Time to add a hedge is better when it looks toppy, hands are rubbing, and mr risk mgmt is in the room...all as you suggest,a little late now. I can't seem to remember this plan. For now, it's the cash from trailing stop losses, circa 40%.
re Direxion family. Never heard of them before. Are you partial to them for big block/indice trading?
Rog,
You title your blog pukification, and you warn me about profanity, and suggest my posts will be deleted?
Wow, thats funny....I must be hitting a nerve.
Anyway, can't wait to read your next post regurgitating something Cramer has screamed, or something you read in Barrons......always insightful, never original.
Why not tell us what really matters.......did you buy, sell, or do nothing in this volatile week?
I think the FED and ECB are still serious about Inflation.
All the liquidity injections have been short term 3 to 14 day repurchase agreements. Enough liquidity to get their books in order.
Bottom line no printing press - no long term money creation for now.
Another reason I expect an orderly slide to continue after option expiration.
Ok with me Roger to shut him down. I enjoy the civility of this blog. It's not a matter of censuring disagreement, but empty useless coarseness. Usually, I just ignore.
anon 12:42--
In the spirit of sharing and learning, perhaps you could tell us what you've done with your portfolio recently. As Roger and others have suggested, I've played defense. I sold my IJJ after it broke the 200 day sma, added some Q's and AOD (nice 11% dividend.) I've got a limit order in on ITA as well. You?
Oooh, i missed the 12:42 comment. I think your comments are great for a couple of reasons and I think you should visit often. I have had a traffic spike lately such that I will be able to increase my ad rates and i think you spending so much time here is helping with that, no joke. there have been days where you have to have accounted for 30 clicks.
further i was not kidding about your comments. as long as its not profane, or some sort of racial slur, I won't delete. dissent all you want, I don't care and apparently neither does anyone else. but you will help my ad rates.
At the blog, Fly on Wall Street (http://flyonwallstreet.blogspot.com/), I found this, "I am hearing lots of rumors, from multiple sources, regarding hedge fund liquidations. I can tell you there is still significant headline risk, specifically with GS."
So the question is this: if headline risk comes to include hedge funds, will the problem escalate into something truly serious? Put differently, what does Ben know that we don't?
On the other hand, Ken Fisher,ranked number one out of 42 market predictors, says it is all silly, this credit crunch fear, and writes: "Pray for Panic. 8/10/2007. . . we welcome market panic. The bigger, the better. A bigger freak-out means more volatility and a bigger bounce off the bottom—all leading to bigger market returns for the year." (Found here:http://www.marketminder.com/commentary/Default.aspx)
Speaking for myself, I think I'll take a (very)long vacation ;-) John
Here's an interesting speculation heard out there: Cramer intentionally had his meltdown to panic markets to panic central banks in order to save GS et al. Pure spec but I would argue that Cramer is psychologically capable, if not compulsively driven, to be manipulative when under stress. A fascinating character. Something akin to Tony Soprano, it's just in his nature.
Re, my earlier post on Fisher: Here is a comment near the end of his article: "The current hysteria has all the markings of a true correction. It came out of nowhere, fueled by a big story (melting credit markets) that we’ll later see as no big deal. Investors will eventually (and probably, shortly) realize, unless they manage a hedge fund focused specifically on trading CDOs on margin, such a small portion of the credit markets doesn’t impact them much at all."
Ken Fisher is correct for long term investors.
But you may have a better buying opportunity month after month after month and Ken Fisher would still be correct, while others might call it a bear market.
I think both perspectives are accurate. I just want to buy back in cheaper.
Goldman hedge funds managing big money are down 26% and 14% respectively on the year. Liquidation time. I am out of this market for good. Took my 401k and other accounts which are now down 3%ytd, sold all funds and am happy with 5% no risk money market rate.
re GS hedge funds...I just fall for the conspiratorial thinking...they are in trouble and want others to sell to blackmail the feds and world banks to lower rates.
Roger, can you offer a big picture relationship between usdollar, fed rates, boj, europe central banks, commodities, and equities? I need someone to dumb it down, please. Specifically, lot of buzz about if yen strengthens...does this allow europe to lower rates to offset liquidity crunch?
Most of the Direxion funds are pretty small but they mostly seem to do what they say they do which, IMO, is reasonably high praise in the investment universe.
I wouldn't look at short (or long) in terms of guts, chicken or what have you. The thing is to understand the techniques and instruments involved, see if they provide the effect on overall portfolio performance that you need to reach whatever goal(s) you have set. Most instruments have more than one effect -- cash is also a hedge (against volatility and market turns) as are long T-bonds (against deflation) and so forth -- but try a couple small positions using shorting instruments and get a feel for them; look at the related literature (some of which you may not get or know about unless you are actively engaged) and see if the fundamental policies or behaviors match your intent. If one or more tools behave usefully then increase their allocation and gauge real-world impact on your portfolio or just take some careful notes of their behavior for a rainy day.
I'm just an 'amateur' investor myself -- been handling my own and family accts for about 30 years now -- it took me over a decade to become comfortable with hedging including appropriate uses of shorting; I still have a lot to learn. I may add a short position to reduce volatility or guard against loss in my strategic portfolios but may also use shorts tactically in my trading portfolio; could even involve the same instrument in each although purpose, time-frame, position size and triggers will almost certainly differ. Just by way of further disclosure I have no direct financial interest in any investment company and my opinion is worth about what you're paying for it, maybe a hair less (g), so FWIW.
Just curious Roger, what makes you think that someone who asks difficult questions, needs to resort to profanity or racial slurs?
Seriously, what have I posted that would lead you to even guess that's where I would go? Perhaps that is really your issue, not mine??
So far all I've done is question your portfolio management strategy, and point out that most of your posts either parrot something you heard on CNBC or read in Barrons.
you are money in my pocket, thank you
My pleasure.
Its nice to see that we can get along civilly, without racial slurs or profanity.
Personally I do not recommend hedging for most investors. Keep it simple sell the equities.
If that is not an option I prefer the double short funds. Let some market experts buy the proper puts to protect on the down side.
It is hard enough to pick the correct equities in a bull market, the rest of this stuff is to complex for me.
Sitting on the side lines.
The Fed was correct with today's action.
The hedge funds, pension funds, banks and certainly the deadbeats and liars who expected to be bailed out by taxpayers for their irrational financial exuberance now deserve to be taught two lessons that are not usually discussed.
We have many rights in this, the greatest nation on earth. They include the right to be stupid and the right to fail.
Well, while we were all pontificating about how the world was going to end, the hedgies were apparently making hay. According to an article tonight at thestreet.com, TrimTabs found new money flowed into U.S. etf's at a record rate this week, nearly three times as much as last week. They trace the buying to hedge funds, not retail investors, and conclude that the smart money is betting the market is about to bottom. I guess we can debate whether hedge funds are indeed the smart money, but apparently they're not all on street corners with tin cups.
Roger:
I was scratching my head about how our little troll friend Anon 12:42 was accusing you of using profanity, but the Urban Dictionary gave me the clue: The first four letters of your headline are a vulgar term for a female body part in Malaysia. Huh, I had assumed your headline was an innocent reference to the common American slang for vomiting!
Just goes to show, where people are seeking to be offended, they'll probably find a way...
Roger, I take a free newsletter from a market timer type that has been bdiscussing a correction since this spring. At first he looked at the 1987 crash but settled on the 1998 similarity in June.
He thinks it's nearly exactly like 1998. He said to not be long or unhedged anything but bonds till october'07. and the next market crash begins by august 24 and ends the first week in sept! he ranks high at timertrac.
Ken Fisher may be ranked number one in predicting the market recently but he definitely makes huge mistakes. On February 12, 2007 he wrote an editorial for Forbes titled "Housing Boom!," and recommended buying Pulte (34, PHM), Toll (34,TOL), and Beazer (44 BZH).
PHM is now 20.31, TOL is at 24.39 and BZH has sunk to 15.19.
And some speak of Roger's fallibility.
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