There’s an old adage among veteran stock traders that goes something like his, “If I told you the news before it were made public – it’s still a 50/50 bet you would guess the market’s reaction correctly.” That was when the markets had some resemblance of normalcy.
Today, normalcy has been replaced with sheer lunacy as to the speculation and interpretations for where these markets go from here. And the dangerous nature of just how cutting a blow to one’s financial future was laid bare in the story that went viral showing some wannabe “trader” wiping out his (and subsequently his wife’s and more) retirement savings. Then, opening up some form of a donation (begging) page to help him cover his now 6 figure margin call to his online broker because he was now broke. His story will far from be the last – for the clues are everywhere.
One of the main points I’ve tried to point out since I first began articulating my thoughts about these “markets” is the inherent dangers contained within where even veterans have found themselves on the wrong side of “would never happen.”
There’s no better example of this than the MF Global™ debacle just a few years ago. Where veteran traders went home at the end of the day with money in their account only to arrive the next morning to find “it’s gone.” The resulting chaos put many a veteran floor trader out of work, out of money, and for some – out of options. The lingering taste of distrust this one-act caused should not be lost. For it’s one thing when a client gets screwed – it’s quite another when you screw your own. This is today’s Wall Street.
JBTFD (just buy the dip) Bulls were once again rewarded this past week with: the best weekly rally for the S&P 500™ in all of 2015, rising some 3.3%.
Reread that last sentence two or three times with only one slight change. As you do add this short sentence: As terrorism struck throughout Paris killing over 130 innocents with open gunfire, explosives, and hostage execution at a restaurant, soccer match, and concert.
And let me point out for those thinking “Well that was Europe not the U.S.” So too did Europe’s market push higher in the wake. Again, why the need for any market concerns to heinous events when the central bankers of today have made it clear they’ll do “whatever it takes.”
The initial knee jerk reaction where the markets spiked down on initial reports were met with a horns over hooves buying frenzy. Why? Well, as callous as it may sound the only thing that truly mattered to the markets was this weeks options expiry cycle close. This is the last chance to closeout the books, and/or re-position on a high note before two very important issues: Year end, and, the Fed’s perceived imminent rate hike.
Market breath (volume and other qualitative analysis) showed the buying of 2015’s “best weekly rally” was anemic at best, and dangerous at worst. There’s no better example as to demonstrate this than what has today come to garner the Wall St. moniker known as “FANG.” (e.g., Facebook™, Amazon™, Netflix™, Google™)
David Stockman recently published an in-depth breakdown of this latest moniker-ed phenom that’s worth reading as to comprehend just how precarious things truly are. I’ll also add; once Wall St. assigns monikers? That’s when you should become very nervous indeed. Remember when the “BRICS” (e.g., Brazil, Russia, India, China, South Africa) were going to save the global economy? Now one wonders if they’ll be able to save their own. How’s Brazil doing for one? But I digress.
So now here we are going into an abbreviated holiday session in the U.S. following an expiry fueled rally. “What could possibly go wrong?” After all, with what we’ve seen transpire within the capital markets over these past few weeks; is the need for concern just more “Chicken Little” cackling? After all: The next in-rotation market Bull, as well as economist to be paraded out across the financial media will stampede over you in getting to the camera, microphone, or keyboard first to spout just how “resilient” these markets have become. And to prove their point (as always) they’ll just point to the current levels as if that tells the whole (or only) story.
Once again I would like to remind many who are currently following the “financial advice” laid out in many of today’s “best sellers” that caution and safety is paramount above all else. The consequences of assumptions are far too grave.
JBTFD has worked of late with a near offensive accuracy. (i.e., terrorism supplies a dip) However, the next dip (if there is one) might just not react in the same fashion. Why? Well, the Fed. has now mused in more ways than humanly possible to decipher that they will indeed hike rates at December’s meeting. Unless they don’t. And don’t forget negative interest rates are still a consideration.
Confused? Don’t be. They could always launch more QE if needed, since they’ve stopped it, stating the markets no longer need it. Sorry, that doesn’t clarify does it? Oh well, that’s what goes for “clarity” by today’s Fed. standards. Think I’m off base? Here, see for yourself. Below is a few lines from the Fed’s vice-chair Stanley Fischer speaking at a recent event in San Francisco:
While we continue to scrutinize incoming data, and no final decisions have been made, we have done everything we can to avoid surprising the markets and governments when we move, to the extent that several emerging market (and other) central bankers have, for some time, been telling the Fed to “just do it.”
Fed meetings are now ‘getting interesting’ as possible rate hike discussed.
In the relatively near future probably some major central banks will begin gradually moving away from near-zero interest rates.
Let’s put a little perspective on that first line: “avoid surprising” is used in a passage that holds both “no final decisions” because of continued “incoming data?” Which is exactly what determined the last surprise. (e.g., no rate hike.) All while we’re supposed to infer “emerging markets,” many of which are collapsing due to currency fluctuations are telling the Fed. to “just do it.?” Really?
Second: Fed. meetings are “getting interesting?” Is that the term to fit what must have taken place at September’s policy decision of inaction over action? I think that phrase is an interesting choice from my perspective. Especially since that decision was predicated on the “international developments” of a near China market meltdown precipitated by a reaction of “emerging market” upheaval in margin fueled carry trades funded in relation to today’s zero bound policy. Interesting indeed is all I’ll say.
Third: As “other major central banks” will begin to move away from near-zero policies? This, as Mario Draghi announces near simultaneously another round of “what ever it takes?” You can’t make this nonsensical double speak up. The only thing more preposterous would be if the Fed. Chair herself had recently reiterated that “negative interest rates” were indeed a tool currently contemplated. Oh wait, I forgot, she did just that at her latest testimony before congress. As the late (great) Gilda Radner would say, “Never mind.”
So with all this in mind what happens next is anyone’s guess. For I’ll contend not only does Wall Street not know – neither does the Fed. itself. For what happens to all this surety of assumptions (yep, that’s how farcical it’s become) if the markets now re-position just like they did in August and sell off their exposure to the increased carry cost exposure they most certainly will have. After all, 25 basis points sounds so minuscule. Unless, you see it as what it really has the potential for in today’s search for yield (any yield no matter how small) market.
In a margin levered carry trade – a 25 basis point increase could result in a 25% loss of profit, or increased cost. That “minuscule” 25 carries a lot of obligation cost or profit with it. So much so – it could blow up trades that would have trading desks begging to have the problems the a fore-mentioned “day trader” experienced. Small numbers have big impacts, and create inconceivable profits almost nowhere else as they do on Wall Street. After all, HFT (high frequency trading) make Billions upon Billions – a fraction of a cent at a time.
From my perspective there’s only one conclusion: a guess. Red or Black for those still foolish to play. For that’s what today’s markets have become. Nothing more than a wagered guess as to which way the market will go. Welcome once again to the casino. And as they like to say: “Everybody, please…Place your bets!” What you won’t hear at a casino yet have to contemplate today on Wall Street is – the hope they’ll be someone their to buy your chips when you want to cash out.
For that also is – a gamble.
© 2015 Mark St.Cyr