No Good Will Come From This

Apparently the market gave us all a big fat finger yesterday when a trader typed a billion when it should have been a million. For anyone who knows me, I don’t believe that explanation for a second, at least the part about the trader mistyping. As the market ticked down 900 plus points, my first thought was Israel finally bombed Iran. In hindsight that may have been a good time for them to carry out that mission, as it seemed things couldn’t get much worse for the markets.

When I realized an attack wasn’t the case, I commented to my assistant that a hedge fund probably blew up and we wouldn’t find out the details until sometime in the future. I then noted as the markets were crossing back up over the down 600 mark that very shortly the media will come out with reports that the precipitous drop was due to some rogue trading error – a fat finger by some low level entry clerk. I further stated that this would be portrayed as an isolated incident. Just as initial reports last week about the Times Square attempted bombing was by a lone, unhappy, deranged madman. Or the Christmas Day underpants bomber acted alone as he tried to blow up a plane as it flew into Detroit Metro. None of these are isolated incidents.

I am constantly amazed that people actually buy into these media spun reasons for events that don’t make us feel comfortable. I was actually smiling as the market tanked as I was net short (investing in a manner whereby my clients would profit if the market to were to decline) heading into the day. I’m not happy for those who lost 3.2% of their hard earned investment dollars in one day, but at some point, investors have to realize that markets move in two directions – up and down! How many lessons will investors need to participate in to understand that concept?

The market is now down for the year. The S&P is still down 30% since the market peaked 31 months ago, and is down 28% for the last 10 plus years! Buy and hold and hope is not working. The NASDAQ is still less than half its value from 10 years ago! Oh but that was a bubble – they can explain!

There really is no explanation necessary. The market was ridiculously overvalued recently as outlined in my previous articles. Whether there is any truth to the fat finger trading error or if I am correct and a hedge fund blew up doesn’t matter. What matters is that the market has issues! It’s going to be very difficult for Mr. & Mrs. Average Investor to get excited about putting their life savings or their retirement account into an investment vehicle that can fluctuate 10% down over the course of an afternoon, for any reason.

I believe there will be lawsuits that come out of this from investors who were stopped out of positions as the market swooned. If I held a stock and my stop loss was filled 40% below where it closed, due to someone else’s trading error, I would be looking to hold someone else liable too.

The media finally started to blame the going-ons in Greece as a possible reason the markets haven’t been acting well lately. You think? Here EU member countries such as Germany and France, and the IMF (which is 17.1% funded by US taxpayers) have made loans available to Greece in the amount of approximately $110 Billion. (Greece needs the money after years of allowing their citizenry to retire by age 55, get 14 months pay for 12 months of work, and take two hour lunches in the middle of each day.) And what do the Greeks do? Riot in the streets and say, ‘hell no – we won’t work past 55, and getting paid 12 months pay for 12 months work is unreasonable.’ Some thanks.

How do you think the hard working, efficient Germans feel about that? Our portion of the IMF contribution to Greece works out to be $6.7 billion of your money – How do you feel about their gratitude? Nice video footage of their warmth. The rock throwing and tear gas were especially touching. It would be different if the Greek situation was an isolated incident, but it’s not. Ireland, Portugal and Spain are not far behind. This could spread here once we recognize that many of our state governments are as broke as Greece.

Sovereign debt issues are the new subprime mortgage problems that got us here in the first place. Our government is complicit to this global and growing problem. The global plan to bail out debt with more debt is unworkable. It’s like the zombies feeding off the dead. We are dead (poor economy and growing debt issues) and the Greeks are the zombies (because they are rioting in the streets). The printing presses have been working overtime for so long here in the US that they are now making new $100 bills. I thought this was because the old presses broke, but I am told the bills were redesigned for a different reason.

I believe most will hope that this will be a one off event and we can go on with our lives and make money in the markets soon. Unfortunately, this is another in a series of warning shots across the bow that our debt problems are growing and getting worse. The market will most likely soon test the lows from yesterday. That means I think the Dow will drop another 656 points in the next month or so.

When the market crashed in 1987, it retested the crash lows within five weeks. After the retest we will reevaluate our next move. If our government and investors continue on in status quo mode between now and then don’t expect those lows to hold. Hopefully we can change course and get more fiscally responsible here and abroad. Somehow I have my doubts that will happen.