All Systems Go for Sustained Government Intervention

Today the US government added yet another weapon in their crash fighting arsenal: outright stock purchases. The US Treasury is prepared to deploy some 250 billion dollars to buy direct stakes in US financial firms. The results were predictable: with shorts running for the hills and investors seduced by avarice buying on the open, short term money dumped shares bought during yesterday's long orgy.

The government has remained ready and willing to do anything to prop up financial markets. They have temporarily guaranteed bank loans in response to similar actions in europe. With Treasury long bond prices still above par, the government still possesses an infinite supply of monetary bullets to fire at the evolving bear market.

The End of "The End"

This day marks the end of this current crisis. We might trade lower from here, or even sideways for the the short term. However, at some point in the next 6 months we will rally much higher.

The stage is set for a lot of unwinding and reshuffling of banks balance sheets. funds will fail and strong ones will consolidate. Just like after a forest fire, young saplings will take the place of large trees felled by the firestorm. All of this will happen in the market, but it will take time.

In the meantime the governments of the world have proven their resolve to act in unison to alleviate monetary pressure. There may be a meeting of the G8 (or G21) soon. Multilateral action will avert any currency crises that could arise from huge US government intervention in debt and equity markets.

Such willingness to rate cut out of trouble may set the stage for further longer term inflation, as the contemporary wave of inflation (that started in 1897 ) looks set to continue for at least a few more years hence.

As commercial paper rates come back into line with treasuries, investment firms will be able to conduct their primary business of financing and arranging transactions and the whole world economy can start anew the great ponzi scheme of growth that we currently rely on.

It's Over

Ok, I'm willing to admit i was premature in thinking this market would bounce today. But losing a few percent isn't bad when the whole world is crumbling. Keeping the stop tights allowed me to survive this week; all the while betting on a bottom.

I'm going to continue trying to pick a bottom in this market, because one of my central market principles is that nothing can move in the same direction forever. On the microscopic intraday time level, stocks reverse themselves all the time. There will be a day when this market bounces 1000 points. It might not be tomorrow, but it will be soon. I will keep the stops tight until that day.

I will know it is time to buy when the cadence of the last few days abates itself. Sellers won every battle this week, so when they appear to back away I'll test if there are any buyers. If it is truly a reversal to the upside, a simple buy the dips and accumulate strategy will do just fine. Otherwise I will keep the stops tight, so I live to fight another day.

Keep the stops tight.

Forensic Examination of the Market

A view of the overall market might convince one that the end of the world is nigh. However, a closer examination of the market that composes this index tells a different story.


We can see that the oil services have gotten killed in the same pattern as the market (which is an AVERAGE of other stock prices, including oil service stocks)


Rio Tinto, one of the worlds largest mining firms, has lost 60% of its value. Arcelor-Mittal (MT) has lost 70%. US Steel is down 75%. This is all since the end of June.

What we are experiencing is a huge popping of a liquidity fueled commodity bubble. Remember the Chinese Liquidity Mechanism? Thats been happening in every asian country in to some degree. So since 2003 there has been a mechanism for creating a ton of money and reinvesting it both in the US and emerging markets. Since commodities are priced in dollars, they have represented an easy way to reinvest accumulated dollar reserves held in foreign banking systems. Now that the largest mechanism for financing this huge ponzi scheme -- the investment banks -- are rotting six feet under, the whole money flow system is under pressure. That has meant less money creation in emerging markets and falling demand for raw materials as Americans buy less shit.

All this has combined with our banking crisis and election cycle to make everyone jittery as fuck. Take a look at some banks. They have gone NO WHERE in the same time frame:



The MASSIVE (combined market cap of greater than $400 billion) domestic banks haven't done anything in the last 5 months except rattle about. Granted they have made huge moves, they just represent the uncertainty that has gripped the market in 2008.

Of course, if you were long some foreign bank ADR's, all bets are off:

Japan:

Brazil:

Russia:

Long story short: our banks our fine. They have huge net interest margin from rate cuts and tons of high yielding commercial paper to buy. They have a 700 billion dollar buyer for their toxic mortgage products.

A commodity bust led to a bust in emerging markets. In a country like China or India, natural resources make up a much larger portion of their economy. Their banks lend to raw material firms. Prices just collapsed. Loans will go bad. Banks will go bust.

The S&P's look bad because its made up of raw materials firms and banks. Don't panic, make money when the world returns to normal. Just don't lose it all now.

My Bailout

Having been shredded by the ~11am back and forth, I became bound and determined to be in NTRS when it began its inevitable rise back upward. If it were going to go down after I bought it, it would have just collapsed like on the moves that caught me earlier. But this one was different in that the buyers stayed pat on every down move, and the XLF's and regional banks were ticking up too.

Buying on the rebound happened fast, with a sub minute move from 62 to below 60. Within ten minutes the stock was up two points to its highs. Sold too soon on both trades.

Structural vs Fundamental Causation: A Look at Hedge Fund Redemptions

Depending on what sources you use, hedge funds face redemptions of 10-20% of their assets under management from disgruntled investors. When an investor redeems their capital from a hedge fund, unless the fund has excess cash it must sell some of its positions. If the market is depressed to begin with, and a herd of investors rush for redemptions all at once then we can see how the market could turn ugly quickly (e.g. the last 2 days).

This provides an excellent opportunity to contrast two different classes of causation in the market: structural vs fundamental. Everyone is familiar with a fundamental reason to make an investment decision. An investor could buy a company because their earnings look good. The return on investment might be higher with one company vs another. The economy could be expanding or contracting. These are all fundamental qualities.

Structural causation comes from things like the massive hedge fund redemptions: they are causes of a not necessarily fundamental basis. They may be caused by fundamentals; a rash of redemptions was caused by a fundamentally crappy market. But structural causes often appear disconnected from fundamental reality. The government has intervened in unprecedented scale and scope; net interest margins will be improved by coordinated worldwide rate cuts. But there are some firms that still need to sell things to raise cash. Until they are able to get the cash they need in loans or by selling inventory, the crash will continue.

Mid-day Report: Don't Feel So Bad, Traders are Getting Annihilated Too

I make my living exploiting statistical linkages between stocks on a microscopic level. Because I am so short term and exploit spreads, I make money on 85% of the days that I trade. That being said, these last two days have been complete garbage. Correlations that I have used profitably for months were demolished today. Any semblance of order was replaced by an inexorable pressure to the downside.

The moral of this story is to stay on the sidelines or if you do trade stay as small as possible. That is not to say that there isn't any opportunity in this market. Buy and hold investors are getting amazing prices. But if your strategy is X and the market wants Y then you've got to take a chill pill for awhile and relax. Either get some new strategies or sit back and watch until yours work again. IT IS EXTREMELY EASY TO LOSE EVERYTHING IN A MARKET LIKE THIS. Be careful, and live to buy another day.