“Last Dance with Mary Jane, one more time to kill the pain.” Tom Petty They say the sharpest rallies occur in the context of a bear market.
On the heels of one of the most strenuous stretches in the history of financial markets, we power up for the final fifth of our freaky week.
We offered on Wednesday that if Hank & Co. had any bunnies left in their magic hat, they would be pulled into expiration. On cue, global central banks injected billions of dollars of liquidity during the overnight session.
The rabbits ran rampant on Thursday’s opening bell but he was running scared.
Into that initial push higher, we mused that a messy press was not only likely, but necessary.
And boy, did we get a full court press.
State Street Bank (STT) was down 50%.
Mother Morgan (MS) hit a hat size.
Goldman Sachs (GS) dipped into double digits for the first time in years.
Panic—while not yet at levels seen during previous pain fulcrums—was palpable for the first time this cycle.
As we approached session lows near 1:00 PM, I penned two scenarios on the Buzz & Banter.
The first was that we were approaching a near-term trading low as expiration loomed and government bullets would be fired into the close.
The second was that we were in for a scary few sessions as price discovery permeated and natural levels were found.
Just as that post hit, we ticked at the nadir of the session.
The catalyst arrived from across the pond when Britain’s Financial Services Authority announced they were banning short-selling on all financial stocks.
We’re not talking upticks here.
We’re talking about short selling.
We wrote in real-time that “the mere specter of stateside adoption will be enough to jack ‘em, if only for a trade.”
And jack ‘em they did, igniting a furious flurry that took the tape all the way back to…Wednesday’s close.
Hank seized the moment to throw some fat on the fire, announcing that he was considering a “Resolution Trust Corporation style” vehicle to absorb the toxic debt on bank balance sheets.
It’s an option we discussed Friday in the ‘Ville and it was out there for the world to see.
This particular push was just getting started.
Let it go, let it go, let it go
Let it go, let it go, let it go…
It hasn’t been an easy few weeks for anyone. Days morphed together, Sunday’s have been sacrificed and the financial industry witnessed a seismic shift.
In a desperate attempt at balance, I joined my brother at the NYC Cowboy Mouth show last night. Live music was the last thing on my mind but I have one brother and life is short.
I arrived at the venue with my best attempt at a fresh face when my phone rang.
The SEC was banning short sales of financial stocks.
As the band stepped on stage and the crowd jumped to their feet, I sat in my chair dumbfounded. The implications for the capital market structure are profound.
To be clear, I appreciate the need for market stability. Time, if you will, to sort out this mess. Nobody wants to see the market crash. It’s not good for anyone.
We warned of this possibility in front of the September corporate debt issuance.
The leaks were springing in the dike faster than folks in
Washington could invent fingers.
The day of comeuppance arrived and something had to be done.
This, however, was a last gasp of desperation I never thought I would see.
Many on Main Street will turn on the tube and see the Dow 1000 points higher than it was yesterday. They will naturally assume that this is a good thing.
They will point to the short-sellers as modern day evil doers and offer that they got what they deserved.
While there are surely some that abused the system, they are not to blame for the structural deficiencies.
There is a difference between short-sellers and short sales.
The former makes a living on finding flawed companies, which in and of itself is a natural and healthy balance in the marketplace.
The latter is a structural process, a necessary element of how free markets work.
It’s human nature to place blame, particularly when we don’t understand something.
Most people in the world don’t understand derivatives.
They don’t understand this has been percolating for years.
They don’t understand that there are two sides to every trade and a risk to each reward.
We’ve monitored this in Minyanville as the cumulative imbalances built.
We watched as the markets were engineered.
We wondered aloud when the wheels would fall off the wagon.
The irony of the current conundrum is that many of the institutions in peril are the same companies that repackaged risk, engineered exotic products and built the derivative structure.
This comeuppance is, in many ways, why a new world order was being established on Wall Street. As painful as it was, it was a healthy progression towards the eventual recovery.
A bitter pill, if you will.
This unprecedented step by the government is the dawn of a new—and dare I say unfortunate—era. While it will flush a few abusive folks out of the system, it will forever alter the integrity of the free market system.
There will be many consequences.
Option markets will cease to function as market makers can’t short stock against their order flow.
Many hedge funds have effectively been put out of business.
An integral layer of demand will be removed from the marketplace, creating a downside vacuum once these curbs are removed.
As Phil Erlanger said on this morning’s Buzz, it is martial law for the markets.
Kevin Depew posted a chart earlier this week drawing attention to the similarities between current day and the 1971-1976 period. I thought that was worth revisiting as we attempt to make sense of this surreal environment.
Price discovery works both ways and just as the market wrestled with risk gone awry, it must now digest the unintended consequences of this latest government action.
This is a new world, folks. Day one. The dawn of a new era and something none of us have ever seen.
The system was broken and rather than let it fix itself through time and price, history has forever been artificially altered.
It is, in many ways, uniquely sad.
Be that as it may, we must remain lucid and play the hand we’ve been dealt. To that end, I would urge Minyans to take a good, hard look at their risk and use price to their advantage.
The rising tide will lift all boats in front of a perfect storm that awaits. It may have been pushed out on the horizon but it's there.
And now it’s really mad.
The doors to Festivus 2008 are officially open! Lock your spot for the critter trot as last year's soiree sold out. This is our annual event to commingle our professors, partners and Minyans while chowing down and listening to live music. The very best part? It's for the kids in the good name of my grandfather.
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No positions in stocks mentioned.