Freaky Friday Potpourri
Boo landed a roundhouse right yesterday and sent Hoofy reeling against the ropes.
"I haven't seen a beatin' like that since somebody stuck a banana in my pants and turned a monkey loose."
Good morning and welcome back to the Freaky Arena. After a series of clenches and breaks, Boo landed a roundhouse right yesterday and sent Hoofy reeling against the ropes. As most of the crowd sat there stunned, the proud bear pranced around the ring with a knowing look and new-found confidence.
"Sub-prime wasn't contained," he said under his breath as he glanced to the executive suites where Hank Paulson was watching the fight, "sub-prime is far from contained." Indeed, it's been the bearish bent that the pebble in the pond would ripple far beyond the niche nuances of the credit markets.
And now it has.
As the liquidity spigot seizes shut-a dynamic that is unknown in terms of longevity-investors are being forced to reassess their risk profiles. That implies different strokes for different folks, from credit to equity to carry-trade players-and it's a delicate dance in the context of an interwoven, credit-dependent financial fabric with upwards of $500 trillion in underlying derivatives.
We've long talked about these conditional elements in the 'Ville but the dog, it seemed, had no bite. That lens lost credibility as a function of absence and conditioned complacency set in. Volatility, already depressed by liquidity, was pressed lower by income-funds looking for dimes in front of the bulldozer. The compression has been stealth, but it's been cumulative.
The unfortunate truth is that many risk managers are unfamiliar with violent volatility. If Bear Stearns (BSC) can morph two funds from heroes to zeros, we can only assume that less seasoned salads are getting tossed. We knew that the weeks after the second quarter would be big (as investor letters made the rounds) and war stories continue to trickle into the marketplace.
Now, to be fair to the Matador Crowd, some context is necessary. The S&P is a scant six percent from all-time highs after a 94% rally off the '03 lows and the lift from those levels has been without major disruption. Couple the prevalent bovine psychology (the market broke out last week!) with the aforementioned complacency and voila, you've got a situation that feels much worse than a snapshot would suggest.
Perhaps many of the pundits pounding the table are right. Maybe this is healthy. The truth is that I'm not smart enough to know. What I do know is that by the time the evidence of "something more troubling" shows up in economic figures or is reflected by earnings, the market, as a forward looking discounting mechanism, will have already baked it into price cake.
Hear everyone but listen to yourself. At the end of the day, the thrill of victory or the agony of defeat is for you and only you to define.
Some Random Thoughts as we bring the swings home…
Not so Sweet? Cadbury Schweppes Plc (CSG) delayed the sale its U.S. beverage unit, which won't help psychology in the space and into the weekend.
The smarter traders I talk to continue to watch the Yen across the carry spectrum as a key tell for equities.
Yes, we're near-term oversold (particularly the financials) but it's worth remembering that the DJIA is still up 8% for the year. We could (dare I say should) see some snazzy rally attempts but if this is the other side of the hump back '07 trade, those lifts will be met with upside supply.
I traded 'em wrong yesterday (hand up, mea culpa) and let my discipline slip. Hey, we're all human and it happens to the best of us. We share our mistakes in the 'Ville with hopes they offer lessons that allow Minyans to avoid similar mistakes.
How did I "go out"? Much smaller and very tired! While I'm conscious of the risks (if we're nosty into the afternoon, "Black Monday" chatter will circulate), I'm respectful of a Snapper and have some inventory to feed him if he shows face.
Wall of Worry? No sir, Mr. Melloncamp!
Hit me again Ike and this time put some stank on it! According to the FT, big bank balance sheets have absorbed more than $40 billion of high-yield, buy-out related debt intended for sale to investors.
Good luck Minyans-let's end this week with some jingle in our jeans and a smile on our puss.
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