The Other Side of the Trade: Bear Trap!
“Can you tell a green field from a cold steel rail? A smile from a veil? Do you think you can tell?”
--Pink Floyd
One of our favorite adages in Minyanville is to sell hope and buy despair, but the question is begged whether we’ve seen enough fear this year.
Last Wednesday, as the wheels wobbled on the financial wagon, we offered that the 2008 trading low was likely established the prior week when the S&P ticked at 840 and the DJIA traded at 7880.
Following the fragile Friday retest, the market enjoyed a spirited sprint that added 150 S&P handles and 1400 Dow points in a matter of days. As psychology shifts and investors twist, we’re left to wonder if the worst is behind us.
There is a massive distinction between a trading low and market bottom. All else being equal, it remains my view that either the dollar must devalue or equities will decline—perhaps next year—as debt destruction manifests across the financial continuum.
As traders, the destination we arrive at pales in comparison to the path that we take to get there. Therein lies the opportunity for those living in the nuts and guts trading the flickering ticks. The volatility is wicked but disciplined risk managers are feasting on the emotional famine.
There are two sides in each trade and risk to every reward. As such, I wanted to explore five reasons why we could see lower prices still by the time we welcome 2009.
World, Hold On!
Seeds of isolationism continue to sow as the going gets tough and the tough tend to their own interests. Derivatives may be financial weapons of mass destruction but liquidity is the neutron bomb—pull the pin and it’ll suck the life out of the global economy.
Recently nationalized global central banks are being polarized as the Dot.Gov bubble bursts. Australia ruled out deposit guarantees for foreign banks, the Royal Bank of Scotland (RBS) canceled its credit line to the National Petroleum Company of Venezuela and Nicolas Sarkozy proposed that each country launch sovereign wealth funds and take stakes in key industries to stop them from falling into foreign hands.
As countries fend for themselves, the risk of geopolitical turmoil is elevated. My single greatest concern is the potential for "something serious" to occur in the Middle East while the current administration is still in office..
Rampart!
As a derivatives trader for seventeen years, I understand the depth and complexity of our current conundrum. Stocks are the world’s biggest thermometers but credit is the backbone and you can’t walk without your vertebrae. 
Classic capitulatory signs were present two weeks ago but the credit cancer is bigger than the economic patient. There are upwards of $500 trillion notional in outstanding derivative contracts and the nationalization of financial institutions transfers—but doesn’t erase—that risk.
False Hope
Much has been written about the uptick in the credit markets being a precursor to an equity rally. While we’ve seen improvement in credit symptoms ranging from LIBOR to TED spreads, we’ve got a ways to go before conditions normalize.
Todd Harrison is the founder and Chief Executive Officer of Minyanville. Prior to his current role, Mr. Harrison was President and head trader at a $400 million dollar New York-based hedge fund. Todd welcomes your comments and/or feedback at todd@minyanville.com.
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One company manufactures robots. They are unable to get funding to continue production of said robots. They have existing contracts with companies but these companies cannot get cash to pay for the contracts. One after another these companies will go down. These are small businesses. The larger companies (grocery store chains, national ISPs, etc) are not having these same issues.
Last night the robot company held a lay-off party at a local bar. The company has retained just a few employees for now until things start moving again.
Being an ISP, we interface with many different industries. The mortgage related companies we had as customers imploded months ago. In fact, of the five we had as customers, only one remains. We have since seen smaller consulting companies for IT related services have trouble paying bills. Now we are seeing other smaller ISPs and small manufacturing companies take a hit. The crisis keeps rolling through industry after industry.
I am hopeful my company can withstand the hit due to some strategic contracts with local museums and larger, national ISPs. Our business is still expanding and we are currently trying to secure funding for more equipment. CIT has stepped up to the plate to fund the purchase. So all is not yet lost. But it aint easy out there. As Toddo says, there is always a place for those that are the best at what they do. That is what my company tries to live everyday.
Thanks to Minyanville for the perspective. By far the best site on the net.
James in Pittsburgh
When a company that makes things that people need is "laid to rest" then I'll start worrying.
The ones that are gone forgot about creating economic value along time ago.
As Kevin says it's not a liquidity problem it's a credit problem . . . too much debt and not enough money to go around.
Equities are the currency of the private sector and as such will be the last asset to be truly liquidated.
Had the Governments not become the "provider of last resort" equities would have assumed that much role sooner.
Minyan Terry
Look at the faces of the tellers and mangers in branches; they are still VERY worried.
I went to cash only the day before WaMu was bought. I've delayed payments on everything, credit card, car, house, insurance, etc..
After the bailout I felt my only vote was to withold my money. I have an excellent credit rating, haven't missed a payment in 25 years. I started getting phone calls from all of the above within 7 days of my usual payment date. I was not overdue; my payment was simply later than usual because I had stopped autodraft payments from my closed WaMu accounts.
I'm paying, but only at the last minute. I'm enjoying it. I like it when they call and want my money. They threaten me with my credit rating, and I ask them "What does my credit rating matter, banks can't get credit, even people with good credit can't get loans, so what does it matter to me? I don't plan on taking out any loans. The government robbed me and my children to bailout the banks, so why should I pay?".
There is silence, then they sputter and hem and haw and try to hit me with the credit club again - and I say - "There is no credit, I don't want credit." They don't know what to say.
They're desperate and afraid; the lie of "good credit" so you can go into "good debt" is exposed. Look for massive defaults on loans and credit card debt either out of lack of ability to pay or simply anger.
I'll keep paying my bills, but based on my personal test the barometer is pointing to "Stormy".
But seriously folks. We need to start pumping the money into Wall Street. Their average income is already off 30% this year. These Poor folks are looking down the barrel at poverty with an average income of only $330.000.00 a year. How will they keep their perilly whites up to snuff on that? Imagine going to a finance institution and having to talk to a finance rep that has a big smacking cavity on her front tooth staring you in the eye. Would you buy an annuity from her? Not likely. How about stock? Not unless she cut her blouse a little lower and had a push up on. Then cavities be dam. (Sign here).
Actually I didn't really sleep in. I was up most of the night watching the Asian then European markets collapsing and then I fell asleep in my easy chair. I'm worried.
We are at the cross roads of our credit crisis, I mean liquidity crisis, ooops! Now it's a debt crisis. A few years from now they will refer to it as the crapolla debacle. But for now we need to concentrate on how do we get out of this crisis?
Should Larry Ellison sell his 474 foot yacht and use the proceeds to pump up his shareholders? Should the oil exec turn down the dials on his pumps and at the same time give back the billion dollar pay package he had last year. Should John Thain give back his 40 million dollar bonus he got from putting up a for sale sign on Morgan Stanley. How about claw backs from Terry Killinger of WaMU who destroyed 47 billion dollars of market cap while making millions for himself under the pretense of intelligence.
It doesn't work that way folks. It's you working class folks that will pay. Yep! The 65% of you who make less then 35.000.00 a year. Dam right! You're poor already so what will it hurt to set you up with three generations of tax liability. We can deflate your house then inflate the hell out of you in the future and you probably won't even notice. Why? You ask? Because we can. We have. We will. You don't really think we are going to take it in the shorts do you? We are the wheels of commerce! With out us you have nothing. There will be no trickle down effect. Don't cry! Oh!!! Ok. Here's a nickel. Go buy yourself a cup of coffee.
Don't you just hate the Whiners?
JPM
JPM
The income stream no longer covers even the interest payments.
But nothing goes straight down, and bursts of hope will go "Over the Top" (to quote a phrase from the end of another era), ruddy cheeked and idealistic, to be met with withering fusilades.
Mind the Vickers, now, old chap.
Sadistic? No, not at all, I'm not mean to the people I talk to. I pose it as a question to them, and I tell them "It's not your fault, but please pass the message along."
Your comment has an undercurrent of arrogance and fear, why is that?
As they say on The Daily Show: "America: the land of Opportunism".
It's finally being realized that opportunism implies a temporary condition. We can't invent our way out of generations of stupidity, and we can't buy our way out of bankruptcy.
Your experiment is humorous. Got any recommendations for medical bills? There's got to be a populist way to get rid of the insurance companies and pay reasonable labor rates directly to doctors.
We don't need health insurance to pay for 'sick care': we need healthy people, and that comes from healthy living and care.
People don't need credit: they need food, clothing, shelter in exchange for a reasonable amount of useful work. They don't really need government, banks, investments, mortgages, etc. As much as these things are handy and fun, they have to be thought of as being as expendable as they think of the people they exploit.
Thank you Dan.
Exactly...ad infinitum.
I think if you pay them a little bit each month they can't go after you too hard, especially if they are a county hospital.
This is how illegals get treatment; they go to the county hospital, can't be refused treatment, get treatment, and if the bill comes due and they can't pay they skip town or country. You can't garnish the wages of someone who is paid under the table and doesn't own property. The loss is "written off" but you and I pay for it.
I'd much rather directly pay my Doctor and Nurse than 27 intermediaries that make that one Ibuprofen cost as much as 100 would at the supermarket. Something wrong with that equation; along with many others as you say...
I intend to be paying my doctor with chickens and potatoes: and I expect she'll be glad for it soon enough.
What makes me so angry about these phone calls is that I haven't missed a payment.
My payments have been delayed a week or two and I pay early in the month. I am swithcing banks because the management of my last bank was unethical and had no integrity (WaMu).
It takes time and the U.S. Postal service to get cashier's checks, stop autodeposits, autodrafts, and move cash to a bank you halfway trust (a quarter of the way?).
So when the banks pester me over not getting their cash immediately this is my feeling:
Excuse me? You didn't instantaneously get my autodraft payment into your balance sheet that YOU fuc*ed up playing Wall Street Craps with MY money!?!? Excuse me!?!!?!
So...it's only human nature for me to enjoy the exercise a little...especially after 30 years of being responsible and getting the shaft for it.
