Monday Morning Quarterback: Social Studies
Tensions rise as the markets fall.
It's ever-present, eh? We've been "in front" of the social mood shift for a few years now, offering in 2006 that we were about to enter "a prolonged period of socioeconomic malaise entirely more depressing than a recession."
While that has proved true in spades, writing it and living it are two entirely different dynamics. Take a step back and think about it for a moment; let's reflect on the "pick a side or stand aside" mentality that has manifested in so many ways.
The Have's vs. the Have Not's.
Red states vs. Blue States.
Wall Street vs. Main Street.
Syracuse vs. Georgetown (tonight on Big Monday).
The battle lines assume many forms, but the underlying tension is thick and constant. You see it on television, you hear it on the radio, you feel it in your bones; an uprising is upon us. It's scary, and yes, quite relevant for investors.
Social mood and risk appetite shape financial markets. We constantly remind Minyans that The Crash didn't cause the Great Depression; the Great Depression caused The Crash. It's a subtle yet important distinction to keep filed away in the back of your keppe.
The modern day malaise will, much like its predecessor, arrive in waves. What was once a financial crisis, evolved into an economic crisis and seeded a social crisis. That cycle will likely, unfortunately and eventually begin anew; remember the banks didn't bottom until 1933, a full four years after The Crash.
Will history repeat or perhaps rhyme? As we listen to pundits and politicians discuss how we averted the second coming of the Great Depression, I would remind them that many of the causal elements are cumulative still, lurking beneath the seemingly calm financial surface.
As I wrote last week, on the heels of President Obama's Wall Street bombshell:
I don't disagree that changes must be made; we need to extract ourselves from the tangled and fragile web currently underfoot and remove systemic risk as best we can. Transparency, compartmentalization and shared culpability are positive steps in that direction. The devil resides in the detail of what, when-and most importantly how-policy is executed on a forward basis.
I would also encourage our President to be careful proclaiming the avoidance of the "second Great Depression". Policy, as it stands, has pushed pain out on the time continuum but the conditional elements of additional malaise (unemployment, untenable debt, social stress) remain very much in place. I don't want to be the Todd in the punchbowl but these things need to be said, regardless of whether they prove true."
Stair-Stepping Through the Modern Day Tulips
At the beginning of last week, we offered a handful of road signs that would prove useful as we navigated the tape. The gap between S&P 1127 and 1115 was the first vacuum, dual support at 1115-1120 was the next zone and S&P 1080 (the bottom of the Q4 trading range and the upward sloping trend channel) came into play thereafter.
As past support is future resistance, those levels remain a focus, along with trenched resistance from S&P 1150 to S&P 1200, if and when.
Last week's news flow juxtaposed quite nicely against those levels. On Tuesday, the market rallied directly to S&P 1150 on anticipation of a Republican victory in Massachusetts. We wrote at the time that the enthusiasm was misplaced, as the specter of gridlock didn't bode well for Wall Street.
Earnings, by and large, didn't help the situation, particularly following a massive rally. While Goldman's (GS) top-line was an eye-popper, revenues lagged and, as discussed, the event dovetailed into stiff regulatory headwinds from Washington (not an accident). Results from Google (GOOG) and American Express (AXP) also missed the mark, offsetting benign results from General Electric (GE), which continues to be a financial in drag.
To be sure, there are two sides to every trade and Hoofy spent the weekend crafting a response to the three ursine amigos.
On the regulatory front, he'll argue that the definition of "proprietary trading" remains to be seen. Wall Street makes a living making markets-I did this for many years-and we'll need to see where the line is drawn between customer facilitation and proprietary trading; I'm hard pressed to see one without the other and the implications are immense, not only for bank earnings but for market functionality as a whole.
On the Bernanke front-which triggered the last leg of lower-the weekend press quelled speculation that he would be replaced as the Chairman of the Federal Reserve. Regardless of how you view Big Ben, we can all agree that displacement, at this point, would roil the markets and the specter of "four mo' years" would alleviate that uncertainty.
Finally, with regard to earnings, we know that good (but not great) results are sold in an overbought tape while bad (but not horrid) reports are bought in an oversold tape. All else (the first two points) being equal, the bulls would argue that "sell the news" is a natural part of the broader stair-step secular progression.
As discussed late Friday in real-time on the Buzz & Banter, I've been trading around some short side gamma-selling blips and nibblin' dips-and made a round of covers into the close (trading "in between" during periods of price discovery is always a good idea). Having sold much of my March S&P paper (into the 55% 3-day pop in the VXO), my next slug of defined risk exposure (against the aforementioned levels) will be out-month paper.
Is there bounce potential? Absolutely, although I would offer that an "up" opening (on the heels of serious selling) is perhaps more bearish than bullish. Expect a test lower near the opening and watch our tells (banks, beta, breadth) for signs of life.
Snaps to the Jets, Vikings, Saints and Colts on a fantastic season, one and all. The Super Bowl should be a good one but there were no losers among the final four.
- Whether or not the toothless tiger spawns teeth-and regardless of the timing-the regulatory headwinds should persist for some time. When the dust settles, I can't help wonder if N's (NDX) will out-perform S's (S&P).
- In the "We're Gonna Release This Late Friday After Everyone Leaves" Department, the US Commerce Dept announced that they revised the November Durable Goods orders from the previously reported +0.2% to -0.7%, citing a "processing error".
- Is this the progression of societal acrimony to social unrest, with a little "economic hardship is typically a precursor to an uprising" sprinkled in for good measure?
- I assume a 15-year old female feline will eventually acclimate to having a precocious 3-month old male kitten running around, right?
- The product placement of the weekend goes to E*Trade (ETFC) (for the interview with the baby on the NFL Fox pre-game show) while the surprisingly good advertisement of the weekend belongs to Dodge for their testosterone-laced Charger spots.
- Time to fly; I'll see YOU on the Buzz. And hey, hey, HEY…let's be careful out there.
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 firstname.lastname@example.org.
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