Random Thoughts: Greece, MF Global, and the Fate of the Free World
Other than that, it's pretty quiet today.
Inhale, exhale and clear the mechanism...
A few observations, in no particular order:
The reaction to the first press lower this morning was constructive-breadth remained 8:1 positive, the dollar was off 60 bips and the banks held their bid (I'm watching Goldman (GS) and Bank America (BAC) as my proxies, the latter of which I sold yesterday as a function of discipline...but it certainly trades dry). Beta also acts well, although Apple (AAPL) feels like it wants to take a trip to the south side.
FOMC days are traditionally a tale of two tapes, with the announcement serving as the toggle. We've said for years now that when the Fed runs out of ammunition, the last bullet would be pointed inward. I'm unsure of the timing but I'm confident that the collective faith in the system and its stewards will dictate when that comes to pass.
The price action in commodities suggests one of two things-optimism surrounding QE3 or hoarding in front of Europe.com. My hope and expectation is that calmer heads will prevail in the near-term although I don't foresee a sustainable solution save widespread debt destruction and/or reorganization-and that has its own set of unintended consequences.
If you were in hope mode yesterday and rationalizing risk, remember what that felt like as you reconfigure exposure. Contrary to what momentum types will tell you, financial assets don't get "better" higher and "worse" lower. As dynamic as the world is, with rumors and chatter and false starts at every turn, the environment hasn't shifted that much since yesterday-only perception has.
There was chatter yesterday that George "Papa G" Papandreou will be ousted-along with his referendum. That would amount to a massive "Never mind!" although we can't underestimate the damage that's being done to the collective psychology. While the Greek tragedy is one thing, the Italian, Portuguese, Irish and "other" mindsets are most certainly being affected. That's sorta the gist of the Bloomberg TV vibe.
Once upon a time, I would have marveled at yesterday's price action-the swings, the false starts, the rumors, the interconnectedness of it all (Germany closed 5% lower, for example)-but sadly, it was just another day at the office. In the last five sessions, I count 2,500 points worth of price swings in the Dow Jones Industrial Average. Nuts.
The dynamic that was overshadowed yesterday-but may be as critical through the lens of psychology- is the MF Global (MF) saga. It's one thing to get toe-tagged in a tough tape; it's another to commingle funds and operate outside known legal boundaries. While I don't sense massive counter-party exposure (just my gut; I have no edge), the unquantifiable element is what it does to an already dinged market mindset.
Making a bet on the banks is making a bet on Europe-and policymakers in Europe don't even know what Europe looks like-so keep that in the back of your crowded keppe as you shape your risk. I've traded in and out of Bank America numerous times in recent days-to make chicken scratch, no less-and while I like the way it traded in a punky market, it was a rental for a reason.
- They say that corrections must feel sinister for them to be truly effective and check the box there. I've said it before and I'll say it again: There's no shame in admitting it's hard, there's only shame in pretending it's not. Remain lucid; the wild ride is sure to continue.
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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