The Smartest Guys in the Room Are Screaming "Get Out of the Markets!"
But should we listen?
Last week, Michael Platt, the founder of the $30 billion hedge fund BlueCrest Capital Management, shared his view that European banks are effectively insolvent and the overseas crisis will get worse in 2012. "The major opportunities will come post-blowout," he told Bloomberg, echoing many of the themes we've spoken of in the 'Ville.
Mohamed El-Erian, the astute CEO of PIMCO, shared similar vibes yesterday. The head of the world's largest bond fund sees more than a one-in-three chance that the eurozone will fragment and trigger a crisis akin to the one we saw in 2008. "It would be the equivalent of a sudden stop…where financial markets freeze up," he told Bloomie, "It would be really, really messy."
I've been writing about The Sovereign Sequel (to the first phase of the financial crisis) since February 2010.
In the summer of 2010, while most folks forecast clear skies, we talked about how we were in The Eye of the Financial Storm, citing "the problem that comes from engaging in high-risk behavior for which the consequences are absent, even if only temporarily, is that such high-risk behavior begins to appear normal and the entire scale of risk gets adjusted and pushed out."
This past August, we shared that The Second Side of the Financial Storm had officially arrived.
Now, nobody likes "I told you so's," particularly when it comes to financial prognostications. We don't "do" victory laps or back-pats in the 'Ville for that precise reason, although we'll sometimes reference past scribes as a contextual backdrop for a conversation. Given today's social mood, being "long humility and short hubris" is the right trade to make.
People don't care who got it right, as evidenced by the fact that many of the same folks who missed the crisis claim to have the answers on how to solve it. The more educated among us want to know what could happen, which is a slight, yet notable shift from the A.D.D immediate gratification mindset that dominated the last decade, when folks just wanted stock symbols and price targets.
As we've been saying for over a decade, financial literacy is a process, not a point, and certainly not a Lightening Round.
So why do I bring this up? For two reasons; first, the path of maximum frustration, by definition, promises to flummox the savviest of folks (hedge funds are having a horrible year).
Second, nobody makes money in a bear market -- not even the bears. So when so many thought-leaders-smart, educated, insightful folks-are forecasting disaster and so few fund managers are "risk on," we must be careful not to become complacent; we must strive to see both sides, even if one or the other is particularly obvious.
It's sorta like that Seinfeld episode when George ordered tuna on wheat instead of chicken salad on white; we live in a Bizarro world, and we must recognize, if not respect, that fact.
For my part, I punted my triple-dip S&P calls yesterday--better lucky than smart, but only if you learn, or relearn, something-and held on to half my Research in Motion (RIMM) position after cutting it in half on yesterday's opening blip higher. I have zero insight or edge on whether or not there is a buyer in the wings, although my thoughts yesterday remain in play.
Lest you missed it, my RIM-specific thought was,
"There's a lot of tax-loss selling," I thought to myself when the stock got slammed and I again doubled down, biding time; there is franchise value, patent value and worst case scenario, I thought, there are suitors in the wings who would love to pick up that stock down 80% this year. There is a very fine line between proactive patience and rationalizing risk; it's called the bottom line.
On my word, I hadn't heard anything-not chatter, not a rumor, not even a whisper-but my trading antennae perked up and I listened to it, and then halved the position because discipline must always trump conviction.
I will say this, however, now that the "story" is out there, it should put a floor under this once noble brand and I'm more comfortable stashing it away for a sunny day. In fact, in the interest of full disclosure, I've been trading the stock actively today, as discussed in real-time on The Buzz & Banter. If you're interested, there's a two week free trial.
The ECB will lend 523 euro-area banks $645 billion for three years at one percent-effectively, "free money." Evidently, they're trying to mimic TARP through third party intermediaries as it's not within the ECB charter to lend directly.
Now we know the "what." The real question remains the "why?"
Yes, we asked this EXACT question in 2008, too.
The reaction to news is always more important than the news itself. Please note that European-and stateside markets-are lower on this news, and sovereign spreads have gapped wider, with the exception of Germany, which remains relatively flat.
The $5 level in Bank of America (BAC) remains an important zone for the market, as many funds aren't allowed, by charter, to hold stocks under a finksi. Keep that in the back of your mind as we watch the year-end action.
- Big Cap Pharma (Johnson & Johnson (JNJ), Merck (MRK), Pfizer (PFE)) and consumer non-durables (Coke (KO), McDonald's (MCD), General Mills (GIS))-both traditionally "defensive sectors"-are outperforming today, a sign of a possible rotation. This, on the margin, is constructive as sector rotations are healthier than outright migrations.
The price action in gold is a great "risk-on, risk off" proxy (said in my best Mr. Miyagi voice).
- Watch the dollar; it's a big picture influence but the day-to-day tracking in pretty insane. Check the chart below, which maps this dynamic over a 10-year horizon.
- Good luck today Minyans, and let's be careful out there!
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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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