click for updated futures
6.24.13 futures



Good Monday morning: The lovely weekend weather has been replaced with hot humid & steamy Summer heat.

The markets are also skipping the pleasantries and rushing headlong into the a summer melt down. No cavalry came to the rescue after last weeks minor carnage. Hence, the summer swoon begins pretty much on time, where prior swoons began.

What is somewhat different this go round is the unlikely market rescue by the Fed. Unlike prior interventions, QE4 is open-ended and continuous. Hence, we will not likely see a grand announcement about a new plan which will excite traders. Instead,  we are most likely to hear minor notes and course correction discussions as various Fed agents discuss and debate policy in public. We may also hear more often from the Fed’s chosen conduit to the Street, Jon Hilsenrath.

Understand that the reaction to the inevitable tapering of QE will be neither rational nor timely, but rather the typical emotion driven trading that makes up most of the daily noise.  We can also expect an outsize reaction — or overreaction — as potential replacements for current FOMC chair Ben Bernanke get floated in various  trial balloons.

I am less convinced that we actually know what is driving these markets than most of us believe. QE Tapering, lots 0f earnings pre-announcements, China’s credit crisis, even just a market that has run too far too fast are all equally valid explanations. Some combination or perhaps none of the above are also just as valid explanations as why the rationales are likely right or wrong.

Regardless of who the next Fed Chair is, they will confront the same issues as the current chairman: A post credit-crisis economic recovery which is softer than we prefer, marked by weak GDP gains and mediocre job creation. They will face a huge balance sheet that will require 7 or so years to run off its excess holdings, a financial sector that still has too much bad paper on its books but a huge appetite for leverage and risk, which helped to create a market that has run up 146% despite an investing public that is completely disinterested.

Despite excellent benefits, you have to wonder who really wants this job.


More to come later




Category: Federal Reserve, Markets

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

19 Responses to “Look Out Below, Sell Off Continuation Edition”

  1. Petey Wheatstraw says:


    More like passing out drunk and busting your head on the coffee table.

  2. PeterR says:

    SPX Futures seem steady around 1570, similar to SPY MA(100) support just below 157. If Thursday’s high SPY volume was not a bottom, then . . .

    VIX holds the key IMO. A jailbreak above Friday’s high at 21, and all bets are off IMO.

    End of month/quarter/half Window Dressing TBD in a possible bottoming process this week.

  3. flocktard says:

    “Understand that the reaction to the inevitable tapering of QE will be neither rational nor timely, but rather the typical emotion driven trading that makes up most of the daily noise. We can also expect an outsize reaction — or overreaction — as potential replacements for current FOMC chair Ben Bernanke get floated in various trial balloons.”

    This is why it’s SO important to become a CFA! :)

  4. ironman says:

    BR’s money quote:

    Understand that the reaction to the inevitable tapering of QE will be neither rational nor timely, but rather the typical emotion driven trading that makes up most of the daily noise. We can also expect an outsize reaction — or overreaction — as potential replacements for current FOMC chair Ben Bernanke get floated in various trial balloons.

    We’ll agree on the second part of that (noise related to potential Chair replacements), but will disagree on the first. The market’s reaction would appear so far to be based very much on changes in fundamental expectations and very little on emotion. To be honest, it wouldn’t take very much on the part of the Fed to adjust the forward-looking focus of investors to reverse the outcome of its real mistake, which could be done with comparatively little cost if they act this week, and which could buy them time for their next more serious actions when they won’t have as desirable an alternative channel for market expectations.

  5. Willy2 says:

    It’s a thing called “Human nature” that drives the markets. If it was up to investors, politicians & the FED then markets would go up for ever, rates would remain low for ever and then the party never would end.

    But rates went higher & higher from 1945 up to 1981, in spite of “Operation Twist” in the early 1960s. Yes, the same kind of “Operation Twist” that was performed in 2011 (???) but the result was zero. Rates went higher anyway. So, why have a FED at all ?

    The FED ? Irrelevant. Remember, there was a crash in 1873 WITHOUT a FED. And there were crashes in 1929 & 2008 WITH a FED. IF the FED had been able to let markets go up for ever, then why didn’t they do it in 1929 & 2008 ?

    There’s one person who has a very clear view on what drives markets and why they “correct”. That person is a canadian called Bob Hoye.

  6. zell says:

    Who will be the Great Unwinder? Does anyone think the Fed will ever be able to unwind ? Maybe get back to 40 B. per mo.? Then maybe to zero- but sell back into the market place? I expect that assets purchased will become a mute point as I expect that structural problems – economic( does economics exist?), political, actuarial, etc., take hold.
    Is there a correlation between the amount of leverage held and the need to front run the Fed and can you infer the obverse?

  7. b_thunder says:

    My playbook:

    The (groupthinking) Market realizes that Fed will NOT purchase every Treasury bond and bill in existence, which is causing a stampede to dump all sorts of assets. Every uptick in bond prices due to QE/POMO will be met with more selling and as a result rates don’t fall but keep rising. “He who sells firsts, wins” become the motto of “yield-chasing” crowd.

    The Speculators will join the party and will try to “break” the Fed, to force the Fed to expand QE instead of contracting. Every “big swinging d*ck” on Wall St has wet dreams about doing to the Fed what Soros did some 20 years ago to the BoE.

    The Fed is forced to buy more than it wants, it effectively loses “control” over the markets. All the GDP, unemployment and inflation expectations go down the drain. The over-medicated patient (the economy) will fall into a stagflationary coma and, considering “how much” has been accomplished in 5 years since the crisis, I don’t know what will get us out of it in less than a (lost) decade…

    • MikeNY says:

      Interesting post. Maybe the Fed has *already* lost control of the asset markets. Then again, it was always a fool’s errand to try to manufacture lasting growth and good jobs by manipulating asset prices — and gilding the 1%.

      I wouldn’t mind QE if it were being used for something productive, like infrastructure. That’s investment, and good jobs. I mind it A LOT when it’s simply to pay for our obese, wasteful military- and medical-industrial complexes.

      The optimist in me says, one more meltdown, and maybe Congress will realize its responsibility….

  8. JVHaar says:

    “despite an investing public that is completely disinterested”

    Is there any historical data available to explain this statement. What was the participation of the public after the last credit crisis–1929? Has the man on the street lost trust in financial institutions or just broke or dissaving now due to demographics?

    • The objective data includes things like Investment in Equities (% of portfolio), Mutual fund Money Flows (Bonds vs Stocks), and
      CNBC ratings.

      After 1929, markets did not get back to a breakeven til 1954 — a new generation were born & grew up prior to breakeven!

  9. Concerned Neighbour says:

    Cue the Fed board members saying the “market misinterpreted” last weeks events. Now that an ever-increasing stock market appears to be the prime goal of monetary policy, they seem particularly averse to ever letting it go down.

  10. Angryman1 says:

    The FED we know didn’t exist to 1951. Please stop using this institution as the be end all of data. It goes beyond that, it goes to globalization and how it treats capital flows.

    I am just seeing portfolio’s being adjusted due to the production surge just not in the US, but Japan.

  11. Willy2 says:

    Key to every market is the situation in the credit markets. The highest peak, since 2008, for my favourite indicator was in april 2011. A smaller peak was recorded in november 2012 and that indicator drifted lower afterwards, revealing a bearish divergence with the rising DOW or S&P. Every important part of the financial markets has peaked. (silver,oil & CRB index in april 2011, gold in september 2011, DOW, S&P in May 2013). That suggests we’re in the first inning of the stockmarket crash of 2013.

  12. ironman says:

    The big difference was the new chairman, William McChesney Martin, who negotiated the March 1951 Accord with the U.S. Treasury, which allowed the Fed to raise the rates on long-term bonds above 2.5% (they had been previously been capped at that level back in 1942 to assist in funding the war effort.)

    In return, the Fed agreed to assist the U.S. Treasury in financing the nation’s debt, which in turn, instituted a positive inflationary bias at the Fed. This actually marks the beginning of what we consider to be the modern period for U.S. financial markets, which were considerably more volatile beforehand.

  13. Joe Friday says:

    Bernanke’s shot across the bow to the financial and housing markets is only relevant if GDP rises to the levels he has forecast for 2014.

    Good luck wit dat, Ben.

  14. DiggidyDan says:

    I’m about 85% cash now and don’t know what to buy. Seems like deflation is on the horizon and China may crap the sheets. I can’t get any yield in cash, but I got out of the bonds and TIPS before the carnage, so at least I didn’t lose anything.

    I’ll be looking at emerging markets for a bottom soon. Wish I pulled the trigger on TBF when I cashed out, but i’m too weak to short, apparently. Maybe I should buy another mountain bike, hahaha.