There was a wobble on Wall Street just before lunch in New York on Monday. The Dow and the S&P 500 both saw early gains wiped out – each index suddenly moving around 1 per cent lower. European stocks followed suit – London’s FTSE 100 fell 1.25 per cent in the minutes before the close of business there.
And no one seemed to know why.
There was an opportunistic attempt to blame Dick Bove (again), while some people talked about a couple of regional banks going under (the FDIC seized seven of them last week alone). Then there was a suggestion that one of the big banks was planning a large cash call.
There was also an idea knocking around that some sort of big credit rating revision on major US banks was coming down the slipway.
Like we said – no one seemed to know what had spooked the markets.
Except perhaps David Rosenberg, the Gluskin Sheff man who has been fuming about this “very flashy” rally for some months now. Rosenberg made a casual mention of a certain technical level on the S&P 500 in his regular Breakfast with Dave missive to clients on Monday:
Practically speaking, if the trend in the S&P 500 reversed today at 1,100, and the technical investors are inclined to sell, the fundamental investors might not show up on the buy side until 750 or 800. “If a share of stock is sold in the forest and nobody is around to buy it, does it still generate a fill?” That’s where the public comes in. Maybe they fill the demand void between trend and value players, but not this time. The public seems to be AWOL.
That bounce off 1100 theory is certainly supported by the chart:
Has Dave’s moment finally arrived? We hope so, because the economist is now losing confidence in capitalism itself…
Back in early 2008, while at Merrill Lynch, I wrote a report that was titled “Capitalism Takes a Sabbatical” and my hope, and believe me I am no Libertarian even if I am very concerned about the macro and market outlook in the face of widespread complacency, was that it was only going to be a sabbatical and not a permanent vacation. All of a sudden, I am not too sure, and all I am left with are two conclusions from all this:
1. The range of possible outcomes has never been as wide as it is today, at least in my three decades as an economic forecaster.
2. No well-functioning capitalist system can be sustained without expanding bank credit, especially since large chunks of the private securitized lending market has vanished and unlikely to come back again. If we learned anything from the Japanese, it was experience and that was it. It doesn’t mean that periodic 50%+ rallies in equity prices don’t occur — we have had at least four of these in Japan and the Nikkei is still down 70% from the highs — but it does mean that these periods should be used to rebalance portfolios and not to mistake these bouts of euphoria with sustainable secular bull markets.
Stand by for more guesswork as soon as we get it.
Related links:
U.S. Stocks Retreat, Led By Banks, on Analyst Downgrades – Bloomberg
Poor Dave – FT Alphaville
Dave’s furious – FT Alphaville