WASHINGTON, June 22, 2012 – All the averages were absolutely pancaked Thursday as a harmonic convergence of really bad economic news hit the tape not long after the open. The Dow lost a whopping 2 percent on just this single day. The broader S&P 500 did worse at 2.2 percent, and the NASDAQ—hanging fairly tough thus far in the June downdraft—got pummeled mercilessly, down 2.4 percent.
Volume yesterday was relatively heavy, as it has been in downdrafts for at least a year. Net selling seems to be the order of the day lately. Investors Business Daily (IBD) noted that “Each main index has dropped below its 50-day moving average after holding above that key level for a few sessions.” (No link available, article behind pay wall.)
As if to rub hapless investors’ noses in the doggy doo-doo, Moody’s came out after the market close with a downgrade of 15 large banks. Banks still having problems? Who knew? The rumor of this impending action earlier in the day (aka, insider information) clearly helped accelerate yesterday’s sickening swan dive. Hey, Warren Buffett owns both Moody’s and a goodly chunk of Bank of America? Don’t these people talk? (Oh, yeah, Moody’s cut BAC less than some of the others.)
Goldman Sachs helped add more bodies to the jam pile yesterday as well. With clear foreknowledge of the Moody’s downgrades (although it was probably an open secret in most big houses), they recommended that its investors short the S&P 500, fixing a downsize target of 1285.
Making things even worse, gold bars were pounded into gold leaf yesterday. Gossamer golden threads fluttered away in the wind as physical gold broke chart barriers that gold bugs were sure would hold. Word is that a lot of this was due to massive selling due both to stops (automatic sell orders) getting hit, exacerbated by forced liquidation in many accounts to meet margin calls necessitated by yesterday’s violent downdraft.
Oh, recent home sales and mid-Atlantic manufacturing numbers came in below par, too. Chinese and European manufacturing numbers also didn’t look so hot. This whole mess is starting to remind us of that tagline from those vintage 1960s “Batman” TV serials: “The worst is yet to come!” Is it? Let’s take a look.
Some of yesterday’s blast into the past was probably due to what one source called a Wall Street “hissy fit” over the Fed’s tepid announcement yesterday. Bulls were expecting that Uncle Ben would launch another (inflationary) round of quantitative easing (QE) yesterday, but all they got was an extension of the marginally effective “Operation Twist” in which the Fed essentially dumps short term debt for longer term paper, thus keeping interest rates (i.e., mortgage rates) low for that proverbial “extended period of time.”
When QE proved not forthcoming, the bulls saw that big pile of free money vanishing into thin air, and away the market went to the downside. Exacerbating everything even further: the mess in Europe has kept pressure on the Euro, eroding it vs. the dollar, which has either been steady, or in a slow uptrend for weeks. This has the effect of putting pressure on large international companies (as in the Dow Jones Industrials) increasing the cost of American goods abroad, which tends to ratchet down those quarterly sales numbers.
Perversely, the dollar’s current strength—which Washington purports to endorse—is perceived as bad for stocks. So when our dollar buying power increases on this side of the pond, which is good for us, the price of the stuff we make increases everywhere else, slowing international sales, making foreign good cheaper here, and increasing the omnipresent U.S. balance of trade deficit. Savvy?
Suffice it to say that the world’s economy is such a tangled, failed mess that nobody knows what to do any more. So, as a result, we get days like yesterday where everybody (including the HFTs and algos) throws in the towel and heads for the local watering hole before the close.
So we must conclude that indeed, the worst is yet to come, right? Well, maybe not. Futures are sharply up as of 7:25 a.m. EDT, indicating the market will give us a nice opening pop this morning. If you’re confused, so are we, but then again, we often get a brief, powerful snapback move after a severe market pounding. Such updrafts, while bullishly pleasant, never seem to last very long, but then again, you never know what the politicians will launch over the weekend when no one can trade.
So, if we do get a pleasant interlude this morning or all day, best advice is to lighten up on what positions we have left, save, perhaps, those stalwart utilities and mostly stalwart REITs. We’ll keep short term (five years or less) bond positions in our closet as they’ve been holding nicely these days. And we’ll keep the rest of what Mr. Market has allowed us to keep in the First Mattress Bank of Podunk. (And we’ll also keep in mind that the Maven’s observations can be wrong.)
Have a great weekend. It’s a 48-hour period during which our accounts can’t get damaged further. We knew there was a horse in that barn somewhere, eh?
For a further antidote to this investment chaos, may we recommend you take a gander at Eric Golub’s latest and very special Tygrrr Express column over in our politics section. In a rare burst of nonpartisan enthusiasm, The Top 30 Hottest Political Women of 2012. Truly, it’s a Babe Watch that far surpasses the original.
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Read more of Terry’s news and reviews at Curtain Up! in the Entertain Us neighborhood of the Washington Times Communities. For Terry’s investing and political insights, visit his Communities columns, The Prudent Man and Morning Market Maven, in Business.
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