Thursday's stock market taper tantrum: Safe to come out yet?

Gold, ETFs, margin calls, quadruple witching...oh, my! Photo: Branco/via LegalInsurrection*

WASHINGTON, June 21, 2013 — Dow Jones, S&P and NASDAQ average-wise there have been far worse days on Wall Street than yesterday. But Thursday’s waterfall decline in all asset classes was particularly troubling because it cut so deeply. The worst drubbings occurred in gold, bonds and bond funds. But pretty much anything you held in your investment accounts took a pretty nasty haircut in yesterday’s action.

We’d vowed to mostly stay on the sidelines yesterday, but tried to scalp a few quick trades in our remaining positions. Disaster. Everything got hosed, and we were forced to quickly trade back out again to avoid greater losses. That’s usually a bad idea, but yesterday’s drop was really scary and whatever eventually might happen today, we decided we simply didn’t want to risk any more capital when even the seasoned 1% pros were finding it difficult to parse all the market currents yesterday.

Underlying causes for the massive selloff, which actually started Wednesday afternoon, included:

  • a silly but substantial panic stemming from Ben Bernanke’s cautious hints that someday, some time before a distant Star Date but prior to the Wrath of Khan, the Fed might have to stop printing money, meaning current absurdly low interest rates might go up a bit;
  • continued pathetic news on the job front;
  • continuing and mystifying activities in the gold and precious metals markets causing a catastrophic drop in the price of the yellow metal yesterday, exacerbated by an announced 25 per cent increase in margin requirements on the CME as of this coming Monday;
  • equally weird downside action in China indicating that country’s stockpiling-financing game in copper is coming to a bad end;
  • quadruple-witching expirations coming this afternoon;
  • stock margin calls coming left and right, exacerbating the selling further;
  • a substantial rise in the VIX, the classic measure of market volatility for which the synonym is FEAR;
  • annihilation of bonds and bond ETFs, partially related to the above, but in particular involving muni bonds, already spooked by the looming muni disaster in Detroit;
  • the utter fecklessness of the Obama Administration’s post-Colonialist excuse for a foreign policy, particularly in the Middle East;
  • and finally, good old-fashioned panic.

The “Financial Times” (FT), which is sliding behind a pay wall, elaborates on the bond thing:

A wave of selling caused many exchange traded funds to tumble below the value of their underlying assets as a bond market sell-off caused stress in the $2tn ETF industry. ETFs track baskets of underlying assets, such as emerging-market stocks or municipal bonds, but discounts widened sharply on Thursday as dealers struggled to keep up with the sell orders.


SEE RELATED: Bernanke taper tantrum ignites Mickey Mouse stock swoon


FT elaborated with some interesting details:

Emerging-markets ETFs were among the worst affected, as investors took fright that the end of Federal Reserve monetary easing would lead to outflows from developing countries…. the iShares MSCI Emerging Markets Index fell to a 6.5 per cent discount to the underlying asset value. The selling also caused disruptions in the plumbing behind several ETFs. Citigroup stopped accepting orders to redeem underlying assets from ETF issuers, after one trading desk reached its allocated risk limits.

Oops. Another risk nobody saww coming.

Oddly, the tone of the market seems relatively benign this morning. It should be, as stocks and bonds are both amazingly short-term oversold. Dow futures are up roughly 30 points as of 9 a.m. EDT, indicating that at least the first few minutes of trading might play nicely with others. (UPDATE: The Dow is up some 65 points at 9:45 a.m., but don’t get your hopes up yet.) Options expirations were pretty much gamed yesterday, with HFTs likely fleecing forced margin sellers for much of their collective net worth, so trades associated in this area could settle down a bit.


SEE RELATED: Wall Street decision time: Rally or taper tantrum


Gold, whether in bullion, futures, or ETF form, is likely to remain treacherous through at least Tuesday of next week due to the way its futures contracts trade, so that’s a trap to avoid. Slightly longer term, gold is dealing with a cosmic problem: is the metal’s huge, prolonged rally finally coming to an end? If the Fed’s vague pronouncements are really correct, and if the economy is finally moving off life-support measures after 5 years or thereabouts, does that mean gold has lost its luster?

It’s hard to say. We’re not convinced this economy is anywhere near to healthy, particularly since the middle class in this country continues to evaporate along with its purchasing power and, yes, credit. Nor are we convinced that the Euro-socialists know how to stop giving away what they never had in the first place or that the Chicoms are really as financially astute as our Marxist media would believe. All of which points to gold continuing as a store of value, at least for now.

But again, it’s really hard to tell what’s going on these days. Hedge fund gurus have been guessing wrong. Veteran fund managers have been guessing wrong. All manner of traditional charts and other historical and predictive measures have been failing to work, big time. And, reportedly, even HFTs are starting to feel some heat as their headline-driven idiocy is, in turn, being gamed by others.

All of which means that we’re on the sidelines today and hoping for some passive recovery in those assets we still hold. Until things settle down, cash is absolutely king here, so hold as much as you can, but in several places, as no custodian can be fully trusted anymore in this John Dillinger-style trading environment.

Maybe around next week, we’ll be ready to pick up a couple pieces and try to rationally rebuild portfolios again. But right now, we’ll watch from the sidelines.

In fact, we won’t even do that. We’ll just enjoy what’s supposedly going to be a nice weekend, probably up at our West Virginia getaway where housing prices are low, where maintenance is relatively cheap, and where we always feel safer since everyone, including us, has plenty of guns and ammunition.

Today’s trades:

Zero. Zip. Zilch. We’ll take a look and consider coming back out of our foxholes next week. But utilities and coal (believe it or not), powerfully beat up lately, are on our radar screen as possible long-term bargains. 

  *Cartoon above by A.F. Branco reprinted by permission/via LegalInsurrection.com

Disclaimer: The author of this column maintains several active trading and investment portfolios and owns residential and investment real estate.

Positions mentioned above describe this author’s own investment decisions and should not be construed as either buy or sell recommendations. The current market is highly treacherous and all investors travel at their own risk, so caution should be exercised at all times.

Illustrations, charts, commentary, and analysis are only the author’s view of current or historical market activity and don’t constitute a recommendation to buy or sell any security or contract. Views, indications, and analysis aren’t necessarily predictive of any future market or government action. Rather they indicate the author’s opinion as to a range of possibilities that may occur going forward.

References to other reporters, analysts, pundits, or commentators are illustrative only and do not necessarily represent an endorsement of such individuals’ points of view. If specific investment vehicles are mentioned in any article under this column heading, the author will always fully disclose any active or contemplated investments in said vehicles.

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.

Follow Terry on Twitter @terryp17

 

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.

Follow Terry on Twitter @terryp17

 


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Terry Ponick

Now writing on investing, politics, music, movies and theater for the Washington Times Communities, Terry was formerly the longtime music and culture critic for the Washington Times print edition (1994-2009) before moving online with Communities in 2010.  

 

 

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