Ugly Day Ahead?

If the Asian markets are any indication, we could be in for an ugly session today. The Hang Seng put in a 52-week low overnight, dropping another 900 points before recovering to finish down 455. The index is down almost 3,000 (almost 12%) since last Monday's open.

The dollar is off pretty sharply against the Euro so far today, thanks to the combination of the S&P downgrade and the ECB stepping in to buy more European government debt to shore up Spain and Italy.

The European markets are in negative territory so far today, but they're not off dramatically. The FTSE and the CAC are both down about 1%. If this is any indication of how the US markets will open in four hours, we could be in for a pretty ugly day.

The S&P downgrade is unprecedented, and we'll be covering it in depth in this week's NSFW (which will be out tomorrow). One thing I find really curious about it is how some people knew it was happening ahead of time.

Obviously, the White House knew about it because S&P made a (dis)courtesy call before releasing the news. But the rumors were all over Twitter on Friday that the downgrade was coming after the close, and I heard they originated with BNP Paribas. So who do the guys at BNP know? S&P? Someone with loose lips in the White House? It's just not where I'd expect a rumor like that (especially one that ended up being true) to originate.

In any case, hopefully you're positioned for a move to the downside, because that's how it's looking right now. Keep your heads low and powder dry, guys. Could be a rough day today.

 
samoanboy:
How on earth S&P, Moodys etc still hold any credibility ia beyond me - the fact that there idiotic analysis is capable of moving markets is incredible (for the record I think AA+ is probably generous!).

As to this morning, lot's of red already, not as bad as Thursday yet though.

I'm really bored of this 'why does anyone trust what the agencies say' chat. Did you chime in, pointing out the poor credit quality of the underlying loans, the correlation of the asset, the weakness of assumed house price trend when people were pedalling CDOs of sub prime? If not, keep quiet.

"After you work on Wall Street it’s a choice, would you rather work at McDonalds or on the sell-side? I would choose McDonalds over the sell-side.” - David Tepper
 
Oreos:
samoanboy:
How on earth S&P, Moodys etc still hold any credibility ia beyond me - the fact that there idiotic analysis is capable of moving markets is incredible (for the record I think AA+ is probably generous!).

As to this morning, lot's of red already, not as bad as Thursday yet though.

I'm really bored of this 'why does anyone trust what the agencies say' chat. Did you chime in, pointing out the poor credit quality of the underlying loans, the correlation of the asset, the weakness of assumed house price trend when people were pedalling CDOs of sub prime? If not, keep quiet.

I'm terribly sorry to have bored you, please accept my humble apologies.

My observation was that when a service provider so clearly fails in their fiduciary duty I believe their credibility should hold little credence to the wider market. Am I to understand that in your opinion we should forgive and forget?

 

Although surprised that they actually went through with the downgrade, I think its an embodiment of the situation right now. Nothing has fundamentally changed since 2008: house prices are still too high, Fannie and Freddie still exist, consumers are still overlevered buying shit they don't need. We tried fixing the economy the same way we tried to fix it every other time: the government spends a bunch of money on random shit (most of it borrowed) and the Fed gets interest rates lower and lower. So what has this massive 'stimulus' spending binge and two rounds of QE yielded us? Bumpkus.

So yes its a credit downgrade, but I see it as more of a credibility downgrade. The US government's method of fixing things is more-or-less having bullshit called on it. I still think of the US as having AAA credit - that we will always make all our debt payments, for at least for the next 15 years. But S&P is saying 'get your shit together now before you start down a path of becoming the next Greece'

Also I think its ironic that after however many years of bashing rating agencies' ratings as shitty and wrong and not to be trusted, somehow suddenly now what S&P has to say has a weighty meaning.

 
In The Flesh:
Tell me something, Eddie--does it make you wish, just a little bit, that you were still in the game?

In some ways. When I was a stockbroker in the early 90's, my sector of the market was in a pretty pervasive bear cycle even though the broader market was doing pretty well. It really got to be a drag after a while, playing poison phone and other shit because nothing was working out. It's kinda how I imagine it must feel to work at a long-only mutual fund today (which would suck ass on a day like today).

When I was slinging futures in the late 90's, I was much better positioned to take advantage of moves like this, so yeah, that was more fun. It still wasn't what I'd call a good time, but at least I was a lot more nimble in my trading and was able to capitalize better on macro moves.

I don't know that you'd ever hear me admit that I "miss it", however. The work was too much of a grind, even on its best day.

 
Edmundo Braverman:
One thing I find really curious about it is how some people knew it was happening ahead of time.

Obviously, the White House knew about it because S&P made a (dis)courtesy call before releasing the news. But the rumors were all over Twitter on Friday that the downgrade was coming after the close, and I heard they originated with BNP Paribas. So who do the guys at BNP know? S&P? Someone with loose lips in the White House? It's just not where I'd expect a rumor like that (especially one that ended up being true) to originate.

S&P knew they were doing this regardless of the political outcome b/c it's run by a bunch of old GOP stalewarts that dinged the US's credit rating to spite a president they despise - way to be team players, ASSHOLES.

As far as BNP knowing: S&P communicated with a number of European points of contact over the last few weeks and it's very likely that someone over there went public with this. Their motive? Europe plays dirty and this helps take the heat off of them, so that's my guess.

I'm glad I'm not a trader today: any time I walk past the entire spectrum of news channels reporters on the way to work it usually gets ugly.

Get busy living
 
UFOinsider:
S&P knew they were doing this regardless of the political outcome b/c it's run by a bunch of old GOP stalewarts that dinged the US's credit rating to spite a president they despise - way to be team players, ASSHOLES.

We actually cover this in this week's NSFW (going up tomorrow). I'll tell you the same thing I told Midas when he made the same argument: regardless of motivation, you can't make the case that the US is the same country credit-wise that it was 5 years ago, 10 years ago, or 50 years ago. The downgrade just reflects the reality on the ground.

BTW, they just cut Fannie Mae and Freddie Mac from AAA to AA+ as well.

 
Edmundo Braverman:
UFOinsider:
S&P knew they were doing this regardless of the political outcome b/c it's run by a bunch of old GOP stalewarts that dinged the US's credit rating to spite a president they despise - way to be team players, ASSHOLES.

We actually cover this in this week's NSFW (going up tomorrow). I'll tell you the same thing I told Midas when he made the same argument: regardless of motivation, you can't make the case that the US is the same country credit-wise that it was 5 years ago, 10 years ago, or 50 years ago. The downgrade just reflects the reality on the ground.

No one is contesting that, but I really do disagree with the decision at this point in time - our credit worthiness is worse than five years ago, but MUCH better than two years ago. The ten and fifty year trends, yeah, I agree. The particular timing to me just screams crass politicking, but that's me.

Although this is probably necessary and will be good for the country in the long term, I'm not a humanitarian or world leader: I'm some guy that's getting dicked by this and there's nothing I can do about it. So honesly, I'm pissed. This is one of those times where I seriously reconsider my law abiding ways and ask myself why I should be fair when life isn't.

Get busy living
 

@alex We shall see, buddy. We shall see.

@WonderWoman I do think it will get there. Well, let me rephrase that. It absolutely should get there, and I'm betting that it will. This is nothing new, however. I've been saying this on the site since early 2010 and maybe sooner.

@Conan You are correct, they could be monsters here. Just be prepared for some serious whipsaw action because it's gonna be a bumpy ride.

 
Edmundo Braverman:
@alex We shall see, buddy. We shall see.

I'm long VIX, only down 1% today.

I posted a few times for people to buy the VIX a few weeks ago, and if they didn't want net long, to buy the August and short the Jan (back when the spread was 5 to the Jan side, now it's 7 to the Aug side). Hope you monkeys listened...

 

UFO: In my opinion, considering the sovereign debt of the U.S., the ratings agencies have been like thy were with MBS. Ignoring the problem for too long. It's just that S&P decided to man up, bite the bullet, and do right by their clients. While this is not all Obama's fault, he has added like $4tn in 2 years when bush did it in 6. That includes dot com. Obama didn't create this economy, but NO COUNTRY should be able to run this kind of deficit and stil be considered the safest investment in the wold.

Reality hits you hard, bro...
 
MMBinNC:
UFO: In my opinion, considering the sovereign debt of the U.S., the ratings agencies have been like thy were with MBS. Ignoring the problem for too long. It's just that S&P decided to man up, bite the bullet, and do right by their clients. While this is not all Obama's fault, he has added like $4tn in 2 years when bush did it in 6. That includes dot com. Obama didn't create this economy, but NO COUNTRY should be able to run this kind of deficit and stil be considered the safest investment in the wold.
You may just be right.
Get busy living
 
MMBinNC:
UFO: In my opinion, considering the sovereign debt of the U.S., the ratings agencies have been like thy were with MBS. Ignoring the problem for too long. It's just that S&P decided to man up, bite the bullet, and do right by their clients. While this is not all Obama's fault, he has added like $4tn in 2 years when bush did it in 6. That includes dot com. Obama didn't create this economy, but NO COUNTRY should be able to run this kind of deficit and stil be considered the safest investment in the wold.

They were really manning up with those CDO's back in 2006, weren't they? Sure, it's the right choice here, but since they could have stopped this entire mess 5 years ago, let's just say I'm not their biggest fan.

"They pull a knife, you pull a gun. He sends one of your guys to the hospital, you send one of his to the morgue. That's the Chicago way.
 
Edmundo Braverman:
ThaVanBurenBoyz:
Eddie, I did not open that small account yet. You might be getting that booze money after all, BAC looks even uglier today.

Friends don't let friends go long BAC.

Awesome.

"Now watch this drive." -W.
 
WonderWoman:
BAC - soon to join bear sterns?

I don't think so honestly. BAC has a lot of good points among the bad. The problems that are coming up will drive the stock down (lawsuits, mismanagement, etc.). But they aren't left holding the bag with billions in MBS or other securities whose value is trending towards zero.

Reality hits you hard, bro...
 

What happens when BAC drops below $5 and is no longer marginable? That could get ugly quick. Plus, the word is out that they're looking to raise capital.

Patrick and I had a conversation about this earlier, and I told him I was reluctant to compare BAC to Bear. That was for two reasons. BAC has access to more outs than Bear did at the time, so that's to the plus side of the equation. To the minus side however, BAC's situation right now isn't nearly as similar to Bear's as it is to Lehman's.

Before you go off on a tangent, I'm not saying BAC is going under or will be allowed to go bankrupt. Not at all. But the liquidity squeeze they are soon to be facing (if the trend continues) is much closer to Lehman's situation than Bear's. The only difference is that someone will step in to buy them, a la Bear.

 
ThaVanBurenBoyz:
You didn't. I was just asking everyone else if they had one (looks like a poll was created), but was specifically interested in hearing if you had one yourself.

Oh sorry, I misunderstood. I think the market could get to 1K on the S&P over the next few months, but not any lower than that because the Fed will be printing money again by the time it gets that low. There are already some screaming buys out there. Who cares where the market goes, do pairs trading. I don't really care how low the market goes because I know the fundamentals of what I own and have a long holding period.

 

In my opinion, this market expects a clear solution from the U.S. government. Debt ceiling alone is not the best result.

As long as there are not any better arrangements, I can say: Ugly Day Ahead...

 
Best Response

With the S&P at 11.5x earnings, we're not quite down to November 2008 valuations quite yet, but we're getting close. Meanwhile, there are some really cheap utilities out there yielding 5-8% that are strongly capitalized. These dividends will probably keep getting paid at some level as long as we have civilization. Of course, folks who bought at 7-8% dividend yields in 2008 were stunned when they saw them widen out to 10% then 12%, then, in some cases, 14%.

If you believe we are going to shut down the economy here and people will stop using electricity and heating their homes, fine. But don't buy gold. In a true crisis, paper gold is often worthless and physical gold just sticks a target on your back. This is especially true in France where it seems like they get out the Guillotine every 30-40 years and line up everyone who looks like they're not dirt poor.

For those of us who aren't giving our life savings to the Methodist Church and praying that Jesus returns quickly, the best response is not to sell and maybe even think about buying if you're in a good financial situation (make sure you have at least six months of living expenses saved- ideally eight). And hopefully this is a good reminder to the crowd of young analysts of why IlliniProgrammer is so thrifty and so conservative with money.

 

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twitter: @CorpFin_Guy
 

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