Friday, May 7, 2010

Black Thursday (1000pt down day)

While there were glitches on Thursday, I don't buy the trader error story to explain why Accenture traded at 1 cent or PG was down 37% intraday.

The Yen was up about 3 Yen vs the USD (and even more vs the Euro) before any crazy trading happened in New York.

There is a lack of liquidity as the huge government bond market seizes up, especially in Europe. In addition, the huge moves out of the Euro (I think bank runs are part of this) and into gold, USD and Yen, is also putting huge pressure on leveraged equity players and hedge funds.

The electronic trading and the few remaining players in the game are also adding to the volatility.

I believe that Black Thurdsday was not a fluke but a warning shot that systemic risk is very much alive. Listen to the market. It is not healthy at all.

This is why I have written about Greece

I haven't had much time to write for my blog due to work and family obligations. However, most of what I've written has been about Greece and the Euro.

Why such emphasis on a country of 11 million (the size of Ontario)?

Greece is the fault line. I have believed that the impending default of Greece, despite a "shock and awe" bailout that I didn't think would happen, is the catalyst for:

1) the end of the tight credit spreads for most insolvent countries. This is consistent with the history of great credit bubbles. This means a
Seinfeldesque "no soup for you" to the international bond markets for Greece and the rest of the PIGS. There is too much debt out there, much of it will never be repaid.
2) the end of the Euro as we know it, and a huge dislocation in currency flows
3) A relatively strong US dollar
4) The re-start of the bear market that was interrupted for 13 months.
5) Another banking crisis as all that government debt becomes devalued and countries pull out of the Euro.

It is difficult to predict the future, but I am very worried that a
redux of late 2008 is back.

There are still way too many bulls out there who think that this will be contained. I now fear that we have re-entered the September 2008 to March 2009 playbook where volatility rules and anything is possible.

I now believe that a quick 30% from the highs is possible over the next few weeks and months (mid 800s S&P), as things can unravel very quickly if the Euro goes to par in that time, and if multiple countries default, with bank runs and a powerless ECB.

One of my weakness is that I often see things before they happen. I had been worried about a bear market for years (
pre-blog). I warned prematurely about a housing bubble bursting in Canada. I have been bearish on the Euro for years. I wrote about a currency crisis in 2008 that didn't fully materialize. I was looking for a huge bear market rally a few months early in 2009 and then I turned bearish too quickly.

This time I fear that I am being too slow in that I have not fully positioned myself for a 30% move that could happen in weeks not months.

I am not predicting this just yet, as the reversal is still new, but one possible doomsday short term scenario over the next 2 months:

Euro to par, maybe in the next few weeks. (Note that we almost hit my 1.15-1.25 range yesterday)
CAD to weaken to 85
S&P to 850
Gold to 1,500
Yen not sure

Risk is very, very high right now.

Disclaimer: I am currently long USD and CAD, short Euro, long gold.

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