–You just don’t see big moves like this in a normal bull market. Down 1.8% with less than an hour to go in Tuesday’s trading session, the S&P 500 came from out of nowhere to rally 4% intraday. It closed up 2.3%. Take that you lousy bear market.
–Rallies late in the game are the sort of thing you expect at a sporting event. You don’t expect them in a stock market, especially a stock market dealing with an escalating European banking crisis. But as we’ve said before, increasing volatility is the sign of an unstable system. This system is not stable.
–In light of Tuesday’s shenanigans, Murray has moved his normal Wednesday S&P analysis to Thursday. Look for it tomorrow.
–In the meantime, the distinguished looking Slipstream Trader has recorded a short video explaining his reason for being. That is, he gets asked all the time how his trading method reconciles with the Markets and Money worldview and how he got this whole gig to begin with. You can see his explanation here.
–What caused Tuesday’s big last minute reversal? Who knows? Nobody knows. Crowd psychology is a good guess. Another likely culprit is an article that appeared in the Financial Times late in the New York session.
–The article reported that finance ministers in the European Union (EU) are:
‘Examining ways of co-ordinating recapitalisations of financial institutions after they agreed that additional measures were urgently needed to shore up the region’s banks. Although the details of the plan are still under discussion, officials said EU ministers meeting in Luxembourg had concluded that they had not done enough to convince financial markets that Europe’s banks could withstand the current debt crisis.’
–And that was it. That was enough to lead to a turnaround on Wall Street and a huge rally in banks stocks. Seriously…that was it.
–Little details were not covered in the plan. Those details include: how big bank losses will be on Greek, Italian, Portuguese, and Spanish government bonds, how much capital European banks will need after taking losses, where that capital will come from if the bonds causing bank losses are issued by governments that are likely to default.
–But you should never let details get in the way of a good story.
–Frankly we don’t have much more to say about the whole mess. We’ve already chipped in our two cents here. And now the real question is when will Greece be allowed to default? After that, will investors believe whatever charade the EU comes up with to fund the European Financial Stability Facility?
–Investors are a pretty gullible lot during a bull market. But this isn’t a bull market anymore. This point came up in a conversation we had last night with a friend over dinner.
–“You seem like you’re trying to make an important point in the Markets and Money,” he said.
–“Well, sometimes there is something important to point out. But honestly, not every day. Which point did you mean?”
–“See that’s my point. You’ve been banging on about ‘lower forward earnings estimates’ and ‘less growth.’ But when you use words like that, it’s like you’re trying to avoid saying what you really want to say. Why don’t you just say it?”
–“Well, I thought it was pretty obvious. I pointed out that the biggest industries in Australia are Finance and Resources. Those are great businesses to be in when the world is having a bull market in credit and people are borrowing money to buy more stuff. They’re not great businesses when credit is in a bear market.”
–“But there you go again. ‘Credit in a bear market.’ That doesn’t mean anything to a non-financial person. Why don’t you just say what you mean? Why do you have to try and sound like such a smartarse?”
–“You’re not a stupid person. Neither are my readers. But okay, I’ll spell it out for you: don’t expect to retire on money you make in the stock market. If the stock market is going anywhere for the next few years, it’s going down. The stock market is not a savings account. It is not possible for a whole generation to retire on the distributed earnings of two industries whose earnings have reached a cyclical peak. You need to make other plans. And you need to make sure your wealth isn’t completely tied up in stocks.”
–“Oh…do you really think all that?”
–“Don’t look at me like that. Of course I think all that. But these things go in cycles. We’d probably be in an upswing right now if it wasn’t for all the intervention from the central bankers and politicians. But they keep adding debt and keep shovelling money into banks that made bad loans. It’s going to take a while to unwind the whole thing. By the time it’s over, no one will want to buy stocks again. That’s when you should buy.”
–“It’ll be too late for me then. Besides I have property. That should be fine. Are you saying I should sell all my stocks? What about the banks? Is my money safe there?”
–“Would you relax? I can’t tell you what to do, except maybe to think for yourself. You’re going to have to start doing that at some point. You might as well start now. Besides, most people are so convinced that they can get rich in the stock market that they’re going to stay invested. They’ll probably just shift from a ‘growth’ or ‘balanced’ strategy to a ‘conservative’ or defensive’ strategy.”
–“What does that mean?”
–“It means all the fund managers are going to crowd into any stocks they think don’t depend on credit expansion, China, or Europe. They’ll reallocate their money to a defensive mindset. They’re going to have trouble with that because the Aussie market has so many growth stocks. But they’ll try anyway. Stocks will go up and down depending on the news. And some of those moves will be tradeable, if you’re into that. At the very least, you can sell into rallies and gradually liquidate your portfolio…if you think I’m right that is.”
–“I don’t really care anymore to be honest. I just wish my money was safe. It’s all so depressing. How can you bother to go to work each day? Don’t you get tired of being such a stick-in-the-mud?”
–“It’s not depressing. It’s actually kind of liberating. Relentless growth and expansion are kind of exhausting. You need to slow down. Focus on stability and the things that matter to you. Make yourself good at something. Worry less about changing the world and more about living a better life.”
–“Don’t be so condescending. Your only useful skill is that you can type fast. Once people give up on the stock market you’ll be out of a job. What are you going to do then?”
–“There’s a lot of reading I’ve been meaning to catch up on. But I’ll find something. The main thing in life is to keep learning and keep trying. You can’t control the results. All you can control is your effort.”
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