March 10, 2020
* Traders reverse Friday’s trading on Monday…
* Last week’s “emergency rate cut” to be followed up next week…
Good day… And a Tom Terrific Tuesday to you! Another day in the markets, and another day on a roller coaster! That and other thoughts will be discussed this morning, but first…. I want to send out a BIG Happy Birthday note to my good friend, Rick Baur… Happy Birthday, young man, may your day be grand! I used to invite Rick into the office and we would share a veggie-pizza… You know back when I had an office that is! Justin Hayward and John Lodge (The Blue Jays) greet me this morning with their song: Who Are You Now…
Well… Apparently, traders had second thoughts about marking down stocks, Oil, and dollars, and buying euros, yen, francs, and bonds, because at a point yesterday that trade pattern stopped on a dime, and began to get reversed… So, the Coronavirus scare must be over, right? I shake my head in disbelief that anyone would think that, much less traders who are supposed to be looking ahead…
The Plunge Protection Team (PPT), must be in total physical exhaustion today from all the heavy lifting they dad to do yesterday… I commend them on a job well done, and now invite them to crawl back into the holes they came out of and leave the markets alone… Do go away mad…. just go away!
So… I had a fellow send me a note yesterday, chastising me and questioning my intelligence regarding the Coronavirus… As I said something like if the virus got too bad that pro and college games would be played in empty arenas and stadiums. He alluded that I wasn’t taking the virus seriously… Really? I definitely recall telling you all yesterday that this was serious, and that it called for serious people… But, then I used skim through things when reading them too!
Alrighty then… So, the euro lost a full cent in trading yesterday, Oil gained a full dollar, and bonds gave back 30 Basis Points, and the Dollar Index gained 65 ticks… So, from that you can see exactly what I was taking about above with the reversal that went on… And this morning, it appears it will continue, as stock index futures are up, and Gold is down $17 in early trading…
OK… There were a lot of things that went on last week and yesterday, and apparently we need to be ready for more things to go on today, but one thing that happened last week, seems to have been forgotten about, and that is the Fed’s “emergency” rate cut of 50 Basis Point (1/2%)… This was an “out of meeting” rate cut folks, which should have sent shudders down the spines of everyone and their brothers!
The Fed’s FOMC will meet again next week on St. Patrick’s Day and follow it up with a rate announcement on 3/18… I’m going to go out on a big fat limb and say the Fed cuts another 50 Basis Points from their Fed Funds rate, next week, bringing their internal rate to 0.75%. Wait! What? isn’t that nearly back to ZIRP (zero interest rate policy)? Why, yes it is young grasshopper, that was very astute of you to recognize that!
While I do believe that we are already in a recession (basically in my mind we never left the recession of 11 years ago), the rest of the markets and economists don’t see that along with me, so for their benefit, I’ll say that when the next recession hits, where does that take interest rates? Oh My! The Fed has nowhere to go with rates, but to go negative… I’m just saying…. We’re almost there now… I’m also just saying…
I just looked up and watched the sun rise out of the ocean… What a beautiful sight… And before some smart alec fires off a note to me telling me the sun doesn’t rise out of the ocean… I’m fully away of that, but from my viewpoint, it sure does look like that’s what’s happening! So there! The ocean here has been very angry for days now, as the wind has really whipped up the waters… I think the wind is suppose to die down today, so maybe we can get back to normal around here!
I deliberately took that tangent to get away from what I was thinking about talking about… So, to our former media folks that gave me media training back in the day, you can be proud of your former student for his “deflection”…
OK… So, we start today with Gold down $17…. This after the shiny metal had climbed above $1700 to $1,704 yesterday… But then the boys in the band arrived and took Gold down to $1,679, just up $6 on the day, when it was up over $25 bucks at one point in the day… I simply find this kind of price action to be lawless… with a lack of regulation… and outright brazen, given the way the metals dealers are being brought to court these days…
OK… I will admit that the stock market selloff has caused some margin calls to be made, and sometimes we see other things sold to meet those margin calls… Other things being liquid assets, like Gold, Silver and Bonds… Because for Heaven’s Sake you can’t just dissolve the margin account and walk away can you?
Longtime readers may recall me telling you that at one point in my life in the markets I was the Manager of the Margin Dept in a regional brokerage house… And while we never saw price action like this, we did see some times when we had to be on the phones all day calling clients and telling them their margin account had a BIG Hole that needed to get filled in the next 24 hours…
I’ve been telling you the size of the margin debt here in the U.S. for years now, and pointing out that when the stock market finally faltered that those margin accounts with all that debt would be in Big Trouble… Well, that time is now…
As I said yesterday, the U.S. Data Cupboard is basically bare this week, and that means that there is only the small business index to print today, which nobody pays attention to, except the small businesses! There’s really nothing else to talk about or deal with today here, so we move along…
To recap… The markets traders began a reversal of their selling of stocks, dollars and Oil last week, and instead sold euros, yen, francs, Gold and bonds… Chuck asks the question, did the Coronavirus go away? Because that’s what the trading yesterday suggested! The PPT must be totally exhausted from all that heavy lifting yesterday… now go back to the hole you climbed out of! Please!
For What It’s Worth… Before the PPT go to work yesterday, there was gloom and doom in the markets, and it appeared that the stock jockeys had walked off a cliff, but like Wiley Coyote, they found a way to remain suspended in air until the next frame… But while that was going on, people in the markets were scared of a liquidity crisis… And this is what that looked like: https://www.zerohedge.com/markets/there-no-liquidity-market-paralyzed-fraois-explodes
Or, here’s your snippet: “Over the weekend, we discussed the latest analysis by JPMorgan’s Nick Panigirtzoglou according to which in addition to the literal lock up in equity markets (where S&P futures were halted limit down for hours overnight), credit and funding markets were starting to show signs of extreme stress, not only as a result of the sudden plunge in energy credits but due to a violent return of what appears to be systemic issues within the inter-bank funding market.
As the JPM quant summarized, “we see initial signs of emerging credit and funding stress. If these shifts in credit and funding markets are sustained over the coming weeks and months, especially in the issuance space, credit channels might start amplifying the economic fallout from the COVID-19 crisis.”
To prove his point that the credit bubble was cracking, Panigirtzoglou highlighted the recent spike in the dollar fx basis, the latest burst of repo activity by the Fed, the spike in the SOFR rate and the SOFR-IOER spread, and last but perhaps most notably, the sudden blow out in the notorious FRA/OIS spread.
Commenting on the sudden liquidity air pockets, Bloomberg Chief Global Derivatives Strategist Tanvir Sandhu wrote that “liquidity holes and the unleashing of suppressed volatility has seen convexity options outperform given the acceleration in volatility gains as tail risks reprice. For example, VIX calls funded by SPX puts would work for those looking for long convexity exposure. Now, extracting vol premium should come into play while managing the further deterioration of risk.”
Yet while traders are looking at indications the financial collapse of 2008 may repeat, there is one novel wrinkle: the unprecedented proliferation of ETFs and passive investing. For Nomura’s Hodges, the problem is exacerbated by the proliferation of exchange-traded funds, something we discussed in “Market Crash Reveals The “Liquidity Problem” of Passive Investing”. The problem with passive investing is that while it propels market dutifully higher, when stocks crash, ETFs reverse, and a painful selling liquidation commences, one which takes a long time to stop, or as Bloomberg puts it, “when the market goes into free-fall, they are required to sell the underlying asset, prompting a frantic search for anyone who will buy it.”
In the end, Aberdeen Investment money manager Luke Hickmore put it best: “People are asking for bids — and then dealing when they see them. You can definitely sell for sure, you just might not like the price.”
He’s right, for now. A few more days of liquidation panic, and there won’t be a price at all: the market will simply be halted indefinitely, and nobody will know when (and if) they reopen, something we first discussed almost 6 years ago in “How The Market Is Like CYNK (Which Was Just Halted)”
Chuck Again… Yes, when it actually does go down the drain, liquidity that is, the PPT won’t be able to stop it… Got Gold?
Currencies today 3/10/20 American Style: A$.6556, kiwi .6314, C$ .7324, euro 1.1351, sterling 1.3027, Swiss $1.0716, European Style: rand 15.8207, krone 9.4608, SEK 9.4617, forint 295.88, zloty 3.8037, koruna 22.5216, RUB 73.87, yen 104.80, sing 1.3912, HKD 7.7697, INR 73.95, China 6.9422, peso 20.40, BRL 4.6808, Dollar Index 95.86, Oil $33.88, 10-year 0.71%, Silver $17.12, Platinum $880.72, Palladium $2,462.64, and Gold… $1,662.80
That’s it for today… No doctor appt., no baseball game, today, what am I to do? UGH! Yesterday what the first day in two weeks that I got my feet up for the 3 hours a day that I’m supposed to get them up for… Psst, don’t tell my doctor! Daughter Dawn, and her family of Jerry, Delaney, and Everett, will arrive on Saturday down here for their Spring Break… So, things will pick up again soon enough! I can’t wait to see my darling little d, and E! Well, we sent all our “tax stuff” to our accountant last week… Now I sit here and worry about payments to the Gov’t! UGH! Last year I received a return, that this year I have to report as income! So, hopefully it all comes out as a net zero! Now wouldn’t that be wonderful? YES! Steely Dan takes us to the finish line today with their song: Kid Charlemagne… I hope you have a Tom Terrific Tuesday, and will please Be Good To Yourself!
Chuck Butler