T.H., January 08
Sample Report
"CAPITULATION BY ANY OTHER NAME"
COMMENTARY TEXT POSTED FRIDAY 11/21 @ 2:30PM.
It's finally happened. We've marginally broken the October panic lows in just five weeks. Is it nothing more than a coincidence that the test comes on the heels of the November 15th deadline for hedge fund redemptions? Sure, we know all about how the economy has fallen off a cliff. But the need to raise capital trumps every other market factor.
MISERY LOVES COMPANY
It is certainly true that the debt market's massive and unprecedented unwind is causing the liquidation of everything and driving asset prices ever downward. This "price discovery" has created the perception that we are caught in a deflationary spiral and the price of everything—including the value of our currency—will go down and stay down for the foreseeable future. This pressure is certainly present today, but will not continue much longer because at this pace the price of assets will soon be zero—and we know that will not happen.
Being steeped in fear and misery after watching their investments lose 50% of their value since the summer ended, most investors really, truly feel that we are going to zero. Watching stocks trade at four times earnings or below cash reinforces the fear as fundamentals don't matter. Watching the break of recent major support and the testing of the 2002 lows adds to the misery.
But now we have now gone way overboard in almost every market—in an almost exact inverse of when markets ignored the brewing crisis and rallied to new highs last year. Now, the indiscriminate selling of everything, the inability to raise capital except from the government and the endless expectation of Depression has gone too far.
THANKS FOR YOUR SUPPORT
It is true than any trading or investing on the long side made during our recent month long trading range action is now under water. Many long trading ideas have hit their stops and have been sold. Losses in everything keep piling up while the deleveraging is underway. It is historical and beyond painful for anyone and everyone who has any investments.
But now that we have pulled back and given up all that has been gained since the leveraged orgy began a decade ago, there will be major technical support. I know that many feel that technicals don't work when the markets are in free fall, but just look at the charts of the major indices, commodities and oil. Most have pulled back to their primary breakouts that occurred a decade ago. After the unrelenting selling pressure and a marginal break, the pressure may finally come off and a sustained period of stabilization—or even a rally—can occur.
BLACK MONDAY THROUGH FRIDAY
There is no doubt that both consumers and corporations have stopped spending since the market's crash in early October. Black Friday next week will be very red as consumers have snapped their wallets shut except for the most compelling bargains and necessities. The recession that has been brewing for over a year is finally squarely on Main Street. But unless equity is worthless (in some cases it may be), most stocks have discounted a multi-year and significant recession lasting to 2010 with unemployment that could reach 10%.
The American consumer is hurt and scared because their nest egg has been cracked. The "Wealth Effect" has been reversed and nothing short of a miraculous stock market recovery can reverse it. So we should all expect some great sales this holiday season.
OCTOBER & NOVEMBER HORRIBLE. WITHER DECEMBER?
We are in the midst of the worst two month period of performance perhaps in the modern history of the American stock market. The most legendary investors are down 50% and there has been absolutely nowhere to hide—except in cash—for anyone who owns any investment in the stock market.
This unwinding of debt and the virtual outright failure of our financial corporations will have a profound effect on the economy and markets for the next decade or more. It truly is a once or twice in a century phenomenon. There will be no easy fix or "V" bottom that we have seen several times over the last two decades.
But I believe what we are seeing this week is today's version of classic capitulation. We all hate that word, but I think we are in it right now. Markets only go one way and all hope has been lost. Everyone from the smallest investor to the largest and most sophisticated hedge funds are losing their shirts if they own any stocks as we have given back a decade of performance. Some short-term Government bonds are yielding zero. Citibank is effectively worthless when looking at their equity—even though they are not worthless. This is it, we are here. But that doesn't mean the major indices are not going lower.
I'm a big believer in the marginal theory of markets. I think that most breakouts or breakdowns are key inflection points where the majority of both investors and traders are wrong. That new low or new high prompts and quick reversal and traps the majority of near-term market participants.
I think that we could easily test the 7k area as that undercuts the major bottom made last month as well as the support hit in the 2002-2003 bottom. That will have the media screaming Dow 5k will be next. That is when the market will give us a real bounce that lasts more than a few hours. It will also take us squarely into the holiday season when things should begin to settle down.
It all adds up to capitulation occurring as we speak. Have a safe and happy weekend.
SB
