Archive for August, 2011

Market Flash Alert

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We received the following email first thing this morning from the editor of highly-respected US investment newsletter “New World Investor”.

“First of all, I know this is brutal – worse than 2008 in some ways – and thoroughly depressing for most of you. The S&P 500 was the devil’s game today, down 6.66%. The VIX – the Fear & Greed Index – jumped 50% to levels associated with bear market bottoms.

The second-hardest thing in the world to do is sell at a top. The hardest is to buy at a bottom. But look at some facts.

On the first trading day after Standard & Poor’s downgraded the U.S. from AAA to AA+, we saw:

The U.S. dollar gained 34 cents, or 0.5%.

The two-year Treasury note yield fell six basis points to 0.2283%, a record low.

The 10-year Treasury note yield fell 21 basis points to 2.35%.

The Treasury sold $29 billion in three-month bills with a bid-to-cover ratio of 4.09, about 50% stronger than recent auctions.

Treasury also sold $27 billion in six-month bills, and will sell $32 billion of three-year notes tomorrow, $24 billion of 10-year notes on Wednesday, and $16 billion of 30-year bonds on Thursday. The total of $128 billion will be sold at a lower yield than last week, before the downgrade.

And all this during a week when the Federal Open Market Committee meets and will issue a statement on Tuesday.

So much for the downgrade “disaster.”

Of course, it was the stock market that took the hit as people worried about – what? The downgrade? I don’t think so, judging by the moves in the dollar and Treasury paper. That the Too Big To Fail banks are about to lock up the credit markets again? That’s realistic, but I think Obama/Bernanke now realize the thing to do is to let the weak ones go under, take them over, split them into a good bank/bad bank and get the good (smaller) bank public again – with all-new management. They are Too Big To Succeed, and it’s time to throw them under the bus.

The G-7 (which includes the U.S.) saying they will inject liquidity into Europe, act against disorderly currency moves as needed, and “take all necessary measures to support financial stability and growth?” Unless the German taxpayers are saps, “Son, your ego’s writing checks that your body can’t cash.” But at least they are talking a good game.

It’s hard to say, but it looks like nothing actually got worse since Friday except stock prices. That usually means a buying opportunity is upon us – blood in the streets. It’d an old traders’ trick to push the market a little below technical support levels, panic the longs, create margin calls and extract stock from the general public, before turning stocks into a violent rally. It is especially easy to do in August, when lots of people are on vacation.

It’s terribly hard to step up to the plate, I know. I bought the SPDR S&P 500 Trust exchange-traded fund Friday and I’m already down about 7.5%. But you will never consistently catch the bottoms. We are now in the timing band for a daily, intermediate and yearly cycle low. All you can do is buy low and wait. I don’t think it will take long.”

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