Market Correction Coming? Or Is This the End?

Tuesday, September 01, 2009 , , , 1 Comments

I've been wringing my hands anxiously in anticipation of this for weeks. Before I start declaring "fuck your rally!" while running through SF's Financial District in my End the Fed t-shirt, I should point out here that the market is now the crusty tramp covered in vodka and vomit the day after a frat party taking the walk of shame back home sans panties. Irrational exuberance? Yeah right, that's not what you should be calling this.


The Dow Jones Industrial Average was up more than 60 points at its morning high but ended down 185.68 points, or 2%, at 9310.60, the biggest slide since Aug. 17. Between 10:30 and 11:30 a.m., the Dow went from just above 9500 to below 9350, a loss of nearly 200 points.

The Nasdaq Composite Index fell 40.17 points, or 2%, to 1968.89. The S&P 500 fell 22.58 points, or 2.2%, to 998.04. The S&P's financial category was the weakest, falling 5.4%.

Financials led stocks' August rally as investors grew increasingly confident the economy had moved past the worst. But fears are rising that the rally may have gotten ahead of fundamentals.

"Everyone is asking if this is it for the run in banks," said William Lefkowitz, chief options strategist for vFinance Investments.

Among the weakest financials was American International Group, which sank 21%. Sanford C. Bernstein & Co. downgraded AIG's shares and estimated that if the government's support and other goodwill were discounted, AIG would have a negative book value of $6.4 billion. AIG shares had more than tripled in August.

Fannie Mae and Freddie Mac fell 18% and 17%, respectively.

Citigroup, which leapt 58% in August, fell 9.2% on New York Stock Exchange composite volume of more than 1.42 billion shares, or roughly 20% of total market volume. Total NYSE composite volume was 7.1 billion shares on the session, well above the 2009 average of slightly below six billion shares a day.

Options traders expect share declines for even the most stable banks. Interest in October options to sell Wells Fargo stock for $26, for example, surged, with the shares falling to $26.21, off 4.8%.

Is the ghost of TARP haunting September? Nah.

"We're beginning to see more of this, where the market is getting good news but not really responding," said David Bellantonio, head of trading at Instinet, a New York brokerage. "It tells you that the market may have gotten ahead of itself."

Or as Market Ticker so eloquently stated in December of 2008:

Anyone who has seen one parabolic blow-off top on a chart knows what comes after the peak is reached. Eventually someone comes to the conclusion that "it's just not going to go any further" and sells.

This begins the collapse in price (and skyrocketing yield) which places the central bank in an extraordinarily-difficult position - if they "take up" all of the supply to prevent the yield from shooting higher they are printing money of zero velocity which does nothing, and once all that supply has been taken up they're out of ammunition and holding the bag on bonds that are worth nowhere near what they paid for them!


It is time to face the facts - "Quantitative Easing" cannot and will not stimulate demand and "reverse a deflation" if there is no capacity (or desire) to borrow irrespective of how cheap you make the money or how much of it you pump into the economy.

To explain all this in one sentence:

You can't solve a drunk's alcoholism with a bottle of whiskey.

Bernanke's thesis has been debunked and both his doctorate and position should be revoked.
Ouch. Anyone got an aspirin? The market may not know where it left its panties last night but thankfully I know where to find mine. Win!

Jr Deputy Accountant

Some say he’s half man half fish, others say he’s more of a seventy/thirty split. Either way he’s a fishy bastard.


Very good post. Good thing I am nearly all cash for the past 30 days. Just waiting for this to hit the bottom.