Why the surge in the stock market lately?

[Doppel]

Like I said the day before (?) the 300+ point rally, another plan agreed upon everybody parties and gets drunk and bids stocks up again, but eventually it will fail. Greece has now in effect defaulted, but there are other Euro nations heading down the same path.

 

[mshan]

I believe Charles Dallara (http://ineteconomics.org/people/participants/charles-h-dallara) represented the big banks holding a lot of that Greek debt and they agreed to take the 50% hair cut and say it was voluntary (you apparently actually have to go and file a claim with some governing financial market body to claim there is a default, so if they don't do it, it is apparently not a technical default triggering credit default swap payouts).

I think both Merkel and these big banks knew that if they let Greece essentially default in an uncontrolled manner (ala Lehman Brothers), they can't necessarily control trajectory of events afterwards and risk having another financial panic / run on those banks so much so that governments have to come in and national banks, wiping out current shareholders. So Merkel played chicken and won because she knew she had stronger hand.

Greeks shouldn't object to 50% haircut per se, since it is like 50% principal forgiveness to them. It is just the strings attached to get principal forgiveness that they have a problem with - severe austerity measures and economic liberalization of this welfare state to promote growth that they have problems with (e. g. saw segment on tv about how there are not enough taxi drivers because medallions are so carefully limited; government wants to issue more to I guess increase competition and lower taxi rates, but current taxi drivers are screaming because they really did pay a lot of money for that license and they make comfortable living because of artificially high taxi rates).

There are some smaller lenders to Greece that I don't think Dallara represented, so those people can claim real default and collect payout of credit default swaps. However, I think they don't represent systemic risk to global financial system and economy.

2008 Lehman triggered financial panic really was thought by many to risk the end of western civilization as we know it (domino effect collapse of AIG, Citibank, etc., all triggered by reckless, supposed "moral hazard of bailout" decision of Bush and Paulson to let Lehman fail in such an uncontrolled manner); this European Lehman-lite potential financial panic I think is more a concern because of risk of putting global economy into moderate to deep recession, and not just mild or moderate recession hopefully limited to Europe alone). I don't hear people talking about putting us back into the Stone Age (financially speaking) this time around.


(At least, that's my take from what I've read).

 

[RbSX]

MShan, stop applying logic to a situation where none exists. Seriously, you will just get yourself hurt.

 

[Imp]

This is the scariest part at all, this rally literally lasted ONE DAY. ONE DAY. That was it.

Good time to completely exit the market and watch the shit hit the fan?

 

[mshan]

RbSX said "Seriously, you will just get yourself hurt."

I don't trade stocks, options, etfs, etc.; all of my investments are in long-term buy and hold mutual funds (contrarian growth and deep value, or just indexed to total market with VTSMX).

All of this exaggerated recent short-term volatility should be creating opportunities for my actively managed mutual fund managers to create value and latent returns, though we might not see those actual returns realized for several years. (famous deep value investor Shelby Davis said "You make most of your money in a bear market, you just don't realize it at the time.")

I read to try and understand what is driving markets over short-term; it helps to not make me a weak hand that easily gets shaken out of market and who is always selling when they should be buying, or vice versa.

And to me, slight pull back on light volume, especially after such a tremendous one day move the day before, is a sign of strength, not weakness, in the markets...




http://selectedfunds.com/downloads/SFSuccInv1210.pdf

http://www.morningstar.com/cover/videocenter.aspx?id=435443

 

[darkxshade]

I think imma start unloading positions for the eventual drop...

Well... can't say that I didn't see that coming.


Currently have a small pool of funds to day trade off etfs... Accumulate/sell after a certain % drop or pop. They're safe enough that if the market does go into recession, I can afford to hold them long term but just volatile enough in this yo yo economy to make a quick buck every couple days.

 

[mshan]

"On a closing basis, the S&P 500's recent decline was 19.4 percent from its April high to the Oct. 3 closing low of 1099, but on an intraday basis it fell more than 20 percent when it hit 1074 on Oct. 4. The index, as of last week, had regained 17 percent on a closing basis and 20 percent on an intraday basis. Since 1945, there have been four "severe" corrections in the 15 to 20 percent range, and four baby bear markets—declines of 20 to 25 percent.

Stovall said the historic average of gains following these "baby bear" markets have been an average 13 percent gain in the first three months, 23 percent in the six months and 32 percent in the year after."


http://www.cnbc.com/id/45109344

We can only hope he is right!

 

[manly]

maybe no one believes the Greek Govt will accept (be able to accept, i.e. social unrest/riots, etc) the deal

The Greeks aren't the problem, they're essentially playing with house money already (how much bond forgiveness can they get away with). Germany would probably just as soon eject Greece from the Eurozone if that was possible without any associated problems.

This is the scariest part at all, this rally literally lasted ONE DAY. ONE DAY. That was it.

Watched the Charlie Rose show on Friday and the panel from The Economist was basically saying the day after the big announcement, everybody realized the plan wasn't fully baked. For example, the Europeans "hope" the Chinese will invest in some of these bonds.

mshan, so I'm a little bit confused. You're a buy/hold investor but also highly interested in understanding short-term volatility. Isn't that the worst of both worlds? (I see you did explain your psychological rationale.)

 

[mshan]

I just try and understand what is driving the market over the short-term (weeks or months, not days or intra-day) so I am comfortable with my long term buy and hold portfolio of mutual funds and don't get shaken out of the market the next time pundits again claim the world is coming to an end.

I guess the other thing that might help put my comments and observations into proper perspective is that 1) most of my active mutual fund managers invest over a time horizon of 3 - 5 years, or longer, and 2) barring a change in the mutual fund where management starts acting in truly non-long-term shareholder friendly manner, I would anticipate holding onto my investments for decades, not years, and let time, compound interest, and a healthy respect for risk (risk being permanent loss of capital, not short-term fluctuations in stock prices) do their magic...

 

[JEDI]

European Stocks, U.S. Futures Drop as Greece’s Government Calls Referendum.

wtf?

why is stock futures plunging on Greece vote? Greece has to vote for the bailout conditions sometime, right?

why has mood changed since last weeks rally?

 

[Doppel]

European Stocks, U.S. Futures Drop as Greece’s Government Calls Referendum.

wtf?

why is stock futures plunging on Greece vote? Greece has to vote for the bailout conditions sometime, right?

why has mood changed since last weeks rally?

Apparently now it's a referendum, so instead of gov voting it will be a popular vote by the people (?). And that's why it's falling, because they may not go for it.

Greece was defaulting one way or the other anyway, that's been obvious for many months. They are in a debt spiral.

Vote in January, majority against the bail-out. http://www.telegraph.co.uk/finance/...reece-to-hold-referendum-on-EU-debt-deal.html

I can't blame them, this silly game Greece keeps playing with Europe is unsustainable. At some point they need to just man up and say give me my beating and reset themselves. They are making no progress to date. If this goes on long enough they'll end up selling large amounts of public assets and still end up broke down the road anyway. The Greeks are greedy buffoons for letting themselves get into this mess but they should probably tell the banks to piss off and be done with it.

 

[Miramonti]

The stock futures are not plunging on greece's vote. If this is one's approach to deciphering the market, please feel free to continue watching the CNB[ullsh!t]C, and stay away from the market...

 

[manly]

2008 Lehman triggered financial panic really was thought by many to risk the end of western civilization as we know it (domino effect collapse of AIG, Citibank, etc., all triggered by reckless, supposed "moral hazard of bailout" decision of Bush and Paulson to let Lehman fail in such an uncontrolled manner); this European Lehman-lite potential financial panic I think is more a concern because of risk of putting global economy into moderate to deep recession, and not just mild or moderate recession hopefully limited to Europe alone). I don't hear people talking about putting us back into the Stone Age (financially speaking) this time around.


(At least, that's my take from what I've read).

thanks for explaining your interest, it does make sense. Even if your horizon is fairly long, buying say this past spring would've given you some grief and you'd still be somewhat in the red.

I could be misreading what you wrote, but when Lehman Brothers was allowed to fail, Sec. Paulson wanted to avoid the appearance of inviting moral hazard when it came to the next domino. Even if the end of civilization rhetoric was a bit over the top, I happen to feel TARP was strategically sound. It was a concerted effort to avoid a run at Wall Street's independent i-banks that would've quickly spilled over to the rest of financials and could have sparked a global depression. In that light, it arguably succeeded. What TARP was unable to do was to stave off a "credit crunch" and resultant deep recession, when every domestic institution curled into a fetal position.

But total PIIGS debt is bigger than Lehman's leveraged balance sheet was. The Europeans claim they'll set up $1T to save themselves, but a Citibank analyst today suggested it'll take 3 times that amount. Point being there's plenty of systemic risk here and just as Europe couldn't avoid America's mortgage meltdown, America and emerging economies clearly can't escape pain if the Eurozone doesn't solve its sovereign debt crisis. So I wouldn't call it Lehman-lite. The main difference now is TBTF banks are better capitalized and may be less likely to require bailouts. OTOH governments seem less willing to employ that level of firepower even if a severe crisis actually came to bear.

 

[mshan]

I called it Lehman-lite because we have had years to delever and derisk the global financial system since then (e. g. I read somewhere that the shadow banking system has been completely dismantled), and because this crisis seems to be unfolding in slow motion relative to the financial panic of 2008.

Then, I believe the crux of the problem was tremendous leveraged speculation, using borrowed money, that might need to be rolled over each and every night (remember all the talk about LIBOR skyrocketing then?), so system was vulnerable to unexpected liquidity shock:

"economic Pearl Harbor"?

"In October 2008 the global financial markets crashed. The story in the media is that it was a panic caused by the insolvency of Lehman Brothers. This is not the truth - or at least not all of it. The crash actually followed a $2 trillion margin call by these four global banks on their prime brokerage clients and OTC counterparties - effectively a 30 per cent increase in required margin. It was the margin call that forced liquidation of global portfolios of all asset classes - and particularly the high quality, most liquid asset classes."

http://londonbanker.blogspot.com/2011/05/concentration-manipulation-and-margin.html

Europe may have a lot of debt built up, but it sounds like it all doesn't need to be rolled over immediately, but over extended periods of time going forward, and this gives them time to slowly ring-fence Greece and prepare for residual fallout of the formal default on their bonds (guarantees, bond buying, bank recapitalizations). (From comments I've seen on the London Banker website, I don't think Europeans were taking their vulnerabilities too seriously, felt that they were in much better fiscal condition than U. S., and also felt that creating more debt to get out of a debt crisis was not proper way to proceed (austerity, austerity, austerity!!!). But tumbling European stock markets might have forced their hand.


Markets may want this resolved definitively right now, but Europe may be motivated to draw this out in such a way that they don't trigger formal cds payouts (see my Charles Dallara comment further up this thread):

"As for the EFSF, we are a long ways from Wall Street and the rest of the bankers getting their hands on this cash.

Part of the reason for my optimism is that the NY Times and the Wall Street Journal have finally begun focusing on the issue of investors not trusting banks.

This is a major, major shift.

Suddenly, investors who are questioning the solvency of US banks are being heard from - all they need to do is focus on derivatives.

More importantly, these investors are asking for granular level data - not assurance from bank executives or regulators.

This movement has implications for how the EU addresses its problems. Merkel intends to do "everything necessary" to ensure banks are recapitalized and investors believe it.

If she follows through, part of everything necessary will be massive disclosure of granular data by the banks.

Yes, this pushes out the timing of when banks are recapitalized (say 3 -5 years). But what is important is it also stops the Wall Street and the bankers from getting their hands on the EFSF funds. "

http://www.blogger.com/comment.g?blogID=912107698547747613&postID=8549580978249768713

Regarding Paulson's initial conception of TARP, here is London Banker's take: http://londonbanker.blogspot.com/2008/10/financial-eugenics-paulson-plan-for.html



(Hope this helps clarify my comments as an amateur observer of financial markets. )

 

[FoBoT]

there is more talk of greece leaving the EU , dropping the euro and going back to the drachma

http://www.nytimes.com/2011/11/02/b...euro-for-drachma-gains-support-in-greece.html

http://www.reuters.com/article/2011/11/01/us-finland-greece-idUSTRE7A010N20111101

"The situation is so tight that basically it would be a vote over their euro membership," Alexander Stubb, the Finnish minister of European affairs and foreign trade

 

[Dear Summer]

The euro zone debt crisis is driving everything right now: equities, FX, bonds, etc.

 

[sandorski]

there is more talk of greece leaving the EU , dropping the euro and going back to the drachma

http://www.nytimes.com/2011/11/02/b...euro-for-drachma-gains-support-in-greece.html

http://www.reuters.com/article/2011/11/01/us-finland-greece-idUSTRE7A010N20111101

Would be best for everyone if they did, even the Greeks. At least for the Short-Midterm anyway. In the long term Greece will definitely want back in.

 

[JEDI]

there is more talk of greece leaving the EU , dropping the euro and going back to the drachma

http://www.nytimes.com/2011/11/02/b...euro-for-drachma-gains-support-in-greece.html

http://www.reuters.com/article/2011/11/01/us-finland-greece-idUSTRE7A010N20111101

wha? wouldnt that be suicide for greece?
who the hell would lend them $ or buy their bonds at reasonable rates once they leave the eu and drop the euro?

 

[AznAnarchy99]

And with the surge there's almost no news coverage, but with the drop, "OMG THE WORLDS ENDING"

 

[darkxshade]

Greece backs off referendum... what a fucking joke. Maybe they should have heavily shorted the market before that, covered and went long before they backed off that stupid idea... then they wouldn't have to worry about backruptcy anymore. Maybe that's exactly what they did.

I'm slowly making small gains every few days from the ups and downs banking on the fact that someone always opens their big mouths every week that reverses the last weeks gains or loss.

 

[uOpt]

Greece backs off referendum... what a fucking joke.

But this might mean a higher chance of serious unrest. Don't load up yet.

 

[JEDI]

I'm slowly making small gains every few days from the ups and downs banking on the fact that someone always opens their big mouths every week that reverses the last weeks gains or loss.

i would have made $$$ if i bought both Triple Long and Triple Short last week.

but too chicken to use margin to speculate

 

[mshan]

"Call it the mother of all margin calls: Up to 50,000 former customers of bankrupt broker MF Global must find some $1 billion in additional collateral almost overnight, or be forced out of their trades."

http://www.cnbc.com/id/45159102

I would like to think this information has already been priced into the market, but sounds like Friday could be another day of exaggerated volatility nonetheless.

Seen previous commentary that temporary pullback to SP500 1200 would be healthy after such a powerful move in October, so (hopefully) there is a silver lining to all of this short-term noise.


edit: Friday midday update on MF Global related potential Margin Calls:

"So far there was little sign of the mass liquidation that analysts fear may ensue as traders rush to raise some $1 billion in additional margin with new brokers, the approximate sum that is being left on account at MF Global as authorities search for missing customer funds. But with margins due only on Friday evening, forcible liquidation occurring on Monday morning, and thousands of accounts still unsettled, dealers were jittery."

http://www.cnbc.com/id/45164928

And here is Bill Strazzullo's take on current trading range today (http://video.cnbc.com/gallery/?video=3000055574)
and earlier in March this year (http://video.cnbc.com/gallery/?video=3000012022)

 

[RbSX]

I would like to think this information has already been priced into the market, but sounds like Friday could be another day of exaggerated volatility nonetheless.

Seen previous commentary that temporary pullback to SP500 1200 would be healthy after such a powerful move in October, so (hopefully) there is a silver lining to all of this short-term noise.

Pullback to 1175 would be more realistic. There is no silver lining though, this is going to be a long hard ride.

 

[Miramonti]

i would have made $$$ if i bought both Triple Long and Triple Short last week.

but too chicken to use margin to speculate

What are the symbols for triple long/short?