"Attitudes are contagious. Are yours worth catching?"
Dennis and Wendy Mannering
Things have been certainly looking quite gloomy out there with the sea of red numbers swarming my computer screen every time I interrupt my research to glance at the most recent developments... It seems as this never ending stream of hedge fund/mutual fund liquidations is just not going to end, until at least a half of them shut down because of the devastating heavy losses... The media, even my beloved Wall Street Journal, seems to have now stopped reported any positives about the economy, and we are instead limited to continuous recounts of all the historical records that plunging markets worldwide are breaking daily...
As I mentioned before, this vicious "domino" effect of falling asset prices is most definitely not a welcome development. But what worries me most today, is that the rapid and violent currency swings are now undermining whatever stability was left in the financial system. Virtually any company out there that had currency/commodity hedges in place is now subject to a "guessing game" of whether they have been prudent enough not to speculate but rather limited themselves to only hedging their underlying exposures... As if banks haven't had difficulties assessing the creditworthiness of their creditors before this most recent fiasco has begun...
Why in the world would the third largest retailer in Mexico bet on a strengthening Peso instead of merely locking exchange rates for their underlying currency exposures??? I mean everyone has been blaming Wall Street for taking unsustainable risks- but how about the firms that should have not exposure to derivatives whatsoever? Like retailers, railroad companies? Are you kidding me?
"The massive liquidation of emerging-market assets by U.S. investors looking for security played a large part in the peso's decline. However, a significant portion of the decline appears to have been homegrown. A number of Mexican corporations had bets against the U.S. dollar (anticipating the continued fall of the dollar relative to the peso) and thus contributed to the massive selling of pesos (lower demand for the peso means it is worth less) as they tried to close their positions.
In all, Mexican companies realized more than $2 billion in losses, with Mexico's third-largest supermarket chain, Comercial Mexicana, declaring bankruptcy as a result. Other major Mexican companies, including Cemex (NYSE: CX) and Gruma (NYSE: GMK), have reported mark-to-market losses on derivatives of more than $500 million."
As you might have sensed already, my mood became a bit more negative over the last few days as the slow bleeding losses of 2-3% a day are much more bearish for equities in my opinion than the less frequent huge 7%+ declines... The ultimate length of this global sell off in my opinion is much more damaging than the depth of it...
Investors, especially large hedge funds, simply have not had a decent opportunity to take a break from continuous selling to rebalance their portfolios or to hedge their losses, because of the absence of the more or less decent "snap back rallies"... I think that most investors have noticed by now, that market losses seem to accelerate around 2:45-3PM ET every day. The main reason for that is the fact that banks send hedge funds margin calls around that time of the day and so far the news haven't been too positive for HFs...
Now back to good news, however rare they might be... Fed is now almost certainly going to cut rates on Wednesday which should provide somewhat of a boost for banks in the short run... It should also reduce credit costs for hedge funds and anyone who is using margin, which might somewhat slow the fund outflows, especially considering we are now very close to the month end mark-up period for mutual funds... Gasoline prices are also approaching $2 a gallon in certain parts of the country which would amount to a $200B stimulus check for the beaten up consumers. The question now is whether consumers will respond to this "stimulus" in the "usual" American way, by spending every penny of this windfall or will they finally move to a more rational state of repairing their own balance sheets... Unfortunately, the more prudent decision of saving money might not be the best one for the world economy :)
Source: Cleveland Fed
Looking purely at the psychological and liquidity developments out there, absent a very decisive and coordinated move from Fed, ECB and BoJ tomorrow, equity markets seem to be setting themselves up for a another "washout" day in one direction or another, where either more quality names could go for "two for one" sale or short sellers get their a.s handed to them...
On the positive side, I am personally now almost 50% deployed and intend to be buying more on 200 point down days. But trying to stay on the safe side I am still sticking to my preferred stocks and "buy-write" closed end funds strategy for now...
Stay safe out there, skepticalcapitalist@gmail.com
