That didn't last long

Uh-oh. For a few hours there, things were looking hunky-dory. The stunning late-session rally in the SPX, which carried over into overnight futures trading, has reversed with a resounding "thud."

It all looked so promising. Cash rates actually fixed lower (see the ICAP 3 month fixing rates below) amid rumours of either Fed rate cuts or that they will enter the unsecured lending market, which has helped swap spreads come a bit lower. Add in a much bigger than expected 100bps easing from the RBA, and everything was looking hunky-dory.
Whoops. That didn't last long. Iceland is imploding; its banks are dropping like flies, and EUR/ISK has traded as high as 350 today. Anyone wanna buy West Ham?

On second thought, maybe you'd better hold off. After all, do you really want to invest in a market where three of the largest banks allegedly handed the government a £45 billion preemptive bill for a bailout? While the story has unsurprisingly been denied, public statements from financial institutions are worth about as much as Confederate dollars (or, for that matter, Icelandic kronur) these days.

Ultimately, all of this may finally set the stage for a tradeable bounce in equities. Yesterday's late session squeeze in the SPX was reminiscent of that on August 16, 2007, which was followed by a "surprise" intra-meeting discount rate cut before the next day's open. Bear market bottoms (even those of the "tactical bounce" variety) require capitulation, and yesterday's equity price action until about 8 pm London time was certainly capitulative.

Macro Man is hearing stories of real money funds seeing redemptions from panicky investors, which is usually another sign of panic lows. Looking at the S&P mini future, we can see similarities to other (temporary) market bottoms since the crisis began last summer. High-volume days which put in a candle with a large lower wick have marked the panic lows of last August and January of this year.

Each of those was, of course, accompanied by a Fed policy easing. This time around, los Federales will probably need help from their European amigos. But if we do get a coordinated rate cut, Macro Man would contemplate going (small) net long to play for a tactical bounce, which would more or less be the first time that that has happened all year.

Of course, if 1.15 pm London time comes and goes with no announcement, then it's probably back to Plan A- namely, equities heading south at great speed. At this point, markets are adopting petulant child mode- throwing their toys out of the pram until they get what they want. And while all parents know that it's a bad idea to give into your children every time they get upset, occasionally you have to try and calm them down.

Yesterday was the first day since this whole fiasco began that Macro Man was scared by what he saw- and he had a decent day yesterday. And there's nothing wrong with calming a frightened child. It might not last long, but there's something to be said for avoiding a complete meltdown.
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gsm_73
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October 7, 2008 at 10:51 AM ×

Dear MM:

We are throwing everything we can lay our hands on at this crisis hoping it slows down/ (maybe ends). Will a coordinated global rate cut help, what next???
You could see some parallel (in the context of response) in the current crisis and earlier ones as mentioned in one of your earlier posts?

gsm_73

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Macro Man
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October 7, 2008 at 11:07 AM ×

If we get coordinated cuts and massive capital injection into all major banks, plus central banks lending in the unsecured market, then we could see some of the recent panic moves unwound, probably aggressively.

We still have the actual recession to navigate moving forwards, of course, but there could easily be a vicious bounce in the event of a policy response.

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October 7, 2008 at 11:12 AM ×

Despite the continued dominance of the financials on the news front, the Stoxx banking index has been what passes for relatively stable at this point in time. Yesterday's lows off 2.5% with respect to the down spike mid-July. Similar for the entire ESX is minus 9%. Gold also off 9% on the corresponding points.

For the moment (and rightly or wrongly), recession might be replacing armageddon as the theme, despite the phenomenal amount of noise from the press corps.

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pej
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October 7, 2008 at 11:13 AM ×

I love your remarks about the kids! But again, this is because these are spoiled children, spoiled by Greenspan then Bernanke, then Paulson. It cannot go on forever.
"At this point, markets are adopting petulant child mode- throwing their toys out of the pram until they get what they want. And while all parents know that it's a bad idea to give into your children every time they get upset, occasionally you have to try and calm them down."

Also: "Yesterday was the first day since this whole fiasco began that Macro Man was scared by what he saw- and he had a decent day yesterday." I was really scared as well. My portfolio was going through the roof, yet I was almost shaking and my heart beat was accelerating.

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October 7, 2008 at 11:25 AM ×

Know the feeling, pej. I put on, by pure coincidence, a short day trade on the ESX on the open of day of the tube bombings. Having seen unedited photos of the carnage at Atocha (ownerless legs lying about the place, and such), I cashed the position and sent all the money to a charity. Been feeling vaguely similar lately about being on the right side of this.

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October 7, 2008 at 11:58 AM ×

MM, we all don't believe anymore to financial institution statement, but do we have to believe to Robert Peston and to risk a huge bank run??
I think that some commentator and journalist don't understand what they're doing..

According to me another big step to stop this mess is that central bank needs to act as clearing house for interbank lending.

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Anonymous
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October 7, 2008 at 12:05 PM ×

Mother of all short squeezes occuring in Volkswagen today - Dax would be down 2% if Vow was flat on the day. Amazing times!!

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Sean Maher
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October 7, 2008 at 12:35 PM ×

Unfortunately Robert Peston has a direct line to a Downing Street source, as shown by recent 'coups' so I'd take that story seriously; I closed my oil/copper and equity shorts last night in anticipation of more radical, coherent, policy action...those CDS default auctions for Fannie & Freddie went surprisingly well yesterday, and that removes a key source of further instability.

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Anonymous
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October 7, 2008 at 2:18 PM ×

Great posts. Thanks, MM. One major reaction that I have as one on the US side of the pond is that the market crisis shows limits in the EU concept that are otherwise not as apparent over here. It seems that the EU has been unable to work together because each country, in turn, is compelled to do what is right for its banks, citizens, etc rather than looking across the Union. I wonder if, at the end of the day, the EUR itself is in jeopardy?

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t
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October 7, 2008 at 2:23 PM ×

"According to me another big step to stop this mess is that central bank needs to act as clearing house for interbank lending."

Isn't that why the fed is paying interest on reserves?

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Anonymous
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October 7, 2008 at 2:52 PM ×

Saying that the EU is unable to act in a coordinated manner in comparison to the US might be a bit premature. So far the US legislative response has been the TARP. Which was finalised last week, after a year of takeovers etc. The EU has now had a few weeks of carnage - I think there will be some showy bit of cross-border toss soon enough.

LFY

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Anonymous
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October 7, 2008 at 3:10 PM ×

USA 10yr CDS 38 / 48
Spain 10yr CDS 73 / 78
Italy 10yr 75 / 85

MacroMan
At what level of 10yr CDS do things typically lose its AAA rating?

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Anonymous
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October 7, 2008 at 4:34 PM ×

MM & Pej, why the panic? I was doing well myself, but wasn't too panicked because (a) the equity markets were finally catching up with the credit debacle, (b) the drop was on fairly normal volume rather than kitchen sink selling. Or are you speaking of the fx market (in which case, it would be great to hear your insights).

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Macro Man
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October 7, 2008 at 4:37 PM ×

The latter- FX- where there was an utter liquidity vacuum unlike anything I have seen in the last ten years.

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Anonymous
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October 7, 2008 at 4:51 PM ×

MM - on what platform did you see the complete lack of liquidity in FX?

I am using a multibank platform (HotspotFXi) and you could still execute large orders, altho at a bit wider spreads, and overall available liquidity went down ever since the crisis intensified. I personally are impressed how the FX market held up with the absence of key-marketmakers like LEH and Bear.

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October 7, 2008 at 5:34 PM ×

@T: paying interest on reserves Fed is trying to fix open market operations and fed rate, more leverage for them.. it could be considered a tax cut..
i think that interbank lending more than ON has to pass from ECB or FED, acting as clearhouse.. but it could be happen only in a generalized nationalization event:(

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Macro Man
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October 7, 2008 at 6:13 PM ×

Anon, the toy I use is my PB's platform, which is generally excellent. But really, what I am talking about is market conditions that allow AUD/JPY to fall 13.5% in a day, with probably half of it in a 5 minute span. THAT price action was very scary.

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mikarsky
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October 7, 2008 at 8:00 PM ×

FX spreads were up a bit at some major currency pairs. Is this a sign of liquidity drain? If so, it reduces volatility and makes FX a bit boring but in general may not be too bad..

Anon 2:18 PM
The EU is unable to act. Mrs Merkel and Mr Steinbr├╝ck shocked Germans and half of Europe when pledging to guarantee all savings. Most savings were insured anyway. It only detracted from the fact that they didn't come up with something else. This message was to avoid bank runs. Instead, it just brought the idea to the table on prime Sunday night.

So perhaps it's better if the EU is unable to act. That minimizes the scope of damage done by politicians to single nations.

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Anonymous
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October 7, 2008 at 8:42 PM ×

http://bigpicture.typepad.com/comments/2006/11/19271933_chart_.html

^^

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Damcanu
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October 7, 2008 at 9:16 PM × This comment has been removed by the author.
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Damcanu
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October 7, 2008 at 9:19 PM ×

Anyone wanna buy West Ham ?

-------------------------------

The injury-prone West Ham striker and Wales captain Craig Bellamy is sleeping in an altitude tent .....

Well, I was waiting for the 'other shoe to drop' in Europe.

Look's like Premiership footballers are finally having their wages cut due to the world's financial crisis - lol

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shtove
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October 7, 2008 at 9:21 PM ×

Won't somebody think of the children!

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Macro Man
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October 7, 2008 at 9:27 PM ×

Damancu, as a West Ham fan I thank you for reminding me that our Icelandic sugar daddy may be an ISK zillionaire, but he's now worth about £5.99 in UK currency.

Shtove, I am sure that someone out there is thinking "we're all thinking of the children...who else will we send the bill to?", so I'll just go ahead and say it.

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Corey
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October 7, 2008 at 9:29 PM ×

i won't tell you when, but i closed my long yen vs. usd and rut puts. i now have crude calls @ $100. i've done absolutely no gold trading, but i suspect the XAU type stocks are screaming buys here. over the next few months i'll be trading for the "mother of all reflations", however i'm not sure it will last too long. short the long bond i think makes sense here.

notice all the small divergences today in lots of stuff vs. equities. good luck.

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Anonymous
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October 8, 2008 at 1:00 AM ×

I have been on the phone with companies that I have contracts with about $ they own me.

"Get a lawyer and get in line" is the standard answer.

I am not in the financial services business, I'm in the food business

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Anonymous
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October 8, 2008 at 1:40 AM ×

MM,

Perhaps a bit outside your normal baliwick, but earlier today, on another blog (calculated risk), a discussion arose about a bear bounce in the S&P, brought on by over-sold conditions.

One of the individuals involved suggested that T/A was "broke" as a tool because of all of the "extraordinary" measures BB and Paulson have been using to stem the tide.

Would you care to comment?

Jan

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Macro Man
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October 8, 2008 at 5:43 AM ×

Jan, I suppose it's possible to break a hammer or a screwdriver, but it doesn't really happen that often.

The charts (as well as fundamental analysis) tell me that we are in a bear market....and guess what? Stocks are lower.

The charts also tell me that, with the right catalyst, indices could bounce hard. As noted in this post, the right catalyst is now coordinated global policy easing; without it,

"then it's probably back to Plan A- namely, equities heading south at great speed.

That seems to have worked. So no, I don't really accept the premise that technical analysis or chart reading is somehow broken.

But just as you need more than a hammer to build a house, you need more than one tool to build a portfolio in this market, as both pure technicians and pure fundamentalists are finding to their chagrin.

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