The spike down to 1056 today in the SP500 was related to bank trading desks (who says their trading desks are benign, remember this day when they report Q2 earnings and so-called trading profits in July 2010 and when future crisis arise) unwinding their overleveraged positions.They (the banks) really are jackasses with regard to categorically understating and underestimating risk via their VAR models and such. Excuse me, but the same assholes who assumed stability in financial markets before the credit crisis still haven’t learned jack shit yet about mkt instability!
A day like today should put lawmakers on notice that banks should no longer be allowed to use risk management models that assume stability (more likely they will stick their heads in the sand). Assuming stability in risk modeling only sets up fingers of instability in the financial system (physicist Mark Buchanan illustrates these power laws exceedingly well in his book Ubiquity). Instability was introduced into the financial markets in 2010 when various central bankers and policymakers (ECB President Trichet chief among them) did not just roll over and do the bidding of the chicanerous banking industry. For more background on assuming stability, understating and underestimating risks in the financial markets see Yves Smith’s timely new title Econned. From Bloomberg:
Bank Default Swaps Surge as Moody’s Raises Sovereign-Debt Contagion Alert The cost of protecting European bank bonds from default surged to the highest level in 13 months as Moody’s Investors Service said lenders face “very real, common threats” from the region’s fiscal crisis. “The risk is for the banking sector because they’re the ones that own most of the government bonds and in cases of extreme crisis banks rely on governments to bail them out,” said Juan Esteban Valencia, a London-based credit strategist at Societe Generale SA. “If governments can’t issue at relatively normal levels, it’s going to be very difficult to bail out banks and that means banks are getting hammered.”
Euro Slides Against Dollar as ECB’s Trichet Doesn’t Calm Greece Concern The euro tumbled the most since the collapse of global credit markets in 2008 after European Central Bank President Jean-Claude Trichet failed to ease investor concern the Greek fiscal crisis will intensify. “We call for decisive actions by governments to achieving a lasting and credible consolidation of public finances,” Trichet said with Axel Weber concurring.
And Geithner is up to his usual good no good lobbying for the big banks: Geithner Rejects Calls to Separate U.S. Banks From Risk-Taking Activities U.S. Treasury Secretary Timothy F. Geithner rejected calls to separate banks from risk-taking activities, saying it couldn’t prevent future financial crises. Geithner, for all his smarts, is either clueless or an out and out prevaricator. By the way, Geithner promised we would never have another financial crisis on NPR radio in December 2009 because he had the political will to prevent that from ever happening again. How well did Geithner, our beloved financial stability watchdog, do today with his Nunca Mas policies?
Believe it or not, the Great Unwind is over now, at least for the time being, unless Trichet and other policymakers continue to leave European banks in the lurch. Then perhaps this could turn into a 1987 Black Monday. Assuming the European banks are not left in the lurch much longer, there won’t be much else to see.
Much like the scene of a crime, police officers will be milling about to remind us folks to move along…and that there isn’t anything left to see. And the media cover-up appears to already be underway so that the public will never know the real story of banks categorically understating and underestimating risks.NYSE Euronext Says There Were a `Number of Erroneous Trades’ During Plunge NYSE Euronext said “there were a number of erroneous trades” during an almost 1,000-point plunge in the Dow Jones Industrial Average.
This sort of media coverage is essential to preserving the mistaken belief that everything in the financial system is A-OK except for occasional computer glitches (which shouldn’t even be plausibly possible if the safeguard parameters are really on these trading platforms as they are supposed to be). God forbid anyone exposes the reality that when overlevered banks that chronically underestimate risk get in real trouble, shit like this happens in the financial markets. Every risk asset class in the world gets sold but the safe havens. One day, perhaps only a few years from now, not even US Treasuries or US dollars will be considered safe havens any longer. Oh Brother, Can You Spare a Yuan?
Returning to the stock mkts, after the SP500 spike below the 2009 yr high at 1128, the 2009 yr close at 1111, and the Nov 27 Dubai World low at 1167, the SP500 snapped back to form a price base between 1103-1106 and 1132. Essentially, this is the 1111-1128 price band between the 2009 yr high and close.
Clearly, the spike low looks like a V-spike. On a one-minute chart, it looks a bit like the 1998 LTCM V-spike on the daily chart. After the LTCM meltdown, the SP500 snapped back to double top on Dec 8 98 and Jan 5 1999. A brief 5 day 50% retrace to the LTCM low ensued, bottoming on Jan 12 1998, then rallied to new highs. The reason for mentioning the 50% retrace following the V-spike double top in Dec 98-Jan 99 is that a 50% retrace off this afternoon’s double top at 1136 would target 1095.
For our purposes, this suggests that any other spike through the bottom of the price base that set this afternoon between 1103-1111 (1111 = the 2009 yr close) is apt to act like a balloon under water in the next several days. Key off the 2009 year close at 1111 expecting a price base to be built around it in the coming days.
