Stocks dove on Friday as the renewed market volatility is beginning to remind investors of the bad old days from a year ago. After gaining nearly 200 Dow points on Thursday in response to a GDP report that came in above expectations, traders apparently had a change of heart as the market gave back all of the prior day’s gains and then some.
The big question on the mind of the average investor (and most of the folks on TV as well) was: “What gives?” In short, there is usually a reason for a swoon of 250 points – especially when the dive occurs the day after one of the best days in months. But on Friday, there was little to complain about as the opening bell rang, other than what appeared to be a little profit taking, that is.
But from there, things got ugly – in a hurry. By the time traders came back from lunch, the DJIA found itself down -275 points. And with no real news to speak of, we’re guessing we weren’t the only ones looking for a reason for the market’s tank-job.
Thus, we went looking for something that would explain the sudden loss of confidence. But instead of one single news story, we found seven different things for traders to find fault with. So without further ado, here’s the not-so lucky seven:
The Not-So Lucky Seven
Reality Check for Economy. Thursday’s GDP report, which initially prompted a chorus of “Happy Days are Here Again” from word that the economy grew at an annual rate of 3.5% in the third quarter, served as a wake-up call of sorts on Friday. Although, it was nice to see the number come in better than expected, when you dug into the report, one of the big questions became: Is this going to be sustainable going forward?
This, of course, brought about cries of “too far, too fast” and “the market is ahead of the fundamentals” from the bear camp. But in reality, they may have a point as few rallies in history have traveled as far or as fast as the March 10 – October 19th run for the roses. And since everybody in the business knows that we are overdue for a meaningful correction, it is little wonder that the buyers simply stood aside on Friday.
The Passing of the Buck: Perhaps a better heading for this section would be “Dollar Carry Trade Starts to Unwind.” But in reality, that sounded awfully technical (and more than a little dull). However, it is the idea that big-time traders around the world have either borrowed dollars at our bargain basement rates to buy other assets, or are flat-out short the greenback that is a part of the problem. As we’ve seen over the past several months, the advent of the “dollar carry trade” has meant that when the dollar is falling and stocks are rising, everything is hunky dory.
But, a rising dollar and/or rising interest rates puts a crimp in the profitability of the carry trade. And with traders around the globe beginning to worry about the economic recovery theme, they naturally gravitate to the world’s safe haven currency – the U.S. Dollar. So, with the dollar actually getting a bit stronger and the economy not looking so solid, the programs kick in and stocks get sold.
Wake-up Call For Banks: Calyon’s Mike Mayo came out with a report on Friday suggesting that Citigroup (C) might need to write down as much as $10 billion in something called deferred assets in the fourth quarter. And while analysts quickly came to Citi’s defense and the bank itself called the idea preposterous, the report reminded investors of the fact that the balance sheets of America’s banks are still a mess (and maybe a little of the stonewalling from Lehman and Bear).
Then There is Commercial Real Estate: Speaking of problems with the banks, renowned investor Wilbur Ross said Friday that commercial real estate is a ticking time bomb for the banks. While this is hardly a new idea, it is indeed something to worry about. And since the market is suddenly in worry mode again…
Speaking of Worrying: One of the bear camps’ favorite themes is the idea that the consumer is not showing signs of life. Since households, unlike corporations, can’t go out and issue stock to pay down their debts, they have to tighten their belts. And with just about everyone expecting the next cycle to be a “jobless recovery” it is hard to see
Comments
Ari - I do believe that much of this correction is tied to the "big boys" and their "fun with computers." There is obviously programs tying the moves in the dollar to the selling of stocks. Thanks for your input!
Not saying you don't make some good points, but sometimes I find it amazing that there are always rationalizations after the fact, regardless whether you are a bull or a bear. Also, whenever i see the prices of the same assets valued at two different extremes over such a short period, I can't help but think of manipulation by the big boys, of course at the expense of the sucker retail trader.