So…when I am not consulting, contemplating or starting small businesses, I like to trade stocks. Born a risk adverse penny pincher and trained in the art of long run returns and diversification (read Modern Portfolio Theory – beta calculation anyone) I am a fundamentalist at heart.
I own three portfolios: 1) my 401K/Roth IRA – which are indexed to the S&P 500 via the SPY etf, 2) Long term positions in various companies including GE, Goldman Sachs, Wells Fargo, etc… and 3) My “Mad Money” account which I like to trade in and out of egregious amounts of double and triple levered etfs which produce awesome gains and massive losses (currently up 35% YTD).
Anyway…there is this blog I joined on a two week trial and it is full of some of the most amazing day-traders I have ever had the pleasure of knowing (I am not going to say the name but email me if you insist on knowing) and one of those traders posted the following which I am going to share with you. I don’t know his real name but his username is rp. Granted this person is a bear (dare I say, perma-bear?) but his analysis is spot on:
fwiw- i’ve put extensive thought into that over the last 6-9 months. i haven’t heard cramer’s thought on what happens if we see new lows (nor do i care to) but here’s mine fwiw: if this market takes out the march lows it will be beyond catastrophic, beyond what even most “experts” you hear on TV even understand. i’ll keep this short as possible but here are the key reasons why the US economy will be FUBAR if the march lows are breached or maybe even re-tested, unless the bounce is immediate and just as powerful as the last one:
- banks: ’nuff said. all gone, complete gov’t nationalization and all shareholder and most/all bondholder equity wiped out. the public will not stand for any additional tax-payer cash infusions without the bank’s stakeholders getting wiped out first nor can the gov’t afford to do so without an utter collapse of the $USD and massive dumping of foreign owned treasury bonds. btw- this holds true even if we don’t see new lows (no more large capital infusions beyond existing tarp funds without shareholders getting wiped out).
- insurance companies: i’ve posted in detail several times in the past about how enormous the liabilities are for the insurance industry (those involved in financial services, namely variable annuities). best to blog search for it if you are interested but this is HUGE and they will all be wiped out and the repercussions will be devasting to the investors/policy holders that have their retirement or life savings with them. we’ll beyond what the gov’t can afford to bail-out.
- pension plans: most are already underfunded by huge amounts. basically, a pension plan is a promise to pay retirees a specific amount of money for the rest of their life. the pension plans invest the assets into the same things everyone else does: stocks, bonds, real-estate, etc.. if the market sees new lows, most or all pension plans will be bust (many already are technically bust). again, the amount and scope of the pension plan liabilities is staggering and can not even be fathomed by most. think about what will happen to millions of pre and post-retirees who see their promised monthly retirement benefits drop from, say 5k per month, to 1k or less. again, well beyond what the gov’t can afford to bail-out.
- state and local municipalities: pension obligations are one their biggest problems but also the fact that they will see plunging tax receipts to fund continuing operations like police, fire, social services, etc.. they can only raise taxes so much to make up for the shortfall in a depression (which is what a break of 666 will certainly bring as the wipeout of the US consumer’s wealth will almost immediately cripple the economy).
- federal gov’t: there’s been enough talk lately about our ballooning deficit and huge risk of our dependence on foreign nations to continue to finance both our bail-outs of everyone and everything, as well as our social security, medicare, and even our vast military machine. if SPX breaks 666, do you think they’ll still be buying our treasuries? that’s like your next door neighbor telling you he’s flat broke, in over his head in debt and asking you to lend him a lot of money.
i’m sure i’m missing some things but you get the point. if the SPX breaks or even revisits 666, it might as well pass go and not collect $200 because it’s going straight to 200-300 if it does.
as far as will that happen and as cramer or someone said before: the gov’t won’t let it. we’ll, i’m glad to hear that although it took until the year 2009 A.D. to happen, mankind and the modern financial system has finally evolved to the point where the federal gov’t now has the brilliant insight, knowledge, know-how, and means to prevent any more stock market and economic downturns. that is honestly great news since now we will never have another bear market or recession in the US. my point is that the fundamentals are what they are and the wheels may or may not already be in motion to take this market and the financial system to it’s knees. only time will tell but from looking at this SPX chart, especially eyeing that price-distribution chart on the right, i’d say that the odds of a break/re-test of the lows increases substantially under 850, continues to increase as we fall and gets critically high under 740. we’ll just have to play it as it comes and i hope as much as anyone that this doomsday scenario doesn’t play out but again, i may be alone in saying this but i think that a break of the march lows will trigger a domino effect which can not be stopped.
It’s going to be an interesting summer…
Donovan Wadholm
www.diybizplan.com
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