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The Investor
Sell First, Ask Questions Later
Greece was a blip compared to the havoc Italy is already bringing to our financial markets. Updated 11.10.11 @ 9:20 a.m.
On Monday, I sent the following note to a friend of mine who also pays close attention to financial markets (though he’s not trading every day like I am):
Now they’re going to go from worrying about Greece to worrying about Italy — which is a much bigger problem.
If you look at the Euro [around 1.38 when I wrote the note], it seems to me that the last jump up to $1.41 before falling off a bit again was a short squeeze. I think people have been short this for quite a while believing it will fall apart, and are giving up — meaning that it’s probably a pretty good time to short the thing now that the trade is less crowded. I have no data to support my theory…just a hunch.
If there’s one major flaw I have as a trader, it’s not trading big enough on my own instincts. And although the market did make that silly rally on Tuesday, the enormous sell-off on Wednesday seems to me more likely to be the beginning of something rather than a buying opportunity. My guess is that Monday and Tuesday were selling opportunities — that I didn’t take.
By Wednesday afternoon, the market was down, albeit less than 2 percent, from Monday’s opening and the Euro was down 2 percent, to around 1.355.
To be sure, the woulda-coulda-shoulda club of traders is a big, loud, and unprofitable one, and I can’t honestly say that I thought we’d fall nearly 50 points in the S&P or 400 points in the Dow Jones Industrial Average the day after having an impressive afternoon rally. What I can honestly say is that I did make some small downside bets on Monday, but that I didn’t have the courage of my own convictions — I rarely do — to make them bigger than I did or to add to them in any significant way on Tuesday. So while I made a few dollars trading (but lost much more in my long-term investments) on Wednesday, I made a fraction of what I “woulda, coulda, shoulda” made.
Enough about me, though.
My bigger point is this: We saw what Greece did to worldwide markets, not just stocks but also interest rates (much higher in weak countries, much lower in strong countries). Italy will be an intensive care-causing pneumonia compared to the hiccup that is Greece’s debt problem.
While Greece’s debt is a stunning 180 percent of GDP and Italy’s is “only” 120 percent, Italy’s national debt is a mountainous $2.6 trillion, roughly five times Greece’s debt and simply too big to bail out — even if otherwise a perfect theoretical candidate for the moral hazard of “too big to fail.”
And thus, Wednesday’s market meltdown (or what we would have considered a meltdown except that we’ve had so many of them recently that we’re numb to ginormous moves) strikes me as likely to be the opening salvo in a “sell first and ask questions later” market.
Markets test and punish weakness. It is how George “I hate capitalism” Soros made one of his first billions — testing the weakness of the British Pound. And you see it frequently in the stock market with headlines like “XYZ was down 15 percent today as short-sellers bet that the firm’s accounting irregularities are a sign of serious problems.” More often than not, despite investors thinking of those short-sellers — people who actually do the most homework on companies — as the villains, their real function is to expose the ugly truth — or lose money if they’re wrong.
And that’s exactly what the “bond vigilantes” have done in Italy recently, with that nation’s government bonds plummeting in price and rising in yield (implied interest rate you receive if you buy one). Over the last week, the yield on the benchmark Italian bond spiked up from 6.2 percent to about 7.3 percent, with half of the move happening on Wednesday. Asif to emphasize the volatility of the situation, the Italian government bond yield plunged by almost half a percent, down to 6.8 percent, in less than an hour in Italy’s afternoon trading. No bet is safe these days.
The seven percent level, while not inherently special, is seen by many traders as the market’s calling out “Danger, Will Robinson” (or whatever “Will Robinson” would be in Italian). As interest rates rise, it means that the Italian government must replace its maturing debt with new debt that costs it more, causing the annual budget deficit and thus the national debt to rise. In other words, if the market forces are big enough, as they are now, they can come perilously close to causing a serious problem by betting that there will be one.
There are always those politicians, regulators, and investors whose gut reaction is to ban short selling, and such bans are in place for certain stocks and bonds in certain countries in Europe and Asia. Additionally, the EU is trying to implement a broader ban on short-selling sovereign debt but that probably won’t be in place for another year.
But banning short-selling is the market equivalent of shooting the messenger. Sure, it’s nice not to hear the bad news for a little while longer, but perhaps having gotten the note sooner could have made the defeat a little less bloody.
About the Author
Ross Kaminsky is a self-employed trader and investor and is a senior fellow of the Heartland Institute. He is the host of The Ross Kaminsky Show on Denver’s NewsRadio 850 KOA at 11 AM on most Sundays. You can reach Ross by e-mail at rossputin(at)rossputin(dot)com.
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Bill Hussein O'Stalin| 11.10.11 @ 7:13AM
The reason governments want to ban short selling is not so much as to protect the public, but to keep their dirty secrets under wraps. Short sellers are not stupid people, they exploit the actions of stupid people running the government or corporations.
Short sellers are probably the smartest kids on the block in many ways who simply exploit the obvious.
Governments hate the obvious. The obvious often exposes the sheer idiocy behind most government actions.
DTOM| 11.10.11 @ 7:23AM
Governments rarely get the 'obvious.'
Barn Cat| 11.11.11 @ 4:11PM
There are times when short-sellers are the only ones buying. By banning short-selling they will make any disaster much more serious.
DTOM| 11.10.11 @ 7:22AM
When I was in school, they taught us that information was very,very expensive.
The 'interweb' has driven the cost of information to near zero. Information's price/quality relationship is largely unaffected, but if you can tell the good stuff from the bad stuff, it's still real cheap.
Trading was done by a relatively small number of traders and and there was enough labor in a trade so transaction costs were not small enough to be irrelevant. Today not so much.
My point? So maybe today the efficient market hypothesis is less efficient because there are a lot more votes available on any given instrument's price on any given day. And whether the voters are relying on cheap, good information or bad, equally-cheap information.
Are markets becoming more like mobs? Shotguns are most effective for dealing with mobs. Sometimes a very thick wallet and a loud voice will do, too, but not always.
I'm just saying...
Ross Kaminsky | 11.10.11 @ 8:02AM
I would say that information is extremely cheap now, but really good information is, depending on the situation, either expensive or illegal.
I don't think much has changed about the efficiency of markets, however, and I do think that the increased participation allowed by electronic trading brings in speculators who dampen volatility as often as they exacerbate it, at least in the markets I trade.
Pecos Pete| 11.10.11 @ 7:43AM
The stock market used to make sense. Not so much anymore. Huge swings in pricing levels make the market more of a gamble than a study of fundamentals. That a quality stock, for no reason, can decline or rise simply because of foreign financial difficulties makes no sense. Yeah, I know it is a "world market" now, even so currency manipulators and foreign government policies have eliminated common sense from the market.
Pete| 11.10.11 @ 9:09AM
That's where I come out as well right now, Pecos. It's a freaking casino at the moment, not a market.
Moe Blotz| 11.10.11 @ 8:02AM
Where is Jesse Livermore when you really need him?
Ross Kaminsky | 11.10.11 @ 8:02AM
Everyone should read "Reminiscences of a Stock Operator"...what a tremendous and enjoyable book.
John C.| 11.10.11 @ 9:20AM
Mr. Kaminsky, here is a simple solution for a more stable U. S. banking system and stock markets. Reinstate the Glass Steagall wall that separated corner banks from the gambling investment firms and demand that traditional banks avoid risky investments -- they hold sacred money. Then if the global investment (so-called) banks fail let the chips fall where the may -- they are too big period. If the stock market tanks let the free market system sort out the mess.
At last night’s GOP debate liberal Jim Cramer was pressing for a bailout of socalist Europe. The big money Wall Street talking heads are now whispering that the IMF should step in and bailout Italy and Greece -- a global TARP, which is code for We-the-People picking up the tab once again.
Wall Street is always for free markets on the way up but demand bailouts of some sort on the way down. The GOP presidential candidates better stop defending the capitalist/socialist Wall Street manipulators or we will have for more years of Obama and a Dem. Senate.
Dai Alanye | 11.10.11 @ 11:06AM
Let's not forget one thing - Jim Cramer is an idiot even when taking his medication, and I've no doubt his entire ancestry is idiot-based. He's a left-wing rent seeker whose advice is highly suspect, and probably contributes to the very market volatility that (I think, because I found him hard to follow last night) might have been one of his complaints.
Ross Kaminsky | 11.10.11 @ 4:02PM
[I posted this once but it showed up in the wrong thread, so I am re-posting here. Sorry for the duplication.]
That's a little far, Dai. Cramer is a liberal, but a moderate liberal, and not an idiot even if a self-promoter (something I do not say as a criticism because if I were an envious person I would envy his success.)
I actually exchange e-mail with him with some regularity and we simply agree to disagree on a fair bit of politics. When we disagree, Cramer has been unfailingly polite.
Also, he sharply criticized Obama's destruction of wealth back in 2009 in a way which I think surprised the liberal media -- and which Jim knew he would take heat for from the left:
http://www.csmonitor.com/USA/P.....ction-ever
In short, while Cramer is, in my view, wrong on important matters of political economy, he is not a rabid leftist and he is not a rent-seeker. He's an experienced trader trying to get good ratings, and I believe he gives his honest opinion -- which doesn't mean he can't be wrong. As someone who fits that entire description myself (though my media world is writing and radio rather than TV), I find it difficult to be as anti-Cramer as many of my conservative friends are.
Let me put it to you another way, would you rather have the Democrats in Congress be who they are now, or would you rather have most of them replaced by Jim Cramer and people like him? For me the answer is clearly the latter.
Cramer may not be your hero, nor is he mine, but he is not -- unlike many of today's prominent liberals -- anti-American. He is the loyal opposition, and for that he has my respect (and I hope I have his.)
skip| 11.11.11 @ 12:05PM
The repeal of the Glass-Steagall Act reduced the severity of the adverse economic effects when the housing bubble burst.
The economic suffering would have been worse had the act still been in effect.
Deregulation - the repeal of Glass-Steagall - served to stabilize the financial industry as the housing market crashed.
Explain the case for reenactment of Glass-Steagall that you have been incessantly parroting on AmSpec.
hardcard| 11.10.11 @ 9:53AM
Italy is drowning,Greece is on fire, Ireland, Iceland, Portugal,Spain are at the brink, France is whinning, Germany is pissed-off, the Russians are dealing, the USA is in debt for the next 100 years, England was bitch-slapped. Where is soro$ now what's he doing, how much is he making ?
Barn Cat| 11.11.11 @ 4:16PM
The US isn't in debt for the next 100 years. No way. The US will default much sooner than that. Not only is the monthly deficit as large as the annual deficit used to be but last year there was an additional $5.3 trillion in unfunded liabilities. The Federal Reserve started monetizing the debt in March of 2009. $15 trillion isn't a lot of money when you make one dollar worth 1% of what it is now. We're going to see hyperinflation in America. It's 100% guaranteed. Just a question of when.
Richard H. Davis| 11.13.11 @ 1:35PM
This is just silly. The US will never default - our debt is in US dollars and we could always print however many are needed. The US GDP was $200 billion 65 years ago - straight-line that number from today and in 65 years the GDP will be more than $900 TRILLON!!!
Purpleguy| 11.10.11 @ 10:55AM
Why has this site not addressed the overwhelming rejection of the GOP on Tuesday? Ohio, Iowa, Kentucky, Maine, Mississippi, Arizona to name a few rejected many initiatives and elected Democrats to Red State positions ... Could this be the harbinger of a Blue Wave in 2012? Hmmmm?
Ryan| 11.10.11 @ 12:49PM
What about Virginia...oh, wait...
Moe Blotz| 11.10.11 @ 1:26PM
What do you do, post the same inane garbage after every essay? Mr. Kaminsky has written about financial markets and the short sellers. Go fishing for political commentary at one of the other essays.
Dai Alanye | 11.10.11 @ 11:09AM
Purple-person has misinterpreted the election results, but I don't have time to correct him right now. Hope someone else picks up the baton.
Purpleguy| 11.10.11 @ 11:37AM
Oh, actual voting needs to be interpreted, huh? Spin away, spin away ... wheeee all the way to oblivion.
TrueBlue| 11.10.11 @ 6:08PM
I did over in the EPA Jackboots column, but he hasn't answered yet.
skip| 11.11.11 @ 12:15PM
What part of 'overwhelming rejection' don't you understand, TrueBlue?
How stupid a lying idiot does an instigating troll have to be, to not only not be able to tick anybody off, but to not receive any responses other than utter abject ridicule?
Stay tuned to Pimplepuss, we are about to find out.
cicero| 11.10.11 @ 12:02PM
Currently, 70% of all trades on the NY exchange are made by computer driven programs. This is not TRADING, it is out and out gambling. This accounts for the volativity. I don't have an answer for this problem. Maybe someone else does. The geniuses who put these programs together are a major cause of the '08 collapse. Until this problem is solved, there will be no rhyme nor reason to the gyrations of the market.
Ryan| 11.10.11 @ 12:51PM
It's easy.
No automated trades other than stop-losses. ALL trades should be made with a person pushing a button.
I have serious doubts as to whether automated trades are truly a free market function.
Ross Kaminsky | 11.10.11 @ 3:56PM
That's a little far, Dai. Cramer is a liberal, but a moderate liberal, and not an idiot even if a self-promoter (something I do not say as a criticism because if I were an envious person I would envy his success.)
I actually exchange e-mail with him with some regularity and we simply agree to disagree on a fair bit of politics. When we disagree, Cramer has been unfailingly polite.
Also, he sharply criticized Obama's destruction of wealth back in 2009 in a way which I think surprised the liberal media -- and which Jim knew he would take heat for from the left:
http://www.csmonitor.com/USA/P.....ction-ever
In short, while Cramer is, in my view, wrong on important matters of political economy, he is not a rabid leftist and he is not a rent-seeker. He's an experienced trader trying to get good ratings, and I believe he gives his honest opinion -- which doesn't mean he can't be wrong. As someone who fits that entire description myself (though my media world is writing and radio rather than TV), I find it difficult to be as anti-Cramer as many of my conservative friends are.
Let me put it to you another way, would you rather have the Democrats in Congress be who they are now, or would you rather have most of them replaced by Jim Cramer and people like him? For me the answer is clearly the latter.
Cramer may not be your hero, nor is he mine, but he is not -- unlike many of today's prominent liberals -- anti-American. He is the loyal opposition, and for that he has my respect (and I hope I have his.)
Ross Kaminsky | 11.10.11 @ 3:57PM
Very strange...this got posted under the wrong thread!
Ross Kaminsky | 11.10.11 @ 3:58PM
Cicero,
That is true (most days), but keep in mind that most of the ultra-high-speed trading is "pairs" trading, meaning the computers buy one stock and sell another based on complicated mathematical models.
It is indeed a form of gambling, but it is not the same as the program trading (where futures prices drive stock trades).
Because the pairs are trading, there is usually not very large net market impact from much of this high-speed trading. And in the meantime, they do add liquidity to the market for those "natural" buyers and sellers of stock, like your pension and mutual funds.
cicero| 11.10.11 @ 1:01PM
Ryan - Makes sense to me. Howver, that would require a true reform of the hedge fund business.
POST American| 11.10.11 @ 6:56PM
"--Sometime take a look at Papandreou's
family background. Very interesting.
Very interesting indeed. Likewise his
successor."
----WE did take a look.
Seems Papandreous comes from a whole
long line of bankster fronting 'revolutionaries'.
Even involved with bringing down Russia
and bringing in GENOCIDE back in 1918.
----STILL on the go.
-----------VERY INTERESTING INDEED-----------
sara monol| 11.10.11 @ 7:11PM
Short selling can make a lot of money but you can also lose a lot too. It is kind of like gambling, you are risking money to make money. But if you do your research, you can make a lot of money. If you don't know what short selling is, this article gives a great explanation on it.
http://explainlikeakid.blogspo.....lling.html
Niniane| 11.10.11 @ 7:24PM
I have turned into a market curmudgeon. I quit trading commodities as I cannot get up at 3 a.m. when the Malaysian rubber market starts trading. I quit trading options when I made the mistake of going out to lunch with the options being worthless by the time I got back as the company announced they were going private. And I quit day-trading the account when I was hit with an enormous tax bill for my success.
I look at the market slides as an opportunity to buy stocks and bonds with proven track records and good forward looking opportunities as many of the trades are just based on emotions (I assume that computers also can be emotional) rather than underlying facts. Dividends and interest are just icing on the cake.
Barn Cat| 11.11.11 @ 4:10PM
Italy will default. Greece will default. When it happens it will take banks down with it. There's concern about credit default swaps and the interconnectedness of the world's banking system. There's a chance a default in either country will cost tens of trillions around the world when all is said and done. That could mean that the Federal Reserve will simply create whatever money is needed to stabilize the world's banking system. Regardless of what it does to the dollar. What if over night the dollar loses 10% or 20% or 50% or 75% or 90% of its value? It'll be a tsunami to the US and world economy.
POST American| 11.11.11 @ 11:19PM
"---Hung around St. Petersburg
--------when saw it was time for a change----"
-ROLLING STONES
Really kiddies, do your own background
check on Papandreoiou -----and that
'unpleasantness' in Russia.
wedding dresses | 11.14.11 @ 3:09AM
I look at the market slides as an opportunity to buy stocks and bonds with proven track records and good forward looking opportunities as many of the trades are just based on emotions (I assume that computers also can be emotional) rather than underlying facts. Dividends and interest are just icing on the cake.