WASHINGTON. Maybe today, Tuesday, is a Warren Buffet kind of investing day. Because there’s blood in the streets. We’re talking Wall Street in particular. After a wobbly opening bell, the bears showed up en masse, looking like a brown, furry version of Game of Thrones’ whitewalkers. And behaving just as destructively. They completely reversed Monday’s bullish party and then some. For investors, it was like spending a day in the lower circles of Dante’s Inferno.
Uncle Warren famously regards a day like today as the best time to buy stocks, more or less. Blood in the streets means that professional and part-time investors alike are dumping stocks like there’s no tomorrow. It’s something that inevitably creates bargain prices of historical note. We know this, having bought wonderful bonds at bargain basement rates in March of 2009: the very bottom, more or less, of the Great Recession. A time when there was more blood in the streets than we could ever remember.
Remembering Maalox Moments
Happily, after a year or two of gulping quarts of Maalox to make it through each trading day, we made uncommon capital gains on all of our distress-priced bond issues. Sadly, the original issuers called most of these away from us for early redemption. We enjoyed successive and substantial capital gains. But we’d have loved to have kept collecting those swell, semi-annual coupon payments. That was the case even as we enjoyed the incredible yields we’d acquired at bargain prices. That’s what blood in the streets investing can do for you. The only problem with doing this consistently is correctly calling a bottom in the market.
But judging from the violence of Wall Street’s still-ongoing crash, which reflects the dismal depths we glimpsed in Dante’s stark vision of Hell, Tuesday’s rapid market descent may not conclude until we’ve reached the eighth and final circle of the Italian poet’s lower depths.
As a result, we’d guess that Warren is keeping plenty of powder dry for that still impending Day of Doom. That said, today’s market action certainly looks and feels like the Apocalypse, at least for investors.
Blood in the streets for sure
The carnage as of 2 p.m. ET today? Having plummeted over 700 points at its worst point, the Dow Jones Industrials are currently off ~650 points as we begin this market recap. That’s already a colossal 2.5 percent loss on the day. We don’t know where things will end at the 4 p.m. closing bell. But it probably won’t be a good place to be, and seems likely to get worse.
Regarding the Dow Jones Industrials, Caterpillar (symbol: CAT) is the villain of the moment. The heavy equipment manufacturer is currently down 7.8 percent for a nearly 5.7 percent loss on the day thus far. But it was down nearly 10 points not that long ago, so where the stock stands now actually an improvement.
In counterpoint, the tech-heavy NASDAQ is nearing a horrific 3 percent decline on the day. It’s off a whopping 215+ points at the moment. The broad-based S&P 500 is nearly as bad. It’s down some 70 points, for a NASDAQ-equaling 2.52 percent battering.
Life in (Dante’s) Investment Hell
Was anything okay this afternoon on Wall Street? Pretty much not, aside from the blood in the streets. That crimson river continues to run through every stock exchanbe and brokerage office in America. Roll Tide!
Save for those boring old utilities, of course, notes CNBC. But not the banks or anything else in that sector.
“‘You can see the utilities positive on the day, but financials are getting hammered on the flatter curve while industrials are likely down on the tariffs headlines,’ said Jack Ablin, founding partner of Cresset Wealth.”
TV analysts and touts like to list the day’s favorite fake “reason” for large moves like this one. God, how these blow-dried dudes and dudettes love to hear themselves talk.
But, tracking with Ablin’s observations, Tuesday’s ongoing obliteration of the Street’s few remaining bulls felt inspired by two unpleasant happenings.
- The interest rate yield curve has inverted, a classic predictor of an incoming recession.
- The 90-day “suspension” of the Administration’s latest tariff hikes starts NOW rather than on January 1.
Behind Door #1
With regard to item #1, CNBC explains why interest rates and yield curves have Wall Street in a high dudgeon.
“The yield on the three-year Treasury note surpassed its five-year counterpart on Monday. When a so-called yield curve inversion happens — short-term yields trading above longer-term rates — a recession could follow, though it is often years away after the signal triggers.
“Long-term rates fell to session lows around midday in New York while short-term yields were little changed.
“‘We started the day at 2.95 percent. Just a couple minutes before noon, the 10-year yield went from a 2.94 to a 2.92 percent yield. That doesn’t sound like much but that’s closer to a yield inversion and that’s adding to the overall pressure in the stock market,’ said Robert Pavlik, chief investment strategist at SlateStone Wealth.
“Jeffrey Gundlach, CEO of Doubleline Capital, told Reuters this inversion signals that the economy ‘is poised to weaken.’”
Behind Door #2
Item #2 is plausible if a bit more dubious as an explanation for today’s stock market swan dive. Learning that the Administration’s 90-day suspension of higher and more extensive tariffs on Chinese goods would conclude sooner rather than later pressured industrial stocks like Caterpillar in particular. Mutually destructive tariff regimes (China would, of course, counter-attack) can and often do serve to slow economies down, particularly in the area of building and construction.
But ZeroHedge offers a more exotic third choice for explaining today’s massive market downdraft. The ZH piece is entitled “Here is What Triggered Today’s Sudden Stock Liquidation.” Given the insider shoptalk involved in this article, we’re providing translations in square brackets as needed. (Bolds and italics via ZeroHedge.)
“But while ongoing (relatively slow) risk parity deleveraging may explain the pressure on the market over the past month, the reason for the sharp waterfall in US stocks just after 12pm ET has to do with another systematic ‘trader’ type in the market: namely the much faster CTAs, or managed futures funds, which do nothing but chase market momentum once it has been established.”
Moving the market all at once
We’ve emphasized a key point here by highlighting it in a different color of virtual ink. What’s going on according to ZH, is that a batch of professional investment managers (CTAs) and / or high-speed computers are selling stocks like fiends, based on the proprietary algorithms and news headlines that drive this market. In so doing, they have massively gang-tackled the entire market.
The chart tells the tale
About the market’s massive noon hour face plant, just take a look at ZH’s chart of same, keyed to the S&P 500 average of stocks. A picture really is worth 1,000 words.
“Deleveraging” is not a 4-letter word. But it should be
“As McElligott writes in a follow-up note the Nomura CTA Trend model ‘is again deleveraging massive notional in long US Equities expressions across SPX [S&P 500], RTY [Russell 2000 Index of smaller company stocks] and NDX [S&P 100] live.’ “
I.e.,Nomura Securities is using a predictive model, not actual trades, to predict the trajectory of the market’s huge move lower. “Deleveraging” simply means in this context either mass dumping of stocks; or, more technically accurate, a massive unloading of debt, particularly if that includes massive long positions that had been purchased via margin, or borrowed money. Another word for that, of course, is “leverage.”
“This is more about performance and year-end timing than the curve inversion / ‘growth scare’ story…but that certainly is not helping the sentiment here either, as stops are being triggered across fundamental and rules-based strats [strategies].”
In other words, ZH is less worried about yield curves and growth slowdowns than the site’s twin authors are about the way internal market dynamics can make a dicey situation far worse.
Negative nellies in the investment world love to run your stops
Many investors (not this writer, for better or worse) put in stop-loss orders to guard against such situations. These are long-term automatic “sell” orders meant to save individual stock positions from getting wiped out in a waterfall decline like today when you’ve gone off to the loo for a few minutes. Computer programs can find these orders and pick them off on the way down, exacerbating any big downward move in stocks and averages.
“More importantly, McElligott identifies the specific deleveraging ‘trigger’ behind the S&P waterfall liquidation, which was due to a massive CTA selling order, which was unleashed once deleveraging stops were hit in the S&P. Specifically, the SPX [S&P 500 average] model was triggered to sell down at 2,763 – the S&P’s 200DMA – with $32.8B notional for sale, reducing CTAs from ‘+100% Max Long’ down to ‘+65% Long.’”
In other words, one big investment manager and / or investment management firm got caught with his / its metaphorical pants down and was forced to dump huge amounts of stock onto the market at an equally huge loss. This, in turn, triggered God only knows how many additional massive stock liquidations. This ultimately results in a considerable and decidedly negative chain reaction on all exchanges.
The dominoes fall
As the dominoes fell (to mix the metaphor), ZH provided its sickening but inevitable summation for a very bad Monday trading day indeed. That’s how you get blood in the streets. It’s not pretty.
“One the selling program hit, it was lights out and the number of stocks that were sold off all at once, as measured by the NYSE Uptick-Downtick index, reached a negative 1,459, which was among the 10 worst readings of the year.”
Lights out. Yep. It sure was.
After the Close: Market update for Tuesday, December 4, 2018
We’ve been eyeballing and adjusting our accounts all afternoon as we added to today’s article. But we’ve generally stood pat with our existing positions, after raising some cash last week, which proved a good idea.
As of now, we’re losing about 1 percent on the day. Not bad, considering. That gets us to today’s near-fatal 4 p.m. ET Tuesday market close.
Here’s the final box score for today’s carnage:
Dow Jones: Close at 25054.25, down 772.18 points for a huge 3 percent loss on the day.
S&P 500: Close at 2700.06, down 90.31 points for an even more sickening 3.24 percent loss on the day.
The tech-heavy NASDAQ: Close at 7158.43, down a horrendous 283.09 points for a nearly 4 percent loss on the day.
As for that Russell 2000 mentioned above. It’s an index of smaller but still publically traded stocks. It was clobbered worst of all Tuesday, closing at 1480.75, down 68.21 for a loss approaching 4.5 percent on the day.
Pretty hideous, eh?
A final, poignant post-script on today’s market disaster
Probably not helping matters on Wall Street today was the fact that the President has officially ordered markets closed tomorrow in honor of former President George H.W. Bush. The earthly remains of our late president currently lie in state in the Capitol Rotunda prior to the state funeral in his honor. Washington’s National Cathedral hosts that solomn event on Wednesday. Air Force One next transports the former president’s remains to Texas. He will be buried in his adopted home state on Thursday.
The advent of Wednesday’s trading holiday likely caused already-panicked institutional sellers and high-frequency trading algos to liquidate hated positions (as in all of them) with greater vigor Tuesday afternoon. That’s because both traders and investors alike faced the possibility of facing a pent-up negative follow-through when trading re-opens Thursday morning. That perception probably triggered even more margin calls than resulted from Tuesday’s initial noon hour market dump-athon. A horrible time was had by all.
As we wrap this article around dinnertime Tuesday evening, we plan to console ourselves with considerable amounts of single malt scotch until we can no longer feel the pain. But we’ll be back at the trading console Thursday morning. Bleary-eyed, yes.
But we’re already seeing plenty of blood in the streets. We’re good to go in the fullness of time.
— Headline image: Gustave Doré, “Hoarders and Wasters” in the 4th circle of Hell, Canto VII of Dante’s “Inferno.”
From the original, with slight emendations by T. L. Ponick.
(Original and images in the public domain, via Wikipedia entry on Dante’s Inferno.)