MARKET MAVEN: It’s cliff dive Friday for Wall Street

Going down... Warner Bros'. Wile E. Coyote and Wall Street have similar issues.

WASHINGTON, January 24, 2014 – We’ve been getting hints for the last two weeks that all was not well on Wall Street as the New Year began. But now, concrete proof has begun to rear its ugly head. After the market’s precipitous dive yesterday—which exempted only precious metals and a few selected REITs—the stock market’s massive cliff dive resumed this morning with a vengeance, with very few stocks escaping damage in today’s ongoing bloodbath.

The Dow has been down well over 200 points at various stages this morning, with the broader S&P 500 off a sickening 23.43 points around noon today.

The catalysts for the market’s current swan dive are numerous and growing. First off, China’s financial markets—only slightly less opaque than the Obama Administration but still vying for first place—look like they might be about to experience their first Lehman Brothers/Bear Stearns moment.

This, in turn, has begun to make a large bloc of investors seriously nervous about Third World (“emerging markets”) currency issues, leading to massive selloffs in currency investments and foreign stockholdings, including mutual funds and foreign (non-U.S.) ETFs, all of which are looking more like road kill by the minute.

But wait! There’s more!

Even as foreign exchange markets get nervouser and nervouser, Argentina has just added to this nasty stew by devaluing its currency. On one level, this is no surprise, as Argentina’s socialist pals in Venezuela have already done this and its only logical for both countries which seem eager to give away to the voting poor massive amounts of money these governments never had to begin with. (Anything sound familiar here?)

On the other hand, the Argentinian actions—which the current Peronist administration is trying to spin as no action at all—has roiled the markets further, particularly Spanish banks which are heavily invested in the South American country. Which in turn is causing heartburn in the European banking sector. Etc., etc. It’s a minor panic, at least at the moment, but a panic nonetheless.

The only sector that currently seems to be benefiting is U.S. Government bonds, oddly enough, once again viewed as the strongest bet among nothing but bad government and currency bets. It’s a bit like a monetary Theory of Relativity. Dollars and U.S. Government bonds are lousy, too, but they’re less lousy (or more cleverly managed) than others. For investors, this seems like about the only place left to hide, which is rather pathetic if you think about it.

Of course, the market also hasn’t been helped by lousy post-Christmas retail sales reports, store closings, and zero growth in full time employment. Which is zero surprise, as we’ve been warning for two years, given Obamacare’s obvious discrimination against employers who put individuals in jobs requiring over 29 hours of work per week.

Actually, Obamacare is the real reason for the market weakness, in the U.S. at least. The papers and the lamestream media won’t tell you this, of course, because the likes of the New York Times and the Washington Post, not to mention the latest issue of the AARP newsletter are all shilling for Obamacare and are incredibly adept at spinning everything into a big positive.

But, in fact, in 2014, mass quantities of personal income will be redirected toward the healthcare sector. All other sectors will slump as a result, particularly retail, resulting in more unemployment and less tax collection. It’s a vicious circle, and yet another reason why, at long last, the U.S. has begun to resemble the perpetually chaotic regimes in countries like Venezuela and Argentina.

People are starting to wake up to this fact, which is why we’re getting off to a very bad start in 2014. We are getting exactly the kind of government the Low Information Voters wanted in 2012. Whatever happens in 2014 is likely to be immaterial. If we don’t get a complete party turnover in 2016, the U.S. as we have always known it is DOA, and we’ll become another member of the Banana Republic Club.

This, too, has the markets roiled. Nouriel Roubini, another one of Wall Street’s serial “Dr. Dooms,” stated at Davos that this whole scenario is beginning to look like 2014. The Maven prefers to call it our “Rosenkavalier” moment, although non-opera fans may not relate. At any rate, however you describe it, this is clearly the end of an era.

Meanwhile, America’s vanishing middle class just sits there and watches as the hard work of entire lifetimes goes off the cliff or down into an ever-widening sinkhole. Choose your own metaphor to describe it.

In the meantime, we’re getting a preview of what this might mean on Wall Street today. Whether it’s a short-term correction or the beginning of another Bear Market, it somehow still seems like the worst is yet to come.

Today’s trades:

None, really. If you haven’t hedged with some kind of short or double-short position, it’s probably best to wait for at least a mini-snapback rally to put one on. Classic hedges the Maven uses are the short and double-short S&P 500 ETFs, SH and SDS; and a new one that’s been unearthed by one of our investment services, a bearish ETF with a complex structure, symbol HDGE, a small bit of which we put on at market open today.

SH moves rather slowly and has not always been effective for us, while SDS move like lightning one way or another and you have to catch it just right—and we missed the train on this one this morning.

As always, if you hedge with these positions, you or your broker need to keep a close eye on them. SH and HDGE are geared to be slightly longer term positions, but SDS is so fast you have to move in and out and can get killed if someone isn’t watching.

In any event, if things continue this badly next week, we’ll get an almost inevitable snapback rally. But if fundamentals still look bad, this rally is the time to unload longs and get into vehicles like SH, SDS, and HDGE. Travel at your own risk, however, as most investors are still uncomfortable with the process of making money on the downside.

Disclaimer: The author of this column maintains several active trading and investment portfolios and owns residential and investment real estate. He currently owns shares of HDGE.

Positions mentioned above describe this author’s own investment decisions and should not be construed as either buy or sell recommendations. The current market is highly treacherous and all investors travel at their own risk. Caution should be exercised at all times.

Illustrations, charts, commentary, and analysis are only the author’s view of current or historical market activity and don’t constitute a recommendation to buy or sell any security or contract. Views, indications, and analysis aren’t necessarily predictive of any future market or government action. Rather they indicate the author’s opinion as to a range of possibilities that may occur going forward.

References to other reporters, analysts, pundits, or commentators are illustrative only and do not necessarily represent an endorsement of such individuals’ points of view. If specific investment vehicles are mentioned in any article under this column heading, the author will always fully disclose any active or contemplated investments in said vehicles.

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Terry Ponick
Biographical Note: Dateline Award-winning music and theater critic for The Connection Newspapers and the Reston-Fairfax Times, Terry was the music critic for the Washington Times print edition (1994-2010) and online Communities (2010-2014). Since 2014, he has been the Business and Entertainment Editor for Communities Digital News (CDN). A former stockbroker and a writer and editor with many interests, he served as editor under contract from the White House Office of Science and Technology Policy (OSTP) and continues to write on science and business topics. He is a graduate of Georgetown University (BA, MA) and the University of South Carolina where he was awarded a Ph.D. in English and American Literature and co-founded one of the earliest Writing Labs in the country. Twitter: @terryp17