While You Were “Celebrating” Labor Day, The DAX Almost Crashed

by Dan September 5, 2011 9:56 pm • Commentary

Ok well maybe “celebrating” wasn’t entirely the right word, especially after Friday’s jobs data, but our fancy European friends finally got back from their holidays on Ibiza, Malaga, Analfi and St. Tropez, decided to take a little survey of things and didn’t exactly like what they saw….The DAX closed on its dead lows today, down almost 5.3%. That is down 9.3% this month alone, 24% ytd and almost 31% from the May high.  If that isn’t a crash I am not sure what is.

Today’s weakness was a combination of things, German Chancellor Merkel’s ruling party lost it’s 5th election this year, this time in her home state, causing fear that any successor would not be nearly as likely to participate in bailouts of weaker European nations…. almost as important, Deutsche Bank CEO Josef Ackermann gave a speech today at an investment conference in Germany that seemed to call the end, or at least for the next few years, of the banking business in Europe.  When you read some of the translated text of his speech, he said in some ways what we all feared and made it sound like the worst case scenario is coming to a theater near you….

Ackermann’s tone doesn’t sound a whole heck of a lot like Jamie Dimon’s did last month, parading around the country on a bus tour with a tv financial news anchor looking all casual in his Dockers and golf shirt and sounding pretty confident………Nothing has changed from 2008, banking CEOs are still full of crap……we all had to sit through 2008 and early 2009 and listen to one after another tell us how “contained” their sub-prime exposures were, and how well capitalized they were, well, it’s all happening again and there are very few out there who have been calling them on it (save Blodget)……deep down inside we all know how this is going to end……again.  And this time the Feds have shown themselves to be impotent.

Back to the DAX, when you look at the chart below, DAX vs SPX, you get a much clearer picture about where the concerns lie…..our markets are being treated as a flight to quality…..

1 YR DAX vs SPX from Bloomberg LP


I guess the real question is not if we play catch up, but how quickly….I have heard the ridiculous suggestion recently that we are likely to “de-couple” from Europe and there is a very good chance that our markets and economy won’t suffer the same fate as our friends across the pond…..I am not sure if you remember, but many argued the exact same about the opposite relationship back in 2008 and how’d that work out?….it didn’t. If they are “going to hell in a bucket” then we are very likely to do it together and at least we should enjoy the ride.

As you would expect, the Euro is getting slammed against the US dollar, down below 1.41 and trading near the low end of a very neat little channel, quickly approaching its 200 day moving average.  When it breaks we could see a new range established with 1.40 being significant resistance for some time to come.

1 YR Euro vs US dollar from Bloomberg LP


As I write at 9:30 pm our futures are down about 2.25% and putting us within striking distance of the closing low of 1121 made Aug 9th.  A close below that and I fear we will see much lower lows….this whole market cycle is snowballing a bit, there seems to be endless reasons to blame on any given day for the weakness, from Europe, to our own “soft patch” over here, and our increasingly negative rhetoric out of both political parties as we head into a presidential election cycle…oh and did I mention that countries like Brazil seem a bit confused by their central banks’ function…..raise rates, lower rates, ehhhh….

Oh and remember the “Arab Spring” that helped spread democracy among all those tidy little places in the Middle East that have been craving it for so long…..well things are still a mess and the Syrians seem to have a hall pass as they appear to slaughter their own citizens on a daily basis and those saintly Libyan Rebels are currently rounding up “dark skinned” Africans to do who knows what to….while Turkey a once ally of Israel has expelled Israel’s ambassador and downgraded relations……will we have an “Arab Fall” that really throws us for a loop???

Hate to be the bearer of bad news, but many of you who have been with me since the Spring when I launched this site, you can probably only count on both hands how many days I have actually been bullish and I am fairly certain that this is gonna get very ugly before it gets a lot better….I was shocked at how short-lived the rally off of Friday’s low, post Bernanke’s speech was, and this has only reinforced my inclination to short every rally.  But as usual, try when possible to define your risk and be careful pressing shorts…….There are plenty of names out there that had ridiculous rallies off of the Aug 9 low, find them and buy Put Spreads….they will get hit like everything else, even the cult names…..just look at how NFLX broke over the last 2 months…..down 30%!  This will happen to WYNN, LULU, CMG, HANS, AMZN…..hell maybe even AAPL.  Valuation Shorts haven’t worked to date, but if we really go into a bear market they most certainly will…we will continue look for the best risk reward relationships using options to define your risk and place these bets……

DON’T BE FOOLED BY ALL THOSE MORONS ON TV WHO RUN MUTUAL FUNDS OR ARE STRATEGISTS/ECONOMISTS AT BANKS, THEY ARE ALL IN IT TOGETHER THEY ALWAYS NEED TO RAISE ASSETS UNDER MANAGEMENT, AND BASICALLY NEED THINGS THEY OWN TO GO UP……AND THAT MEANS THEY NEED YOU AT HOME TO BE MORE INCLINED TO BUY THAN SELL AND NOT PANIC!   Well I am all for the not panicking part, but if you want to buy the market then just buy the SPY. Don’t pay some brainwashed/group-thinky mutual fund manager to generate “alpha” because most don’t and after fees you are so behind the game.  All these guys are gonna tell you is that stocks are historically very cheap with the 10 year treasury yield at 2% and on a PE basis…..well, treasuries are going up for a very good reason and unless you were Bill Gross you would have been a fool to short them at any point in the last year….oh, and on a PE basis they are really cheap, but if we are going into a double dip recession then take the 2H S&P earnings number and chop a huge chunk off of that and let’s see how those PEs look…..Earnings in Q3 are going to absolutely suck and I would expect pre-announcements early and often over the month of September.

I guess the only thing that could punch holes in this thesis is some sort of MASSIVE COORDINATED central bank action globally and all the crappy rule changing stuff like banning shorts etc…..while that may cause a short squeeze, just like the last time, it won’t fix the problems, and the those that we have to fix today won’t and can’t be done overnight….QE3, hmmm does it cause a 30% rally like last year? I am not so sure, maybe 10% off of the bottom, but last year was a joke and not sustainable, just stealing from Peter to pay Paul…….