In Between Days: Trick or Treat?

by CC October 31, 2011 10:18 pm • Commentary


Well, that wasn’t pretty.

Stocks slid right off the opening bell, and then proceeded to continue its descent right into the closing bell, bringing a fine October rally to an ugly end. In the process, stocks seemed to make history in reverse. At the top of the day, the S&P 500 was on pace for its best month since October 1974 (the age of Nixon and Olivia Newton-John). Then, as the initial selloff came, that record-setting euphoria had to be pared back a bit: stocks were now on pace for their best finish since January 1987 (think Reagan and George Michael). By day’s end, never mind, it was the S&P 500′s best month since December 1991 (Bush, Sr. and Nirvana).

Even so, there was much for market historians to be proud of. October remains the best month for the Dow Jones Industrial Average EVER — in terms of point gains, at least, which is admittedly less meaningful, given the size of point swings these days. In percentage terms, the Dow still posted its best month since October 2002.

As we’ve noted more than a few times here, the S&P 500 didn’t have back-to-back losing days this month, the first time it’s managed that since October 2006. And perhaps most importantly, October successfully staved off the bear market (for at least the time being), turning what was, in the middle of the day on Oct. 4, a 20%+ decline off its recent highs into a vicious rally that ripped right up to a three-month high.

But let’s not forget that worries abound. Much of that was built right into Monday’s action, which saw the afternoon swoon come courtesy of Greece’s prime minister, reminding us that no we are not out of the woods on the Euro-debt crisis. In addition to a jobless report on Friday, meetings of the European Central Bank (under new head Mario Draghi) and the Federal Reserve, investors now have to contend with a vote of confidence in Greece’s legislature. Yes, you are allowed to groan.


The S&P plunged at the open, churned sideways until the final hour and then sold off in the final hour to close near its low, down 2.47%. On a brighter note, the index gained 10.77% for the month of October, which is the eighth best monthly close since the inception of the S&P 500 in March 1957.

On the other hand, the index slipped back into the red year-to-date, down 0.35% and is 8.09% below the interim high of April 29.

From an intermediate perspective, the index is 85.3% above the March 2009 closing low and 19.9% below the nominal all-time high of October 2007.


Until a few months ago, the markets apparently gave too little consideration to fundamentals such as the debt/ GDP ratio and the primary surplus, thinking that Italy’s default and exit from the euro was inconceivable. If markets now think back, we can expect bond yields a return to the levels of 15 years ago. Mr Berlusconi’s resignation, while probably necessary at this point, will hardly be sufficient and substitute for a painful and prolonged fiscal adjustment.


If ever there was an example of an “overnight repo Black Swan” event, MF Global’s “repo-to-maturity” laddered trades seem to be it. Though, in this case, they’re probably better described as the realisation of the “short-term repo Black Swan”.

A.k.a institutions’ growing tendency to risk it in the short-term repo universe, to beat the crappy returns being offered in the “risk-free” market.

So, while most of the media has been commonly referring to MF’s sovereign bond positions as proprietary bets gone wrong, there’s more to it than just that.

If anything this was a financing position (or liquidity trade) — not a bet on the future direction of the bonds themselves.

What’s more, if executed properly the trade should — at least on paper – have posed little or no risk.