out of control ≠ contained!

Last night was relatively calm (that is, compared to the night before). The Japanese market managed to bounce about 6%, though that did not help Europe, which was under a modest amount of pressure on the back of Moody’s downgrade of Portugal’s debt (to just a few notches above junk), along with increased tensions in the Arab world, particularly Bahrain, where authorities closed the stock market. Thus, even though Japan managed a bit of a comeback, the Spooz were unable to get much upside traction.

In addition, this morning’s macro data was not so friendly, as housing starts were quite a bit lower than expected (while fewer permits is better for the long-term health of the housing market, it doesn’t do much for the economy in the near term) and the PPI was a fair bit worse. Regardless, the data were most likely ignored anyway, especially the PPI, since, of course, the bulls neither eat nor drive, and that portion of the index was in line with expectations.

“Peaking” Our Interest

Turning to the early action, the indices were slightly lower, though beneath the surface yesterday’s kinky stocks — i.e., cloud computing and other concepts (read: names with decent-sized short positions) — were firm. I don’t believe any of that was about fundamentals, of course, but rather “market dynamics,” as folks appeared to be piling into short-oriented ideas.

Salesforce.com makes a pretty good example. As I noted, it was fairly stable yesterday, and higher this morning by about 2%, even though Japan accounts for 10% of its business. A company with such a high multiple against such a low growth rate certainly can’t ignore having 10% of its business suddenly under a black cloud. (I could not resist and bought some puts today.) I bring that up to show that market dynamics are more powerful in the short run than fundamentals, even with all the problems we have in Japan, the Middle East and North Africa, the PIIGS, and our own laundry list of troubles.

Beware of the Option Chain Reaction

Bottom line, the early going was pretty calm until about 11:00 a.m. EDT when a headline hit that read: “EU Energy Chief: Situation at Japan Nuclear Plant Out of Control.” The Spooz immediately dropped about 20 handles before bouncing 10 or so. They then began to leak, and were soon back to the lows as more details emerged.

After trading sideways for an hour or so, the S&P dropped another 10 points to 1,250, a loss of 2.5%, before bouncing a bit to close 2% lower. By day’s end pretty much everything was red, with some former favorites (i.e., Google, Apple, and IBM) really getting spanked.

Away from stocks, Treasuries were very strong, oil bounced 1%, and the metals were flattish. The dollar was higher ex the yen. It closed at 83 and I think that if it spends time below 80 (lower in yen terms means lower versus the dollar) it could unleash some financial chaos (not that we haven’t seen plenty so far). I am concerned about derivative-related problems for Japanese financial entities precipitated by the yen having broken 80. I don’t have any hard facts to back this up; it’s just an educated guess on my part. We all just need to be on the alert for clues. Whatever happens next, I doubt it will be orderly.

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About abwehra group

The Art&Science of Trading Gold
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