Equities fell about 6% over the past two weeks primarily because of very weak employment data; the nasdaq generated a never before seen series of 9 lower highs and lower lows to start the month.. Some other issues weighing on the markets include continued problems with Greece (they need and will likely receive a comprehensive bailout), a downgrade by Moody's of key Eurozone banks, and tightening credit globally. The ECB suggested they are likely to hike interest rates next month, South Korea hiked rates, and China is tightening credit. QE2 ends this month and has some investors nervous about who will buy US debt now that the Federal Reserve is done buying. Treasury prices have been strong because of the deflationary fears that accompany tightening credit and the weak economic data, but that could change quickly.
High Yield debt has sold off significantly, which is often a precursor of equity weakness. However, the put/call ratio is very high (often a contrarian indicator), and the VIX (a measure of the volatility expected by options markets) has remained low. Overall, this suggests to me that many market participants are pessimistic but are not expecting a wild sell off. Hedge funds are generally bearish, which can have a contrarian effect.
Crude oil has fallen with equities and the strong dollar; OPEC was expected to increase production but could not reach consensus; Saudi Arabia said they may increase production unilaterally.
Chinese equities have been weak for the past 9 months. This is partly because of fears of a Chinese credit or real estate bubble, and partly because many Chinese companies have been uncovered as a frauds, sometimes in very high profile cases. For example, John Paulson, manager of the one of the largest hedge funds in the world, lost $235 million in two days in his investment in Sino-Forest. A shortseller released research that the company was massively overstating assets...and the company neglected to deny the harmful claims. It was primarily this fear of fraud that kept me out of the Chinese market for the past two years. If the Chinese stock market continues to sell off, this will likely reflect more "spring cleaning" of built up problems, and will eventually represent an exceptional opportunity for value investors. I'm starting to hunt for gems.
Overall, I remain relatively flat and patient. If crude oil sells off another 4-8%, I may buy some as a longer term play. I am also likely to buy puts on gold and silver over the next couple of days; if deflationary fears continue to gather over the next couple months, gold and silver could get hit hard.
We present commentary on how to think about investing, markets, economics, macro forces, industries, securities, etc. We see this as a place to discuss investing broadly, from abstract ideas like the nature of risk to concrete analyses of financial statements and recent data. We may occasionally publish opinions about securities, but these are not investment recommendations.
Alpha is an investor and an entrepreneur. Ari is a proprietary derivatives trader. The views here are personal to the authors and do not represent the views of any other individual or organization.