Right you are Freshmilk, if you keep betting black eventually you'll hit it and today I hit it: On 2/15/07 I stated: "although the US stock market has made breathtaking gains lately, the spread between the highs and lows is getting really narrow. I've noticed on smaller scales that when this happens that significant downturns can occur." Today my prediction became fact resulting in a significant downturn (in relation to the prevailing spread between highs and lows). At one point (3pm EST) the Dow dropped 300+ points over the span of ten minutes for a daytime low of -546 points. Jim Cramer stated it like this: "You didn't even have time to panic. The system failed us, breaking down too fast for you to panic." I also noted on May 18, 2006 while musing about the 1987 crash that "in looking at what the market is doing now, I see it headed down sharply and not recovering any time soon [and I would] not be surprised if we see a day in the not too distant future when the market tanks heavily in a one or two day period."
And it appears that the Yen Carry Trade may have held some of the blame (take that BK!). In my previous post I stated that if the yen rises, investors who had been relying on the value of the yen to stay low will have to suddenly unwind from their investments (sell dollar investments like the stock market and buy yen) if the price of the yen goes up, which will push the price of the yen higher still.
Bloomberg.com reported that "The yen rose the most in more than 19 months against the dollar amid a sell-off in U.S. stocks and as investors shunned emerging-market assets, prompting an unwinding of trades betting on a decline in the Japanese currency. The yen rose 2.3 percent to 117.94 against the dollar at 4:15 p.m. in New York, from 120.66 yesterday."
And this from the New York Times, "There was a sharp rise in the Japanese yen. People are unwinding the carry trade,” Mr. Barbera of ITG said of Tuesday’s trading. "In that trade, which has been very popular with hedge funds, traders borrowed yen, at very low interest rates, and then invested the money in assets in other countries. Now you try to get closer to shore, traders have sold investments and used the proceeds to repay their yen borrowings."
So watch this closely, that 2.3% rise in the yen probably had an effect in today's sell-off and it may get worse due to the viscous circle nature of selling dollar assets to buy back yen to pay off loans and given the trillions of dollars caught up in this strategy this will have a profound effect on the market.
To answer BK's assertion that the yen carry trade is like other signals that the sky is falling, I can only say that I've looked at some of these other signals, like copper, and they haven't caught my eye. Copper, while historically has been a good bellweather for times of growth, copper is now caught up in the whole big liquidity bubble that all assets are experiencing and therefore is not behaving in exactly the same way as it has in the past. I'm stating that the yen carry trade is special in this regard due to the huge amounts of money involved, the sudden unwinding that will have to occur and because I believe that the low valued yen is the very source for the global liquidity bubble.
So my prediction is that the sell-off isn't over. The uptrend that we had for the last 8 months is over and a downtrend just started. I'll go out further on a limb and say that this is the start of the big drop. The price of the Dow and other markets may pop back up to yesterday's level briefly (although I really doubt it given the brick wall that it hit today) but for the most part we've seen the stock market's heyday. I say this from a technical charting perspective and a fundamental one; there's too much liquidity, which has led to speculation and now that liquidity is starting to shrink (because the speculation is imploding). True, for the past 90 years the market has gone up (interspersed with occasional interludes of downward prices). We've experienced the largest bull market in history, but all bull markets come to an end and bears eventually take over. If we're talking about hundreds of years then yes, all markets eventually go up overall, but we're due for a huge bear market--much larger than anything we've seen since and including the Great Depression. I believe we've actually been in a bear market since 2000. It doesn't seem like it because the Dow is higher now (at least it was yesterday) than it was in 2000. That doesn't mean it's not a bear market, it's just a really, really big bear market, which is just getting started. We just got done with the pullback (in this case a large 3 year upward move), contrary move, wave B (in Elliot Wave parlance), whatever you want to call it and we will now resume the downward path that was started in 2000 and unlike 1987's October crash, this drop today will not be a bump in the road to higher gains but rather the talking skull and crossbones located on an arch above your E-ticket boat raft. He talks to you and you can just hear him over the sound of ever louder rushing water: "No fear have ye of evil curses, sez you? Ahhh... properly warned ye be, sez I ... Who know's when that evil curse will strike the greedy beholders of this bewitched treasure. Dead men tell no tales."
I guess it was good that you were prattling on about the copper stuff on chat and not on Lowbar then. But you did indeed hit it this time. Congrats, I hope the money I lost somehow got to you.
As a side note, the stock you lost a bet to me on (which I will never seek to collect), ESRX...you were sure it was going to touch or go below 40 at some point in the year leading up to Oct 31 2006, it never came close... you win some...anyway the company is is involved in a pretty interesting conflict with CVS. It is an interesting study in capitalism. In a desperate attempt to interfere with a proposed buyout of Caremark by CVS, Express Scripts entered a hostile bid valued quite a bit higher than the CVS deal. However, the Caremark board rejected it, raising the ire of big shareholders who stood to cash in from the plum Express Scripts offer. And, that rejection brought to light how the Caremark execs had written into the deal for themselves a bounty like few before it. The story goes on. I think over time we might get a mini-scandal out of it.
