2011 Market Panic

The only thing my son wanted to be for Halloween this year was a firefighter.

Last year, he wanted to be his father, “his hero.” I was so proud… until he tried convincing my wife to buy a fat suit “like the one Daddy wears every day.”

Suffice to say, I was happy I was not this year’s costume inspiration.

So my wife of 11 years went online, picked out the jacket, the gloves, the helmet, the pretend gas tank, the boots, the bells, and the whistles.

Three hundred dollars later, there I was at a Halloween party holding the gloves, the helmet, the pretend gas tank, the bells and the whistles…

It’s what a parent does — that and put up with the parents of his child’s playmates at parties.

As is the case with many parties I attend, I’m often reminded of why I hate the financial business — specifically the brokers, the big banks, and the middlemen.

This time was no different.

Standing a few feet from me was Eric Johnson, a neighbor, a real estate expert, a financial analyst, and a broker — one of those guys who is always on the phone trying to look important while his 6-year-old son is begging for attention… a real ass.

And of course, I couldn’t help trying to overhear what he was saying on the phone. I needed a hot new tip.

He was telling his “friend” that now is the time to buy everything — even at lofty valuations.

“Okay, buddy,” he said. “We’re buying everything. This euro crisis is over. The dollar will pull back. It’s up from here, my friend. No. Technical analysis here is crap… Sounds good. I’ll put that order for you in now.”

I was like a deer in headlights. And I couldn’t say a word.

It wasn’t my place. I was standing there holding a $300 firefighter costume while my son traded Halloween candy.

But listening to Eric con someone into buying the “all is fine” thesis was maddening. I knew the euro crisis wasn’t over. I knew the U.S. economy wasn’t on good footing. But what was I going to do? What could I say?

This was the same day MF Global filed for bankruptcy, and was accused of “losing” millions of investor dollars.

Federal regulators have discovered that hundreds of millions of dollars in customer money has gone missing from MF Global in recent days, prompting an investigation into the brokerage firm, which is run by Jon S. Corzine, the former New Jersey governor, several people briefed on the matter said on Monday.

The recognition that money was missing scuttled at the 11th hour an agreement to sell a major part of MF Global to a rival brokerage firm. MF Global had staked its survival on completing the deal. Instead, the New York-based firm filed for bankruptcy on Monday.

I couldn’t say a word — even though I knew MF Global wouldn’t be the last domino to fall. Even though I knew we may need to deal with a “black swan” post-MF Global moment, where many financial customers pull monies out of other “MF Globals” around the world.

I couldn’t tell Eric’s customer that MF Global’s descent is like watching Lehman three years ago.

I couldn’t tell him that the only difference between 2008 and today is that nothing has changed…

I could only hope Eric’s “friend” would realize what so many other investors are learning: that Europe’s comedy of errors can’t be fixed, that their woes will eventually lead to a financial firestorm that’ll take out most of the globe.

Paul Krugman is warning of a possible “gigantic bank run” and “emergency bank closing,” fearing a euro breakup and Italy’s return to the lira:

The question I’m trying to answer right now is how the final act will be played. At this point, I’d guess soaring rates on Italian debt leading to a gigantic bank run, both because of solvency fears about Italian banks given a default and because of fear that Italy will end up leaving the euro. This then leads to emergency bank closing, and once that happens, a decision to drop the euro and install the new lira.

How It Will Impact the United States

Last week, the Euro-saviors rescued Europe for the twentieth time with a trillion-dollar bailout fund. The news lasted maybe a week.

• Our banks are tied to European banks.

According to USA Today, Bank of America has $16.7 billion in European exposure, at the close to June 2011. JP Morgan has $14 billion, and Citigroup has $13.5 billion. Morgan Stanley, Wells Fargo, and Goldman Sachs have $3-$5 billion in exposure.

Still, the banks may actually be lying about their real exposure, as Zero Hedge points out.

• A European recession could destroy European consumer needs for American products.

• Companies like General Motors with European exposure could take a hit.

• And it could easily send economic and market volatility through the roof going into the next presidential election cycle.

Everything is not fine.

Europe can no longer kick the can down the road. It has to let things hit rock bottom, let countries fail… and start over.

Technical Analysis Calls the Tops and Bottoms

Despite Eric Johnson’s “technical analysis is crap” theory, it’s what called recent tops and bottoms — that, and hope and despair over the euro.

Recent volatility is a prelude to a bigger crash — one that could look a little bit like this.

But take a look the recent technical analysis I shared with Trader’s Pit blog readers: Every time we’ve crossed the upper and lower Bollinger Bands, we’ve snapped back — sort of like a rubber band pulled too tightly.

Now look at the Dow. With the Dow, I like using a six-month candlestick chart with MACD, DMI, and Williams % Range (W%R).

We were able to call the bottom in the Dow at 10,500 because of the dip below the lower Bollinger Band, an oversold read on W%R, and bullish crossovers on MACD and DMI.

Last week, we were above the upper Bollinger Band with an overbought read on W%R and MACD. And we’re in the process of pulling back.

While it’s best to wait for pullback or bouncing confirmation from MACD and DMI crossovers (in agreement), W%R, and even from candlesticks, you can be sure that as soon as we cross a Bollinger Band, the “rubber band” will soon snap back.

Stay Ahead of the Herd,

Ian L. Cooper
Analyst, Wealth Daily