Starting from last Monday, Aug 1st - the S&P 500 has fallen as-near-as-it-makes-no-difference 12%. What is going on?
Well the first reason is that US government was debating on how to raise the debt ceiling. The whole circus going on in Capitol Hill really showed you the ugly and greedy side of politics.
After the debt deal was signed, the markets didn't budge a bit as low GDP numbers and the looming possibility of debt downgrade by Moody's and Standard & Poors kept investors on edge.
ISM numbers came in and tanked the market early this week. This string of bad news was enhanced by trouble in the Eurozone, as Italy and Spain become more and more dangerous and could possibly need some life support. Italy's public debt of 130% of GDP is a very alarming figure, and the GDP figures come out tomorrow.
I don't know about you, but if I were to choose between that or the US jobs report as being a bigger mover in the markets tomorrow morning, I would say Italy's GDP by a mile. That number doesn't look like it'll please many people besides those short the market. The US jobs report tomorrow morning at 8:30am doesn't look too promising either.
There was a massive sell-off today as the VIX spiked and blue-chips were unloaded by investors moving into a risk-off scenario. Investors flocked to any safe security, including US Treasuries. For a moment, the 1M T-bill had negative yield. For those unfamiliar with the matter, that means you are PAYING the government to hold onto your cash for a month. Ridiculous. The 10-yr TIPS yield also fell more than 50%, moving inverse to the price.
What's to come?
My guess is more of a correction. Bernanke will use what's left of his warchest for QE3, but that should have the effect of a mouse coughing. Things don't look good people. The signs point to a global slow-down.
US - economic data looks weak and even though companies are beating earnings, the outlook doesn't look as rosy as it did at the beginning of earnings season
Europe - They've got their hands tied for a long time coming. Greece is barely supported, Italy is going to become a problem, Spain has some time to get things in order so long as GDP keeps growing. Portugal is being supported by Trichet and the ECB, but that can't last forever. You know something's amiss when Trichet goes against what he said he would not do in order to prop up the crumbling structure of the Euro. Godspeed to Europe.
China - Overheating. Expanding too fast, not enough infrastructure, the government is starting to strike a discord with the people. Growth is good, but China can't be a one-trick pony, and indicators are showing that the trick is getting old and consequences are starting to catch up.
Brazil - Actually, nothing too bad about Brazil. Growth and risk-on story. Look for pull-back of funds, and use that as an entry point for yield. IMO this is a better yield play that waiting it out in US equities, good luck trying to find something with decent yield in the US market.
Even gold seems to be affected, as people are selling off everything, including gold, to move into cash. I am usually contrarian, but when the smart money is leaving and risk is left on the table - that is not the time to be picking up the dice.
Retreat and live to fight another day.
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