Aaron Task sat in for Matt Nesto for this edition which, of course, addressed the sell-off sparked by the Standard & Poor's negative outlook for U.S. debt.
With markets down nearly 2%, Task was looking at where investors could hide, or even profit, from a negative tape. His answer, alas, was nowhere. As it turns out, bearish mutual funds were the worst performers over the last decade, something of a surprise given the fact that markets have gone though at least two drops of historic proportions during the period. If bear funds can't at least break even during stocks' Lost Generation, we quickly dispensed with the notion that going into a bearish fund would be prudent at all.
I offered the idea that cash may be, as Task put it, "the most contrarian stance." My logic? Local currency is impacted by local inflation rates. Period. When you hear the dollar is getting battered, that means you need to stay at cheaper hotels when you go abroad. Trading foreign currencies as a hedge is a tough proposition for most investors, and the Fed, for all its failings, is likely to be spending a significant amount of time fighting U.S. inflation rates if and when they finish quantitative easing.
Ok, so the idea of sitting in dollars may not be all that compelling for most. Keeping up with the Joneses in this tape means going long what's working. As market leadership continues to thin, what's left standing, at least for the moment, are silver and gold. The Glitter Twins of finance are up at midday, as has been the norm of late. Too late to chase? Probably, but if you're bearish you can bet (and in this case "betting" is the right word for it) that the metals trade is going to get even more crowded before an increasingly likely brutal correction. Not a lot of solace but better than a poke in the eye with a big sharp stick.
Aaron and I share a general contempt for ratings agencies as a whole, blaming them in large part for being the last straw in the near collapse of the financial system with the timing of their downgrades. If the muttonheads at S&P can cause stocks to lose 2%, it suggests the sentiment on the Street is increasingly bearish and stockholders have a "weak hand." As the S&P 500 attempts to get a foothold at 1,300 (Big Round Number support), it looks more and more like the 1,250 level is in play.
In other words, if today's selling has you nervous, now is a very good time to think about how you'd feel 50 points lower. "Sell until you can sleep" is my advice, as always.
- S&P 500
- quantitative easing
- inflation rates
- U.S. inflation rates
- Keeping up with the Joneses
- mutual funds
- Local currency