Thursday, May 13, 2010

Is the “Wolf Pack” in control

For at least the last 12 months regardless of the number of jobs lost or gained the market went up on reporting day, the first Friday of the month. The string was broken with this past Friday’s employment report. We had the best job creation number in almost four years and the markets, at least for Friday, ignored the good news, sold off and closed down for the day, the week and are now negative for the year to date. Some of the questions on people’s mind are: is the long market run over and is it time to take money off the table? Did people suddenly decide that all the insurmountable issues around the world can not truly be solved and we are  in for another global depression?

Over the weekend the IMF and the European Central Bank agreed to make available almost 1 trillion dollars to deal with the problems in Greece and to try and stave off problems in Spain and Portugal. I found the term interesting that was used this past weekend to describe what had happened last week and what was going on around the world. The “Wolf Pack” was on the loose and wrecking havoc in every part of the world. People who are reacting to the economic problems of the world are now the “Wolf Pack.”

There is no question that a week like this past week has many people nervous, if not outright scared, about what comes next. I have written to you several times about market psychology. When the market goes up people are happy and feel more positive and optimistic about their prospects for the future. In some respects in up beat times people are more interested in taking risk. When we go through a week like last week, especially when it includes a day like Thursday when the market dropped 1000 points in 20 minutes, confidence goes out the window. Now we add a sinister “Wolf Pack” to the mix and people start to worry that enormous power is now in the hands of predators of the financial markets.

This week our astute Congress is going to have hearings as to why the market dropped almost 1,000 points in such a short time on Thursday. For the moment the Congress is not going to investigate the 143 points down on Friday or the 250 points down on Tuesday and they surely will not want to ask about the almost 400 point rally of today. I would be very surprised if anybody from Congress will ask any questions of the 600 point move from the low on Friday to the intraday high on Monday? Look for the question. Who stood to gain in this volatility?

Do you think that anybody in the Congress will bring up the concept of the “Wolf Pack”? Will “Wall Street” be seen as the bad guys because they caused the problems with their Flash and Program Trading practices? Will we get cries for more regulation in the financial markets to stop this volatility? I fear yes we will not only get the cries, but possibly amendments to the financial reform bill working its way through Congress right now.

The market went down because of concern that Greece and other European countries had budgets that were out of control. People wanted more and the government said, “we can do that for you”, and the people said, “yes I want that.” Investors were looking for leadership and positive direction in solving the problem. They waited till they just couldn’t wait any longer. Investors had profits and to protect their profits they just said, “sell me out”.

The result of this weekends round of talks and agreements is that the world is taking on an additional $1 trillion of debt to feed the “Wolf Pack”. The problem with these solutions is that the “Wolf Pack” will want to eat again.  Yes, it is nice to have a 600 point rally, but remember the “Wolf Pack” may be asleep in its cave with its belly full of profits, but it will need to feed again. So while it is sleeping it is planning its next attack.

I said in my FLASH to you last week that I was looking for about a 20% correction that would take us to the 950 to 975 levels on the S&P 500. My guess is that the “Wolf Pack” will want to feed in late July or early August.

Dan Perkins

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