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Market Recap Thursday August 4, 2011.

  • Written by Syndicated Publisher 346 Comments346 Comments Comments
    August 5, 2011

    Capitulation calls are growing. If this market was capitulating AAPL, the source of cash for all margin calls would be down a lot more than 3%. This is controlled selling right now. The VIX was elevated today but there is no mass “get me out of Dodge” selling here. The fear of missing out is still greater than the fear of losing. Longs are still hopeful. Capitulation is when longs become fearful.

    I also want to repeat a word of caution mentioned earlier about those fund managers paraded on CNBC telling you to buy this market. When asked the question are you buying here they always say yes. The reality is they are buying with your money, not theirs. They are paid by your fees not their returns. These guys get paid to be fully invested and when markets turn against them their only answer is to tell you to be brave, buy the dip and “this too shall pass.”

    Forced margin selling has to be part of what is going on yet this market seems somewhat orderly in its selloff. Wednesday’s flash when the March lows failed to hold was more panic, indiscriminate selling. Today barring the final 30 minutes of the close was somewhat orderly. Art Cashin who is an amazing gentleman was talking about rumors of forced selling out of EU investors using US markets to raise cash. For those unclear of margin calls and forced selling here is an example.

    Interactive Brokers ran a commercial today stating they will lend you $1 million for a $200,000 deposit at 1.3%. So let’s assume you open this account and decide to trade ES futures because you heard how easy it is to make money and the Fed has your back with QE. Below are two examples assuming you have $1 million invested of which $200,000 is your own money (using $800,000 in margin).

    Winning Example

    Futures rise 10% and  you earn $100,000. Based on the $200,000 you invested that was a quick 50% return (excluding trade and margin fees).

    Losing Example

    Futures fall 10% and you lose $100,000. Based on the $200,000 you invested that was a quick 50% loss.

    Now the broker is calling you because that $900,000 account value is funded by only $100,000 in your capital. They demand you either deposit $80,000 or sell $400,000 worth of futures within three days. If not they will liquidate for you. Remember the first $200,000 in losses are yours, not theirs.

    Margin is great on the way up and an account destroyer on the way down. In fact many times when the account is liquidated not only is your capital wiped out but you owe the broker money. Worse what if IB in this example decides to change how much margin they will lend out of fear they’ll lose money. The use of margin is very dangerous and when forced selling kicks in wonderful companies like AAPL will be sold to mind boggling low levels.

    This market is about raising cash now, pure and simple.

    Few notes on today’s selloff

    Oil was down 6%, copper down 2%

    10 year yield is 2.46% (down 14 basis points, massive) and the 30 year yield is 3.72% (down 15 basis points)

    BAC broke $9 a US based black swan event, the next LEH, next stop is 8.00 (at least that is where I’ll cover my current short). I told my wife if $9 was broken I would do another ultra marathon (my sixth).  Looks like I’ll be running more.

    European markets were down 3-5% (Asia should be a nasty session tonight)

    Today was the highest NYSE volume of the year.

    Later this evening I will again update the 2007 “analog” and the vix skew divergence chart. My mind is fried from trading today. The SPX was down 60 handles. Crazy move!

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    Market Recap Thursday August 4, 2011- Macro Story.

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