Government Sponsored Volatility

Thankfully, this isn’t Russia or Pakistan, and the US government has not halted trading in our markets yet, so… at 9:30 AM the market will open as usual, but, more importantly, the Senate Banking hearings will also start. I said it yesterday, and I’ll say it again this morning, governments do not put bottoms in markets. What the US government is doing right now changing the rules on the fly and sponsoring volatility and illiquidity as a result.

In the week prior to the short selling ban, we were running huge volume days on the big board (between 6.5-9.5B shares/day) – yesterday volume dropped to 4.5B, and volatility across asset classes shot straight up. Oil had a +24% intraday move! I don’t know why they don’t get this, but hedge funds are critical equalizers out there in finding efficient prices. Some days they can represent 30-40% of the volume in any given market. Now the government is changing the rules on them, banning short selling on down moves and talking about regulating “oil speculating” hedge funds on up moves. Pretty soon we won’t be able to be on any side of the “Trade”!

Confusion breeds contempt in markets, and my thought is that Paulson, Bernanke, and Cox don’t simplify this picture when they are ‘You Tubed’ by politicians this morning. This is an election year. This is too politically charged. This why I am in cash.

Asia closed lower, and European markets are down 1-2% across the board ahead of the 9:30 AM reality TV session with the US government. Yesterday, the S&P 500 failed to climb and close above my critical resistance line of 1258.11, so we find ourselves with the ominous technical combo of both the immediate “Trade” and intermediate “Trend” looking lower. I am going to move my downside S&P 500 target to 1157.22 this morning. I don’t know if we get there today, tomorrow, or on October the 3rd, but that’s my level.

Here are 3 global macro focus levels of downside support to manage risk towards:
1. Hong Kong closed down -3.9% last night at 18,872, and I see immediate downside at 17,427
2. India’s BSE Index closed down -3.1% at 13,561, and I see immediate downside at 12,954
3. London’s FTSE is trading down over -2% so far this morning at 5,112, and I see immediate downside at 4,826

The US Dollar got hammered yesterday, putting in its biggest single day drop since October, 1998. This is not American Idol folks – the world has voted on the Paulson Plan. This US$ weakness, of course, contributed to the melt up in commodities which were amplified by the aforementioned move in oil, but the CRB Commodities Index (19 components) was +3.9% on its own. Bailouts are inflationary.

The “bottom is in” crowd was all over the tape on Friday. Remember, governments don’t put in bottoms. This government is sponsoring volatility and illiquidity – that combo is not going to solve anything any time soon. This is structural. This will take time.

I wish I could see something positive in all of this. I wish I had a more creative solution than being in cash. My critics will tell you that is because I am not as smart as they are. I’d have to agree with them on that.

Good luck out there today,