The energy patch has just experienced a gigantic margin call. Oil was down around 4% last night before todays rally. We finally got a bounce at the 61.8% Fibonacci support level from the 2008 low. If we should decisively break that level over the coming weeks then we are headed to $50 oil. This is what I call a crash. The devastation in some E&P equities has been equally as spectacular. For example, one stock, Sanchez Energy (SN), was $34 in September, $18 last week and $10 today. This rapid selling was a forced liquidation or what an old fashioned stock broker would call a margin call.
In 1929 one could own a stock with just 10% down. We all know that mere retail mortals can’t do that today. However, other demigod market participants can lever up to 1929 levels with the help of their friendly prime broker or through the use of derivatives. The bottom line is that the leverage in the system from Fed QE has been the fuel for this stock market and quite frankly all asset classes. We have reached maximum debt where credit creation can no longer keep market forces at bay. Eventually the investment that the debt was used to create needs to produce a cash flow to service the debt. Commodities and currency volatility are the early warning indicators that a great debt deflation is coming our way. A giant global margin call is beginning and you just witnessed its start this fall.
In the summer of 1929 the manic depressive speculator Jesse Livermore noticed that commodities were collapsing and he surmised that a gigantic deflation was coming. Commodities were the tell for him that the Bull market in stocks was ending. He sold his holdings and went short. The rest is history. The Bull market of 1929 was a credit induced orgy much like this one. I believe that this Bull will crash just like 1929. Except, I now believe that we could possibly loose 30-50% in a week or two due to the fact that our genius policy makers have stretched this market beyond all natural cycles and the HFT microstructure of this market. Is this an insane prediction? Perhaps, we shall see.
The question is when can this happen? This week? Next week? Next year? Hard to say given the palpable fear that our cabal of global banking overlords are emitting and their dogged determination to deny mother nature her due. Could we get a mega blow off top? Sure, nothing at this point would surprise me. However, the action in the energy patch last week and the AAPL flash crash today due to a large seller are previews of what our future holds once the herd is scared and heads for the exits. Eventually mother nature will exert her influence and it will be fast, brutal and short lived. The longer they stretch this cycle the worse the subsequent correction. Avoid being the victim of yours or other peoples margin calls.
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Nothing ever changes, least of all in the stockmarket.
BS – always interesting, always insightful, always well elucidated .. danke einmal
BlueStar, this question is for educational purposes only and by no means questioning your post. Could you please explain how the Fed and QE created leverage in the system? I assume you mean that by keeping interest rates so low for so long, market participants have been able to buy on margin and use credit derivatives, with little fear of a rate hike. Any clarity on my question or statement would be much appreciated.
BlueStar – Have you been reading Kindleberger? “Remember, in those
days we dealt with commodities in a different way than we do
now. Primary products would be shipped to the United States
and sold when they arrived. The commodity brokers who
bought them needed credit, but if credit was all tied up, the brokers
could not get the money to buy the goods, and prices fell”.
So Jesse Jr…You feeling lucky?
The use of HFT in markets sure does frighten me but there are stops in the exchanges which will at least pause the
hysteria.-I can’t believe I just succumbed
to the inevitability of the decline
When money is free and flowing then we have a perverse incentive to borrow and buy assets. When volatility is low then your ability to carry even more leverage goes up. However when everyone else does it it only take a grain of sand to begin the deleveraging process. The Fed has enabled risk taking on a global scale we have never seen before. The unwinding process will be epic.
Oil has been finacialized. Its collapse is a margin call. The wealth destruction will spread.
i am a scared little rabbit short. I will shoot this in the back. No confirmation yet.
Welcome to the Dark Side young skywalker.
More than anything the epic collapse in crude has turned me bearish. I thought we were going to get the blowoff but I’m unimpressed at the lagging of a number of stocks like GOOGL throughout this whole melt up.
This is the perfect time too to begin the pullback too, when no one is paying attention or expecting it. Everyone expects a Santa Claus rally every year. What if we all get coal. A number of stocks are still in outer space. Those are the ones I’m most interested in pummeling. AMZN is public enemy number 1.
BlueStar, thank you for your response and insight. I appreciate you taking the time!
Thanks for the ongoing commentary Blue!
Thanks for the ongoing insights.
Although it’s not good news as such, It’s good to hear your big picture perspective.
I couldn’t agree more.
The Fed’s exit plan: 4:32 – 4:53