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.