“I love the smell of napalm in the morning” … Robert Duvall as gung-ho, Lt. Colonel Kilgore in Francis Ford Coppola’s classic Vietnam film, “Apocalypse Now.“
In Kilgore’s case it was the “smell of victory” … not so for the market. Since Monday, Oct. 8, it was napalm morning, noon and night for US equities, burning investors and incinerating portfolios. Panic set in bolstered by computer-generated algorithmic trading (if certain pre-determined trigger-points are hit the computer says ‘sell‘ — forget the fundamentals –it sells). I believe we saw that Wednesday and Thursday, coupled with natural (human/institutional investors) sellers. As a proxy for fear the VIX fear index (VIX-CBOE Volatility index), closed Thursday (11/11) at 24.98, more than doubling since October 3. Of course, the media was there to stoke the flames.
The downward spiral in equity prices emanated from a much-anticipated quarter point bump in the Federal Funds rate and comments from Fed chair, Jerome Powell, that the US economy was no longer in need of monetary support from the from the central bank and that we needed to get rates back to a more normal level (away from the life support levels created during the financial crisis). On that news the 10-year US treasury note ticked up 25 basis points to a new 5-year high of 3.26%. The previous high occurred in 2013 on the beginning of the taper of Quantitative Easing (QE). In 2013, as is in the present case, the pundits and media were screaming that this was the end of the US economy and market … never happened. FYI, the 10-year closed Thursday at 3.15%, up 15 bps from the 2013 peak … BIG DEAL.
Jim Cramer warns the Fed and fudges on history
Speaking of the media, on October 10, Jim Cramer of Mad Money fame, took his viewers on a stroll down memory lane recalling his warning rant to the Fed in August 2007. In the video link (warning rant) Cramer goes off on the Fed for about a four point increase in the Fed funds rate (1% to 5%, May ’04 to June ’07). Cramer was apoplectic, and rightly so, but he had no idea how right he was to be that way as he continued to recommend purchase of Bear Stearns almost to the day in March 2008, when in financial shambles, it was taken over by J.P. Morgan at $10/share. The stock was $93 in late February 2008. Cramer’s rant presaged armageddon, but his adherence to Bear Stearns seemed to indicate that his rant was more for effect and that he had no clue as to what was coming. Then again, most in the industry had no idea what was coming as a result of the housing bubble, proliferation of derivatives and mortgage-backed securities (backed by no more than thin air). Yours truly was among the clueless.
