Monday, February 08, 2016

Selling Vonn Miller Jerseys in Charlotte?

With China effectively shutdown for the next week as a result of the Lunar New Year celebrations most people expected a relatively calm week on Wall Street.  However, that calm was severely disrupted this morning - specifically at around 4:55am when someone stepped on the selling accelerator.

A specific sell order hit the market at just before 5am and while it was not particularly large it hit at a moment when the markets were quite "thin" (ie, few buyers and sellers in the market).

Imagine trying to sell Vonn Miller jerseys this morning in Charlotte to understand what it means to sell into a thin market.  You might have to lower your price quite a bit to complete a sale :)  This sell order took the markets lower just as European markets were preparing to open.

So, what is triggering this late round of worries?  Well, there are the usual suspects of slowing growth, concerns about the Central Banks becoming less effective, etc., but I think the greatest concern that I have seen lies in Germany.

Credit Default Swaps (CDS) are incredibly complicated instruments but for simplicity's sake let's just call them insurance.  They are insurance against a company becoming unable to fulfill its obligations.  During the 2008 crisis the CDS signals from Lehman, AIG and Bear Sterns were the most consistent warning signs that something was very, very wrong.  You can use these prices to help calculate the market's assumption that a company may default.

Well, Deutsche Bank (likely the largest bank you've never heard of) has seen their risk of default rise from about 5% to over 16% in the past couple of weeks.  Anything above 10% is disconcerting in my opinion and there doesn't seem to be much relief in sight.  Deutsche Bank also has about $55 trillion - yet trillion with a T - in counterparty exposure.  This simply means that what impacts Deutsche Bank impacts every major financial institution in the world.

I don't know how this will play out and I'm not ready to forecast that Deutsche Bank is the next Lehman Brothers, but this is the stuff behind the headlines that is actually moving the markets.  The lessons of 2008 have been completely ignored and the global banks are more concentrated today than in 2008 and they have assumed even more risk.

For the record my past employers included Lehman Brothers, AIG and..... yep, Deutsche Bank.  I'm going for the global financial crisis catalyst trifecta :)

Cheers!

PS - remember 1810-1815 on the S&P 500 (currently 1880).  If we were to close below those levels the computers will likely go haywire trying to find a new bottom and it could be significantly lower (note, I'm not a technical analyst and I think that technicians are more closely related to numerologists than analysts, but the markets are ruled by the charts right now).


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