CRASH OF 1987......(30th Anniversary)
Now - today (Monday) is a significant day in history - it is the actual DAY of the CRASH of 1987 - a day that saw the mkt lose 22.5% of its value over a 6 1/2 hr period....it was on the back of a global meltdown that began on Sunday evening in NY just as I was tucking myself into bed......(remember Sunday at 9 pm here is Monday morning at 9 am there....)
Mkts came under extreme selling pressure as a result of a weakening global economy which in itself is not bad, but it was exacerbated by the signal given off by the latest (and greatest) 'computerized risk management' model known as "Portfolio Insurance"....It was a product designed by quants, academics, physicists and engineers - all guys that thought they had the answer - all guys that had no idea how mkts really operated.....(they were all geeks) ...that they could 'de-risk' the mkts by taking emotion out of it by handing the reigns to a computer....(how'd that work out?)
It was a DISASTER, to say the least, I was 26 yrs old and had been a member of the NYSE for 2 yrs when the it happened....The memory of that day is as vivid today as it was then.......and while the mkts did recover - it brought into question a host of issues in terms of mkt structure, rule sets and what the future looked like in an automated world......Expect to hear lots of stories and see lots of videos this week - as I am sure so many news outlets will be writing about the events of that day...
For those of you that were not around - during that time - it is difficult for you to imagine 1366 men and women - members of the NYSE - along with the 3,000 broker and specialist clerks trading stocks in an environment like that... - let me tell you - it was an incredible day.....one that will always live in the minds of anyone that was here....and in the end - no matter how ugly and difficult it got - I would not change a thing about it....about what happened, why it happened and how we as a nation recovered from it.....Understand - we lost 22.5% of mkt value in one day.....some stocks lost upwards of 50% in value in 6 1/2 hrs....... Over the next weeks - stocks whipped around as they tried to find some level of stability.....testing the patience and the resolve of Americans and the traders on the NYSE......- It is a story about failure and despair, but it is also a story about resilience and hope.....It is an American drama that played out across the world causing untold devastation as people were controlled by the latest technology........ It is an incredible story......One that I was privileged to have lived thru......
And so it begins - the FED quietly began the process of tapering the balance sheet - opening up the vault and exposing that giant stash of MBS (Mortgage Backed Securities) - securities like a traumatic memory were buried deep within the vault (brain) - hoping never to be seen or heard from again - and when the therapist ( in this case the FED) unlocks the vault (brain) and exposes them to the sunlight - you're not really sure what will happen - will you re-live that traumatic event or will you face it head on and finally RELEASE the demons (in this case - all that crap that the big banks created and the ratings agencies signed off on) that held you hostage...? Well - the session has just begun...the vault has been unlocked - let the therapy begin......
[Late afternoon on Friday the Fed confirmed that it will immediately begin letting go of $4 bil/ month of mortgage backed securities for the balance of the year......and then in January, the amount goes to $8 bil/month and in April - expect it to go to $12 bil/ month. It will gradually increase to $20 billion/month for as far as the eye can see. - Treasuries are next to the tune of $6 bil/month gradually increasing to $30 bil/month by late spring/early summer 2018.]
Now the FED could not be more transparent......they have been telling us this for month's now....while also telling us that the economy and the mkts would have to take a very serious dive for them to halt this new program known now as QT - or “quantitative tightening” - the opposite of QE (quantitative easing.) .....Now the starting amounts are nothing more than a pimple on you backside - but as we move into 2018 it will begin to add up - and be exaggerated by the realization that 'balance sheet expansion' is coming to an end around the world......so at some point risk management software will have to consider mkt valuations vs. economic performance.....
So a forward looking mkt will soon come under increased volatility as reality and risk sets in.....the continued and progressive nationalization of our markets by every central bank has resulted in such highly overvalued mkts that even the central banks now realize that the 'gig is up'. While their initial efforts during the birth of the GFC (Great Financial Crisis) were created to stabilize and rescue the global financial system - the continued stimulation for a decade now puts us all in a new place....a place that no man has gone before...... and, as such, we must ask ourselves - Have the central banks set us up for some serious instability in the years ahead? - Which is why the conversation about a new FED chair becomes very important.....Kevin Warsh - (a contender) is NOT Janet Yellen.....he is much more hawkish and aggressive and has been a critic of current monetary policy....so be careful what you wish for.....and with Donny apparently unable to hear anyone or take advice - it feels like a change in leadership at the FED is coming.....just sayin....
On Friday - when the session ended we found that the major indexes managed to eke out another small gain - for the moment! At 4 pm on Friday - here were the results - The Dow closed up 30 pts, the S&P added 2, the Nasdaq tacked on 14 pts - only the Russell (small/mid caps) notched a slightly negative performance....ending the day lower by 2.5 pts....
The sense that 3rd qtr earnings will be strong amid an improving US and global economy - has caused investors to continue to support stocks - even as some analysts appear just a bit concerned over how pricey some stocks look......The good macro data points being celebrated while anything that appears the least bit contrary to the good mood is being discounted away as temporary....the results of 3 massive hurricanes and now an uncontrolled wild fire that is sweeping across California....
Banks and financials - which are the first to report are (so far) reporting better than expected earnings BUT have come under pressure....we talked about this..... Since the season has started we have seen weakness across the board.......Since last week - WFC -4%, C -5%, JPM - 2%, MS -3.25% and GS - 3% (and they report today - exp of $4.25/sh) - The broader ETF - XLF is off 2% for the week - now look this is not a disaster by any stretch - the group is still up more than 5% in the past month alone and has not posted a negative return in the month of October since 2009. But we don't want to see continued weakness is this group at all....we need this group to lead if the broader is going to continue to perform well....
Earnings today include: GS, CSX, NFLX, UNH, JNJ, MS, GWW AND PLD.....
ECO data today only includes the Empire State Manf Survey - exp of 20.5.
On Friday - Gold pierced $1,299/oz....(that was long-term resistance) to end the day at $1,304/oz........and today is UP $2 at $1,306/oz.....Now that we are above long-term resistance - do not be surprised to see gold shoot higher and test $1,320 on its way to the September highs of $1,350/oz.
Oil is also performing better - currently up 0.67/cts at $52.12/barrel on its way to test the September high of $53/barrel.
Missile launch signals from North Korea are rising again in the near term......with both 14 day and 30-day signals turning higher......and while this alone does not suggest an imminent launch - it does suggest that Chubby is up to something......
Take Good Care
Chicken Fried Steak w/Onion Gravy
(As seen in: "Texas Eats - the new lone star heritage cookbook - Robb Walsh")
I got this recipe out of a cook book that was brought to me by 3 guests that I hosted on the NYSE back in September. They had never been to the NYSE and it was one of those 'bucket list' requests that I think everyone needs to see to understand.
Now they know my passion for cooking, so they brought me this book that details typical Texas Eats.....this one in particular is great. Try it won't you?
For you need: Peanut oil, 2 cups of seasoned flour - (see below), 1 cup of buttermilk, 1 egg - beaten, 12 tenderized eye of the round steaks (3 lbs), and the onion gravy (see below)
Seasoned flour - 2 tbls chili pepper, 1 tbls salt, 1 tbls black pepper, 1 tbls onion powder and 1 tbls of garlic powder
Begin by pouring 1 in of peanut oil into a heavy skillet - (cast iron if you have one) and heat it to 370 degrees
While the oil is heating - put the seasoned flour in a large bowl. In another bowl whisk together the egg and the buttermilk.
Dredge each steak in the flour - then the egg and then the flour again. Repeat for each of the steaks,
Now - place 2 or 3 steaks in the hot oil - remember - the temp of the oil will fall once you put the steaks in - so you will need to turn up the heat. Keep the oil at a stable 350- degrees. If you let it get to hot you will burn the steaks before they are cooked and if you let it get too cool you will not crisp up the batter they way you should. The steaks should cook for 3 - 5 mins - the batter should be crisp and golden. Remove the steaks and place on a paper towel to drain. Repeat until you have cooked all of them. Serve on a plate with mashed potatoes and this onion gravy.
Onion Gravy - 1/4 c of butter, 1 lg yellow onion - thinly sliced, 5 tbls flour, 2 1/2 c of whole milk, 2 tsp salt and 1 tbsn of Worcestershire sauce.
In a large sauce pan - melt the butter and add the onion - cover and cook on med heat for about 15 mins...stirring so that they do not burn. Now remove the cover and continue cooking for another 15 mins and the onions have caramelized. Now whisk the flour into the onion and mix for 3 mins....until it is smooth. Now add the whole milk slowly - stirring as you add. Do not let it get lumpy....next add the salt and the Worcestershire sauce and simmer for about 10 mins.....make sure you stir it. Once it has gotten thick - it is done. Serve over the steak and the mashed.
The market commentary is the opinion of the author and is based on decades of industry and market experience; however no guarantee is made or implied with respect to these opinions. This commentary is not nor is it intended to be relied upon as authoritative or taken in substitution for the exercise of judgment. The comments noted herein should not be construed as an offer to sell or the solicitation of an offer to buy or sell any financial product, or an official statement or endorsement of O’Neil Securities, Incorporated or its affiliates.