After sinking to a nine-month low on Tuesday, the equity markets soared on Wednesday and Thursday along with the Euro, but faded Friday afternoon after the Fitch rating service downgraded the sovereign debt of Spain from AAA to AA+. All in all, due to the dip in the US Dollar, this was a pretty good week for the Bulls, but an absolute disaster for the month of May - one of the all-time worst.
With all the tumult caused by the currency market's hot money ebb and flow, what came to mind this week is the expression that the capital market is a game that plays people; not the reverse. Equity traders who are active participants are close to being worn out.
Overrun as it is by the dominant financial services industry, the market, we know, is also mostly about marketing.
Last week, the random noise along with the hype orchestrated by vested interests reached a crescendo. Don't count me among them, but there are some who now believe the worst has past and it will be blue skies ahead for the next couple years.
At such times, which happen all too frequently, I tune out Financial Entertainment Television. It's just not constructive to be listening to lobbyists tell us, for instance, that BP's (BP36.52 0.00 0.00%) Gulf of Mexico oil spill is only 5,000 barrels a day when experts say that, before this crisis is effectively managed with a relief well, possibly 100 to 125 days after the disaster, the total water area affected and essentially destroyed is going to be the size of Florida or Georgia or Michigan or Illinois. As I see it, the economy of the entire southern United States is going to be fractured, with far greater consequences than hurricane Katrina, as bad as that was.
As too much is at stake with respect to the future of global society, it's time the people of the world woke up to the phony messages being delivered to them.
Unlike the mainstream media, which needs a positive spin to retain its audience; traders are forced to deal with reality. So, in my case, I just tune out the media and stick to watching prices.
Year-to-date, except for a few markets - Indonesia, Philippines and Thailand in southeast Asia - equity market prices worldwide are way down. Some, like China (-19.0%), Taiwan (-10.9%) and France (-10.7%), are down quite substantially this year. Trillions of dollars have been lost and those losses will not be easily recovered.
These year-to-date numbers don't lie.
Let's look at the details of what transpired in capital markets this week. Obviously, it wasn't all bad. Europe, for instance, had a pretty good week, although that might not last as Fitch stuck a fork into it after equity markets closed in Europe on Friday.
The following charts and a table that I created from scratch shows (i) the immediate $5.6 billion impact on the share prices of five large European-based banks following news that Fitch had downgraded Spain, (ii) the time of information was received by the vested interests who control the equity market (12:34pm ET), (iii) followed by 14 minutes of free-fall. After spin control kicked in at exactly 12:48pm, a substantial bounce occurred in these prices; but by the end of the day - the final 30 minutes of trading at least - Mr. Market had thrown in the towel and these share prices sank again.
Here is the intra-day chart of Spain's Banco Santander (STD 9.83 0.00 0.00%), which had a relatively mild loss (-1.33%) between 12:34pm and 12:44pm, before recovering, for a while at least.
In the same 14 minutes, note the action of Spain's Banco Bilbao (BVDA 0.00 N/A N/A).
Clearly, as the week came to a close, most traders were thinking about the Rain on Spain, although My Fair Lady didn't come to mind.
But the Euro (FXE 122.03 0.00 0.00%) was though. Note the time of the collapse was 12:34pm ET.
Here's the chart for Gold (GLD 119.91 0.00 0.00%), which normally drops with the drop in the Euro, i.e., falls with the US Dollar. But, at times like this, Gold and Dollars are a safe-haven. See the price and volume spike at 12:34pm ET
There are many reasons why the European banks hit the skids as soon as the Fitch downgrade of Spain was announced. The immediate impact is that these banks are the major holders of Spain's bonds, which got hammered in price. Then as bond prices fall, interest rates go up, so all that real estate loans and asset-backed investment paper the banks are holding are going to be less valuable. The longer-term impact is that Fitch is reporting a concern over the economic future of Spain, which means less business for the banks in that country.
When you start to look at the capital market as a system like any in nature, where prices ebb and flow like ocean tides, impacted by wind and waves, and so forth, all inter-related, you'll try to synchronize your mind and your breathing. And, when prices get as volatile as they are today, you have to learn how to relax and not let emotion get in the way of good decision-making.
Easier said than done. The instant that Fitch released their decision on Spain, your positions either gained or lost, some in the extreme, and that's tough for most people to handle.
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