11:46 TALKX Floor Talk: Still a skittish market
It was another treacherous open for the market, marked by the kind of immediate fade of the opening rally that we've seen so many times before over the past several weeks. Given all of the crosscurrents investors have been dealing with this week, here's how we break down the current sentiment:
The Backdrop: The major averages, and literally thousands of individual stocks, are incredibly oversold, and have been since mid-October. Valuations are dirt cheap (although no one in their right mind would trust the forward estimates) and high quality companies are sporting very attractive dividend yields.
The Here and Now: Ever since the Nov 4 election there has been an almost total buyers strike, with the longs essentially ceding the market to the shorts. And once the major averages breached the key support level marked by the Oct-Nov lows two days ago, we immediately started to see a whole new round of forced selling by funds and market risk-reduction efforts by insurance co's. Hartford (HIG) essentially confirmed that insurance co's have been major sellers last night, when it stated that "The company's investment management team is taking a series of actions aimed at repositioning the portfolio in light of current economic outlooks, with plans to enhance the overall credit quality of the general account. The company is currently investing in treasuries and other high-quality securities, and maintaining higher levels of liquidity than it has in recent quarters."
In an ominous turn, the financials are back driving the market again. The plunge in Citigroup (C) this past week has created another round of uncertainty in the Financials. And earlier in the week a major story emerged -- but has surprisingly flown under the radar -- that kicked out the one remaining leg of the stool that the financials were sitting on: There was an announcement that two separate operators, a shopping mall and a hotel, were past due on their payments to their creditors. The commercial property space (as opposed to residential) had been the one remaining "safe" area in real estate, so this announcement caused a rush by lenders to insure themselves in case of default, thus causing the CMBS market to rocket higher, which in this environment is a recipe for panic (we saw an identical panic develop with LIBOR rates a few months ago when FNM, FRE, and LEH were on the brink). As a result, all financial stocks and REITs are getting thrown overboard, the former on concerns of additional portfolio writes-downs and the latter due to concerns that REITs will have extreme difficulty rolling over debt.
Tying these together, since the election the path of least resistance for the mkt has been down, and there really is no way to know when this latest round of forced selling will end. But especially given the oversold nature of this market, the dirt-cheap valuations on high-quality stocks, and the fact that "shorting every rally" has become a far too obvious tactic by now, this suggests that the potential is great for a significant short-covering rally at any time. This is why, despite their recent success, even the shorts are skittish down here.
It was another treacherous open for the market, marked by the kind of immediate fade of the opening rally that we've seen so many times before over the past several weeks. Given all of the crosscurrents investors have been dealing with this week, here's how we break down the current sentiment:
The Backdrop: The major averages, and literally thousands of individual stocks, are incredibly oversold, and have been since mid-October. Valuations are dirt cheap (although no one in their right mind would trust the forward estimates) and high quality companies are sporting very attractive dividend yields.
The Here and Now: Ever since the Nov 4 election there has been an almost total buyers strike, with the longs essentially ceding the market to the shorts. And once the major averages breached the key support level marked by the Oct-Nov lows two days ago, we immediately started to see a whole new round of forced selling by funds and market risk-reduction efforts by insurance co's. Hartford (HIG) essentially confirmed that insurance co's have been major sellers last night, when it stated that "The company's investment management team is taking a series of actions aimed at repositioning the portfolio in light of current economic outlooks, with plans to enhance the overall credit quality of the general account. The company is currently investing in treasuries and other high-quality securities, and maintaining higher levels of liquidity than it has in recent quarters."
In an ominous turn, the financials are back driving the market again. The plunge in Citigroup (C) this past week has created another round of uncertainty in the Financials. And earlier in the week a major story emerged -- but has surprisingly flown under the radar -- that kicked out the one remaining leg of the stool that the financials were sitting on: There was an announcement that two separate operators, a shopping mall and a hotel, were past due on their payments to their creditors. The commercial property space (as opposed to residential) had been the one remaining "safe" area in real estate, so this announcement caused a rush by lenders to insure themselves in case of default, thus causing the CMBS market to rocket higher, which in this environment is a recipe for panic (we saw an identical panic develop with LIBOR rates a few months ago when FNM, FRE, and LEH were on the brink). As a result, all financial stocks and REITs are getting thrown overboard, the former on concerns of additional portfolio writes-downs and the latter due to concerns that REITs will have extreme difficulty rolling over debt.
Tying these together, since the election the path of least resistance for the mkt has been down, and there really is no way to know when this latest round of forced selling will end. But especially given the oversold nature of this market, the dirt-cheap valuations on high-quality stocks, and the fact that "shorting every rally" has become a far too obvious tactic by now, this suggests that the potential is great for a significant short-covering rally at any time. This is why, despite their recent success, even the shorts are skittish down here.
