Wednesday, December 14, 2011


Good Morning. Long time readers know that I am a stout believer in the idea that there is usually a reason behind a good-sized market move. I'm not talking about 50 point swings in the Dow that can happen at any point of any day for little or no reason other than somebody clicking a button. No, I'm talking about a move of at least 1% or more (in either direction) within a short period of time - you know, something that gets your attention.

Yesterday's session had a couple/three of these moves and for the most part, the reasons behind the early moves were fairly obvious. We saw a nice pop in the NFIB Small Business Optimism Index as well as an uptick in sentiment in Germany to get things started off on the right foot. And when Angela Merkel said "nein" to the idea of increasing the size of the bailout fund, the swift dive in stock prices made sense.

However, what didn't make much sense at all was the -2.1% header the S&P 500 took after the Fed released its statement yesterday afternoon. Sure, some volatility directly before and after a Fed announcement is standard fare. And this time was no different. But then after the requisite post-announcement move, things got ugly. And then they got really ugly - all on no news. And since you know that I am obsessed with finding the "reason" behind such movements, it shouldn't surprise you to learn that shortly thereafter, I suddenly found myself on a mission.

To be sure, the Fed statement was NOT the cause of the move from 1246 to 1220 on the S&P. While I will agree that a small segment of the trading population may have been disappointed that the Fed didn't introduce any changes to their communication efforts, the Fed's announcement and accompanying statement was really a non-event.

After checking my news sources (you'd think that of the 150 news flash emails I get a day, one would have held the key) I found nothing to speak of. Frankly, I didn't think a potential ban on the use of cell phones by drivers was worthy of a big dive. And while there was a rumor that there might be a high profile downgrade near the close, nothing ever materialized. So then I really started digging.

After a search of my favorite websites and a few calls to my fellow market geeks turned up nothing (well, nothing more than the usual rumors of yet another well-timed downgrade by S&P - don't get me started), I started looking at charts. And before long the answer became obvious - the Euro was in the process of falling off of a cliff.

While the macro guys/gals were explaining that it was disappointment over the inability of EU leaders to get a handle on this crisis that was the cause of the Euro's strife and that it was the economic outlook for the Eurozone that was the source of the stock market's sudden ills, I felt that there could be other forces at work. You see, a falling Euro means a rising dollar. And what does a rising dollar mean? Yep that's right, the unwinding of dollar carry trades.

Lest we forget "carry trades" are a big deal in the global macro hedge fund world. The way this trade works is a fund will borrow (or short) dollars and invest the proceeds in risk assets. With rates at 0% in the U.S., this works out really well. Until the dollar starts to rise, that is. If the dollar starts to surge, your short dollar trade begins to struggle. So what do you do? You buy dollars to cover your short and sell the risk assets. So, with the Euro breaking down yesterday and the dollar moving to the highest level in nearly a year, the dollar-carry trade may have been on the run.

Normally, a rising dollar would be a good thing for U.S. investors. After all, a rising dollar is indicative of economic strength - even if that strength is only relative. But in this case, there probably wasn't much thinking going on. No, my guess is that yesterday's "reason" for the quick loss of 2% for the S&P had more to do with math wizards and their computerized trades driven by algorithms than any macro view or economic strategy. And from where I sit, this is just plain sad.

So, is there a reason for big moves these days? I say yes. But whether or not the reason makes any sense to anyone except the big wigs on Wall Street is a question for another day.

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