That little EU debt crisis we have been warning about for over a year is finally hitting the fan. The market has fallen over 10% percent in the last 9 trading days, which is similar to a mini-crash. Today the Dow was down 512 points with European bourses performing much worse. Why the dramatic decline?
The realization that the EU is on the verge of collapse is finally starting to dawn on investors. About fucking time in my opinion. More importantly the EURO finally got smacked hard after ECB president Trichet finally acknowledged that future rate increases will not happen. Furthermore, the ECB started to buy Italian and Spanish bonds in a desperate action to restore confidence (did not work). This action caused massive panic in Europe and dumping of the EURO in favor of gold--which was bid all the way up to $1680. The Europeans see the writing on the wall. Either the ECB monetizes all PIIG debt (inflationary) or the EU collapses into oblivion. Natural response is to buy gold.
But, a funny thing happened in the middle of New York trading--gold was deliberately taken down from $1680 to $1650. The rumor on the trading desks was that COMEX was going to increase margin requirements (didn't happen). It is days like today where you really know gold is manipulated by the US government and central banks. Why would gold suddenly go into a flash crash in the middle of trading on no news? I could see if gold fell in Europe along with the market. This would make some sense, but today's move was unjustifiable and clear evidence of market manipulation. The gold cartel did not want to see gold surge to new all-time highs during a market meltdown. Good news is that gold held its own.
Why was gold relatively strong today? Because QE 3 is guaranteed! It may not be called QE 3, but Bernanke and Co. will almost certainly start to print more money or begin Operation Twist 2.0 (manipulating Treasury yields). The market will continue to fall until the Fed injects more liquidity.
That being said the market is getting pretty oversold and could get a token bounce tomorrow with the NFP. The number may not be as bad as expected and that will give a reason for a short-term move higher.
As for how to protect yourself from further market losses? There is little you can do at this point when the vix is over 31 up 50% over the last three days. The time to protect your portfolio is when the vix is below 18 not at panic highs above 30.
From a trading perspective the easiest trade is to short volatility if it jumps to around 35-36. This would likely constitute a short term market bottom. The way to play is through VXX which is mathematically guaranteed to decline over time because of the term structure of volatility. About they only way this instrument could rise longer-term is if volatility became an appreciable asset (impossible). In the intermediate time frame it should be noted that super-investor Marc Faber thinks the SP 500 could fall to around 1100 before a QE 3 bounce.
Today I picked up NS--Nustar Energy MLP an oil storage company with steady earnings and a stable 7% yield. A lot of hedge funds have been flushed out of the name and it looks like a good opportunity.
Have a good day.
Black Swan Insights