Just listened to an interview with Larry Pesavento today.
He is comparing the market action now to the action of August
1987 -- leading up to the infamous crash. He claims he was
short the market in Oct of 87 -- similarly, he is short the market
now (and frustrated). Looking back on that chart, I see lots of
similarities, but lots of differences (chiefly, Young Ben Bernanke
was but an inexperienced Jedi then and didn't have the Force to
save the world like he did just now -- what a relief btw!).
Was anybody from this blog in the market in that time frame that
can compare the two situations? (sentiment) I'm sure in both
cases, the moves at the end were exaggerated by the summer trading
doldrums (no volume). That move in 1987 was crazy -- far more
parabolic than the one we are in right now. Obviously with
the current economic backdrop, I would argue the move right now
makes less sense. The US was still making stuff back then!!!
That SP price to earnings chart that was posted today is
scary!
Finally, if Zerohedge is right and the HFT programs turn off
(maybe in September) and we have a liquidity crisis in the markets,
will inverse, leveraged etfs perform correctly? I fear those
things could blow up one day.
I was just starting at Merrill Lynch end of August 1987.
The biggest difference I can remember is the long bond went from 7%
in the spring to 9.5% on the day of the crash. Merrill was
hiring like crazy and the veteran brokers thought that was an
indicator of a top in the market. People could live on 9+%
yields, not what we see today. If we get 7% long yields
again, you will see baby boomer money leave the market for
good.
Two things stand out in my mind for that August date:
First, August 17th, 1987 was the beginning of the twenty-five
year Harmonic Convergence; Second, the Japanese Market
made its all time high on August 24, 1987 as I remember.
Sure, Larry Pesavento is a regular guest on "The Tom O'brien
Show" on TFNN.com. Tom does a 2 hour show daily from 4-6PM
after the market closes. I listen regularly and although Tom
is a bit cavalier, he has really keen observations. You can
download the shows from itunes for free -- just search for tom
o'brien show. If anything, I will download the shows and put
them on my ipod and listen to the first few minutes where he does a
brief market re-cap -- then I'll skim through to find Larry's
content. Handy way to keep track of the markets for those of
us with dayjobs.
I do think the folks at ZeroHedge have raised a very real
concern about what happens if the HFT programs are suddenly turned
off at a moment of intense market volatility. Seems like we could
hit a huge air pocket where there is essentially no liquidity.
Couple that with the proliferation of leveraged ETFs and I do worry
that there is the potential for a 1987-like event. There is no
doubt that the leveraged ETFs have blow up risk -- they are
synthetic and they use swaps and who knows who the counter-parties
are and what might happen to them. I don't think it's possible to
know how the leveraged ETFs will act in an out-of-the-envelope
event, which is an additional reason to be vigilant about not
having too much capital at risk in leveraged ETFs at any moment in
time -- long, or short. As to how they will perform on the short
side -- I think that's equally unknowable.
One thing that I've worried about, and discussed with brokers
without ever being able to get an answer, is this: If you are short
a leveraged ETF which blows up, will you end up with a "terminal
short" that makes you a lot of money? Or might you end up getting
caught in the world's worst-ever short squeeze because you can't
buy back the shares to cover at any price, or at any "reasonable"
price? One person I discussed this with drew what I think is the
appropriate analogy: When you are short a leveraged ETF you have
effectively sold a naked put with infinite risk. Which leaves
me believing that -- at least on a theoretical basis -- there is
even more potential risk in shorting leveraged ETFs than in being
long them. Would be interested in others thoughts on this.
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Anybody here old enough to experience Aug 1987?
Posted by kalinm on 21st of Aug 2009 at 06:43 pm
Just listened to an interview with Larry Pesavento today. He is comparing the market action now to the action of August 1987 -- leading up to the infamous crash. He claims he was short the market in Oct of 87 -- similarly, he is short the market now (and frustrated). Looking back on that chart, I see lots of similarities, but lots of differences (chiefly, Young Ben Bernanke was but an inexperienced Jedi then and didn't have the Force to save the world like he did just now -- what a relief btw!).
Was anybody from this blog in the market in that time frame that can compare the two situations? (sentiment) I'm sure in both cases, the moves at the end were exaggerated by the summer trading doldrums (no volume). That move in 1987 was crazy -- far more parabolic than the one we are in right now. Obviously with the current economic backdrop, I would argue the move right now makes less sense. The US was still making stuff back then!!! That SP price to earnings chart that was posted today is scary!
Finally, if Zerohedge is right and the HFT programs turn off (maybe in September) and we have a liquidity crisis in the markets, will inverse, leveraged etfs perform correctly? I fear those things could blow up one day.
Old Guy
Posted by ralph on 22nd of Aug 2009 at 08:41 pm
I was just starting at Merrill Lynch end of August 1987. The biggest difference I can remember is the long bond went from 7% in the spring to 9.5% on the day of the crash. Merrill was hiring like crazy and the veteran brokers thought that was an indicator of a top in the market. People could live on 9+% yields, not what we see today. If we get 7% long yields again, you will see baby boomer money leave the market for good.
Two things stand out in
Posted by pneumo on 22nd of Aug 2009 at 07:13 pm
Two things stand out in my mind for that August date: First, August 17th, 1987 was the beginning of the twenty-five year Harmonic Convergence; Second, the Japanese Market
made its all time high on August 24, 1987 as I remember.
gotta link?
Posted by mobucksman on 22nd of Aug 2009 at 04:59 am
gotta link?
Link to Pesavento
Posted by kalinm on 22nd of Aug 2009 at 11:09 am
Sure, Larry Pesavento is a regular guest on "The Tom O'brien Show" on TFNN.com. Tom does a 2 hour show daily from 4-6PM after the market closes. I listen regularly and although Tom is a bit cavalier, he has really keen observations. You can download the shows from itunes for free -- just search for tom o'brien show. If anything, I will download the shows and put them on my ipod and listen to the first few minutes where he does a brief market re-cap -- then I'll skim through to find Larry's content. Handy way to keep track of the markets for those of us with dayjobs.
I do think the folks
Posted by puma on 21st of Aug 2009 at 07:24 pm
I do think the folks at ZeroHedge have raised a very real concern about what happens if the HFT programs are suddenly turned off at a moment of intense market volatility. Seems like we could hit a huge air pocket where there is essentially no liquidity. Couple that with the proliferation of leveraged ETFs and I do worry that there is the potential for a 1987-like event. There is no doubt that the leveraged ETFs have blow up risk -- they are synthetic and they use swaps and who knows who the counter-parties are and what might happen to them. I don't think it's possible to know how the leveraged ETFs will act in an out-of-the-envelope event, which is an additional reason to be vigilant about not having too much capital at risk in leveraged ETFs at any moment in time -- long, or short. As to how they will perform on the short side -- I think that's equally unknowable.
One thing that I've worried about, and discussed with brokers without ever being able to get an answer, is this: If you are short a leveraged ETF which blows up, will you end up with a "terminal short" that makes you a lot of money? Or might you end up getting caught in the world's worst-ever short squeeze because you can't buy back the shares to cover at any price, or at any "reasonable" price? One person I discussed this with drew what I think is the appropriate analogy: When you are short a leveraged ETF you have effectively sold a naked put with infinite risk. Which leaves me believing that -- at least on a theoretical basis -- there is even more potential risk in shorting leveraged ETFs than in being long them. Would be interested in others thoughts on this.