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Revolution in Egypt and poor US data herald a Black Monday for stocks

Posted on 29 January 2011 with 7 comments from readers

The eruption of widespread protests to overthrow the regime in Egypt and several weaker than expected US economic numbers brought stock markets down the most since November yesterday with emerging markets falling furthest. Gold, silver, bonds and the dollar strengthened in a flight to safety by investors.

Stock markets were already looking vulnerable to a correction after a long rally from the lows of March 2009. But the revolution in Egypt was completely unexpected this week, and grew from small protests to an attempted revolution within days.

Uncertainty in anarchy

What comes next is hard to predict, not least because all Internet and mobile communications have been shut down. But with key buildings in Cairo on fire last night the chances of the old regime surviving look slim, and the shape that any alternative government might take is completely unknown, if indeed there is one.

Meanwhile, the more humdrum issue of US economic data contained a string of disappointing figures last week that pointed to the weakness of the economic recovery. The durable goods order number was particularly bad, so too house price data showing a continued fall, and GDP data below expectations.

The spin doctors of Wall Street and the US financial media struggled to find positive trends within these data sets, and looked increasingly about as credible as spokesmen for the Egyptian government arguing that everything was fine.

However, in order to stay bullish in this market you need to have a solid argument for going long on stocks right now. What is it? Are you so sure that the money supplied by the Fed to the banks to prop up the stock market will be enough to manipulate the market still higher against this flock of black swans?

Black Monday?

Is it not more likely that a big downturn in stocks will follow as that artificial prop breaks? For the stock market is currently set up to anticipate rising profits in a full-on recovery. Not only does the actual US economic data quite clearly show this is not happening but the global situation is worsening by the day.

Revolution in Egypt is one thing. What about hyper inflation and a property bust in China? What about the downgrading of debt in Japan? That means the country with the world’s largest overseas assets will have to liquidate holdings as yields rise on its bonds – that’s terribly bad news.

And what about Ireland, Spain, Portugal and Greece and the euro zone debt crisis? Or the UK with its falling GDP? Really for stock markets to be doing anything other than tanking in this economic environment is absurd.

Gold and silver are the winners, and in the short term the US dollar, oil and bonds. Short stocks. Unless peace breaks out in Egypt over the weekend this is the new momentum trend.

Posted on 29 January 2011 Categories: Banking & Finance, Bond Markets, Global Economics, Gold & Silver, Hedge Funds, Islamic Finance, Oil & Gas, US Dollar, US Stocks

7 Comments posted by readers:

Comment by sandman - 29 January 2011

me and my basket of 3X Short ETFs hope you are right!

Comment by tim mckee - 29 January 2011

“as credible as Egyptian govt spokes”..comedy is tragedy..only two days ago i asked why would H Clinton open her dirty, lying yap to distress all on Egypt by calling the regime stable?..a worthless woman!..and her kind of human vermin staff the govts of the world..nothing is safe save gold is the mantra

Comment by obewon - 29 January 2011

Excellent “food for thought”, Peter! And you are absolutely correct about the US economy being nothing more than a mirage! Obama gave a great “pep talk” in his annual SOTU message, but then again, Obama’s only “strength” is in delivering “pep talks.” The US economy is in serious trouble, and has been for the past 30 months, but the emperor has no clothes.

@sandman:
While it may sound logical to invest a portion of one’s portfolio into a leveraged short ETF, there are inherent dangers there, even as the global markets are falling. They may be useful to hold for the very short term, but the longer one holds onto a 3X short, the more he/she is likely to lose.

In essence, if TPTB continue to manipulate their stock markets, as I suspect they will, then this creates significant volatility. And when there’s lots of volatility, the 2X and 3X shorts perform poorly.

Comment by Bill near Slidell - 30 January 2011

I think the market will go down in the first 2 hours, but gradually recover during the day, and end up down only .2%. (But I’m usually wrong, so sandman will probably make a fortune with his short bet.)
I got this new laptop just in time. It will be interesting to see how bad the looting gets in Egypt with no police. Hopefully, the army can keep the criminal element at bay. Every society has one. And many prisoners have escaped. Many were in jail for a legitimate reason.
CNBC did an interview in Davos with the Prime Minister of Iceland. It was beautiful seeing him describe how Iceland made the investors in the banks take the loss, instead of the taxpayers. THAT is capitalism, not what we have here in the USA. We have legalized theft to bail out the super rich. Europe has it too. I doubt that it will end well. Trying to pay down the debts that those banking clowns got rich creating can only be done now by creating a LOT of inflation. We are starting to see what that leads to. And it is just starting.
How fast do those black swans multiply? Not as fast as the mice that invaded my FEMA trailer after Katrina, I hope. They could sneak through some tiny cracks around the water pipes. I used a lot of tape. They will probably outlast us.

Comment by obewon - 30 January 2011

@ Bill Slidell:
OK, I’ll take the “other side” of your bet regarding the US stock market performance for 31 Jan.

While the FED and the US banks will continue to pump “FED money” into the markets (just like they’ve been doing for the past 6 months now!), I believe the US markets will still be down at the closing bell by over 2% or more.

Comment by eric - 01 February 2011

Looks like the doom and gloomers are wrong again.. Maybe the world markets will collapse next week. I’ll keep betting on the US economy…

Comment by obewon - 02 February 2011

Oops!

Looks like I was “dead wrong.”

Lesson Here: never underestimate the determination of the US FED! While I realize that the FED and their agents, the large NY banks, would continue to pump the market, I didn’t realize they would be so successful!

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