Identifying Panic Selling
This was another big and surprising day in the market. I am not surprised to see some selling, since I did not view the Fed message as some kind of ultimate answer, but the extent certainly raises questions.
From the perspective of the many professionals who focus on data, this is all a mystery. Earnings are solid. Outlooks are OK. Interest rates are excellent. Bond auctions are fine. Liquidity is fine. Economic growth is sluggish, but positive.
So what is going on? I bring you the news of the day.
Today's Featured Rumors
The heart of today's selling came from rumors about French banks and especially SocGen, which was down 14.5% on the day. US banks, even those with limited European exposure, were down 7 -10%. This illustrates the market perception–right or wrong– of a systemic effect.
SocGen denied "all rumors" which the market found to be unconvincing. The CEO, Federic Oudoudea, did an interview with Maria Bartiromo. He specifically denied various rumors, emphasized that capital met all requirements and that there were no unknown problems. Here is the video link.
Jim O'Neill, Goldman CEO, also did an interview and stated that he had no idea about what could be behind the selling and was bullish on the banking sector. [The CNBC video link is not working, and the summary of the interview is not accurate.]
I was impressed with the apparent honesty in his answers. He sees what most market pros do — a reaction that is not supported by data.
As always, I check out The Kudlow Report to see who the guests are and whether there is a fresh insight. I am going to split this into two portions — the overview and the banking sector.
Here are some choice quotes!
Kudlow: "US banks… catching the flu from the speculative attack on French and other European banks….(The) triumph of fear over careful analysis.
Santelli: Let the markets run their course….Get to a point where things make sense from a market standpoint.
Koesterich (Blackrock): These problems are well reflected in price. Look at Germany right now…trading at 7 1/2 times forward earnings. There is a triumph of fear over analysis.
Schlossberg: ….need a eurobond. The problem is France. We have all seen this movie before. With a run on the banks, anything can happen.
Comments on the banking system
Cohen: The banking system is healthy. US banks are exponentially stronger. They are far better capitalized. Their asset quality is clearly superior. And they are literally awash in liquidity at this point in time.
It is fear, and fear bred of uncertainty…..the more important uncertainty is about the housing situation.
Malpass: US money market funds are burning off the funding that they have been providing to the European banks….They need a European borrowing facility.
Truman: They do not have a single system and a backstop arrangement….The stress test … left big doubts about what was there.
Kudlow: American companies have never been more profitable. They have never had more cash. This is completely unlike 2007 and 2008. This could be a golden age for American business.
From Kosterich: If you look at the US and most developed markets, the price reflects a severe recession or another 2008-style banking collapse. Unless you believe we are going into a Japan style deflationary spiral, this looks like it has gone too far.
Kudlow: I see the fear, but I do not see the analysis.
Schlossberg: We are in a globalized synchronized slowdown….Companies are not spending cash…The fear creates its own reality. It does not matter how much cash is on the books if there is no spending.
This was a good discussion, and the main point is clear. There is a cycle of panic. The reduction in spending and investment increases the chances of an actual recession — something that would not otherwise have happened.
The antidote to a crisis of confidence is leadership — something that seems to be in short supply!