Triggers & Tipping Points

Futures are higher this morning on positive earnings news, strength in Asian and European bourses, and a dearth of any new credit disasters. (It is also the last day of the month).

As we mentioned yesterday, investors should watch the quality of this overall bounce, keeping a close eye on volume and breadth, to determine the next move beyond this week.

While there was plenty of teeth-gnashing angst over this very minor correction, I have not seen the sort of capitulatory panic that typically marks the end of a major selloff.

Some commentators have pointed to Thursday as a 90/10 day — more than 90% of the volume was to the down side — but historically, that marks a bottom only when it comes after a long decline. A 90/10 down day within 5% of a high has never been shown to be a reliable buy signal.

Considering that we have yet to see a 10% SPX or Dow correction in this 5 year old Bull, what might actually cause that major dislocation? MarketWatch’s in-house curmudgeon, Paul Farrell, gives us a menu to choose from:

1.  War/military defense budget busting
2.   Real estate bubble raging
3.  Foreign trade imbalance, trillions new debt
4.  China’s economy overheating
5.  Private-equity credit imploding
6.  ‘Homeland Insecurity’ failures
7.   Hedge funds hurting retirement plans
8.   Oil rocketing toward $100 a barrel
9.   Weak U.S. dollar keeps sinking
10.   Federal budget deficits
11.   Social Security entitlements
12.  Medicare’s massive deficits
13.   Health-care-insurance deficit
14.   Climate change fuels global wars
15.  Personal savings shortfall
16.  Consumer debt surging
17.   Corporate pension defaults
18.   Local government pension deficits
19.  International credibility deficit
20. Washington politics in endless gridlock

I find 7 of these (in italics) that represent serious threats, some short term, some long term.

Which of these are real threats? Which are hyped up and already discounted by Mr. Market? What unknowns have been omitted from the list? The comments await your insights . . .


New contest: Pick one big tipping point
You decide: which of 20 triggers will end ‘aging bull’
Paul B. Farrell
MarketWatch, 7:54 PM ET Jul 30, 2007

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What's been said:

Discussions found on the web:
  1. W.Edwards commented on Jul 31

    Paul forgot to include my favorite:

    Highly leveraged hedge funds rushing to the door due to rising volatility and negative returns which is in turn aggravated by high investor redemption requests.

  2. mhm commented on Jul 31

    Another vote for the excessive leverage risk, doesn’t matter on with instrument. Higher volatility is the trigger.

  3. dhukka commented on Jul 31

    Not entirely free of credit problems, this just off

    Residential mortgage issuer C-Bass, an affiliate of MGIC Investment and Radian Group, on Tuesday said it has been subject to an “unprecedented” amount of margin calls from its lenders that has adversely affected its liquidity.

    Oh yeah and how about the little matter of the suspension of trading of American Home Mortgage yesterday?

  4. techy2468 commented on Jul 31

    i know we are talking about 10-15% correction, but i am a bit more interested in the probability of recession.

    if i am not off track, the reasons which can cause recession:
    1. increasing consumer debt, reducing disposable income with no real wage increase.
    2. decrease in business spending (in the expectation of a slowing economy) leads to layoffs.

    right now i dont see any fear in business (infact in IT hiring is very aggressive since industry has aging applications)….and i dont know the state of consumer indebtness (if anyone knows please comment).

  5. chad commented on Jul 31

    Everywhere I look are reasons to be wary. Verifiable reasons to get excited are, well, nil. I’d like to see someone come up with a list of 20 reasons to stay in…other than portfolio diversification don’t try to time the market crap.

    It seems to me everyone is trying to eak out another % or 2 before the inevitable happens.

  6. Charles Butler commented on Jul 31

    1. War/military defense budget busting

    Don’t know what you mean.

    2. Real estate bubble raging

    We’re still waiting.

    3. Foreign trade imbalance, trillions new debt

    It’s fully funded, by BRIC

    4. China’s economy overheating

    Might be what is wanted (see 3)

    5. Private-equity credit imploding

    Puts a damper on some demand

    6. ‘Homeland Insecurity’ failures

    Do you mean terrorist attack? Yup, that’s a biggee.

    7. Hedge funds hurting retirement plans

    Still seven years out.

    8. Oil rocketing toward $100 a barrel

    What’s so attractive about that number except if you’re gunning stops?

    9. Weak U.S. dollar keeps sinking

    More cheap consumer stuff. Antidote to the housing bust.

    10. Federal budget deficits

    Funded by BRIC.

    11. Social Security entitlements

    Still seven years out.

    12. Medicare’s massive deficits

    Still seven years out.

    13. Health-care-insurance deficit

    Still seven years out.

    14. Climate change fuels global wars

    Pure Hollywood. Shifting of global economic and political power would be the trigger. Pack a lunch. It’ll be while.

    15. Personal savings shortfall

    Still seven years out.

    16. Consumer debt surging

    Still seven years out.

    17. Corporate pension defaults

    Still seven years out.

    18. Local government pension deficits

    Still seven years out.

    19. International credibility deficit

    Assuming you mean American credibility – does anyone, other than news outlets, still believe the U.S. actually leads anything? Sure everyone looks that way, but now it’s cause they’re selling their sister cheap.

    20. Washington politics in endless gridlock

    Abelson would say that’s a good thing.

  7. Bob Estes commented on Jul 31

    Climate change (i.e. man-made global warming)is a huge scam put on by the environmentalists. They will all look like fools once the sun stops increasing its output, and global temperatures start to go down.

  8. cinefoz commented on Jul 31

    During the dip earlier this year, you posted an analysis that noticed most stock market declines have double bottoms.

    Any ideas on if there will be another one soon?

    To me, this one feels incomplete. But, on the other hand, panic buyers have controlled the market for a few months.

    I bailed of the market completely a couple of months ago and went in a little less than half way yesterday. I plan to average in with most of the rest in a couple of weeks or so.

    I ignored BRIC this time. It doesn’t feel right. The decline there wasn’t as sharp as in past dips. I think that has carry trade implications but I am not smart enough to know what they are.

  9. Mr. Obvious commented on Jul 31

    Charles, Bravo for putting yourself up for a target. The climate change comments alone ought to be good for a couple of smackdowns from the fear mongers.

    I can’t remember who penned it (Don Coxe?), but the saw about what’s on p16 of the WSJ, not what’s on p1, being what kicks one in the teeth comes to mind.

  10. fake skeptics, astroturf groups commented on Jul 31

    Second-hand smoke, the ozone, and now global warming. Just one “scam” after another for some people…but who scams who?

    Anytime you read one of these so-called “skeptics” sites or articles, read the authors’ bios. You might learn they’re always on “the other side of the trade” on several issues — and wrong — in the past. But, since the mainstream opinion is “crowded”, taking the unpopular/minority opinion is relatively more profitable.

  11. techy2468 commented on Jul 31

    1. does anyone know how many households maybe affected by ARM resets?

    2. when can we expect consumer debt to max out, leading to a sharp decline in retail sales.

  12. Philippe commented on Jul 31

    No more terrorist threats, which would leave the current US administration with empty ideas and themes and the obligation to solve its own vacuum.
    No more war which would trigger a donwnsizing of the GDP.
    A fiscal policy which would be aiming at a better redistribution of wealth,from acquired wealth to wealth builders (added value as opposed to passive wealth through Ponzi schemes)
    Higher interest rates which would reflect the actual necessity to rebalance the main economics aggregates.

  13. Greg0658 commented on Jul 31

    good list of rough stuff

    21. population / commodity ratio

    birth control, war, famine

    22. civil unrest (might be #6 Homeland Security)

    better operating systems

  14. Eric Blood Axe commented on Jul 31

    A military coup, to keep the Democrats out of the White House.

  15. johntron commented on Jul 31

    Add a 21. The whole world wants to give the USA a big f*** you….

    From anecdotal sources….given the heightened visa/arrival screening and often heinous delays for short-term visas at embassies (ex-EU/Japan/Canada, etc. whose citizens don’t require visas), a lot of business people native to the emerging markets try to avoid entering the US at all costs….and prefer to close deals/meet with bankers/etc. in London, Hong Kong, etc.

    Long-term (combined w/Sarbox, etc) could this mean the relative decline of NYSE, Nasdaq, NYC?

  16. Chief Tomahawk commented on Jul 31

    Nothing about Sowood?!?

    They got scalped for 50 cents on the dollar.

  17. Rod Roth commented on Jul 31

    None of the above. When the market generates enough excesses internally to become vulnerable to decline, it will decline. An unknown (and unknowable beforehand) event may come about towards the end (9/11 came six months into the decline) to later be given as the “reason” for the decline, but it will be another instance of misunderstanding that exogenous events do not “cause” market action. The market makes the news, not the other way around.

    Thanks for keeping up a terrific blog. It’s my fave.


  18. Fredf commented on Jul 31

    “A 90/10 down day within 5% of a high has never been shown to be a reliable buy signal.”

    Well it was in the recent June and march lows.

    Do you have the stats on this?

  19. MarkTX commented on Jul 31

    the main thing that would “ALLOW” the market to correct 10% would be if the PPT was not allowed to interfere in the “Free Markets”

    China cutting the US off would probably do it if they “really wanted to”.

  20. sam commented on Jul 31

    funny you say aging IT application. And we wonder what about aging infrastructure? when credit event comes, people will make do with “adult” IT applications. Indeed, in the coming meltdown, IT will be one the major victims.

  21. Rob Dawg commented on Jul 31

    1. Military budget busting? Whatever are you talking about? Get back to me if we ever get anywhere near half what President Kennedy was spending as a portion of the Fed budget. We are deficit spending and deep in debt because of social welfare and entitlement. Add to that increasingly inequitable tax policies if it makes you sleep better.

    8. $100 oil. BFD. At $100 sustained all kinds of alternatives become viable. Solar, bio, tar sands, coal gasification. That’s why we won’t get $100 oil.

    20. Political gridlock is the berst form of governance. The real fear is Dem/Dem Exec/Legis. Wed see nationalized healthcare to cure American competetivness, onerous business regulation and taxes and a disasterous global warming justified expansion of govt intrusion/meddling. Give me gridlock. Please.

    21. Of course the biggest threat is Windows Vista but like other irrational exuberances this one people don’t see.

  22. Eddie commented on Jul 31

    Someone above asked for good reasons to be in the market at this time. I have a few:

    – Global economic boom. This is an unprecented period of widespread sustained economic growth. Every multinational company benefits from this.

    – Still tons of liquidity out there. Japan is still giving money away.

    – What do you think is going to happen to all those foreign reserves that keep accumulating? They’re going to eventually start SPENDING! That means increased demand for everything (infrastructure, commodities, company-buyouts, etc).

    – Budget deficits are less scary than ever.

    – Other countries remain willing to finance our growth at low rates. This is a good thing.

    A note about inflation. Yes, it is there, whether we like it or not. In moderation, it’s not going to be too bad IF YOU ARE INVESTED IN THE MARKET. If not, and you’re earning 5% in cash, you will be hurt by inflation.

  23. Dale C. commented on Jul 31

    What would be the effect on the market if we all wake up one day to find that the US is mounting a sustained bombing campaign on Iranian nuclear sites and military facilities?

  24. techy2468 commented on Jul 31

    Eddie….i am have parked all my savings in indian Gov backed bank CDs at 9% interest, you can add dollar depreciation to that and see how sweet it is.

    do you think US stock market with no fundamental support is still a better choice.

    Global economic growth, if that is the case, why invest in US stocks, we should be in emerging markets, right?

    ton of liquidity: so you are trying to time the market or you are saying BOJ and FED are never going to stop the free money flow?? (i would be a bit scared by this though, because this is one of the major current cause and i can see that if they want they can keep the party going on for a while, unless inflation becomes a japanese problem)

    foreign reserves: so u think all those people are dumb enough to buy shrinking companies?? (in my opinion they want real assets or complete control)

  25. Ralph commented on Jul 31

    The comments are all over the place. I always find that fascinating.

    I always like to see if there is a simpler way to look at things. I think your list breaks down into two categories.

    Geopolitical risks. They are always out there and one can usually count on the human race coming down on the side of survival. These are rarely the tipping point. Sometimes they are the trigger.

    Everything else boils down to RISK being UNDER priced over a period of at least the last 5 years.

    This can be kept hidden for a long time but eventually the losses have to be counted. In small amounts this does not cause much harm. Today we are past the point of no harm.

    The tipping point for a crisis like this is rarely predictable. It is the thing that no one sees, and therefore can not protect themselves from. Which makes the list an interesting exercise but nothing more than that.

  26. Woodshedder commented on Jul 31

    While I am defensive right now, I’m not convinced that we need a capitulation day if this is just a “minor correction.”

    Funny that we have had one up day since a 5% decline, and are in the midst of possibly closing up again, and bears are already talking about the PPT.

  27. sam commented on Jul 31

    that will not be a good idea if indian rupee tanks to 50 (very likely). And you will not be able to convert it to dollar as indian rupee is not freely convertible.

  28. VJ commented on Jul 31


    does anyone know how many households maybe affected by ARM resets?

    Millions Are Facing Squeeze On Monthly House Payments

    Millions of Americans who stretched themselves financially to buy homes face a painful adjustment — some could even lose their houses — as monthly payments on adjustable-rate mortgages are reset higher.

    More than $2 trillion of U.S. mortgage debt, or about a quarter of all mortgage loans outstanding, comes up for interest-rate resets in 2006 and 2007, estimates Moody’s

    A recent study by First American Real Estate Solutions, a unit of title insurer First American Corp., projects that about one in eight households with adjustable-rate mortgages that originated in 2004 and 2005 will default on those loans.


  29. John Thompson commented on Jul 31

    Trigger is carry trade unraveling with Yen rising?

    KPCC reports from Griffith Observatory that solar cycles are waning, not increasing over last twenty years.

    These global warming deniers are so in love with their money. It’s a shame.

  30. techy2468 commented on Jul 31

    sam you maybe surprised that its more likely that indian rupee may go to 35 than 50 (sweet part i will love if it goes to 50, my current earnings are in dollars…and my future retirement can be india for the right exchange rate)

    indian rupee has appreciated only around 15% against the dollar in the las 4-5 years….whereas i think euro and other currencies have gone up as much as 30%.

    which means indian rupee is still undervalued (indian central bank wants to keep the peg around 40-41, so as not to destroy exports……just like chinese)

    and its no longer the case that you cannot convert rupee into dollar….but the limit is around $100k/person.

  31. SAM commented on Jul 31

    can you give me reference of that 100K repatriability.
    rupee is not undervalued. what you forget that indian inflation is more than twice that of US so there is soft appreciation of rupee nonetheless.

  32. Don commented on Jul 31

    I wonder when the debt story comes in. When folks were using the house as ATM lots of credit cards were paid offses). Now the house as ATM model is broken, but I wonder how many folks cut up the credit cards after they paid them off? Credit card balances are going up now, eventually consumers will reach their credit limits again.

  33. slick commented on Jul 31

    Let’s see…

    1) Market valuation relatively high (though not insane, and some sectors represent decent value).

    2) Market internals lousy.

    3) As Don said, the refi ATM is “out of order”. Bye bye Main St.

    4) Short-term rates coming off of multi-decade lows. The key here is that they are not declining. Market relative overvaluation AND flat/increasing rates = correction EVERY time.

    5) Contrary to what most think, the deficit decreasing as a % of GDP is a BAD thing for the stock market. Big deficits are usually good for the stock market.

    6) Tightening credit – always bad for the stock market, in numerous ways.

    The thing that I find most curious, is that I’ve read time after time how the masses were really not “in” on this bull market. Too much skepticism, etc. That was the alleged “wall of worry”. So…which is it? Can’t have it both ways.

    Long-term: Global expansion is unrpecedented. Gotta be a bull. Make sure you’re internationally diversified – now more than ever.

    Short-term: Down (hate the term “correction”).

  34. techy2468 commented on Jul 31

    sam i will try to find information about repatriability but i think i was wrong in stating about $100k… i got confused about Rs. 1000k news report, which is is a upper limit of foreign investment by a indian resident.

    coming back to true of indian rupee or chinese yuan…. try to compare the downslide of dollar against euro or cad or aud or nzd against indian rupee (and to get magnified picture, try to exclude the last 4-5 months, when indian central bank purposefully let the rupee appreciate around 11% to stem inflation)

  35. Marion Knight commented on Jul 31

    You guys post too much garbage, all these experts here, this is just as bad as the Yahoo! Message boards but still entertaining (that’s why I keep visiting this site). LOL.


  36. MarkTX commented on Jul 31

    No Marion Knight,

    It is not that entertaining….

    This is not garbage…..

    Go Home….

  37. TulsaTime commented on Aug 1

    Cascading hedge fund failures will lead to a rapid decline in the Dollar. Perhaps the ‘sudden’ demise of Goldman Sachs will be the key to Black Thursday, when the market sheds 20% of total value. The years to follow will see a total of 75% shaved off market value, and the rise of a christo-fascist military junta.

    Argentina anyone?????

  38. wunsacon commented on Aug 1

    >> and the rise of a christo-fascist military junta.

    W. was trying and to some degree has succeeded. His party controlled 3 branches of government. He started purging ethical Republicans from the Justice Department. He hired 150 graduates of Pat Robertson’s Christian law school. He holds an unknown number of people in secret locations and tortures them. He modifies laws with “signing statements”. He spies on Americans without even consulting the secret court staffed with the secret judge to review secret spying programs. He suppresses unfavorable scientific facts and views. The Ministry of Plenty provides/emphasizes misleading economic statistics.

    (All this is done with “plausible deniability” that’s “plausible” only to some — but that “some” is “enough”. It’s not necessary to fool all the people all the time; just enough of the people enough of the time.)

    If you control the information, you can confine people’s thinking and direct electoral outcomes. With representation and not direct democracy, elected officials can often safely ignore voters on many issues.

  39. techy2468 commented on Aug 1

    Cascading hedge fund failures will lead to a rapid decline in the Dollar. Perhaps the ‘sudden’ demise of Goldman Sachs will be the key to Black Thursday, when the market sheds 20% of total value. The years to follow will see a total of 75% shaved off market value, and the rise of a christo-fascist military junta.

    Argentina anyone?????

    tulsa….i am sorry but i disagree with that…

    argentina can happen in a developing country/emerging economy…..but usa is a far mature economy…..

    i feel that comments on this blog is becoming more of a hynotic doom and gloom followers.

    my knowledge of economy and markets are very limited but i can still say that the max correction right now cannot go beyond 30% (of course financials maybe wiped out to the extent of 60-80%, since people will realise that they dont create anything except for mumbo-jumbo, products on paper)

    i feel that even my estimate of 30% is very much on the higher side.

  40. Fred commented on Aug 1

    Gee…it looks like it got a bit too easy (cocky) on the short side.

    Selling look exhausted from my perch. This market is way oversold.

    The negativity is a (very) crowded trade. When it gets that crowded, go the other way.

    Buy Fear…(and sell greed)

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