Reviewing the 2008 Playbook

 | Aug 22, 2011 | 10:25 AM EDT
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You know what doesn't help? The charts. Keep them in mind on what starts as an up day, because they all look the same if you go out three years. They all look like they are headed back to the lows of 2008-2009. Almost every one of them.

You see the pattern everywhere. Where it is most evident is in the cyclicals that have little or no yield support. I was looking this weekend at a company that has continually said there is no slowdown, Starwood Hotels (HOT), and the amazing and endless decline, the simply hideous selloff, would indicate that earnings per share are coming down by a third, maybe more. That could be the innocent look-see, though. If you go back three years, you can see that the stock is about to embark on the historic retest of the bone-crushing era that was the Great Recession.

Do I think it gets there?

No. But that's not the point. We are all about 2008 here as a playbook, even as I don't think it is going to happen. We have to presume it will, if only because there is a broad sense that there is a "Lehman" or several Lehmans lurking in Europe, and the U.S. banks are not ready for such an occurrence.

Of course, our banks deny any exposure of any consequences, although our money funds, which are now "kind of insured," have lots of exposure.

As far as their Lehman, they are so sensitive to the charge that they doth protest too much. I can't see how we don't get a Lehman, given the weak balance sheets and the derivative exposure, as I mentioned last week.

I am going to work on a series of "What gets us out of this mess," but it is more likely to be time, price destruction and panic lows than fundamental improvement. We all accept that the euro is a failed security, but nobody believes that the authorities over in Europe can own that, because there's been too much money and intellectual capital spent around it. Much of this "break Europe" situation revolves around classic Latin-American-like failures, and I think that we would simply like to get it all over with, even it sends markets down 15%, 20% or 25%, with "markets" meaning chiefly European markets.

The need to own the bearish view is upon us, and I am only emphasizing it today, because it looks like an up day. Certainly, if we can get Brent crude down through a combination of Libya back on line and margin hikes, we could avoid a nastier denouement, but I am not counting on that either from the people who gave you two rate hikes this year.

Gold shows you that maximum caution is needed, and tech and banks must be sold on any bounce. The cyclicals are in no man's land, prey to 10% declines and advances, depending upon where the high-frequency traders want to exacerbate the moves, too.

One bit of good news: It has become obvious to all that the HFT people exacerbate the moves. The HFT people, as always, say they play no role in the market. Same as the 2x and 3x ETF people. The fiction must be maintained. The only issue to me is, do they really believe it, or are they just in the same self-preservation mode we would all be if our livelihoods were threatened?



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