Cashin: Strange things on Wall Street

CNBC's Courtney Reagan and Art Cashin, of UBS, discuss trading in Japan and its impact on Europe and the U.S. "Something strange is afoot," he says.

The Dow closed down over 200 points.

The Three Hour Bear Market

Art Cashin ...

Fed Teases, Short Squeezes, A Three Hour “Bear Market” And A Zombie Bank

In Tuesday’s Comments, the summary of the Consensus call was “Has potential to be a whacky session”. Well, it sure lived up to that potential.

The day started out with a gap down, as the unwrapping of the Dexia Bank situation (which we had noted for two days) revealed some extensive and apparently unsuspected problems. That the bank had passed the regulatory stress tests with flying colors only a few months ago, raised real new doubts about the stress tests and the entire European banking system.  U.S. markets then watched markets and events in Europe to see if any nuance might suggest the next move.

They also kept an eye on the Bernanke testimony. It had an almost plaintive tone to it. Mr. B said the economic rebound, that he and the Fed had carefully nurtured through QE1 and QEII, was at risk of  “faltering”. That was as close to a Fed chairman saying “double dip” as we are likely to come to hear.

As a sidebar, we would like to note a rare, perhaps unique, event at the hearing. One of our elected officials asked an intelligent question of the Chairman. He asked if the balance of Operation Twist would be measured in par value or market value. Bernanke responded - “par value”. The rest of the panel looked at each other as if someone had just quoted Shakespeare in Swahili. The same flummoxed looked appeared on the faces of some the “fed experts” covering the hearings on TV. It was a precious moment and I’m sorry I didn’t tape it.

Markets reacted only slightly since the main focus of the day remained in Europe.  A third factor in the drama was the internal technicals of the market itself. As we had also noted in the Comments, the market was badly oversold after back to back 90% down days. They, in turn, had brought us down to some critical support levels. Those support levels were broken by the gap down opening, resulting in some trapdoor style selling in the first hour.

The early break of the support levels brought some interesting exchanges among the trading section of the Friends of Fermentation. Several noted that if a sharp break of important support doesn’t bring on a bout of full, all out, capitulation selling, the bears (shorts) may find themselves too far off base. In some past years, the resultant attempt to reduce risk (cover some shorts) started a panic among other shorts. When those observations were exchanged around the opening, no on realized how prophetic they would be by the closing bell.

With the Bernanke hearing ended and Europe starting to close, stocks began to tip-toe higher in a rather timid attempt to see if the former support had now converted to resistance.  Sure enough the rebound began to sputter as the Dow reached the region of 10,600 and the S&P around 1098/1103.   Seemingly capped by the new resistance, stocks began to drift lower in what looked to be a ritual move to retest the morning lows. Then as the final hour neared, news began to filter out of Europe.

First was news on Dexia Bank. This formerly good bank (stress tests) would put a large chunk of its assets into a “bad bank”, a zombie-like organization whose primary function was to hold toxic assets in a financially lead-lined vault, unmarked to the markets. The importance of the splitting of Dexia was not about the structure but the sense of urgency. Hey! Maybe they finally “get it”. Maybe they realize that action is needed and needed now. Stocks began to rally and then the other shoe dropped. Shoe? Hell it was like a “Seven League Boot”.

The FT carried a story that European leaders were working on a plan to “re-organize” many of the European banks. The story was instantly and simultaneously leaked to a variety of media outlets. The sense that “they finally get it” went from a whisper to a roar in a nano-second. (Forget that Christine Lagarde had suggested this at Jackson Hole.)   Electronic buy programs exploded onto the floor. A rush of short covering then joined the stampede. (That assumption is based on the leading role in the rally played by the heavily shorted stocks - Bank America; Morgan Stanley; SocGen; et. al.)  The pressure on the shorts was unrelenting and the buying never even paused for breath. They closed right on the high tick and in heavier volume. The bears, who had looked so smug at 10:00, limped off to the showers with bruised faces and much lighter wallets.

Try to keep a straight face when a reporter tells you that reporters only report the news, they don't shape it.

Art Cashin lives on the floor of the New York Stock Exchange and because he's not hobbled by a college degree, he's a fount of knowledge and a very sharp observer of current events - on or off the markets. Here's an interesting piece of historic trivia that he shares with us today, illustrating that "making it up" is not a new thing for newspeople of all genders and sexual preferences.

On this day (-1) in the year 1900, American and European forces broke through Chinese lines around the Imperial City of Peking (now Beijing). They freed hundreds of terrified non-Chinese hostages and thus broke the back of the "Boxer Rebellion".

History books will tell you that the original anti-foreign rebellion in China was sanctioned by the Dowager Empress and driven by the secret "Society of the Harmonious Fists" (Boxers - get it!). While those facts are true, the real facts may be more ironic.

The Boxer Rebellion may have started, by accident, in America. According to some reports, about a year or more earlier, a bunch of hard drinking reporters were sitting around exchanging their frustrations that the "event du jour" had failed to appear.

How could they meet their deadlines. Being good journalists who needed the meager paycheck they agreed to do the obvious thing - - make up a story. But it had to be a good story. And it had to be a lulu. But these guys were pros. So they invented a story that wealthy Americans and Europeans were planning to buy, dismantle and transport the Great Wall of China (as nearly a century later some would do with the Berlin Wall). What the hay -- it was fun -- it met the deadline -- it sold papers.

But somehow the short-lived story reached China. Chinese nationals were inflamed. Word of mouth said foreigners wish to rape our heritage and national treasures. Hostility turned to aggression and then it inspired the Boxer Rebellion.

Today, the need for a paycheck is just as great for the storytellers in the press; at least the ones still collecting one in that failing industry (faster please).

Just as the Chinese were a handy and despised tool for the racist media of that time, the Tea Party folks fill that niche for the modern day opinion shapers. This may be why my local waste of newsprint – the Virginian Pilot (motto: "True to the Democratic Party in victory or defeat") fills its editorial pages with the confident prediction of the demise of their enemies. Perhaps taking their cue from one of their leaders, Harry Reid, they tell us that the Tea Party is OVER, DEAD, DYING, FINI, DEFUNCT, “pining for the fiords.”

I suspect that this is designed for Republican running for office, to influence the more susceptible ones to betray their natural constituents. Even as the anti-Tea Party standard bearer is sinking in the polls, the modern day scribblers are telling us that Americans really don’t want the debt reduced, that they really like the federal government telling us what to eat and drink, how to flush and what light bulbs we can use; that we don’t want our electricity made with coal and we’re willing to see our power bills skyrocket; that Obama really is focused like a laser beam on jobs especially on the golf course and on vacation in Martha’s Vineyard. They really want us to believe that the US debt was downgraded because the Tea Party was calling for a default when the only ones talking about it were Democrats and their amen corner in the press. They want us to believe that the path to jobs and prosperity is more spending and more debt because that has worked so well the last three years. They want us to believe that if we don’t like Obama’s policies we’re racists because there cannot be any other reason. They want us to believe that raising taxes on millionaires and billionaires and people who own jets is the answer to ending the deficit, and that providing health insurance to 30 million people will lower health care costs.

I find it easier to believe that rich Americans and Europeans will buy the Great Wall of China and move it to Las Vegas because I may be gullible but I’m not stupid.

What Wal-Mart knows about the economy.

Art Cashin passes along this tidbit about how the poor on welfare are coping with the recession.  From the CEO of Wal-Mart: 

I don't need to tell you that our customer remains challenged…You need not go farther than one of our stores on midnight at the end of the month. And it's real interesting to watch, about 11 p.m. customers start to come in and shop, fill their grocery basket with basic items – baby formula, milk, bread, eggs – and continue to shop and mill about the store until midnight when government electronic benefits cards get activated, and then the checkout starts and occurs. And our sales for those first few hours on the first of the month are substantially and significantly higher.

I'm so glad the recession ended last year.

How's that HopeN'Change working out for you?

Sunspots and climate

From Cashin's comments:

The primary reason to monitor sunspots (unless you are a ham radio operator) is their possible link to the weather here on earth. Proponents claim that low sunspot numbers are often followed by cold weather on earth. They cite something called the "Maunder Minimum". This was a period of low sunspot activity observed about 75 years after Galileo's introduction of the telescope. Proponents claim it was followed by the Little Ice Age that is said to have occurred over the next 150 years.

If there is a relationship, and the sunspot activity remains remarkably low, this could be a very cold winter season. That might be particularly painful with heating oil and natural gas threatening record highs. Some of us think there may also be a solar cycle that relates to the stock market. But, that's a story for another day.

For well over a year now sunspots have been virtually non-existent. And, at least from our vantage point, the weather has been wetter and colder than normal. In fact our friend, Dennis Gartman has written that colder weather may be inhibiting, somewhat, the growing of grains this year in the northern U.S. and southern Canada.

Sunspots tend to come in cycles of approximately 11 years. The period between the cycles tend to be the minima. Old cycle spots grow fewer and fewer, spots from the new cycle appear slowly and infrequently. The good news in the data we reported yesterday is that the spot that was sighted looks like it's from the new cycle, "Cycle 24." If spots are from the new cycle, it raises hope that the number of spots will increase as the cycle progresses.

How do we know which cycle a spot belongs to? Part of it has to do with their magnetic makeup. The easier part is their location relative to the sun's equator. The spots of the older, dying, cycle tend to be closer to the sun's equator while the new cycle spots occur further away.

Now that you understand why we follow sunspots – don't tell Al Gore. It'll put a chill on his day. P.S. They actually called out the snowplows in parts of New Jersey yesterday.

A Late Bloomer (there's hope for me yet!)

From Cashin's Comments...

On this day in 1703, a crowd jeered as the London Constabulary led a rather motley fellow to the pillory (what we in America called the public stocks - "put your hands and head in the hole in the board please"). We said the guy was motley because of his description in the police report. In modern English and modern police work it ran something like this - "medium height; bent frame, about 40 years old; swarthy complexion; a crooked nose and a large mole near his mouth."

And, it wasn't just his physical makeup that made him uninspiring. Even his mom would be hard-pressed to boost his merit. He failed at selling beer. He failed at selling wine. He even failed at selling tobacco, garments, cloth even oysters. Sensing he was not a salesman he tried manufacture - bricks: he failed - tile: he failed again - but you get the picture.

So....motley, friendless, and failed (and also in debt), he was locked in the pillory. The crowd picked up rocks, mud and er…..let's just say other odorous items....in preparation of flinging at said felon. As they moved closer (to get a better shot), the prisoner shouted that he would recite "A Hymn to the Pillory." He then proceeded to make up a poem - line by line - and the crowd loved it. He was an instant hero.

Released, he sensed writing could be his destiny. He tried a couple of topics but was happy with none of them. For nearly twenty years, he remained happy with none of them. Then he heard about a castaway sailor named Selkirk being rescued from an isolated island after being marooned for years.

That's the stuff, he thought - so Daniel DeFoe wrote something called "Robinson Crusoe" - then "Moll Flanders"; then - oh you get the point....

To mark the day, remember to note to the authorities that sometimes the pen is mightier than da pen....or even the pillory. (Oh yeah! Try to convince someone that you too are a late bloomer.)

Stock market analysis from Art Cashin

From May 27th comments:

Cocktail Napkin Charting – As noted above, the Dow tested and held 8221 as the S&P did with 879. Yet the tests did not covert many skeptics even though it did panic some shorts. The rally peaked just under resistance at 8500/8525 in the Dow. The S&P was also contained below 914/920.

A potentially troubling trend may be developing. The number of stocks dipping back below their respective 50 day moving averages. That suggests the rally may be deteriorating internally. Another thing we're watching is the VIX. Its chart is
hinting a possible breakout higher. Not a prediction but a reason to monitor carefully.

Napkins suggest resistance, as noted above, is Dow 8500/8525. In the S&P, it looks like 914/920. Support is Dow 8340/8355 and S&P 898/903. These are somewhat minor levels. We wrote yesterday that Friday's compressed action in the McClellan Oscillator suggested a 200 point move was likely. We got the 200 point move alright but without a hint of direction, the information was useless. Back to the drawing board.

Consensus – The dominance of electronic players raises questions of sustainability. Nervousness of shorts will make the 10:00 housing data and 1:00 auction results very important to watch. Tension builds as the S&P and Dow remain trapped in a tightening vise between the 200 day moving average and the 50 DMA. Remain wary and stay very, very nimble.