Why Is the Market Selling Off?

What is driving the market lower?

I thought the economy was starting to improve. Didn’t the Federal Reserve indicate as much just yesterday. Do you believe them? While we could debate the depth of integrity embedded in many statements that emanate from Washington, let’s focus on what we do know and see happening. In the process, we will be better positioned to most effectively navigate our economic landscape and the markets.

So, back to the initial question, what’s driving the markets lower? I see a confluence of reasons reflected in some dramatic price action. These reasons include:

1. China’s restricting bank lending. I have been highlighting this the past few days and continue to believe it is the most important factor influencing our markets currently.

Look at commodities in general (DJ-UBS Commodity Index), but the copper market specifically. This metal continues to melt down, pardon the pun. Copper is off more than 3% today and 10% from its high three weeks ago. We should be mindful, though, that copper more than doubled over the last year. As such, this metal has much more room to retrace that price action.

2. The fiscal and political disaster known as Washington D.C.. With all due respect to the office of the Presidency, Obama’s performance last evening was not inspirational, try as he might. The market is discounting this administration’s ability to turn our economy around.

3. The initial withdrawal of support for our markets by both the Federal Reserve and Treasury should not be discounted. Can our markets survive on their own? The risks are certainly increased. High five to MC for pointing out the fact that the SEC has officially allowed for money market funds to suspend redemptions. Will this development ultimately be the death knell for this industry. There is a very real chance it will once the first fund actually does suspend redemptions.

4. Unwind of the dollar carry trade. I continue to believe many market participants are short the U.S. dollar and long a basket of risk-based assets, including emerging market equities, commodities, domestic equities, and corporate bonds. As the dollar improves, these other markets should selloff. Monitor the U.S. Dollar Index and look for an inverse correlation between this index and these other markets.

JPMorgan (JPM) yesterday reported that they are less bullish on emerging market equities. How is that sector doing?  Down approximately 7% on the month after a 74% increase in 2009. Again, there is plenty of price action to retrace.

The sector that has been holding up better than any other is high yield corporate bonds. While these other referenced sectors are down 5-10%, the high yield space is unchanged to slightly better on the year. What’s up with that? Who’s putting cash to work there while the cash exits these other sectors?

High five to our friends at 12th Street Capital for pointing out that state pension funds are reaching for yield within the bond market on a leveraged basis–that is using borrowed funds.


In my opinion, with government supports, both here and abroad, abating the risks within our economy and markets remain high and are actually elevating.

Remember, the last trading day of the month is tomorrow. Many believe that as January goes so goes the year.

Pack lightly and be careful as we try our best to navigate what will continue to be a challenging trail throughout 2010.

About Larry Doyle 522 Articles

Larry Doyle embarked on his Wall Street career in 1983 as a mortgage-backed securities trader for The First Boston Corporation. He was involved in the growth and development of the secondary mortgage market from its near infancy.

After close to 7 years at First Boston, Larry joined Bear Stearns in early 1990 as a mortgage trader. In 1993, Larry was named a Senior Managing Director at the firm. He left Bear to join Union Bank of Switzerland in late 1996 as Head of Mortgage Trading.

In 1998, after 15 years of trading and precipitated by Swiss Bank’s takeover of UBS, Larry moved from trading to sales as a senior salesperson at Bank of America. His move into sales led him to the role as National Sales Manager for Securitized Products at JP Morgan Chase in 2000. He was integrally involved in developing the department, hiring 40 salespeople, and generating $300 million in sales revenue. He left JP Morgan in 2006.

Throughout his career, Larry eagerly engaged clients and colleagues. He has mentored dozens of junior colleagues, recruited at a number of colleges and universities, and interviewed hundreds. He has also had extensive public speaking experience. Additionally, Larry served as Chair of the Mortgage Trading Committee for the Public Securities Association (PSA) in the mid-90s.

Larry graduated Cum Laude, Phi Beta Kappa in 1983 from the College of the Holy Cross.

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