Overview
The initial debt concern in weak members of EU and the debt ceiling debate in the U.S. have now turned into a confidence and banking crisis in EU and the U.S.. The old market leaders in commodities and tech were slaughtered. There is no new leadership emerging. Most of the rallies were driven by the S&P futures and short covering.
Redemption Pressure by Institutional Players
It appears that the current market malaise is similar to the last downturn in 08, although we don't have a Lehman Brothers yet and the banking system is better capitalized in the U.S.. However, the process of selling begets selling among institutional players, especially hedge funds and mutual funds to satisfy redemption demands, is the same. The market is not trading on fundamentals in the short term, but rather on who owns what. Can the market recover on its own? Yes, market can rally, driven by bottom fishers, but only if the corrections are minor and no key financial institutions are at risk of defaulting. The bulls have been badly injured in the past couple of months. The fact that David Tepper who made a killing by buying bank stocks at the last crisis sold most of his Bank of America holding shows that the hardcore bulls are surrendering. Bill Miller, another religious bottom-fishing fundamentalist, has no money. Warren Buffett, the biggest and most patient of all, usually waits until other bulls are killed. Now, he is making a move by investing in Bank of America. In summary, it shows the bulls' lineup is dangerously thin. I believe we are closer to the situations of 1987, 1998, and fall of 2008 when the bulls are too weak to fight the bears.
A Bailout is Needed
Capitalism is great, but it needs bailouts by socialists. Buffett cannot save the banking system by himself. If last crisis is any guide, the turning point, in my view, was the explicit guarantee of the major financial institutions by the Treasury in March 2009. All hopes right now hang on to Bernanke's Jackson Hole speech. After that, Obama will be next in line to save his presidency. A similar guarantee is needed in EU, but it will be a lot harder to achieve because Germans do not want to bailout non-Germans until the current crisis affects Germany more severely. I don't think we are there yet.
