Here Is Why This Might Be The Week Of Reckoning For Stocks…

Are we about to witness widespread panic in the global financial marketplace?  This week is shaping up to be an absolutely critical week for global stocks.  Coming into December, more than half of the 93 largest stock market indexes in the worldwere down more than 10 percent year to date, and last week stocks really started to slide all over the world.  Here in the United States, the Dow Jones Industrial Average is down about 600 points over the past week or so, and at this point it is down more than 1000 points from the peak of the market.  That brings us to this week, during which the Federal Reserve is expected to raise interest rates for the very first time since the last financial crisis.  If that happens, that could potentially be enough to accelerate this “slide” into a full-blown crash.

And just look at what is already happening.  Trading for stocks in the Middle East has opened for the week, and we are already witnessing tremendous carnage

Following Friday’s further freefall in crude oil prices, The Middle East is opening down notably. Abu Dhabi, Saudi, and Kuwait are lower; Israel is weak and UAE and Qatar are tumbling, but Dubai is worst for now.  Dubai is down for the 6th day in a row (dropping over 3% – the most in a month) extending the opening losses to 2-year lows. The 11% drop in the last 6 days is the largest since the post-China-devaluation global stock collapse. Leading the losses are financial and property firms.

Things in Asia look very troubling as well.  As I write this, the Japanese market has just opened, and the Nikkei is already down 508 points.

In recent days I have been explaining to my readers how everything is lining up in textbook fashion for another major market crash.  In particular, the implosion of junk bonds is a major red flag.  Late last week, Third Avenue Management shocked Wall Street by freezing withdrawals from a 788 million dollar credit mutual fund.  The following comes from Bloomberg

A day after a prominent Wall Street firm shocked investors by freezing withdrawals from a credit mutual fund, things only got nastier in the junk-bond market. Prices on the high-risk securities sank to levels not seen in six years and, to add to the growing sense of alarm, billionaire investor Carl Icahn said the selloff is only starting.

The meltdown in High Yield is just beginning,” Icahn, who’s been betting against the high-yield market, wrote on his verified Twitter account Friday.

Icahn’s comments come as junk-bond investors, already stung by the worst losses since 2008, are the most nervous they’ve been in three years after Third Avenue Management took the rare step of freezing withdrawals from a $788 million credit mutual fund.

What Third Avenue Management just did was absolutely huge.  Now investors that have money in any similar funds are going to be racing to get it out.  We could be on the verge of a run on bond funds that is absolutely unprecedented.  This is so obvious that even CNBC’s Jim Cramer is sounding the alarm…

Friday was a day where Cramer’s ears were burning with concern because of the troubles discovered with a high yield bond fund run by Third Avenue Management. It decided to bar investors from getting their money out of its Focused Credit Fund, because it could not meet demands to get cash back to them in an orderly way.

This was significant because when it tries to sell the bonds needed to satisfy these orders for redemptions, it could destroy the high yield bond market because there are no buyers anywhere near the amount that they want to sell.

I cannot emphasize enough just how disconcerting this move is,” Cramer said.

I know that for the ordinary person on the street, all of this sounds very complicated.

But it basically comes down to this – anyone that has a lot of money invested in these bond funds is in danger of getting totally wiped out.

In a situation like this, it is those that are “first out the door” that come out as the winners.  I like how Wolf Richter explained what we are currently facing…

It works like this: When an “open-end” bond fund starts losing money, investors begin to sell it. Fund managers first use all available cash to pay investors. When the cash is gone, they sell the most liquid securities that haven’t lost much money yet, such as Treasuries. When they’re gone, they sell the most liquid corporate paper. As they go down the line, they sell bonds that have already lost a lot of value. By now the smart money is betting against the fund, having figured out what’s happening. They’re shorting the very bonds these folks are trying to sell.

The longer this goes on, the more money investors lose and the more spooked they get. It turns into a run. And people who still have that fund in their retirement account are getting cleaned out.

Bond funds can be treacherous – especially if they hold dubious paper, which is never dubious until it suddenly is. And when they get in trouble, you want to be among the first out the door.

I would anticipate that we will see more junk bond carnage this week – especiallyif the Fed raises rates.

And as I have discussed previously, a stock crash almost always follows a junk bond crash.  If the Fed does raise rates this week and stocks do start falling significantly, one key day to watch will be Friday.  JPM’s head quant Marko Kolanovic has warned that “the largest option expiry in many years” will happen on that day…

This important event falls at a peculiar time—less than 48 hours before the largest option expiry in many years. There are $1.1 trillion of S&P 500 options expiring on Friday morning. $670Bn of these are puts, of which $215Bn are struck relatively close below the market level, between 1900 and 2050. Clients are net long these puts and will likely hold onto them through the event and until expiry. At the time of the Fed announcement, these put options will essentially look like a massive stop loss order under the market.

A perfect storm for stocks is brewing, and this week could potentially be one of the most chaotic that we have seen in a very long time.

But of course the Federal Reserve could decide to surprise us all by not raising rates, and that would change things substantially.

So what do you think will happen this week?

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About the Author: The Economic Collapse Blog

  • Joe Cabot

    Amateur being the key word. Still awaiting the info on how we can find those mythical published works of yours.

  • Mike

    They (The GOP) ALWAYS screw things up so totally that the voters throw them out (1920-1932) AND (1981-2009) and we have economic success for about 40-50 years (1932-1981) AND (2009-?)

  • JohnDille

    Hold on, this is waiting to be approved by The Trading Report.
    Hold on, this is waiting to be approved by The Trading Report.

    Hold on, this is waiting to be approved by The Trading Report.
    OOOPS… I ALMOST FORGOT… I HAVE TO CENSOR THIS OR THE RIGHT CENSORED WHO CONTROL THIS BOARD WILL NOT ALLOW IT TO BE PUBLISHED….

    I AM RIGHT IN THE MIDDLE OF A LONG TERM STUDY OF DISTRIBUTIONS OF INCOME… AND OF THE FEDERAL INCOME TAX SYSTEM… AND INTERESTING PATTERNS ARE ALREADY EMERGING…. BUT THOSE PATTERNS ARE NOT NEWS TO ME. I HAVE SEEN THEM ELSEWHERE. WHEN DEMOCRATS HAVE SOLID CONTROL OF THE FEDERAL GOVERNMENT… WHICH REQUIRES FAIRLY SOLID CONTROL OF THE LARGE MAJORITY OF THE STATES… SO THAT STATES ELECT DEMOCRATS TO THE HOUSE AND SENATE, AND SO REPUBLICANS CANNOT CENSOREDMANDER THE HOUSE LIKE THEY HAVE MANAGED TO DO IN RECENT DECADES…. YOU TEND TO HAVE HIGH TAXES ON THE WEALTHY, WHICH ALLOWS THE GOVERNMENT TO INVEST HEAVILY IN INFRASTRUCTURE… WITHOUT BORROWING ALL THAT MUCH… WHICH GENERATES JOB CREATION… WHICH GENERATES UPWARD PRESSURE ON WAGES… WHICH ALLOWS WORKING PEOPLE TO BUY MORE GOODS AND SERVICES… WHICH GENERATES THE CREATION OF MORE JOBS… WHICH GENERATES MORE UPWARD PRESSURE ON WAGES… WHICH GENERATES MORE BUSINESS GROWTH, AND MORE TAX REVENUES FOR GOVERNMENT… WHICH ALLOWS THE GOVERNMENT TO INVEST IN MORE INFFRASTRUCTURE…. AND SO ON AND ON… THE ULTIMATE VIRTUOUS CYCLE! EVEN WITH MUCH HIGHER TAXES, EVEN THE WEALTHY DO WELL… BUT SO DOES EVERYONE ELSE!

    BUT… STARTING WITH THE RIGHT CENSORED SOUTHERN DEMOCRAT REBELLION AGAINST THE DEMOCRATIC PARTY… BECAUSE OF LIBERAL AND MODERATE SUPPORT FOR WOMENS RIGHTS AND CIVIL RIGHTS FOR CENSORED PEOPLE… REPUBLICANS BEGAN TO GAIN EVER STRONGER SUPPORT STARTING IN THE LATE 1960’S AND INTO THE 1970’S… AND REALLY GOT POWERFUL WHEN REAGAN TOOK OFFICE. DEMOCRATS STILL HELD MAJORITIES IN BOTH HOUSES OF CONGRESS… BUT A LARGE NUMBER OF THOSE DEMOCRATS WERE SOUTHERN CENSORED WHO OFTEN SIDED WITH REPUBLICANS… OR WHO IN OTHER WAYS PERVERTED THE MOST IMPORTANT DEMOCRATIC POLICIES. EVEN MORE IMPORTANTLY THAN THAT, SOUTHERN DEMOCRATS EFFECTIVELY WORKED WITH REPUBLICANS TO CENSOREDMANDER MANY STATES, SO THAT LIBERAL DEMOCRATS COULD NOT GET ELECTED… AND NOW, THERE ARE MORE THAN 30 STATES THAT ELECT FEW, IF ANY, ACTUAL REAL LIBERAL DEMOCRATS TO ANY OFFICE. HERE IN IDAHO, WE HAVE HAD ONLY 2 SOLIDLY LIBERAL POLITICANS ELECTED AT THE STATE AND NATIONAL LEVEL IN THE LAST 50 YEARS… AND THAT PATTERN WOULD BE TRUE IN A SOLID MAJORITY OF ALL STATES! THAT IS WHY THE CENSORED BROTHERS AND THEIR MANY ALLIES AND SUPPORTERS ARE SO DANGEROUS… THEY ARE DESTROYING THE DEMOCRATIC PARTY FROM THE GROUND UP… AND IF THEY CONTROL A SOLID MAJORITY OF THE STATES… AND IF THEY ALSO CONTROL CONGRESS IN 2020… THE DEMOCRATIC PARTY… AT LEAST AS IT EXISTS TODAY… IS DOOMED. REPUBLICANS WILL SO SOLIDLY CENSOREDMANDER MOST OF THE STATES… AND THUS CONTROL STATE SENATES AND STATE HOUSES AND CONGRESSMEN FROM ALL THOSE STATES, THAT THEY WILL BE ABLE TO TOTALLY CONTROL THE UNITED STATES! THAT IS EXACTLY WHY RIGHT CENSORED REPUBLICANS HAVE GOTTEN SO DESPERATELY NOISY IN RECENT YEARS…. THEY SMELL BLOOD… THEY SMELL TOTAL VICTORY… AND THEY ARE CENSORED BENT ON CARRYING OUT THEIR PLAN TO CONTROL THIS NATION… TOTALLY!!! AND IF THEY DO, THEY WILL CONTINE TO DESTROY WHAT IS LEFT OF THE OLD DEMOCRATIC VIRTUOUS ECONOMIC CYCLE… AND THAT WILL LEAD TO A VERY GRIM AND IMPOVERISHED NATION. WHAT MAKES THINGS WORSE IS… WE NEED TO BE GOING SOLAR ON A MAJOR SCALE BY THE 2020’S… AND WE NEED TO BE BREAKING DOWN THE TOTAL CONTROL OF THIS NATION BY THE WEALTHY… AND WE NEED TO BE DOING SOMETHING VERY POWERFUL IN BREAKING DOWN THE BLATANT CENSORED AGAINST MINORITIES AND BLATANT CENSORED TOWARD WOMEN… AND WE NEED TO STOP THE RISE OF RIGHT CENSORED CENSORED IN THIS COUNTRY, BEFORE IT GETS TOTALLY OUT OF HAND. AND THAT IS WHY 2016 IS SO IMPORTANT…. IT REALLY IS THE DEMOCRATS LAST CHANCE TO STOP TOTAL REPUBLICAN CONTROL OF THIS NATION… AND TO STOP THE DRIFT TOWARD RIGHT CENSORED CENSORED THAT REPUBLICANS ARE CENSORED BENT ON CRAMMING DOWN OUR THROATS. BUT I HAVE TO SAY…. THE FAR RIGHT HAS BECOME VERY VERY POWERFUL, AND THEY HAVE TENS OF MILLIONS OF PUPPETS SUPPORTING THEM… AND MANY ARE WILLING TO KILL TO MAKE SURE THAT THE FAR RIGHT SUCCEEEDS… AND THAT CAN ONLY GET WORSE UNLESS DEMOCRATS CAN SOMEHOW STOP THOSE TRENDS… AND I DO NOT SEE THAT HAPPENING!!! WE NEED A VERY STRONG DEMOCRAT IN THE WHITE HOUSE, AND MANY DOZENS OF VERY STRONG DEMOCRATS IN BOTH HOUSES OF CONGRESS… AND THOSE PEOPLE HARDLY EXIST ANYMORE, BECAUSE REPUBLICANS HAVE POLLUTED THE SOCIAL AND POLITICAL WATERS SO BADLY! BEING A DEMOCRAT IN AMERICA TODAY HAS BECOME LIKE BEING A CENSORED IN AMERICA BACK IN THE 1950’S… BECAUSE REPUBLICANS HAVE LIED AND LIBELED AND SLANDERED DEMOCRATS SO BADLY AND FOR SO MANY YEARS! I WILL CONSIDER MYSELF LUCKY TO DIE BEFORE RIGHT CENSORED REPUBLICANS RISE TO TOTAL POWER… BUT THEY ARE RISING FASTER THAN MY HEALTH IS FAILING, SO I MAY NOT KICK OFF BEFORE THEY GAIN TOTAL CONTROL OVER THIS NATION!!!

  • Mike

    In my opinion, the GOP represents the wealthiest 3% and the Democrats represent the 97%… That is why the economy and the stock market has done so much better when the Democrats are in control and so poorly when the GOP is in control… As I said before, it has to do with Income Inequity and the Velocity of Money… Under the Democrats Income Inequity falls and because the average American has more money to spend, the Velocity of Money Increases and jobs are created and the economy flourishes and the stock market goes up. Just the opposite happens under the GOP… It really is that simple, in my opinion….. If you study what Grayson (Economist and Lawyer/Harvard with Honors) tells us it is much clearer… 🙂

  • JohnDille

    IT WAS ALMOST CERTAINLY AFGHANISTAN AND LOW OIL PRICES THAT BROUGHT DOWN THE SOVIETS. STAR WARS WAS LIKE FUSION POWER… A GOAL FOR DECADES… BUT NEVER ACTUALLY REALIZED IN PRACTICE. AS FOR YOUR ASSOCIATION WITH THE COMPANY… IT WOULD BE EXTREMELY INTERESTING IF ALL AMERICANS COULD REALLY AND TRULY KNOW WHAT IS HAPPENING BEHIND THE SCENES… AND WHY. A MAJOR PROBLEM WE HAVE IN THIS COUNTRY IS THAT FEW AMERICANS REALLY UNDERSTAND WHY WE ARE A RICH AND POWERFUL NATION… AND HOW THAT IMPACTS OUR FOREIGN POLICIES… AND DOMESTIC POLICIES… ENORMOUSLY! REPUBLICANS BELIEVE IN ALL SORTS OF FANTASIES… AND DEMOCRATS TEND TO HAVE ONLY VAGUE NOTIONS THAT THEY CANNOT EXPLAIN WELL BECAUSE THEY DO NOT HAVE ENOUGH INFORMATION. DEMOCRATS VAGUE NOTIONS BASED ON REALITY IS BETTER THAN REPUBLICAN FANTASIES… BUT FULL KNOWLEDGE WOULD BE FAR BETTER FOR ALL CONCERNED. A LOT SCARIER AND MORE SOBERING… BUT BETTER!

  • Mike

    John,

    Thanks for your service… I was dirt poor and chose to volunteer rather than get drafted. My choice was Special Fores back in the 60’s…. After my service, I used my GI Bill to complete College in Business with interests in International Economics and Quantitative Analysis…

    When you spend time in Special Operations, you spend a lot of time around what we called the “Company” back in my days…. Left you with an interesting take on how things really happen in the world…. Like for example, why the top in Gold on April 11 1987, signaled to many of us that the Soviets were bankrupt and Star Wars had worked…. An ongoing bet among us back in those days was how long it would take the Western Media to figure out that: 1) the Soviets were done and 2) how long it would take for the world to figure out that the Soviets were negotiating with the West Germans to sell them back East Germany!… 🙂

    With those skills and those learned in Business School, I was able to invest very well and now I am wealthy beyond any expectations of this once dirt poor kid… 🙂

    Interesting how Cheney/bush screwed themselves and the Oil Industry for short Term Profits by conspiring to jack up oil from $18 to $140 and the effects that it had on oil exploration and drilling and the HUGE increase into alternative approaches to energy creation because of those sky high prices!… 🙂 Now the days of oil and gas are rapidly going into decline because of their head long rush into short term greed!… 🙂

  • JohnDille

    I AM AN AMATEUR ECONOMIST. BACK IN THE 1970’S, WHEN SOARING OIL PRICES WAS KNOCKING THE HECK OUT OF THE US AND GLOBAL ECONOMY, I GOT CONCERNED ABOUT THE ENERGY FUTURE! I WAS A NAVY NUCLEAR TECH, AND SO UNDERSTOOD A LOT ABOUT ENERGY… AND BECAUSE OF THAT, I QUICKLY BEGAN TO UNDERSTAND JUST HOW IMPORTANT CHEAP ENERGY WAS TO THE WORLD AND US ECONOMIES. I UNDERSTOOD THAT… IF ENERGY RESOURCES BEGAN TO GET MORE DIFFICULT TO FIND AND RECOVER AND MAKE USE OF, IT WOULD SLAM THE US AND WORLD ECONOMIES… HARD… FOR DECADES. AND I REALIZED THAT THE WHOLE ENERGY THING WAS EVEN MORE ABOUT ECONOMICS THAN IT IS ABOUT ACTUAL SUPPLIES AND RESERVES OF ENERGY RESOURCES… SO I BEGAN TO STUDY ECONOMICS… NOT SO MUCH IN ANY CLASSES… BUT BY DIGGING AS DEEP AS I COULD INTO LONG TERM ECONOMIC DATA. AND ONE OF THE FIRST THINGS THAT I NOTED WAS…. THE ECONOMY ALWAYS… ALWAYS… ALWAYS… DOES BETTER UNDER DEMOCRATS THAN UNDER REPUBLICANS! THAT WAS 40 YEARS AGO… AND THAT TENDENCY HAS BECOME EVEN MORE PONOUNCED SINCE THEN!!! WELL… ECONOMICS IS NOT THE ONLY THING IN LIFE… BUT… IF PEOPLE ARE DOING WELL FINANCIALLY, THEY CAN USUALLY AFFORD TO DO WAHTEVER ELSE IT IS THAT THEY NEED TO DO, TO IMPROVE THEIR LIVES. IF YOU HAVE ACCESS TO THE NECESSARY RESOUCES, YOU CAN DO ALMOST ANYTHING YOU WANT OR NEED TO DO. IF NOT… GOOD LUCK TRYING TO DO ANYTHING MUCH AT ALL! TOO BAD THAT REPUBLICANS ARE EITHER TOO RICH AND ARROGANT… OR TOO BRAIN WASHED AND STUPID… TO UNDERSTAND EVEN THAT MOST BASIC OF REALITIES!!!

  • Mike

    John,

    There is an article out there written by Allen Grayson, that appeared in the New York times called “Poor Dumb Rich People” that demonstrates how poorly the Conservative Ultra Wealthy (CUWs) actually do at running the Economy and the Stock Market… This site will not allow me to paste it here… How unusual, aye?… 🙁

    Since 1929 the average Annual Return under Republican Administrations is 0.4% and under Democrat Administrations it is 10%… When annualized I believe that is about 167 times better under the Left leaning Democrats than under the Right leaning Republicans! So much for GOP being the party of Business, aye?… 🙁

    Wonder where the insulting GOP Sycophant Joe is right now?

  • JohnDille

    WHAT??? YOU MEAN THAT REPUBLICANS AND OTHER BRAINLESS RICH FOLKS ARE FINALLY… FINALLY… FINALLY REACTING TO REALITIES THAT HAVE BEEN OUT THERE FOR YEARS??? I GUESS BEING RICH MAKES AN AWFUL LOT OF PEOPLE STUPID…. THERE IS NOTHING HAPPENING NOW THAT HAS NOT BEEN EVOLVING FOR AT LEAST A YEAR TO TWO YEARS… OR THAT COULD NOT HAVE BEEN FORESEEN 2 AND EVEN 3 AND MORE YEARS AGO. IF RICH REPUBLICANS HAD ANY SENSE, THEY WOULD HAVE PRICED ALL THE PROBLEMS OF THE WORLD INTO THE MARKETS OVER TIME…. AND WE WOULD NOT EVEN HAVE TO WORRY ABOUT ALL THOSE RICH REPUBLICANS LOSING TRILLIONS VIRTUALLY OVER NIGHT…. NOR WORRY ABOUT THE IMPACTS OF THEIR ,LOSSES ON THE FEDERAL GOVERNMENTS FINANCES, AS THOSE RICH REPUBLICANS WRITE OFF THEIR LOSSES… AND DUMP A NEAR MAJORITY OF THE COST OF THOSE LOSSES… ON FEDERAL AND STATE GOVERNMENTS!

  • Mike

    Classic right wing GOP bull crap… Always blame someone else but themselves… Where were these guys in November 2007 when Cheney/bush and their Republican Majority Congress, where about to take American into the 2nd Stock Market Crash and Depression in the past 100 years (The 1st being Republican Hoover and that Republican Majority Congress in 1929)? Or the “Secret Meetings” of the Oil Producers at the beginning of their reign before oil went from$18 to $140? Anybody notice that the stock market rally from March 2009 stopped right as the Republicans were becoming the Majority in Congress back in January? Gee, big surprise, aye?… 🙁