Monday, April 20, 2009

"Follow the Leader"

What a strange day. Oracle bought Sun, BofA lost a quarter of its value, and everything that had been going up all of a sudden started going down again.

What caused yesterday's sell off?

Most pundits will probably tell you it was Bank of America’s 50%+ sequential increase in loan loss reserves combined with managements somewhat pessimistic(or realistic depending on your point of view) outlook on the future of the US economy that triggered the sell-off. Others will tell you that’s nonsense, and that the market was just overbought. They will point to the fact that BofA beat the consensus number by 1000% which meant that they basically turned in the best upside surprise of any reporting financial company. BofA knocked the cover off the ball and yet it dropped like a rock. That makes no sense, so this clearly had to be a technical sell on the news and BofA was just a scapegoat. The perma-bears will counter that this rally has always been about temporarily suspending reality, and thus was destined to end badly. They will argue that BofA like all other financials reported a ludicrous number, and that their share price, which is trading at 30c or so on the dollar is evidence of the fact that anyone with a brain doesn’t believe that bank’s reported balance sheets are anywhere remotely close to reality. While these are all plausible explanations for yesterday’s move, they are all wrong.

To truly understand why Europe, the US, and now all of Asia sold off over the last 24 hours you will need to venture into Expat Purgatory. Only in a land filled with traders and bankers that live out of range rovers and spend their days dodging debt collectors on the beach will the correct explanation to the current sell-off be found. Out here, in a world that is now commonly referred to as the ‘dark side’(thanks Johann), the bear market rally died. The time of death was roughly 2pm Dubai time on April 19th. According to most dark siders, the cause of death was a 4% decline in the Tadawul. It would appear that Saudi traders tired of chasing international markets decided to flip the switch on the rest of the financial world and do a little leading for a change.

So, if you are looking to make money trading markets, get ready for a little game of follow the leader. Because from now and on….

As goes Saudi, so goes the rest of the Planet.

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