Art Cashin Discusses The STUPIDs And The Global Dollar Margin Call

From UBS Financial Services: Cashin's Comments, February 5 early am

Greece Fire Leads To Flight Into Dollar Resulting In A Global Margin Call – In early afternoon with stocks, gold and oil flat on the canvas, we sent the following email to some trading friends:

Panicky unwinding of dollar carry trade acts like a global margin call which we suggested weeks  ago. Europe a swirl with rumors and speculation. Will there be general strikes in Greece? (Recall ugly street rioting that lasted for months after police killed that youth.) Portugal tries to sell equivalent of Treasury Bills and only gets bids on 60%. Similar concerns and speculation on others in the STUPID acronym.
Euroland starting to sound like U.S. markets between Bear Collapse and Lehman. Looming weekend heightens angst. All we need is a geo-political event to cause a full flight to safety into dollar sparking more margin style liquidation across asset classes. Cross your fingers. Run rate at 1:00 is 1.6 billion.

At the time, the S&P was beginning to break below the critical 1070 support area. There were fears on the floor that a significant breach of that support might trigger trapdoor selling from stop orders and algorithms.

Selling did take the S&P through the support but there was no aggressive follow-through. Nevertheless, stocks closed hard on their lows, grateful that the bell ended the pain.

Decoding The Email – For months we have voiced concern about the growing level in the “dollar carry trade”. Speculators and traders had been borrowing dollars at near zero rates to finance positions in gold, oil and U.S. stocks, among other things. In setting up the carry trade, they would often short the dollar for currency protection.

Back in December, we told Carl Quintanilla that we felt the greatest risk to the market would be a flight to safety into the dollar. If, for example, there was a key geo-political event (Israel/Iran?), the resultant rush into the dollar would result in the equivalent of a global margin call. We said it could drive the Dow down 1000 points in a day. Yesterday, there was a rather mild rush into the dollar and we lost 270 points in a day.

The reference to Greece is self-explanatory. The failed Portuguese auction could have sold the entire offer but at much worse price. Only 60% of the offering received “proper” bids. The “stupid” acronym apparently refers to Spain, Turkey, Ukraine, Portugal, Italy and Dubai (although there are substitutes).

The allusion to analogies with the environment between Bear and Lehman should be self-evident. Then it was financial firms that were the subjects of rumors and contentions. Now it is sovereign nations.

Thursday’s action clearly demonstrated the dominance of the dollar’s influence across asset classes. Let’s hope no geopolitical surprise pops up.

Cocktail Napkin Charting – As noted, the support at 1070 held for a while before clearly yielding as we moved into the final hour. The selloff re-ignited Elliot Wave speculation that we may have begun severe corrective wave C. I wroteyesterday that the market might show its hand by Tuesday. We’ll stick with that timeframe. For today, the napkins look for support in the S&P around 1050/1053. Violating that level could heighten probability that wave C has, in fact, begun. First resistant is broken support at 1070/1075, with a backup at 1087/1092.

Some Eye-Catching Headlines on Bloomberg:
- “Taleb says ‘Every Human’ should short U.S. Treasuries” (Nassim Taleb of Black Swan fame says  shorting treasuries is a “no-brainer” given Fed and Obama policies.) [stay tuned for more on this in Zero Hedge shortly]
- “Biggest Bubble in History is Growing every day” (William Peske on China’s currency reserves)
- “Payrolls probably increased in January…..” (Speculates that this morning’s number may show growth)

A Personal Crusade – While it’s too late to do it this year, I think we should seek to turn Super Bowl Sunday into Super Bowl Saturday. It would be great for the economy. More parties in more places with a chance to sleep in the next day. If you agree, email the NFL.

Consensus – Payrolls may set the tone if the dollar behaves. If the dollar moves, it will dominate the action. Stay very,
very nimble and stimulate the economy by hiring a kid to shovel the snow.

Trivia Corner

Answer - The apples are 25 cents a pound and the apricots are 75 cents a pound.

Today's Question - Heir today, gone tomorrow. The ancient King of Numeria had a favorite stallion who grew old and was dying. The king offered each of his three sons half the entire kingdom if he would bring a fresh apple to the ailing horse exactly half the time the horse had left. If a son accepted the challenge but was off by more than one day, that son would be out of the will and banished. The oldest son declined saying no one knew how long the horse would live. The youngest son agreed and declined also. The middle son smiled, took the challenge and won easily. What did he probably do?

And the obligatory history lesson:

On this day in 1895, America was in a funny financial spot. Well, it was a bit over a hundred years ago today - so - I guess you deserve an explanation. Let me see....if I remember what Sister Herman Joseph taught me - that different America of a century ago looked something like this:

The economy appeared to be struggling. There was a Democrat in the White House. Congress was divided and squabbling, hostily and uncivilly. Some thought the debates were so coarse and rude they spoke of forming a new political party. Technology was the new mantra even after a bumpy start and telecommunications were exploding (in use if not profitability). Much of the country was in the grip of unusual and extreme weather. And...oh yeah....I almost forgot....suddenly folks had begun talking about gold....can you imagine "gold!"

Anyway, despite what pundits of the day thought, gold had begun to rise. Now, in 1895, the old U.S. was on the old "gold exchange standard." That meant, whether citizen or foreigner, if you thought public policy was not to your liking, you could hand in your green pictures of dead presidents and get gold - real, glistening, bite into it to check it, gold.

As hard as it is for us to believe today, a goodly number of those citizens distrusted what they saw in Washington. Gold rose and soon began to bubble and the dollar began to slide. The rush to exchange dollars might deplete the gold of the U.S. Treasury and cause a default. Imagine - a time when the government wrestled with the question of default.

So - to avoid chaos - the President sought the help of the one man who could control the banks, who could calm Wall Street, who - in short - could find a way to halt the run on the dollar and government reserves. (No Virginia, it was not Ben Bernanke - there was no Federal Reserve.) Thus, on this day in 1895, the President of the U.S. sat down with a certain J.P. Morgan seeking the latter's help in saving the country.

Morgan allowed as how he might just happen to know one fellow who could put the government into default that very afternoon. (The President never asked if it was Morgan, himself.) Morgan conveniently recalled some obscure Civil War legislation that allowed the President to issue bonds to buy gold. The same law said the bonds could be sold secretly (without bidding). But who would buy them. Well, Morgan allowed as how it was probably his civic duty (along with that of his syndicate) to not only buy the new secret bonds but to buy up some gold and recycle it to the Treasury for the dollars he paid for the bonds. And all this for just a small commission.

To mark this anniversary recall the words of Warren Buffett - There's always a silver lining -or was that Jimmy Buffett.

There was a lot of buzz about gold on the floor yesterday but none of it was about a scarcity of the yellow metal.

h/t Back9