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Beware the Black Turkey

Beware the Black Turkey: ETF Outlook for Wednesday October 20, 2010

Courtesy of John Nyaradi of Wall Street Sector Selector

a turkey perched on a rock

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Instratrader Indicators: 

Red Flag: We Expect Lower Prices Ahead 

Daily Technical Sentiment Indicators: Neutral

Short Term Market Condition:  Oversold (short term bullish)

Short Term Trend: Neutral

Just about everyone has heard about or read “The Black Swan: The Impact of the Highly Improbable” by Nassim Nicholas Taleb in which he describes how unexpected, highly improbable events can have massive impact. 

I think that recent developments in U.S. financial markets could be a “black turkey,” larger, more destructive and uglier than any black swan ever could be.

In recent days, a “black swan” event, or even worse, a potential “black turkey” event has surfaced that is just beginning to impact financial markets and could have far reaching effects going forward. 

I’m talking about “Foreclosuregate” or the “robo signing” scandal that has been rocking financial markets over the past several days and that this action could be just the beginning of a major unforeseen, black swan event. 

Of course the details are still murky but the Attorneys General in all 50 states have launched an investigation to see if false documents and forged signatures were used in their foreclosure procedures. 

All the big names could be involved, including Ally Financial, Bank of America and JP Morgan, among others, and the ramifications could be huge as this situation could throw the whole foreclosure process into question and uncertainty. 

Today’s selloff appeared to be what could be the first salvo in a bloody war as PIMCO, Blackrock and the New York Federal Reserve went to Bank of America with a demand for $47 billion of mortgage repurchases. These entities are all huge players with similar interests and to have them square off against each other is certainly an unexpected event. 

Bank of America will fight this, of course, but the “black turkey” here is that nobody knows how large the liability or how far reaching the claims might go if “robo signing” spreads. 

JP Morgan estimates liabilities of as high as $120 Billion but if the $47 Billion at Bank of America is accurate, total industry liabilities could be much higher.

And here’s where the “black turkey” really could really get ugly. As we know, the market hates uncertainty worse than anything and the questions of where Wells Fargo or Citigroup or the other large banks fit into this picture is a spooky situation as Halloween rapidly approaches.

Overall it was a bad day as China unexpectedly raised interest rates for the first time since 2007 and Bank of America reported a $7.3 billion loss and finds its share price rolled back to the middle of 2009 while investor dissatisfaction spread as well to Yahoo, Apple and IBM . 

The US dollar has been vastly oversold and appears to have possibly put in a bottom which we’ll discuss in greater detail in this weekend’s report.  Gold, oil and stocks all responded with red prints and that could be the pivot point we have been expecting for some time. 

On the macro front, housing starts were up slightly and better than expected; the French continue their strike against the “austerity” proposals and are encountering fuel shortages.

On the Fed front, the Presidents are lining up behind Dr. Bernanke for “QE2” to set sail with the not so quietly whispered number of $100 Billion per month for a year.  However, Bloomberg reported that Dallas Fed President Richard Fisher, a non voting member, said, “We have not committed to quantitative easing.  The markets may be making certain assumptions, but a discussion has not yet taken place and may not even be finished on Nov. 3.”

Speaking of “black turkeys,” that would be a monster. 

So here we are on the 23 anniversary of “Black Monday,” October 19, 1987, when the Dow dropped 23% in one day.  The more things change, the more they stay the same.


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