Blood Starts to Squirt

The famous French quote that it is time to buy when blood is flowing in the streets (actually referring to the beheadings in the French revolution) was quoted numerous times by all kinds of talking heads 6 to 9 months ago. I scoffed that it was in no form or fashion blood flowing in the streets. Well gents, today the blood started squirting. If AIG files bankruptcy tomorrow (something that is increasingly looking likely) the blood will truly be flowing. Of course you do not hear that sane quote from the likes of CNBC anymore.

I have been a bear (not out of desire, it is a much harder trade) because that seemed the only logical position to be. Well as a bear I am now getting scared. Scared for our economic future over the next two to five years, scared about the basic underpinnings of our economic framework, scared about the value of simple cash that I am holding. All the outcomes we are seeing today from Lehman, AIG, Washington Mutual, have serious domino affects. I do not see how we can let AIG fail. I am not one for Government bailouts and have been very critical about government actions but even I can't see how you let AIG fail. The potential ramifications are daunting.

I was a tepid buyer right at the close taking off a small percentage of a put position on the Russell 2000 and covering half a short. If we open down tomorrow more than 200 points I think you have to be once again be a tepid buyer. The likelihoods of a crash continue to increase, there was an equivalent of a crash throughout the credit markets today, but the market is ruled by fear and greed and if you have short exposure, the way you battle greed is by forcing small incremental trades taking off short exposure as the market declines. It seems almost illogical with what we are facing but there could be some news on AIG, or FED rate cut, or something else that sends the market rocketing and you don't want to be caught without booking some profits or leaving you room to add to short exposure if that is what you decided you wanted to do.

The smart money (i.e. Buffett) seems battered down. Cash cash cash. You have to have it in case things get unthinkable bad.

Keep your eye on the credit markets. They were in total disarray today with TED spread blowing out, bids for FED mortgage repos off the chart, CMBX and ABX melting, CDS blowing out, etc. etc. etc.

All things considered, the move in the equity markets was fairly orderly and tame though if your long it does not feel like it. Believe me, today could have been much worse.

The problem right now is there will be no buyers outside of short covers tomorrow. The technical guys are out, you just broke through major support, most of the fundamental guys are out, they are in wait and see mode, so it is hard to see how you start to get a bid for the first 20 points in the S&P outside some major relief news from the FED, or AIG, or something.