Is a crash in the markets coming?

I am not sure.

If one does occur, experts will look back and see many clear warning signs. And there are a multitude of red flags.

However, governments, banks, investment companies, and the like, are doing their best to avoid a calamity. 

Of course, when we are talking governments, banks, etal., doing their “best”, I am not filled me with much confidence. To date, some of their “best” has been accumulating USD 15 trillion in debt by the U.S. government, creation of Dodd-Frank, Europe and the Euro crisis, the protests in Greece over any real reforms, MF Global, UBS rogue trader, etc., etc., etc. The list is a long one of “best” efforts.

One firm though is convinced that bad times are near.

One Company’s Approach

Ann Barnhardt of Barnhardt Capital Management has decided to cease operations. In a communication to her clients, Ms. Barnhardt states:

I could no longer tell my clients that their monies and positions were safe in the futures and options markets – because they are not. And this goes not just for my clients, but for every futures and options account in the United States. The entire system has been utterly destroyed by the MF Global collapse. Given this sad reality, I could not in good conscience take one more step as a commodity broker, soliciting trades that I knew were unsafe or holding funds that I knew to be in jeopardy.”

Ms. Barnhardt sees potential difficulties for companies other than MF Global.

“MF Global is almost certainly the mere tip of the iceberg. There is massive industry-wide exposure to European sovereign junk debt. While other firms may not be as heavily leveraged as Corzine had MFG leveraged, and it is now thought that MFG’s leverage may have been in excess of 100:1, they are still suicidally leveraged and will likely stand massive, unmeetable collateral calls in the coming days and weeks as Europe inevitably collapses.”

And she concludes her thoughts by recommending to clients that:

“The futures and options markets are no longer viable. It is my recommendation that ALL customers withdraw from all of the markets as soon as possible so that they have the best chance of protecting themselves and their equity. The system is no longer functioning with integrity and is suicidally risk-laden. The rule of law is non-existent, instead replaced with godless, criminal political cronyism.”

Perhaps Ms. Barnhardt is correct in her assessment. She knows her market segment well. For what it is worth, I agree that there are other dominoes likely to fall in the financial sector.

Which Companies Might Be in Trouble?

The difficulty is knowing which ones are in trouble.

Jon Corzine, (now-resigned) Head of MF Global, was a golden boy in the investment world. Right up until the moment that MF Global collapsed. He was a major link to Wall Street for President Obama and was widely rumoured to be the next U.S. Treasury Secretary if Tim Geithner stepped down. In August, 2011, everyone seemed thrilled by his performance. However, less than three months later, his MF Global clients (who are missing over USD 600 million in their client funds) or former employees (over 1000 employees that lost their jobs), you may get a different answer.

Which golden boy may be next? I have no idea. But there may be one. So if you are investing through one of these firms, be careful.

The Futures and Options Markets

I would also suggest avoiding both the futures and options market.

I think you need a relatively high level of investment knowledge and experience to be in these markets at any time. And now with all the economic issues, government problems, and financial mismanagement, these markets are even trickier.

As for general equity and bond markets, I still believe that there will be increased volatility over the next few months. Until the European situation clarifies in one way or another, markets will be unpredictable. The same is true as relates to the U.S. elections. Until the Republican nominee is known and the results of the November 2012 election become clearer, there will be swings up and down.

Dollar cost averaging will help smooth your purchase prices. If you are in the market, it is an effective tool, especially now. Or, you can sit on the sidelines in cash until some of the uncertainties go away.

Where things finally shake out will dictate where the markets ultimately end up. And right now it is hard to predict what will finally happen.

1 Response » to “Is a Market Crash Coming?”

  1. Joe Pearl says:

    It’s nice to learn that the Bankruptcy Court in the MF Global case approved the realease of $2.2 Billion in customer funds from the Bankruptcy estate. However, there is still at least $1.2 Billion missing. If Corzine and the board allowed the company to use funds from protected accounts on these risky bets, they are likely to be found personally liable. Joseph S. Pearl, LL.M. – A Professional Law Corporation 1400 Chester Ave., Suite C Bakersfield, CA 93301 661-281-0253

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