Another rough long weekend

Looks like the market is set to open with a big gap down tomorrow. A bunch of big US banks are being sued for about $200 Billion by the US government for MBS fraud including BOA....I'm sure if Buffet was taking a  bath when he heard this his bath water got hotter by 15 degrees. Economic data coming out of China is showing significant slowdown in activity and European worries are flaring up yet again resulting in the DAX getting smashed for 5% hitting a fresh new 2 years low. Not good....not good at all especially when Germany has been the strongest country in Europe. It's amazing how things have unraveled so quickly due to a flurry of bad news hitting the wires one after another.

The only positive thing  to take away from this is that things are getting so bad so quick it makes it more likely that some sort of decisive, coordinated effort that may even involve backstop from China and the US will be forthcoming to deal with PIIGS once and for all and the solution may not necessarily be a bailout but rather a combination of a bailout and a restructuring. Whatever the outcome, disaster or not, I'm getting the sense that the problems in  Europe is approaching a climax. It's becoming painfully obvious that a Lehman event is indeed going to happen unless something big is done right now. One thing though that I find very odd is how the Euro has been hanging tough despite all the market turmoil. You would figure that it would have been sinking as it usually does during broad market declines especially given the instability in Europe. What exactly does this mean? hmmm....

One piece of news that nobody talked about is that Brazil cut rates by 50 basis points late last week. I mentioned a couple months ago the ominous condition of inverted/flat yield curves in Brazil, China and India. It seems Brazil now "gets it" that there's economic weakness coming and inflation pressures will be rapidity easing in the months ahead.  They are taking decisive, proactive action instead of waiting like most Central bankers do until it's painful obvious things have turned sour.  It will be interesting to see if other emerging market countries will follow Brazil's lead. Remember that I said a while back that one of things the market needs in order to clear the way for a sustained move higher is for Emerging market central banks to stop their tightening.

This is a dangerous market right now for anyone bears or bulls alike because the headline risks for either side are huge. Bears have the advantage though because the structural factors and economic momentum is deteriorating.They say the best time to be buying is when there is turmoil like this and that is true but you never know just how deep and prolonged any turmoil can be which is why I prefer to be aggressive on the long side coming out of the turmoil with the wind at your back as opposed to trying to bottom pick at the depths of the turmoil getting ran over. As I've been stressing...give it time. There's no need to rush in fearing you will miss the bottom and if you do so what...there will still be plenty of opportunity to get in relatively early.

I want to bring to your attention 2 dates. October 10, 2008 and  July 10, 2009. On both of these dates the market was trading at about the same level (SPX 900). Both of these dates also turned out to be good times to buy longer term but there was a major difference between buying  in Oct 2008 vs July 2009. If you remember, Buffet came out with his "Buy American" article in the NY times in mid October of 2008 and said "be greedy when others are fearful". Well, if you followed his advice you would have suffered quite a bit  for the next 6 months or so as stocks went lower still...quite a bit lower too....a year later though, you would have been comfortably in the black. But how many people who followed Buffet's advice had the stomach to ride out those interim losses during those 6 months especially when the headlines were suggesting the end of the world? And for anyone who didn't capitulate during those 6 months after October 2008 most of them likely sold at break even in the summer of 2009 thankful to get their money back. I bet few likely held tight for a over a year and actually made money.

Now, take someone who bought into the dip of  July 10, 2009. Again, the market was around the same level as it was on October 2008 when Buffet said to buy, but unlike then, the trend in the preceding months was up not down. The economic fundamentals (earnings) and structural factors (credit spreads)  were improving, not deteriorating.  Although prices were the same, buying in July 2009 resulted in no teeth gnashing and sleepless nights like buying in October of 2008 would have since you wouldn't have been underwater for 6 months (and likely capitulated) before your positions showed a profit. You would have made money quickly and painlessly never being put in a situation where your get whipsawed or emotions get the best of you. That my friends is the way to play this game - with the wind at our back.  July of 2009 is an example of what I call a sweet spot opportunity - it's when you get in on a pullback/consolidation early in new uptrend. I told you already about my botched, missed opportunity in TLT  calls when I noticed such a pullback in July of this year - shame on me.

We need to patiently await the next sweet spot for the market before getting aggressive on the long side. That could take a long time to happen...possibly as long as next spring!  In the interim there will be ST trading opportunities but I'd be very careful and selective about this. The headline risk is super high for either side of the market. Based upon what I'm reading and seeing out there, I can tell a lot of people are struggling this year even most bears, who I can tell have missed most of this move down.

This game ain't supposed to be easy...always remember that. But you can make it easier for yourself and beat the crowd if you only play the premium hands. Probably the biggest mistake most people make is that they overplay the market trying to make money every day, every week. I see clowns on realmoney.com trying to predict the day to day moves. Even veterans like Kass do this. I suppose the pressure to beat your benchmark is responsible for this behavior but all it does it backfire on you.  Often times the best thing to do is jack squat for months at a time and not even look at the market at all. If we sink into the abyss you might say doing nothing means missing out on short side profits. This is true, but in my opinion going short when the market is longer term oversold, the VIX in the mid 30's, unfilled gaps overhead and ultra high headline risk is simply not a favorable reward to risk scenario. If you want to go short in a bear market smartly, you need to wait for moments like in May of 2008 when the market had a nice rally to clear longer term oversold conditions accompanied by complacent VIX hitting sub 20. If you don't get those opportunities, it's best you just sit tight in cash and be patient.