Alright so we got the short squeeze that I saw coming. Unfortunately it looks like just that....a short squeeze and not the start of sustainable rally that ends this rout we've been in since July. News that China is buying bonds and Central banks are willing to provide liquidity to European banks were likely the triggers. Like I said, it could have been anything.
I read an article in the post today which talks about how European banks were reluctant to lend to each which was exactly what happened in late 2007 and 2008 when the sub prime started to go sour. Adding liquidity to the system did nothing to solve the crisis. Ultimately, the bad assets had to be expunged via TARP and the banks that were exposed to them had to be recapitalized, merged with a stronger bank or let fail. Ultimately, I think this is what is going to happen in Europe. It could happen next week, next month, next year who knows....but until it does I have my doubts the market will be able to go back to bull mode.
Unlike with sub prime and MBS which due to the slicing and dicing of mortgages were complicated messes the exposure of" sub prime European debt" appears to be a lot more transparent. Once authorities come to terms with reality (realizing that restructuring/haircuts/bankruptcies have to happen) hopefully, they have learned from 2008 what to do and what not to do (such as letting banks fail like Lehman instead of taking receivership like Bear Sterns).
Timing is everything. A lot of bears saw this crisis happening over 2 years ago and they either shorted the market or stayed on the sidelines and got wiped out or embarrassed badly as the market went up 100% from the bottom. I don't care how smart you are or how times you said "see I told you so"...if you can't translate your predictions to making money, you are a loser and are no better than someone who lost money because he was outright wrong about the market.
It still remains to be seen if indeed the bears will be right about Europe having to bite the bullet....I think they will have to. Now, this doesn't necessarily mean we will see 2008 all over again. If the right steps are taken the damage could be a lot less. China is really the only country out there that has the fire power to contain the damage. They indicated their willingness to help out but I don't think they are going to be willing to throw good money after bad in a material way. They have been buying bonds but they have been token purchases from what I gather. If the haircuts are taken and the bad assets are expunged I think the Chinese would be then be willing to make a major move in recapitalizing the system.
We are just going to have to see now how this all plays out. If I end up being right we will see at least a retest of the lows at some point but in the interim, there's going to be sharp rallies just like we've seen this week. You think Mr. Market is going make it easy for the bears to profit? Not a chance. When the market gets oversold and bears pile in like they have been they will get crushed. Go take a look at the last 2 bear markets to see just how sharp rallies can be.....we're talking about rallies that can last more than 2 months and rise 20%+. Bear markets destroy both bulls and bears and yes, I'll call it a bear market because it's acting like one but by the same definition, last summer was also a bear market abliet a very short one, therefore, it's possible this could be short one as well but until the market starts acting in a way that suggests it's over you better have respect for it and so that means the best course of action is to remain mostly in cash until it's over.
Is it possible that we can kick the can again like we did last year? Sure, but I don't think it's likely. The damage done to the banks in Europe and yields on Greek debt suggest to me that the condition is terminal and there's no turning back. Again, it could take days or months for this to play out much like the life span of a terminally ill cancer patient but my gut is saying that it's not going to be hunky dory for another year like last time when the market rocketed 30% for 6 month. If I'm wrong, hey, it won't be the first time and hopefully I will be able to adjust but as of now I just cannot be a strong holder of equities given what I see out there. ST trading opportunities will present themselves but the headline risk is ultra high right now to make me comfortable with those either.
I've whittled down my exposure to 20% with a position I'm comfortable holding for the LT no matter what happens and so I'm in a position to be able to be patiently sell into strength at favorable prices if I see the opportunity. That's my game plan at the moment.
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