Weekend Ramblings

I said I was going to talk about the bear case. I'm going to do so with respect to indicators and fundamental issues which pertain to the ST/IT. If you want to read about the long term, financial collapse bear case which oozes in dogma from self righteous "intellectual" pessimists,  there are plenty of sources you can find, be it zerohedge, the media and the majority of stock market blogs out there. Here's the thing though....the doomsday bear case is no longer the contrarian case it was 12 years ago when being a doomsday bear meant being in the minority. I remember those years very well as I was one of them. But if you're a bear now you're probably in agreement with how your neighbor feels and odds are he/she hasn't made money in the markets. And if you listened to the guys at zerohedge and the rest, you would be just about broke by now. Basically, the doomsdayers have either outright or implied you make 3 trades over the past few years: 1) short stocks 2)short US government bonds 3)Buy gold. Only one out of 3 has been right and has not made up for the beating you would have taken shorting stocks and bonds. 


One of the important things I've learned over the years is that the comfortable, easy trade is seldom the right one. By in large the correct posture in the market over the past few years has been to be an optimist and to be one has not been easy. Everything from the media, the headlines and the flashbacks of 2008 has been telling you to do otherwise. But, is there a weakness in contrarian theory and therefore a possbility for the bears to end up being right? Yes there is. You have to be careful not to be contrarian for contrarian sake or what I like to call being a "smartass" contrarian. If I predict grass will turn blue soon because everyone believes it's green; that's an extreme example of being a smartass contrairan. If something is fact, or an event is pretty much assured to happen (close to fact) being a contrarian won't work very well. So, on that note, is the economy "doomed" to collapse? If that's the case, then no amount of contriansim is going to help the bulls. I happen to believe we're not doomed like so many out there think. This is not to say that things can't go wrong but rather that I believe there are "outs"  as they say in poker.  As bad as the doomsdayers are trying to convince you of the end of the world,  and despite all the turmoil and the negatives out there, earnings in the SPX have been making record high after record high, balance sheets are flush with cash and companies have been refinancing their debts at historically interest rates. I think there's a good chance we will grow our way out of our "debt" problem. Where will the growth come from? It's often not clear untill after the fact and it often takes a leap of faith to believe it's possible like it did in previous downturns like in the early 80's and 90's. As a starter, how about the opportunities that can result from the abundance of nat gas discoveries in North America such as nat gas powered vehicles, LNG exporting, nat gas to diesel conversion plants, and who knows what else? 

The bottom line is that for me...I'm looking at the glass as half full as opposed to half empty because to be a grumpy gus means I'm going to be in agreement with guys like my cousin Tom  (and just about every joe blow who know nothing about finance or economics). I know from experience that fading guys like my cousin is the correct thing to do to be a winner in the market longer term. At the same time though, I don't want to be biased either. But it's because of guys like my cousin that no mater how bleak things seem, there's a good chance that somehow, someway there will be a happy ending to this.

I digress. Let's talk about some things pertaining to ST/IT which look worrisome to me. First off is the VIX. We saw it get as high as 27.5 during this correction without much spiky behavior and now it's back to 18 after the little bounce we've had since the lows in early June. I don't think we neccessarily have to see a VIX of 40+ like we did in the last 2 summers to mark a bottom, but I'd like to at least see more spiky behavior. Maybe I'm getting too finicky about this. Next is the Rydex ratio. It has remained stubbornly too high during this correction. Every significant correction bottom of recent years was accompanied by rydex traders running for the exits and they haven't done that yet....they've only been reluctantly walking to the exits. With NAAIM they haven't been as stubborn but these active managers also need to show more "risk off" behavior. The put/call ratio and AAII sentiment however, have indeed shown enough fear to mark a major bottom.

With respect to fundamental issues, we are seeing weakness in some of the economic surveys especially with China and Europe and the problems in Europe remain unresolved and appear to be reaching a boiling point. Everyday I hear more and more grumblings about how Europe can only be viable if there is some sort of  fiscal union whereby a central authority can control the finances of each of it's members countries. I agree with this and if this were to happen, then I think Merkel would finally be on board with the idea of a Euro bond...she pretty much said she would be. But can such a fiscal union happen and when? I think ultimately it will happen but before it does, more pain is likely. As Napoleon once said, there are only two things that motivate men: fear and self-interest. Out of self interest, weaker Euro nations have been resisting giving up political control to a central authority hoping that the Germans would cave first and do the euro bonds, but the Germans have made it clear over and over they are not going to cave until they see reforms (to protect their own interests of course). The Germans are in a position of strength while the euro bond beggars are in one of weakness and when things get bad enough, although everyone will suffer, it's the weak who will suffer the most and so out of pain or fear of more pain, they will capitulate first. This reminds me of when the NHL season got cancelled in 2004-2005 due to a lockout whereby the players refused to agree to a salary cap. In the end they caved like I expected, because the owners were in a position of strength while the players in one of weakness. Due to the poor economics of the NHL, the owners wouldn't be much worse off  then they already were if the season was cancelled, but players on the other hand would indeed be much worse off as most earned peanuts playing over seas in other leagues. In the end, the players capitulated and capitulated royally agreeing to a deal that was worse then the one the owners had originally offered

The bottom line with the markets: Expect more range bound markets with the possibility for one or 2 more scares to the downside. The Euro summit this week could result in fireworks one way or the other. Be careful out there. I'm very tempted to make a ST downside bet but it's very treacherous out there and I'll be very picky about pulling the trigger. If in doubt I'll just maintain my core + heavy cash position and wait for this shit to blow over.


  

Another summer game of chicken

First off I'm glad to report that my mom seems to be on the road to recovery. She has beaten the odds. The doctors told us recently that when they first saw her condition they didn't think she'd make it.  They are very impressed with how she's progressed and she should be moving out of ICU soon. There is still a long road ahead in terms of recovery and rehab but now with my mom far more responsive, breathing on her own and able to take some steps on her own as well, it represents a huge, huge improvement from where she was just a couple weeks ago. I don't know what else to say other than we're lucky and thank God. Life for all of us is starting to normalize and for me that means getting back to the markets.

The Greek vote tonight has people breathing a sigh of relief but I had the feeling that it wouldn't be the disaster that many were thinking. First of all, such  highly anticipated "hold your breathe" moments usually don't turn out to be so bad. Think Y2k. Plus, the market had been rallying for the past couple of weeks just like it did prior to Y2k which suggests it was anticipating a non-doomsday result. But let's focus on the bigger issues here. 


Here we are now almost a year later and the same things that were plaguing the market last summer are doing it again.  Last summer I mentioned a few times how I wanted to see some "resetting" in some fundamental factors before I was a confident that the worst was over which included the following

1) Oil price in the 80's

2) All troubled Euro banks recapitalized

3) Emerging Markets switching from tightening to easing mode undoing the flat/inverted yield curve. 

Aside from oil briefly dipping in the 80's, we never did these things happen by the end of the year and because of this and a couple of other things, I was rather slow to embrace the big rally that started in November. Now though, it seems we are closer to seeing the fundamental reset that I wanted to see last year but we're not quite there yet; but if we get there, it means there could very well be more pain before it gets better. A bailout for Spain and it's banks have been granted but it is enough and what are the details? Are there any other troubled banks in Europe that will need bailing out? Probably. Emerging markets, namely China and Brazil, have been cutting rates but it's just the start of what's likely more to come. Let's focus on China since it's the biggest player in Emerging Markets which and has been a large, if not the the biggest, driver of growth during this bull market. 

As you can see, in recent months the yield curve in China flattened to a levels last seen during the heart of the crash of 2008. Towards the end of 2008, China respsonsed swiftly with rate cuts and fiscal stimulus which resulted in a favorable yield curve and their economy responded in the ensuing months which in turn helped kick start the global economy. The yield curve is on the rise again but it needs to rise more before monetary conditions are favorable again for China. Early last year China was worried about inflation as well as an overheated housing market and as a result they put on the monetary brakes. It took some time, but their economy did end up slowing. Since the 2nd half of last year China's economy has been on the down slope with lots of people now worried about a hard landing. For months their hands were tied because of high commodity prices but  now with prices off significantly, inflation pressures are going to be collapsing and that's going to give China and the rest of Emerging market countries the green light to ease more significantly. But, you usually don't see things turn around with just 1 rate cut much like you don't see things turn around with just one hike. It will usually takes a series of cuts or a couple of large ones before they becomes significant enough to impact the economy and then it takes some time before the economy responds. I suspect if we see a series of rate cuts in China and the rest which results in a steep yield curve, equity markets will start sniffing out a recovery and start rising big despite what negative economic headlines may appear. I realize I'm getting a head of myself here....fist let's see those rate cuts happen. 


In the short to intermediate term I don't see much upside in the market at this point. We had a relief bounce which seems dubious because I didn't see a few hold out indicators like the rydex ratio and NAAIM give the green light. Also, we're getting overbought and last week saw a sizable inflow. 


But on the positive side of things, despite all the 2008-type worries the SPX only corrected 10% off the high at its lowest point so far this year and is still over 5% in the green. Here in Canada and with many international markets it hasn't been nearly as good. The TSX is still down 4% ytd. Although upside seems limited, downside also seems limited as well at this point since the market has worked off all of it's longer term overbought condition. At the most recent lows, it was as oversold in both the ST and LT as much as it was during the lows that ocured after the flash crash of 2010. 


So, in conclusion, it seems we could be in a situation that is much like early last summer of 2010 and 2011 whereby the market saw it's worst of the year (or close to it) but had to chop around for months before a sustainable big rally to new highs began.  That chop was killer for both bulls and bears, so be careful out there. 
But could this year be different? Could the grumps who have been crying bear actually get it right this time??? I'm going to examine the bear case in the next post.






   

    

My mind has not been on the market much these days. My mom suffered a ruptured brain aneurysm 11 days ago and has been fighting for her life since. For some odd reason, I've been rather calm throughout most of this ordeal. I think it's a form of denial even though I'm fully aware of the threat to my mom's life. 50% of people who get a ruptured brain aneurysm die either before they reach the hospital or due to complications after surgery to repair it. If you do happen to survive you have a 1/3 chance of going back to normal after multiple years of rehab, 1/3 chance of permanent minor disability and a 1/3 chance of permanent major disabilities. My mom successfully got surgery to repair the aneurysm and has survived the critical 3-5 day period afterwards whereby risks of death are the highest due to swelling of the brain but she's not out of the woods by any means. She's still on life support. Her body has to absorb the blood that's surrounding and covering her brain and that can cause complications. She's been showing modest improvement day by day but it's 2 steps forward, 1 step back kind of thing. She very drowsy and dazed most of the time but when she's having a good day she can respond to commands like squeezing your hand and wiggling her toes and can shows the slightest hint of a smile when you say something that makes her happy or would make her laugh.

Although I've been rather calm since my mom has been sick, numbed is probably the better word, there have been a couple times when I've broken down in tears. My heart is so heavy seeing her go through such a horrible thing, seeing her in the dazed condition that she's in and most importantly her life of soon to be 58 years being seriously threatened. My mom has sacrificed so much for me. I know most children will probably say this, but I wouldn't trade her for anyone. She is as good a mom as anyone could ever ask for. I wish there was some way I could trade places with her for I owe my mom everything.

I see her everyday at the hospital but I know I can't be there all day or I'll drive myself crazy. There's not much I can do. She's asleep most of time anyway and whens she awake she's very dazed.  My dad and my sister were absolute wrecks the first week but they've settled down now. Someone has to be strong and keep a level head and that someone has to be me. Maybe that's why I've been so numb during all this. When my mom got sick I did some research and I knew that it would be a long battle even if she survived the critical first week and so I've been telling myself not to get too low when there was setbacks but not get too high when there was minor progress...an attitude I try to have with my trading and when playing competitive sports.

This has been the longest 11 days of my life. I just want her back