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.