Holding your breath would have worked!....at least for the time being

Well, so much my "don't hold your breath" comment. Dead wrong. If you did held your breath at that 4th retest of 1175 you could have exhaled with delight on Wednesday. Tuesday night I read a bloomberg article that suggests the EU may be forced to take more action to fight the crisis. You can read the article here. Then, Wednesday morning there were rumors that the US may step in to help Europe. This along with better than expected ADP jobs report caused the gap and go rally. These types of rumors and headline risks are examples of why I stay away from ST trading i.e. 1-3 day holding periods. There's no way you can predict many of these types of things.

I believe it's pretty much a lock that more aggressive action will indeed take place in Europe with or without the US despite any public backlashes. For better or for worse, the EU has committed itself to market intervention and for them to pull the plug or maintain status quo while the debt markets implode seems very unlikely. They've gone this far, they aren't going to turn back now. And yes, I wouldn't be surprised if they get help from the US.

Most people out there it seems don't like all of this government intervention and would rather have them stay out of it and let the "free market" deal with any crises that arises. I think that's a very dangerous line of thinking. People seem to have this notion that so called "free markets" are ideal. They are not. Totally free markets would result in abusive monopolies. In addition, free markets are NOT always efficient. They are still subject to irrational herding behavior and the madness of crowds which would still allow for manias, panics and depressions and during such depressions, without any safety net from the government/fed they would be unnecessarily severe and prolonged. In my opinion a totally free market is the equivalent to letting teenage kids do whatever they want free of restrictions, guidance and support from their parents. Yes, parents can make bad decisions and be either too passive or too strict with their kids which can backfire but overall, kids are better off having parents then not having them. Parents also provide a safety net for their kids when they fuck up and are in need.

The mistake the parents (i.e. the government/fed) made 5 years ago was that they allowed their kid (the economy) to get lazy and spoiled. He spent his college tuition secretly gambling on online poker instead of buying books and paying for courses. When the kid was dead broke and even owed money on his credit card he whimpered back to his parents and confessed. If your kid did this what would you do? Not supporting him would result in the kid claiming bankruptcy and not going to college. He would certainly "learn his lesson" but the cost to him would be enormous and potentially life ruining. The alternative is to support your kid by giving him a "bailout". You lend him the money to pay for college at a generous interest rate payable at some point after he gets a job. Does he deserve it? No. The bailout creates a "moral hazard". Yes, but not giving him a bailout is worse. And the bailout CAN indeed work IF the money is used properly.

I always hear people say you can't solve a debt crisis by with more debt....all you are doing is kicking the can down the road. This is not necessarily true. If that new debt is used to refinance existing debt at more favorable terms such as lower interest rates and extended maturities the borrower gets an immediate and long lasting benefit. And if that debt provides the necessary capital to survive a downturn and is used efficiently to capitalize on the upswing it could kick start the person/firm/country into lasting profitability/prosperity which could then be used to service/retire existing debts. I mentioned this before once. Take for example what happened in the movie Rounders. Mike was heavily in gambling debt and had until the next morning to pay up to a couple of shady characters. He got a friendly "bailout" loan from his professor and with that money he played poker and won big. He had enough to pay off all his debts, both hostile and friendly, and still have plenty left for himself. So there you have it....a debt crisis solved by using more debt.

Switching back to the markets now...aside from sentiment concerns I have which are intermediate term in nature, longer term fundamentally, we could be close to the point where we see sustained job growth and that would likely trigger the next major phase of the bull market. Initial claims for unemployment is approaching the 400K level. During prior recoveries whenever the 4-week average dropped to 400K that would be the tipping point of when you can confidently expect to see significant, consistent monthly job gains. We aren't there yet but we are getting close and based upon the trend we could see this happen in the first half of 2011. If we start seeing a string of strong job growth what will be the excuse then for the permabears? I wonder if any of them would actually capitulate. No, of course they won't. They’ll just say that the day of reckoning has been pushed back and will be even worse when it comes. You can never lose by saying "I'm not wrong, just early" because you can keep saying this for as long as you need to until eventually you get proven right. Just ask Pretcher who has been bearish since 1987 when the SPX was at 300. Unfortunately, there's this tiny inconvenience of losing all of your money if you actually bet alongside these "I'm not wrong, just early" gurus before they actually get proven right.