No I'm not talking about the dos equis guy I'm talking about Mr. Market. There is no shortage of interesting things going on with him right now. The jobs number on Friday was terrible which was in contrast with the ADP report the day before. I'm not going to go into the nitty gritty as to which one is right or wrong. Suffice to say that with the unemployment rate upticking again to 9.2% the recovery we've had so far as been subpar to put it mildly...which is not uncommon when you have a housing led downturn. Look back to the early 90's to see what I mean. Since this housing bust was larger the recovery has been slower than the early 90's.
It's understandable why there is so much anxiety out there and as one who has been a full fledged bull since the summer of 2009 I'm having a lot more respect for the bear case these days.....in the intermediate term for now. You have the issues in Europe which despite the Greece bailout, still don't appear to be fully resolved. For instance Portuguese 2 year bonds yields hit a fresh high at 16.25%. You have stubbornly high unemployment and sluggish growth which appears to be downshifting. I highlighted this because this is what the market cares about.....the expected rate of change in growth. You have emerging markets- the only part of the world that has showed growth - in tightening mode with India and Brazil having inverted yield curves and China a flat yield curve....a warning sign of an immanent serious slowdown in growth or outright recession. You have energy prices which although have dropped from their highs are still relatively elevated. Then to top it all off, there are pressures to reign in US government spending and raise taxes which would be yet another headwind to GDP growth.
Timing is everything. I've always said that the market only cares about earnings and where they are headed and until the market starts sensing that the above factors are actually going to impact earnings in the near future, they will be ignored and they have been for that reason. But it seems to me that we are 1 or 2 quarters away from when these issues will indeed start to impact earnings in a negative way. Bears have been raped repeatedly for being overzealous and jumping the gun. In bear markets or a prolonged correction it's always difficult to profit from the short side because Mr. Market never likes a lot of company especially on the short side and so he'll do whatever it takes to shake out bears and take away their money too. Remember the last bear market? The first sign of trouble with subprime happened in March 2007, but the market fully recovered from that dip to make new highs. Then another more serious warning shot happened in August of 2007. By then bears where thinking "Ok, this has gotta be it now...game over for the bulls" So, what did the market do? Why, it rebounded to make a new all time high of course. Bears were pulling their hair out as they got smoked again. "How the fuck could that be possible with all the problems that are clearly there? "They thought. That's just the nature of Mr. Market folks. Aside from overzealous bears who got squeezed, the reason the market didn't fall off he cliff just yet was because the impact of the subprime implosion and it's domino effect had not yet been reflected in earnings in a material way. But by the 4th quarter it was clear that it had and downside momentum gathered steam. You might think the market is stupid for being so short sited and should have rolled over back in March 2007 or even earlier. Well, that's just the way it is....accept it. Those who trade based upon what they think the market should do go broke and then whine like bitches about it.....there's tons of people like this and they tend to be self righteous pricks with big egos.
It's difficult to profit from what you think may be a major turning point in the market especially on the short side because timing is lot more critical. When you attempt to bottom pick a bear market, so long as you aren't leveraged you can simply buy, hold and wait for as long as it takes for the turn around. If you're early you can simply ride it out. But when you short you don't have that luxury because your loss potential is unlimited if you are wrong and you could be forced to cover via margin call if you're early, therefore you will have "uncle" point where you are forced to give up. To offset this risk and put yourself in a position similar to a bottom fishing bull, what you could is use long dated, deep in the money puts.
Given everything I said, I believe it's prudent to maintain a high cash balance. I'm less confident about riding the bull...for the time being. I certainly run of the risk of being wrong and trading myself out my position and that's a risk I'm willing to accept. The market could very well go to new highs but just like what happened in October 2007, that may not mean anything but a giant head fake to put the final squeeze on the bagholding shorts who are trapped at 1300 and suck in under invested bulls who got out in June. Or of course, it could also mean I'm dead wrong and we go on wards and upwards to challenge 1500.
If the bear case ends up playing out I don't think it will be "game over" for the bull market although it might feel like it. The reason why I feel this way is because we never saw the type of exuberance that marks a bull market peak from the public and I sense no fading of the contemptuous, permabear mentality that still makes up a large part of the financial media and market participants especially the retail type - the suckers of the market. That to me says that somehow, someway, the market will end up going a lot higher in the years to come.
Here's the type of contempt I'm talking about. This is comment from an article I just read in the globe and mail
the US equity market has been propped up by the US Fed using their proxies over at the big investment banks to shovel in the money. Simple. Volumes are terrible and it is basically a few big computers with their algos trading against each other.
I've been seeing bullshit conspiracy and "low volume" bitching like this since the summer of 2009. If you go to marketwatch.com or the yahoo message boards you can see that the retail schmucks thinks like the guy who made the above comment. The root of this contempt is because they got burned by the market either during one of the crashes in the past 11 years and/or shorting this bull market. If these retail schmucks were making money you wouldn't see such bitching. These losers are actually rooting for a crash so that they don't feel so bad about being the chumps that they are. I don't want to be on the same side as these losers for so long or I could end up being one of them!
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