The Obama Bounces: Unique Short Windows Will Open

It is not clear when the Obama stimulus package will create the first job. And without knowing the cost of that package, the stamp of approval by George Soros is indeed puzzling. But the markets are desperate for feel-good stories, and it is very reasonable to expect the incoming Obama administration to oblige. Periodic Obama bounces are on the cards in forthcoming weeks. Most such bounces will open short trading windows.

The uniqueness of these windows lies in the fact that, even if President-elect Obama’s Saturday Democratic address is taken at full face value, there is every reason to believe that domestic and global economic conditions will worsen considerably, well before the foundation stone is laid for any wind farm, road, bridge, school or hospital. In other words, the bounces will, almost invariably, qualify as temporary illusions--a dream scenario for short sellers who are convinced that the present crisis is one primarily concerning flawed asset valuations and excess leverage.

Therefore, what this writer is seeking are safe shorts in the short term, within a timeline starting Monday and valid up until the time that the first few thousand jobs become a reality; the infrastructure spending proposition targets 2.5 million jobs, but that can be debated when more details are available.

Late Friday, television anchors and their portfolio-manger guests were uniformly attributing the 500 point rally in the Dow to the appointment of Timothy Geithner as Treasury Secretary. “The markets like certainty,” speakers on CNBC, Bloomberg and Fox repeated with striking regularity.

Nobody offered clarity on what that certainty will bring, and when. What we are certain about today is that the jobless rate could breach 8.5% in the first quarter of 2009, that Citigroup’s future is at stake, that Detroit’s automakers are threatening economic chaos, that life insurers are lining up for bailouts, that credit card delinquencies are rising and that a further 15% decline in home prices is overdue. So what merit is there to the Geithner bounce?

When the Obama PR machine gets into full gear is anybody’s guess. But the timing of certain bounces can be predicted now. The biggest set of bounces will occur in the days leading up the January inauguration. Then there will be bounces when stimulus bills are cleared by Congress and bounces when more bailouts are approved. In the meanwhile, the risk in the major equity indices will remain intact. The biggest threat continues to be the inherent leverage embedded deep inside the financial and business matrix, i.e. the threat of substantively overvalued assets which need to be aligned with today’s reality.

This type of short recommendation is valid only over a 2- to 4-month period, after which the prospect of 2.5 million jobs may well start encouraging corporations to upgrade earning forecasts for 2010 and 2011. Unless, of course, by that time, the deficit-induced barrage of borrowings ($2 trillion or thereabouts through 2009) results in a deterioration of the credit of the US government, with disastrous consequence for the domestic bond markets.

There is no hard data which enables a considered weighted-average assessment of the quantum of develeraging still required by constituents of the S&P 500. But rough estimates, incorporating a measure of contraction in the emerging markets, do suggest a residual 15-20% downsizing of balance sheets in the insurance, housing, credit card and services sectors before any medium-term or longer-term purchases can be justified, by P-E or DCF methodologies. The transformation of the forthcoming bounces into an extended bull run will require all the commitment (and the pocket books) of the vast majority of the 67 million people who voted for Barack Obama earlier this month.

Disclosure: Author holds short positions in SPY, XLF

Comments

[DegreeNodal:]

Interesting, but you have predicted two moves, one up, then one down. Why hit only one side? Are you modest?

2008 Nov 24 08:55 AM

[Kunst:]

The market went up 10% in the last two days. Did anything fundamental about the economy improve 10% in the last two days?

2008 Nov 25 12:28 AM