It's a New Year, Is Anything Different?

December was a month of dancing bulls. It looked strange, with the market, I mean the Dow, trading in the 8000-9000 range. Anyway, the investment world was full of dancing bulls shouting, "Stocks are so low, they can't get any lower, it's a bottom, buy, buy, buy."

Now we have a New Year. It’s just a number in the calendar. There was a good rally on the first trading day of the year, but it still looks like a bear market rally, and now, the bulls are not dancing anymore, and instead, are running like the bulls in Pamplona. Hey bulls, do you know what happens to your Pamplona relatives at the end of the run? After entertaining the public, the lucky ones end up being killed by a sword, and the unlucky ones are simply sent to a meat processing plant.

Let's see what's really going on in the markets. First of all, why do bulls think that market can't go any lower? In the years of Great Depression, the market fell 89% between the peak in 1929 and the bottom in 1932. In today's Dow points, such a bottom would be somewhere around 1530. At that point, I myself will say that it can't go much lower. Before that, I don't know - nobody knows.

The market has been going up for several days when all the news is bad. Usually, it's a bullish signal, but we have a new year, which also means a new quarter. For me, it's just a number in a calendar, but for fund managers, it's time to make changes in portfolios. For the bad ones, it's time to sell stuff they bought for window dressing, for good ones, it’s time to profit from such window undressing, and for the best ones, it means nothing. The current market might reflect some new trends, or it could simply be window undressing.

Oil is going up sharply and other commodities are going up, although not as fast. The common (mis)conception is that investors are preparing for coming inflation. Maybe, but so far, the oil jump is looking like a typical bear market rally, and other commodities might react to different events, as well.

Now, let’s look at inflation. Everybody is talking about it. The Fed rate is near zero: inflation! Never mind that Japan had (and still has) its rate near zero and despite this, they are still looking for that elusive recipe for economic revival: inflation. Obama's team is preparing a massive economic stimulus: inflation! Yeah, right. Japan had stimuli as well. So far, what I see is quite a modest stimulus package, and it's a big question as to when and in what form Congress will eventually adopt it. The several trillion dollars question, is how big a stimulus is necessary in order to revive the economy? What’s the best way to inject money into economy so it goes into the real market, into wages, supermarkets, shops and causes some inflation, instead of going into Treasuries and the dollar carry trade?

We are still in deflation mode, and in the current economy, deflation equals depression.

I am an optimist, of sorts, and I hope that, unlike Japan, in some way or another we pull out of this crisis. This country, my country, is too dynamic to stay down for decades. That's why I believe that this Great Recession (if not Great Depression 2.0) will not last more than five years. I also hope that it will be shorter and be over by the end of 2011. Other than that, all bets are off. The most optimistic scenario is that we start recovering in the beginning of 2010. If market, as usual, recovers half a year before economy, the real bull market might start this summer – not now.

I'm not trading or investing on hope, and there will be no big changes for me right now. If I'm wrong and bull market prevails, the long portion of my portfolio will take care of it. If we go much lower, I have cash on the sidelines and will buy stocks, which I feel fell too low. I'm going to close my position in ProShares UltraShort Lehman 20+ Year Treasury ETF (TBT) this month, unless some event changes my mind. And I'll try not to miss any obvious trades. Other than that, I'm neutral or slightly bearish and remain so until there is a reason to change my approach.

Full disclosure: At the time of publication, the author had a long position in TBT. Positions can change at any time.

Comments

[Jason Rines...:]

Good article. I agree that this will be a five year deal on recovery, dating from the worst of the crisis (Nov 2008) to 2013. 2012 should also bring along some big changes at the House of Representatives if history is any guide. I am looking to begin buying at the end of Q1, after earnings are released and I see what Washington fiscal policy will look like. It will be a 5 year buy and hold strategy.

If we are both wrong on being a little optimistic about the American people, then such forecasts will be meaningless as the country would resemble a Banana Republic run as a Fascist enteprise. Some say the country is already there in it's behavior. I see it as Central Banks protecting there vested interests first and an incumbant Congress that must act, even if it is largely unconstitutional and innapropriate causing breach of trust by the investing public.

Jan 05 02:59 PM